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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-K

ý   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007
OR

o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission File No. 001-07511

STATE STREET CORPORATION
(Exact name of registrant as specified in its charter)

Massachusetts
(State or other jurisdiction of incorporation)		   04-2456637
(I.R.S. Employer Identification No.)
One Lincoln Street
Boston, Massachusetts
(Address of principal executive office)		   02111
(Zip Code)

617-786-3000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

(Title of Each Class)
 
(Name of each exchange on which registered)
Common Stock, $1 par value   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

         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 ý No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý        Accelerated filer o        Non-accelerated filer o        o Smaller reporting company
                                             (Do not check if a smaller reporting company)                    

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No ý

         The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the per share price ($68.40) at which the common equity was last sold as of the last business day of the registrant's most recently completed second fiscal quarter (June 29, 2007) was approximately $23.00 billion.

         The number of shares of the registrant's Common Stock outstanding as of January 31, 2008 was 387,445,603.

         Portions of the following documents are incorporated by reference into Parts of this Report on Form 10-K, to the extent noted in such Parts, as indicated below:

         (1) The registrant's definitive Proxy Statement for the 2008 Annual Meeting to be filed pursuant to Regulation 14A on or before April 30, 2008 (Part III).


STATE STREET CORPORATION
Table of Contents

 
   Description
   Page Number
PART I        
Item 1   Business   1
Item 1A   Risk Factors   6
Item 1B   Unresolved Staff Comments   18
Item 2   Properties   18
Item 3   Legal Proceedings   19
Item 4   Submission of Matters to a Vote of Security Holders   19
Item 4A   Executive Officers of the Registrant   20

PART II
 
 
 
 
Item 5   Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   22
Item 6   Selected Financial Data   24
Item 7   Management's Discussion and Analysis of Financial Condition and Results of Operations   25
Item 7A   Quantitative and Qualitative Disclosures About Market Risk   75
Item 8   Financial Statements and Supplementary Data   76
Item 9   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   132
Item 9A   Controls and Procedures   132
Item 9B   Other Information   135

PART III
 
 
 
 
Item 10   Directors, Executive Officers and Corporate Governance   135
Item 11   Executive Compensation   136
Item 12   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   136
Item 13   Certain Relationships and Related Transactions, and Director Independence   137
Item 14   Principal Accounting Fees and Services   137

PART IV
 
 
 
 
Item 15   Exhibits and Financial Statement Schedules   138
    Signatures   142
    Exhibit Index   144

PART I

ITEM 1.    BUSINESS

        State Street Corporation is a financial holding company, organized in 1970 under the laws of the Commonwealth of Massachusetts. Through its subsidiaries, including its principal banking subsidiary, State Street Bank and Trust Company, State Street Corporation provides a full range of products and services for institutional investors worldwide. All references in this Form 10-K to "the parent company" are to State Street Corporation. Unless otherwise indicated or unless the context requires otherwise, all references in this Form 10-K to "State Street," "we," "us," "our" or similar terms mean State Street Corporation and its subsidiaries on a consolidated basis. State Street Bank and Trust Company is referred to as "State Street Bank." The parent company is a legal entity separate and distinct from its subsidiaries, assisting those subsidiaries by providing financial resources and management. At December 31, 2007, we had consolidated total assets of $142.54 billion, consolidated total deposits of $95.79 billion, consolidated total shareholders' equity of $11.30 billion and employed 27,110. Our executive offices are located at One Lincoln Street, Boston, Massachusetts 02111 (telephone (617) 786-3000).

        We make available, without charge, on or through our Internet website at www.statestreet.com all reports we electronically file with, or furnish to, the Securities and Exchange Commission, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, as soon as reasonably practicable after those documents have been filed with, or furnished to, the SEC. These documents are also accessible on the SEC's website at www.sec.gov. We have included the website addresses of State Street and the SEC as inactive textual references only. Except as may be specifically incorporated by reference into this Form 10-K, information on those websites is not part of this Form 10-K.

        We have adopted Corporate Governance Guidelines, as well as written charters for the Executive Committee, the Examining and Audit Committee, the Executive Compensation Committee, and the Nominating and Corporate Governance Committee of our Board of Directors, and a Code of Ethics for Senior Financial Officers, a Standard of Conduct for Directors, and a Standard of Conduct for our employees. Each of these documents is posted on our website, and each is available in print to any shareholder who requests it by writing to the Office of the Secretary, State Street Corporation, One Lincoln Street, Boston, Massachusetts 02111.

GENERAL

        We conduct our business primarily through our principal banking subsidiary, State Street Bank, which traces its beginnings to the founding of the Union Bank in 1792. State Street Bank's current charter was authorized by a special act of the Massachusetts Legislature in 1891, and its present name was adopted in 1960. With $15.30 trillion of assets under custody and $1.98 trillion of assets under management at year-end 2007, we are a leading specialist in meeting the needs of institutional investors worldwide. 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. Including the United States, we operate in 26 countries and more than 100 geographic markets worldwide.

        For a discussion of our business activities, refer to the "Lines of Business" section that follows. For information about our management of capital, liquidity, market risk, including interest-rate risk, and other risks inherent in our businesses, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations included under Item 7, and Risk Factors, under Item 1A, of this Form 10-K. Financial information with respect to our non-U.S. activities is included in note 23 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

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        In July 2007, we completed our acquisition of Investors Financial Services Corp., a bank holding company based in Boston, Massachusetts, with approximately $17 billion in total assets and approximately $1.9 trillion in assets under custody. We acquired Investors Financial in order to enhance our position as a worldwide service provider to institutional investors. Additional information about this acquisition is included in note 2 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

LINES OF BUSINESS

        We report two lines of business: Investment Servicing and Investment Management. These two lines of business provide services to support institutional investors, 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. For additional information about our lines of business, see the "Line of Business Information" section of Management's Discussion and Analysis included under Item 7, and note 22 of the Notes to Consolidated Financial Statements included under Item 8, of this Form 10-K.

COMPETITION

        We operate in a highly competitive environment in all areas of our business worldwide. We face competition from other financial services institutions, deposit-taking institutions, investment management firms, insurance companies, mutual funds, broker/dealers, investment banking firms, benefits consultants, leasing companies, and business service and software companies. As we expand globally, we encounter additional sources of competition.

        We believe that there are certain key competitive considerations in these markets. These considerations include, for investment servicing, quality of service, economies of scale, technological expertise, quality and scope of sales and marketing, and price; and for investment management, expertise, experience, the availability of related service offerings, and price.

        Our competitive success will depend upon our ability to develop and market new and innovative services, to adopt or develop new technologies, to bring new services to market in a timely fashion at competitive prices, to continue and expand our relationships with existing customers and to attract new customers.

SUPERVISION AND REGULATION

        We are registered with the Board of Governors of the Federal Reserve System, which we refer to as the Federal Reserve Board, as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended. The Bank Holding Company Act, with certain exceptions, limits the activities in which we and our non-bank subsidiaries may engage, to those that the Federal Reserve Board considers to be closely related to banking or managing or controlling banks. These limits also apply to non-bank companies of which we own or control more than 5% of a class of voting shares. The Federal Reserve Board may order a bank holding company to terminate any activity or its ownership or control of a non-bank subsidiary if the Federal Reserve Board finds that such activity, ownership or control constitutes a serious risk to the financial safety, soundness or stability of a bank subsidiary or is inconsistent with sound banking principles or statutory purposes. In the opinion of management, all of our present subsidiaries operate within the statutory standard or are otherwise permissible. The Bank Holding Company Act also requires a bank holding company to obtain prior approval of the Federal

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Reserve Board before it may acquire substantially all the assets of any bank or ownership or control of more than 5% of the voting shares of any bank.

        The parent company operates as a financial holding company, which reduces to some extent the Federal Reserve Board's restrictions on our activities. A financial holding company and the companies under its control are permitted to engage in activities considered "financial in nature" as defined by the Gramm-Leach-Bliley Act and Federal Reserve Board interpretations, and therefore may engage in a broader range of activities than permitted for bank holding companies and their subsidiaries. Financial holding companies may engage directly or indirectly in activities considered financial in nature, either de novo or by acquisition, provided the financial holding company gives the Federal Reserve Board after-the-fact notice of the new activities. Activities defined to be financial in nature include, but are not limited to, the following: providing financial or investment advice; underwriting; dealing in or making markets in securities; merchant banking, subject to significant limitations; and any activities previously found by the Federal Reserve Board to be closely related to banking. In order to maintain status as a financial holding company, each of a bank holding company's depository subsidiaries must be well capitalized and well managed, as judged by regulators, and must comply with Community Reinvestment Act obligations. Failure to maintain such standards may ultimately permit the Federal Reserve Board to take certain enforcement actions against such company.

        Many aspects of our business are subject to regulation by other U.S. federal and state governmental and regulatory agencies and self-regulatory organizations (including securities exchanges), and by non-U.S. governmental and regulatory agencies and self-regulatory organizations. Aspects of our public disclosure, corporate governance principles and internal control systems are subject to the Sarbanes-Oxley Act of 2002 and regulations and rules of the SEC and the New York Stock Exchange.

Capital Adequacy

        Like other bank holding companies, we are subject to Federal Reserve Board minimum risk-based capital and leverage ratio guidelines. As noted above, our status as a financial holding company also requires that we maintain certain capital ratio levels. State Street Bank is subject to similar risk-based capital and leverage ratio guidelines. As of December 31, 2007, our capital levels on a consolidated basis, and the capital levels of State Street Bank, exceeded the applicable minimum capital requirements and the requirements to qualify as a financial holding company. Failure to meet capital requirements could subject us to a variety of enforcement actions, including the termination of deposit insurance of State Street Bank by the Federal Deposit Insurance Corporation, and to certain restrictions on our business that are described further in this "Supervision and Regulation" section.

        For additional information about our capital position and capital adequacy, refer to the "Capital" section of Management's Discussion and Analysis included under Item 7, and note 14 of the Notes to Consolidated Financial Statements included under Item 8, of this Form 10-K.

Subsidiaries

        The Federal Reserve Board is the primary federal banking agency responsible for regulating us and our subsidiaries, including State Street Bank, for both our U.S. and non-U.S. operations.

        Our bank subsidiaries are subject to supervision and examination by various regulatory authorities. State Street Bank is a member of the Federal Reserve System and the FDIC and is subject to applicable federal and state banking laws and to supervision and examination by the Federal Reserve Bank of Boston, as well as by the Massachusetts Commissioner of Banks, the FDIC, and the regulatory authorities of those countries in which a branch of State Street Bank is located. Other subsidiary trust companies are subject to supervision and examination by the Office of the Comptroller of the Currency, other offices of the Federal Reserve System or by the appropriate state banking regulatory authorities of the states in which they are located. Our non-U.S. bank subsidiaries are subject to

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regulation by the regulatory authorities of the countries in which they are located. As of December 31, 2007, the capital of each of these banking subsidiaries was in excess of the minimum legal capital requirements as set by those authorities.

        The parent company and its non-bank subsidiaries are affiliates of State Street Bank under federal banking laws, which impose certain restrictions on transfers of funds in the form of loans, extensions of credit, investments or asset purchases from State Street Bank to the parent and its non-bank subsidiaries. Transfers of this kind to affiliates by State Street Bank are limited with respect to each affiliate to 10% of State Street Bank's capital and surplus, as defined, and to 20% in the aggregate for all affiliates, and are subject to certain collateral requirements. As a bank holding company, the parent company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or lease or sale of property or furnishing of services. Federal law also provides that certain transactions with affiliates must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions involving other non-affiliated companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, non-affiliated companies. The Federal Reserve Board has jurisdiction to regulate the terms of certain debt issues of bank holding companies. Federal law provides as well for a depositor preference on amounts realized from the liquidation or other resolution of any depository institution insured by the FDIC.

        Our investment management division, State Street Global Advisors, or "SSgA," which acts as an investment advisor to investment companies registered under the Investment Company Act of 1940, is registered as an investment adviser with the SEC. However, a major portion of our investment management activities are conducted by State Street Bank, which is subject to supervision primarily by the Federal Reserve Board and the SEC with respect to these activities. Our U.S. broker/dealer subsidiary is registered as a broker/dealer with the SEC, is subject to regulation by the SEC (including the SEC's net capital rule) and is a member of the Financial Industry Regulatory Authority, a self-regulatory organization. Many aspects of our investment management activities are subject to federal and state laws and regulations primarily intended to benefit the investment holder. These laws and regulations generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict us from carrying on our investment management activities in the event that we fail to comply with such laws and regulations, and examination authority. Our business relating to investment management and trusteeship of collective trust funds and separate accounts offered to employee benefit plans is subject to ERISA and is regulated by the U.S. Department of Labor.

        Our businesses, including our investment management and securities and futures businesses, are also regulated extensively by non-U.S. governments, securities exchanges, self-regulatory organizations, central banks and regulatory bodies, especially in those jurisdictions in which we maintain an office. For instance, the Financial Services Authority, the London Stock Exchange, and the Euronext.liffe regulate activities in the United Kingdom; the Deutsche Borse AG and the Federal Financial Supervisory Authority regulate activities in Germany; and the Financial Services Agency, the Bank of Japan, the Japanese Securities Dealers Association and several Japanese securities and futures exchanges, including the Tokyo Stock Exchange, regulate activities in Japan. We have established policies, procedures, and systems designed to comply with these requirements. However, as a global financial services institution, we face complexity and costs in our worldwide compliance efforts.

        Most of our non-U.S. operations are conducted pursuant to Federal Reserve Board Regulation K through State Street Bank's Edge Act corporation subsidiary or through international branches of State Street Bank. An Edge Act corporation is a corporation organized under federal law that conducts foreign business activities. In general, banks may not invest more than 20% of their capital and surplus in their Edge Act corporations (and similar state law corporations), and the investment of any amount in excess of 10% of capital and surplus requires the prior approval of the Federal Reserve Board

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(which approval is generally valid for a 12-month period). State Street Bank periodically applies to the Federal Reserve Board to invest in excess of 10% of its capital and surplus in its Edge Act corporation, and State Street Bank currently has approval to continue investing a dollar amount up to the equivalent of 18% of its capital and surplus.

        In addition to non-U.S. operations conducted pursuant to Regulation K, we make new investments abroad directly (through the parent company or through non-bank subsidiaries of the parent company) pursuant to Federal Reserve Board Regulation Y, or through international bank branch expansion, which are not subject to the 20% investment limitation for Edge Act corporation subsidiaries. We cannot predict with certainty what the future impact of the Regulation K investment limitation may be, but in light of available alternatives, we do not believe the limitation will materially limit our ability to expand internationally.

        We are subject to the USA PATRIOT Act of 2001, which contains anti-money laundering and financial transparency laws and requires implementation of regulations applicable to financial services companies, including standards for verifying client identification and monitoring client transactions and detecting and reporting suspicious activities. Anti-money laundering laws outside the U.S. contain similar requirements.

        We are also subject to the Massachusetts bank holding company statute. The Massachusetts statute requires prior approval by the Massachusetts Board of Bank Incorporation for our acquisition of more than 5% of the voting shares of any additional bank and for other forms of bank acquisitions.

Support of Subsidiary Banks

        Under Federal Reserve Board guidelines, a bank holding company is required to act as a source of financial and managerial strength to its bank subsidiaries. Under these guidelines, the parent company is expected to commit resources to State Street Bank and any other bank subsidiary in circumstances in which it might not do so absent such guidelines. In the event of our bankruptcy, any commitment by the parent company to a federal bank regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and will be entitled to a priority payment.

ECONOMIC CONDITIONS AND GOVERNMENT POLICIES

        Economic policies of the U.S. government and its agencies influence our operating environment. Monetary policy conducted by the Federal Reserve Board directly affects the level of interest rates, which may impact overall credit conditions of the economy. Monetary policy is applied by the Federal Reserve Board through open market operations in U.S. government securities, changes in reserve requirements for depository institutions, and changes in the discount rate and availability of borrowing from the Federal Reserve. Government regulation of banks and bank holding companies is intended primarily for the protection of depositors of the banks, rather than for the shareholders of the institutions. We are also impacted by the economic policies of non-U.S. government agencies, such as the European Central Bank.

STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES

        The following information, provided under Items 6, 7 and 8 of this Form 10-K, is incorporated by reference herein:

        "Selected Financial Data" table (Item 6)—presents return on average common equity, return on average assets, common dividend payout and equity-to-assets ratios.

        "Distribution of Average Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential" table (Item 8)—presents average balance sheet amounts, related fully taxable-equivalent interest earned or paid, related average yields and rates paid and changes in fully taxable-equivalent

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interest revenue and expense for each major category of interest-earning assets and interest-bearing liabilities.

        Note 3, "Investment Securities," of the Notes to Consolidated Financial Statements (Item 8) and "Investment Securities" section included in Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 7)—disclose information regarding book values, market values, maturities and weighted average yields of securities (by category).

        Note 1, "Summary of Significant Accounting Policies—Loans and Lease Financing" of the Notes to Consolidated Financial Statements (Item 8)—discloses our policy for placing loans and leases on non-accrual status.

        Note 4, "Loans and Lease Financing," of the Notes to Consolidated Financial Statements (Item 8) and "Loans and Lease Financing" section included in Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 7)—disclose distribution of loans, loan maturities and sensitivities of loans to changes in interest rates.

        "Loans and Lease Financing" and "Cross-Border Outstandings" sections of Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 7)—disclose information regarding cross-border outstandings and other loan concentrations of State Street.

        "Credit Risk" section of Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 7) and note 4, "Loans and Lease Financing," of the Notes to Consolidated Financial Statements (Item 8)—present the allocation of the allowance for loan losses, and a description of factors which influenced management's judgment in determining amounts of additions or reductions to the allowance charged or credited to results of operations.

        "Distribution of Average Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential" table (Item 8)—discloses deposit information.

        Note 8, "Short-Term Borrowings," of the Notes to Consolidated Financial Statements (Item 8)—discloses information regarding short-term borrowings of State Street.

ITEM 1A.    RISK FACTORS

        This Form 10-K contains statements (including, without limitation, statements in Management's Discussion and Analysis of Financial Condition and Results of Operations, included in this Form 10-K under Item 7) that are considered "forward-looking statements" within the meaning of U.S. federal securities laws. In addition, State Street and its management may make other written or oral communications from time to time that contain forward-looking statements. Forward-looking statements, including statements as to industry trends, management's future expectations and other matters that do not relate strictly to historical facts, are based on assumptions by management, and are often identified by such forward-looking terminology as "expect," "look," "believe," "anticipate," "estimate," "seek," "may," "will," "trend," "target" and "goal," or similar statements or variations of such terms. Forward-looking statements may include, among other things, statements about State Street's confidence in its strategies and its expectations about financial performance, market growth, acquisitions and divestitures, new technologies, services and opportunities, and earnings.

        Forward-looking statements are subject to various risks and uncertainties, which change over time, and are based on management's expectations and assumptions at the time the statements are made and are not guarantees of future results. These expectations and assumptions, and the continued validity of the forward-looking statements, are subject to change due to a broad range of factors affecting the national and global economies, the equity, debt, currency and other financial markets, and factors specific to State Street and its subsidiaries, including State Street Bank. Factors that could cause

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changes in the expectations or assumptions on which forward-looking statements are based include, but are not limited to:

        Forward-looking statements should not be viewed as predictions, and should not be the primary basis upon which investors evaluate State Street. Any investor in State Street should consider all risks and uncertainties disclosed in this Form 10-K and in our other SEC filings, including our reports on Form 10-Q and Form 8-K, which are accessible on the SEC's website at www.sec.gov or on our website at www.statestreet.com.

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        Actual outcomes and results may differ materially from what is expressed in our forward-looking statements and from our historical financial results due to the factors discussed in this Risk Factors section and elsewhere in this Form 10-K or disclosed in our other SEC filings, and forward-looking statements should not be relied upon as representing our expectations or beliefs as of any date subsequent to the date this Form 10-K is filed with the SEC. State Street undertakes no obligation to revise the forward-looking statements contained in this Form 10-K to reflect events after the date it is filed with the SEC. The factors discussed above and below are not intended to be a complete summary of all risks and uncertainties that may affect our businesses. Though we strive to monitor and mitigate risk, we cannot anticipate all potential economic, operational and financial developments that may adversely impact our operations and our financial results.

Business Conditions/Economic Risk

        Our businesses are affected by global economic conditions, political uncertainties and volatility and other developments in the financial markets. Factors such as interest rates and commodities prices, regional and international rates of economic growth, inflation, political instability, the liquidity and volatility of fixed-income, equity, credit, currency, derivative and other financial markets, and investor confidence can significantly affect the financial markets in which we and our customers are engaged. Such factors have affected, and may further unfavorably affect, both regional and worldwide economic growth, creating adverse effects on many companies, including us, in ways that are not predictable or that we may fail to anticipate.

        A significant market downturn may lead to a decline in the value of assets under management and custody, which would reduce our asset-based fee revenue and the value of securities we hold in our investment portfolio, and may adversely impact other transaction-based revenue, such as securities finance revenue, and the volume of transactions that we execute for our customers. The assets held by our asset-backed commercial paper conduits can be similarly affected. In addition, lower market volatility, even in a generally rising market environment, may reduce trading volumes of our customers, and our ability to achieve attractive spreads, which could lead to lower trading revenues. Our revenues, particularly our trading revenues, may increase or decrease depending upon the extent of increases or decreases in cross-border investments made by our customers. The level of cross-border activity can be influenced by a number of factors, including geopolitical instabilities and customer mix. General market downturns would also likely lead to a decline in the volume of transactions we execute on behalf of our customers, decreasing our fee and revenue opportunities and reducing the level of assets under management and custody. Market performance and volatility may also influence the revenue that we receive from off-balance sheet activities. A widening of credit spreads or credit deterioration could cause some or all off-balance sheet assets and liabilities to be consolidated onto our balance sheet.

        In addition, revenues during a calendar year, driven by the products and services we provide, can fluctuate commensurate with the normal course of business activity of our customers, typically resulting in stronger revenues in the second and fourth quarters and relatively weaker revenues in the first and third quarters.

        In recent years, investment manager and hedge fund manager operations outsourcing and non-U.S. asset servicing have been areas of rapid growth in our business. If the demand for these types of services were to decline, we could see a slowing in the growth rate of our revenue.

Strategic/Competition Risk

        We expect the markets in which we operate to remain both highly competitive and global across all facets of our business, resulting in increases in both regional and global competitive risks. We have experienced, and anticipate that we will continue to experience, pricing pressure in many of our core businesses. Many of our businesses compete with other domestic and international banks and financial

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services companies, such as custody banks, investment advisors, broker/dealers, outsourcing companies and data processing companies. Many of our competitors, including our competitors in core services, have substantially greater capital resources. In some of our businesses, we are service providers to significant competitors. These competitors are in some instances significant customers, and the retention of these customers involves additional risks, such as the avoidance of actual or perceived conflicts of interest and the maintenance of high levels of service quality. The ability of a competitor to offer comparable or improved products or services at a lower price would likely negatively affect our ability to maintain or increase our profitability. Many of our core services are subject to contracts that have relatively short terms or may be terminated by our customer after a short-notice period. In addition, pricing pressures as a result of the activities of competitors, customer pricing reviews, and rebids, as well as the introduction of new products, may result in a reduction in the prices we can charge for our products and services.

        Acquisitions of complementary businesses and technologies, development of strategic alliances and divestitures of portions of our business, in addition to fostering organic growth opportunities, are an active part of our overall business strategy to remain competitive. We may not be able to effectively assimilate services, technologies, key personnel or businesses of acquired companies into our business or service offerings, alliances may not be successful, and related revenue growth or cost savings may not be achieved. In addition, we may not be able to successfully manage the divestiture of identified businesses on satisfactory terms, if at all, and this would reduce anticipated benefits to earnings. Ongoing consolidation within the financial services industry could pose challenges in the markets we serve.

        Acquisitions present risks that differ from the risks associated with our ongoing operations. Our financial results for 2008 and for the next few years may be significantly impacted by our ability to achieve the cost savings and other benefits that we anticipate as a result of the acquisition of Investors Financial in 2007, as well as our ability to retain its customer base and to successfully cross-sell our products and services to its customers. These cost savings and customer retention goals will be significantly influenced by our ability to convert former Investor Financial customers onto State Street systems in a timely manner and to maintain the level of customer service such customers received from Investors Financial. Future acquisitions may present similar integration, cost savings and customer retention challenges.

        Intellectual property of an acquired business, such as Currenex, Inc. in 2007, may be an important component of the value that we agree to pay for such a business; however, these types of acquisitions entail the risk that the acquired business does not own the intellectual property that we believe we are acquiring, that the intellectual property is dependent upon licenses from third parties, that the acquired business infringes upon the intellectual property rights of others, or that the technology does not have the acceptance in the marketplace that we anticipated. Acquisitions of investment servicing businesses such as Investors Financial normally entail information technology systems conversions, which involve operational risks and may result in customer dissatisfaction and defection. Customers of businesses that we acquire, including, in the case of Investors Financial, its largest customer, are competitors of our non-custody businesses. The loss of some of these customers or a significant reduction in revenues generated from them, for competitive or other reasons, would adversely affect the benefits that we expect to achieve from the acquisition.

        Our ability to acquire other entities that provide our core services to achieve greater economies of scale or to expand our product offering is dependent upon our financial resources and ability to access the capital markets. Due to company-specific issues or lack of liquidity in the capital markets, our ability to continue to expand through acquisitions or to dispose of businesses that no longer are strategic to us may be adversely affected.

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        In connection with most acquisitions, before the acquisition can be completed, we must obtain various regulatory approvals or consents, which approvals may include the Federal Reserve Board, the Massachusetts Commissioner of Banks and other domestic and foreign regulatory authorities. These regulatory authorities may impose conditions on the completion of the acquisition or require changes to its terms. Although we would not enter into a transaction anticipating materially adverse regulatory conditions, such conditions may be imposed, or we may experience regulatory delays, that could limit the benefits of the transaction.

        With any acquisition, the integration of the operations and resources of the two businesses could result in the loss of key employees, the disruption of our and the acquired company's ongoing businesses, or inconsistencies in standards, controls, procedures and policies that could adversely affect our ability to maintain relationships with customers, and employees or to achieve the anticipated benefits of the acquisition. Integration efforts may also divert management attention and resources. Where we acquire a business and combine it with our operations, we are also exposed to risks from unknown or contingent liabilities with respect to which we may have no recourse against the seller. While we normally seek to mitigate that risk through pre-acquisition due diligence, increasingly acquisition transactions are competitive auctions in which we have limited time and access to information to evaluate the risks inherent in the business being acquired, and no or limited recourse against the seller if undisclosed liabilities are discovered after we enter into a definitive agreement.

        We may not achieve the benefits we sought in an acquisition, or, if achieved, those benefits may come later than we anticipated. Failure to achieve anticipated benefits from an acquisition could result in increased costs and lower revenues than expected of the combined company. In addition, if the financial performance associated with an acquisition falls short of expectations, it may result in impairment charges associated with the intangible assets reported as part of the acquisition.

        Our financial performance depends, in part, on our ability to develop and market new and innovative services and to adopt or develop new technologies that differentiate our products or provide cost efficiencies, while avoiding increased related expenses. The risks we face include rapid technological change in the industry, our ability to access technical and other information from our customers, and the significant and ongoing investments required to bring new products and services to market in a timely fashion at competitive prices. Our proactive cross selling of multiple products and services to our customers can exacerbate the negative financial effects associated with the risk of loss of any one customer. Developments in the securities processing industry, including shortened settlement cycles and straight-through processing, have required continued internal procedural enhancements and further technology investment.

        Our strategy for growth depends upon both attracting new customers and cross selling additional products and services to our existing customer base. To the extent that we are not able to achieve these goals, we may not be able to attain our financial goals. Substantial risks and uncertainties are associated with the introduction of new products and services, including technical and control requirements that may need to be developed and implemented to offer such products while also managing associated risks. The introduction of new products and services can also entail significant time and resources. Regulatory and internal control requirements, capital requirements, competitive alternatives and shifting market preferences may also determine if such initiatives can be brought to market in a manner that is timely and attractive to our customers. Failure to successfully manage these risks in the development and implementation of new products or services could have a material adverse effect on our business, as well as our results of operations and financial condition.

Liquidity Risk and Management

        Liquidity management is critical to the management of our consolidated balance sheet and to our ability to service our customer base. In managing our consolidated balance sheet, our primary source of

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funding is customer deposits. Our deposits are predominantly short-term, transaction-based deposits by institutional investors. Our ability to continue to attract these deposits, and other funding sources such as certificates of deposit and commercial paper, is subject to variability based upon a number of factors, including volume and volatility in the global securities markets, our credit rating and the relative interest rates that we are prepared to pay for these liabilities.

        In managing our consolidated balance sheet, we also depend on access to global capital markets to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, and to accommodate the transaction and cash management needs of our customers. Other sources of funding available to us, and upon which we rely as regular components of our liquidity risk management strategy, include inter-bank borrowings, repurchase agreements and borrowings from the Federal Reserve discount window, or comparable non-U.S. central banking sources. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of our corporate debt or equity purchasers, or a downgrade of our debt rating, may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Similarly, the failure to maintain an acceptable credit rating on our obligations may preclude us from being competitive in certain products. General market disruptions, natural disasters or operational problems may affect either third parties or us, and can also have an adverse affect on our liquidity.

        We generally use our sources of funds to invest in a portfolio of investment securities and to maintain the liquidity necessary to extend credit to our customers. These funds are invested in a variety of assets ranging from short-term interest-bearing deposits with banks to longer-maturity investment securities. While we have historically maintained our investment portfolio at a relatively short duration with respect to interest-rate risk, the average maturity of the investment portfolio is significantly longer than the contractual maturity of our deposit base. In addition, as part of our custody business, we provide overdraft financing to our customers, and liquidity lines to third-party commercial paper conduits and mutual funds, as well as more traditional extensions of credit. The demand for credit is difficult to forecast and control, and may be at its peak at times of dislocation in the securities markets, potentially compounding liquidity issues.

        In a period of financial disruption, or if negative developments occurred with respect to State Street, the availability and cost of our funding sources could be adversely affected. In that event, our cost of funds may increase, thereby reducing our net interest revenue, or we may need to dispose of a portion of our investment portfolio, which, depending upon market conditions, could result in our realizing a loss or experiencing other adverse accounting consequences upon those dispositions. Our efforts to monitor and manage liquidity risk may not be successful or sufficient to deal with dramatic or unanticipated changes in the global securities markets or other State Street or market event-driven reductions in liquidity.

        In our business activities, we assume liquidity and interest-rate risk in managing longer-term assets or asset pools for third parties that are funded on a short-term basis, or where the customers participating in these products may have a right to the return of cash or assets on limited notice. These business activities include, among others, the unconsolidated asset-backed commercial paper conduits managed by our Structured Products group, securities finance collateral pools and money market and other short-term investment funds. In the commercial paper conduits, for example, pools of medium- and long-term financial instruments, principally mortgage- and other asset-backed securities, are financed through the issuance of short-term commercial paper. The conduits strive to maintain a positive margin between the rate of return on their longer-term assets and the short-term cost of funding. This mismatch in the maturity of the investment pools and funding creates risk if disruptions occur in the liquidity of the short-term debt or asset-backed securities markets, or if the cost of short-term borrowings exceeds the conduits' rate of return on their investment pools or purchased assets.

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        In connection with the administration of the activities of the commercial paper conduits, we provide contractual back-up liquidity to the conduits if they cannot meet their liquidity needs through the issuance of commercial paper. Other institutions can and do provide liquidity to the conduits. In the event that maturing commercial paper cannot be placed by the conduits, the liquidity providers are required by contract to, among other things, provide liquidity to the conduits by purchasing portfolio assets from them. We may also provide liquidity by purchasing commercial paper or providing other extensions of credit to the conduits.

        Beginning in the third quarter of 2007, asset-backed commercial paper conduits, including those sponsored by State Street, experienced significantly less liquidity and higher borrowing costs in the global fixed-income securities markets, and in a few cases, required liquidity support from their sponsoring bank. The fixed-income markets remain significantly disrupted, and the potential for decreased liquidity, increased funding costs and adverse asset valuations remains a material risk. We on occasion have purchased, and during the third and fourth quarters of 2007 did purchase, commercial paper from the conduits, the purchase of which we recorded in our consolidated balance sheet. We may continue to do so in the future. These purchases of commercial paper were funded from our general liquidity, and the liquidity agreements were not drawn.

        The conduits are not recorded in our consolidated financial statements. However, if circumstances change we may be required, under existing accounting standards, to consolidate the conduits onto our consolidated balance sheet. For example, if changes in market conditions require us to update the assumptions in our expected loss model, we may be required to increase the amount of first-loss notes in order for the investors in the first-loss notes to continue to be considered the primary beneficiaries of the conduits. In various circumstances, including if the conduits are not able to issue additional first-loss notes or take other actions, we may be determined to be the primary beneficiary of the conduits, and we would be required to consolidate the conduits' assets and liabilities onto our consolidated balance sheet. Existing accounting standards may be changed or interpreted differently in the future in a manner that increases the risk of consolidation of the conduits.

        Consolidation, or the purchase of assets of the conduits pursuant to the contractual agreements described above, could affect the size of our consolidated balance sheet and related funding requirements, our financial and regulatory capital ratios and, if the conduit assets include unrealized losses, could require us to recognize those losses. Because of our contractual agreements to purchase assets from the conduits under specified conditions, we are also exposed to the credit risks in the conduits' portfolios.

        Other of our business activities that involve managing pools of assets that are funded in the short-term markets and invested in longer-term markets include managing securities finance collateral pools and money market and other short-term investment funds. These businesses involve similar risks inherent in an arbitrage of funding and investment; however, in these businesses, we primarily act as agent and do not have the direct principal risk. For example, if a collateral pool or a money market fund that we manage were to have unexpected liquidity demands from investors in the pool that exceeded available liquidity, the investment pool would be required to sell assets to meet those redemption requirements. During periods of disruption in the credit markets, it may be difficult to sell the assets held by these pools at a reasonable price. In those circumstances, the financial loss accrues to the pools' investors and not to us.

        Similarly, credit risks inherent in these portfolios are attributable to the investors in the investment pools and not to State Street. These investment pools may have significant exposure to individual credits. The incurrence of substantive losses in these pools, particularly in money market funds, could result in significant harm to our reputation and significantly and adversely affect the prospects of our associated business units. In some circumstances, we may seek to mitigate that risk by compensating the investment pools for all or a portion of such losses even if not contractually obligated to do so;

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however, that would potentially result in the recognition of significant losses or a greater use of capital than we have available. Certain accounts managed by SSgA are managed in accordance with specific investment guidelines and have the benefit of contractual arrangements with third-party financial institutions that allow the accounts to issue and redeem units based upon the book value of such units rather than market value. The third-party financial institutions have an obligation to fund any shortfall after all the units have been redeemed at book value. Several of these accounts were significantly impacted by the volatility in the fixed-income markets in the second half of 2007. The continued willingness of these financial institutions to partner with us in these products may be negatively impacted if the variance between book and market value and other risk metrics fall or remain below the financial institutions' internal risk standards.

        We used a portion of the reserve announced on January 3, 2008 to reduce the differences between the book and market value of these accounts. This cash infusion was intended to reduce the difference between market and book values of these accounts to levels that are within the risk tolerance of such third-party financial institutions. If the third-party financial institutions are or become unwilling to continue to partner with us, our business may be adversely affected. There can be no assurance that these and other costs associated with our legal exposures resulting from SSgA's active fixed income strategies will not exceed the reserve we have established.

        Investment, operational and other decisions and actions, often made to achieve scale and other benefits, are implemented over multiple investment pools as applicable, increasing the opportunity for losses, even small losses, to have a significant effect. To mitigate these risks to the investment pools, we seek to prudently manage the duration and credit exposure of the pools, to satisfy large liquidity demands by the in-kind delivery of securities held by the pools and to closely monitor liquidity demand from investors; however, market conditions or increased defaults could result in our inability to effectively manage those risks. To some degree, all of our investment management pools hold potential risks to our reputation and business prospects if the asset pools that we manage have higher than anticipated redemption or other liquidity requirements and the pools incur losses to meet such demands.

        Other parts of our business where we primarily act as agent, such as other investment management activities of SSgA and certain of State Street Global Markets' business units, do not currently have significant liquidity requirements; however, as we develop new products in response to customer demand and to remain competitive in a dynamic marketplace, we could take on more principal risk in these businesses. Any increase in the extent to which these or other businesses assume principal positions would increase the risks associated with our liquidity management strategy.

        The disruption in the global fixed-income securities markets beginning in the third quarter of 2007 has had a substantially greater impact upon liquidity and valuations in those markets than has historically been experienced. Because demand from investors for fixed-income products has markedly decreased and dealers have been less prepared to take principal exposures, funding sources, such as the commercial paper markets for conduits, have been less reliable and more expensive. At the same time, the ability of the markets to absorb the sale of large portfolios of certain types of securities has been substantially impaired. These conditions have also led to greater difficulty in accurately valuing portfolio positions. These market conditions have made the management of our own and our clients' liquidity significantly more challenging. As discussed above, the risks to State Street inherent in its management of liquidity are significant, and a further deterioration in the credit markets could adversely affect our consolidated financial position, including our regulatory capital ratios, and could adversely affect our results of operations and our business prospects in the future.

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Reputational Risk

        Our relationship with many of our customers is predicated upon our reputation as a fiduciary and a service provider that adheres to the highest standards of ethics, service quality and regulatory compliance. Adverse publicity, regulatory actions, litigation, operational failures, the failure to meet client expectations and other issues could materially and adversely affect our reputation and our ability to retain and attract customers. Preserving and enhancing our reputation depends not only in maintaining systems and procedures that address known risks and regulatory requirements, but also our ability to identify and mitigate additional risks that arise due to changes in our businesses and the marketplaces in which we operate, the regulatory environment, and customer expectations. If any of these developments, including our recently announced customer concerns related to certain SSgA active fixed income strategies, has a material effect on our reputation, our business will suffer.

Credit Risk

        Our focus on large institutional investors and their businesses requires that we assume credit and counterparty risk, both on- and off-balance sheet, in a variety of forms. We may experience significant intra- and inter-day credit exposure through settlement-related extensions of credit. From time to time, we may assume concentrated credit risk at the individual obligor, counterparty, guarantor, industry and/or country level, thereby potentially exposing us to a single market or political event or a correlated set of events. The credit quality of our on- and off-balance sheet exposures may be affected by many factors, such as economic and business conditions or deterioration in the financial condition of an individual counterparty, group of counterparties or asset classes. If a significant economic downturn occurs in either a country or a region, or we experience the failure of a significant individual counterparty, we could incur financial losses that could adversely affect our earnings.

Financial Markets Risk

        As asset values in worldwide financial markets increase or decrease, our opportunities to invest in and service financial assets change. Given that a portion of our fees is based on the value of assets under custody and management, fluctuations in the valuation of worldwide securities markets will affect revenue. Many of the costs of providing our services are relatively fixed; therefore, a decline in revenue could have a disproportionate effect on our earnings. In addition, if investment performance in our asset management business fails to meet either benchmarks or the performance of our competitors, we could experience a decline in assets under management and a reduction in the fees that we earn, irrespective of economic or market conditions.

        We have increased the portion of our management fee revenue that is generated from enhanced index and actively managed products, with respect to which we generally receive higher fees compared to passive products. We may not be able to continue to increase this segment of our business at the same rate that we have achieved in the past few years. The amount of assets in active fixed-income strategies, for example, has been adversely impacted in 2007. In addition, with respect to certain of our enhanced index and actively managed products, we have entered into performance fee arrangements, where the management fee revenue we earn is based on the performance of managed funds against specified benchmarks. The reliance on performance fees increases the potential volatility of our management fee revenue.

        Financial markets trading businesses, as well as our asset and liability management activities, are also subject to market risks. Adverse movements in levels and volatilities of financial markets could cause losses that may affect our consolidated results of operations and financial condition. In addition, changes in investor and rating agency perceptions regarding certain asset classes or structures can also affect volatility, liquidity and market prices, which, in turn, can lead to losses. The degree of volatility in foreign exchange rates can affect our foreign exchange trading revenue. In general, we benefit from

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currency volatility, although it can increase risk. Foreign exchange revenue, all other things being equal, is likely to decrease during times of decreased currency volatility. In addition, as our business grows globally, our exposure to changes in foreign currency exchange rates could affect our levels of revenue, expense and earnings, as well as the value of our investment in our non-U.S. operations.

Interest Rate Risk

        State Street's financial performance could be unfavorably affected by changes in interest rates as they impact our asset and liability management process. The levels of global market interest rates, the shape of these yield curves (changes in the relationship between short- and long-term interest rates), the direction and speed of interest rate changes, and the asset and liability spreads relative to the currency and geographic mix of our interest-earning assets and interest-bearing liabilities, affect our net interest revenue. Our ability to anticipate these changes and/or to hedge the related exposures on and off our balance sheet can significantly influence the success of our asset and liability management process and the resulting level of our net interest revenue. The impact of changes in interest rates will depend on the relative durations of assets and liabilities in accordance with their relevant currencies. In general, sustained lower interest rates, a flat or inverted yield curve and narrow interest-rate spreads have a constraining effect on our net interest revenue.

Operational Risk

        Operational risk is inherent in all of State Street's activities. Our customers have a broad array of complex and specialized servicing, confidentiality and fiduciary requirements. We have established policies, procedures and systems designed to comply with these regulatory and operational risk requirements. We also face the potential for loss resulting from inadequate or failed internal processes, employee supervisory or monitoring mechanisms, or other systems or controls, and from external events, which could materially affect our future results of operations. We may also be subject to disruptions from events that are wholly or partially beyond our control, which could cause delays or disruptions to operational functions, including information processing and financial market settlement functions. In addition, our customers, vendors and counterparties could suffer from such events. Should these events affect us, or the customers, vendors or counterparties with which we conduct business, our results of operations could be negatively affected.

        Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities in which we engage can be intense, and we may not be able to hire people or retain them. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, their knowledge of our markets, their years of industry experience, and, in some cases, the difficulty of promptly finding qualified replacement personnel. Similarly, the loss of key portfolio management staff, either individually or as a group, can adversely impact customer perception of SSgA's ability to continue to manage certain types of investment management mandates. In some of our businesses, we have experienced significant employee turnover, which increases costs, requires additional training and increases the potential for operational risks.

        We enter into long-term fixed-price contracts to provide middle office or investment manager and hedge fund manager operations outsourcing services to customers, services related but not limited to certain trading activities, cash reporting, settlement and reconciliation activities, collateral management and information technology development. These long-term contracts require considerable up-front investment by us, including technology and conversion costs, and carry the risk that pricing for the products and services we provide might not prove adequate to generate expected operating margins over the term of the contracts. Profitability of these contracts is largely a function of our ability to accurately calculate pricing for our services and our ability to control our costs and maintain the relationship with the customer for an adequate period of time to recover our up-front investment.

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Performance risk exists in each contract, given our dependence on successful conversion and implementation onto our own operating platforms of the service activities provided. In addition, our failure to meet specified service levels may adversely affect our revenue from such arrangements, or permit early termination of the contracts by the customer.

        We actively strive to achieve significant cost savings by shifting certain business processes to lower-cost geographic locations, while continuing to maintain service quality, control and effective management of risks within these business operations. This transition to a true "shared services" operational model focuses on certain core service offerings, including middle- and back-office reconciliations, securities processing and transfer agency activities. We have employed various structural arrangements to achieve these goals, including establishing operations in lower cost areas, such as Eastern Europe, India and China, forming joint ventures in India and China and outsourcing to vendors in various jurisdictions. The increased elements of risk that arise from conducting certain operating processes in some jurisdictions could lead to an increase in reputational risk. During periods of transition, greater operational risk and client concern exists regarding the continuity of a high level of service delivery. The extent and pace at which we are able to move functions to lower-cost locations may also be impacted by regulatory and customer acceptance issues. Such relocation of functions also entails costs, such as technology and real estate expenses, that partially offset the financial benefits of the lower-cost locations.

        Our businesses depend on an information technology infrastructure to record and process a large volume of increasingly complex transactions, in many currencies, on a daily basis, across numerous and diverse markets. Any interruptions, delays and/or breakdowns of this infrastructure can result in significant costs. As a result, we continue to invest significantly in this infrastructure. Our businesses and our relationship with customers, are dependent upon our ability to maintain the confidentiality of our and our customers' trade secrets and confidential information (including personal data of their customers). A failure of our security measures in such regard could have a material adverse impact on our competitive position, relationship with customers and reputation. To the extent that we are not able to protect our intellectual property through patents or other means, we are also exposed to the risk that employees with knowledge of such intellectual property may leave and seek to exploit our intellectual property for their own advantage.

Litigation Risks

        From time to time, our customers may make claims and take legal action relating to our performance of fiduciary or contractual responsibilities. If such claims and legal actions are not resolved in a manner favorable to us, such claims may result in financial liability to State Street and/or adversely affect the market perception of us and our products and services, and could impact customer demand for our products and services. We record balance sheet reserves for probable loss contingencies, including litigation and operational losses. However, we cannot always accurately estimate our ultimate exposure. As a result, any reserves we establish to cover any settlements, judgments or operational losses may not be sufficient to cover our actual financial exposure. Any underestimation or overestimation could have a material impact on our consolidated financial condition or results of operations.

        In connection with certain of SSgA's active fixed-income strategies, we established a reserve to cover legal exposure and related costs in connection with such strategies as of December 31, 2007. Among other things, the portfolio managers for certain actively managed fixed-income strategies materially increased the exposure of these strategies to securities backed by sub-prime mortgages and shifted the weighting of these portfolios to more highly rated sub-prime instruments. During the third quarter of 2007, as the liquidity and valuations of these securities, including the more highly rated instruments, came under increased pressure, the performance of these strategies was adversely affected, in some cases significantly. The underperformance, which was greater than that typically associated with

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fixed-income funds, also caused a number of our customers to question whether the execution of these strategies was consistent with their investment intent. This has resulted in several civil suits, including putative class action claims. These lawsuits allege, among other things, that we failed to comply with our standard of care in managing these active funds as a fiduciary under ERISA. We have also received inquiries from regulatory authorities regarding SSgA's active fixed-income strategies. Given our desire to fully respond to customer concerns, following the end of the third quarter of 2007, State Street undertook a further review of all the actively managed fixed-income strategies at SSgA that were exposed to sub-prime investments. Based on our review and on-going discussions with customers who were invested in these strategies, we established the reserve to address our estimated legal exposure.

        The reserve was established based upon our best judgment as to legal exposures and related costs associated with the active fixed-income investments. As of December 31, 2007, we had entered into settlement agreements with aggregate total payments of $16 million. We believe that our reserve will be adequate to accommodate the potential exposure relating to SSgA's active fixed-income strategies. The amount of the reserve is based on certain assumptions. While we believe the reserve represents a reasonable estimate of our legal exposure and other costs associated with these issues, we do not believe that it is feasible to predict or determine the amount of such exposure with certainty. As such, it is possible that we have overestimated or underestimated our exposure. If the amount of our actual exposure is materially different from our reserve, there would be a material impact on our financial condition and results of operations.

        To determine whether the issues that arose within the active fixed-income area are limited to SSgA's active fixed-income strategies, we are conducting, with the assistance of third-party consultants, a systematic review of the operational, risk and compliance infrastructure, procedures and resources across SSgA's entire product line. This review has only recently begun and no conclusions or recommendations have resulted from that review as of the date of this filing. While we do not believe that such review will identify material legal or regulatory exposures, there can be no assurance as to the conclusions of such review.

Regulatory/Legal/Accounting/Tax Risk

        Most of our businesses are subject to extensive regulation, and many of the customers to which we provide services are themselves subject to a broad range of regulatory requirements. These regulations may affect the manner and terms of delivery of our services. As a financial institution with substantial international operations, we are subject to extensive regulatory and supervisory oversight, both in the United States and overseas in connection with our global operations. Our businesses are subject to stringent regulation and examination by U.S. federal and state governmental and regulatory agencies, including the Federal Reserve, the SEC and the Massachusetts Commissioner of Banks, and self-regulatory organizations (including securities exchanges), and by non-U.S. governmental and regulatory agencies and self-regulatory organizations. The regulations affect, among other things, the scope of our activities and customer services, our capital structure and our ability to fund the operations of our subsidiaries, our lending practices, our dividend policy and the manner in which we market our services. Evolving regulations, such as the new Basel II capital framework and anti-money laundering regulations, can require significant effort on our part to ensure compliance. New or modified regulations and related regulatory guidance may have unforeseen or unintended adverse effects on the financial services industry.

        If we do not comply with governmental regulations, we may be subject to fines, penalties or material restrictions on our businesses in the jurisdiction where the violation occurred, which may adversely affect our business operations and, in turn, our financial results. Similarly, many of our customers are subject to significant regulatory requirements, and retain our services in order for us to assist them in complying with those legal requirements. Changes in these regulations can significantly affect the services that we are asked to provide, as well as our costs. If we cause customers to fail to

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comply with these regulatory requirements, we may be liable to them for losses and expenses that they incur. In addition, adverse publicity and damage to our reputation arising from the failure or perceived failure to comply with legal, regulatory or contractual requirements could affect our ability to attract and retain customers or to maintain access to capital markets, or could result in enforcement actions, fines, penalties and lawsuits. In recent years, regulatory oversight and enforcement have increased substantially, imposing additional costs and increasing the potential risks associated with our operations. If this regulatory trend continues, it could adversely affect our operations and, in turn, our financial results.

        New accounting requirements, or changes in the interpretation of existing accounting requirements, by the Financial Accounting Standards Board or the SEC, can potentially affect our consolidated financial condition and results of operations, as accounting rules in the United States and other jurisdictions consistently evolve to reflect the increasing complexities of business. These changes are very difficult to predict, and can materially impact how we record and report our financial condition and results of operations and other financial information. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the revised treatment of certain transactions or activities, and, in some cases, the restatement of prior period financial statements.

        Our businesses can be affected by new tax legislation or the interpretation of existing tax laws worldwide. Changes in tax laws may affect our business directly or indirectly through their impact on the financial markets. In the normal course of business, we are subject to reviews by U.S. and non-U.S. tax authorities. These reviews may result in adjustments to the timing or amount of taxes due and the allocation of taxable income among tax jurisdictions. These adjustments could affect the attainment of our financial goals.

Risk Management

        We seek to monitor and manage risk on a corporate basis and within specific business units. The types of risk that we monitor and seek to manage include operational risk, interest rate risk, trading risk, fiduciary risk, legal and compliance risk, liquidity risk and credit risk. We have adopted various policies, procedures and systems to monitor and manage risk. There can be no assurance that those policies, procedures or systems are adequate to identify and mitigate all risks inherent in our various business. In addition, our businesses and the markets in which we operate are continuously evolving. We may fail to fully understand the implications of changes in our business or the financial markets and fail to adequately or timely enhance our risk framework to address those changes. If our risk framework is ineffective, either because it fails to keep pace with changes in the financial markets or our business or for other reasons, we could incur losses.

        We also measure our material risks. Our measurement methodologies rely upon many assumptions and historical analyses and correlations. There can be no assurance that those assumptions will be correct or that the historical correlations will continue to be relevant. Consequently the measurements that we make for regulatory and economic capital may not adequately capture or express the true risk profiles of our businesses. Additionally, as businesses and markets evolve, our measurements may not accurately reflect those changes. While our risk measures may indicate sufficient capitalization, we may in fact have inadequate capital to conduct our businesses.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.    PROPERTIES

        We occupy a total of approximately 6.8 million square feet of office space and related facilities around the world, of which approximately 6.1 million square feet are leased. Of the total leased space,

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approximately 3.4 million square feet are located in eastern Massachusetts. An additional 1.3 million square feet are located elsewhere throughout the U.S. and in Canada. We occupy approximately 1.0 million square feet in Europe, and approximately 370,000 square feet in the Asia/Pacific region.

        Our headquarters is located at State Street Financial Center, One Lincoln Street, Boston, Massachusetts, a 36-story office building. We have leased the entire 1,025,000 square feet of this building, as well as the entire 366,000-square-foot parking garage at One Lincoln Street, under 20-year non-cancelable capital leases. A portion of the lease payments is offset by subleases for 153,000 square feet of the building. We occupy two buildings located in Quincy, Massachusetts, one of which we own and the other we lease. The buildings, containing a total of approximately 821,000 square feet, function as State Street Bank's principal operations facilities.

        Additional information about our occupancy costs, including commitments under non-cancelable leases, is in note 18 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

ITEM 3.    LEGAL PROCEEDINGS

        We are involved in various industry-related and other regulatory, governmental and law enforcement inquiries and subpoenas, as well as legal proceedings, including recent proceedings related to SSgA's active fixed-income strategies, that arise in the normal course of business. For a discussion of recent proceedings, litigation exposure and related costs and other similar matters associated with SSgA's active fixed-income strategies, including the establishment of a reserve of approximately $625 million, refer to "Risk Factors—Litigation Risks" included under Item 1A; the "Summary," "Financial Highlights," "Operating Expenses" and "Line of Business Information" sections of Management's Discussion and Analysis of Financial Condition and Results of Operations included under Item 7; and note 10 of the Notes to Consolidated Financial Statements included under Item 8 of this Form 10-K. In the opinion of management, after discussion with counsel, these regulatory, governmental and law enforcement inquiries and subpoenas and legal proceedings, including the above-mentioned matters associated with SSgA's active fixed-income strategies, can be defended or resolved without a material adverse effect on our consolidated financial position or results of operations in future periods.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

        None.

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ITEM 4A.    EXECUTIVE OFFICERS OF THE REGISTRANT

        The following table sets forth certain information with regard to each of our executive officers as of February 15, 2008.

Name
   Age
   Position
Ronald E. Logue   62   Chairman, President, Chief Executive Officer and Chief
        Operating Officer
Joseph C. Antonellis   53   Vice Chairman
Joseph L. Hooley   50   Vice Chairman
Jeffrey N. Carp   51   Executive Vice President, Chief Legal Officer and Secretary
Joseph W. Chow   55   Executive Vice President
James J. Malerba   53   Senior Vice President and Corporate Controller
David C. O'Leary   61   Executive Vice President
James S. Phalen   57   Executive Vice President; Interim President and Chief Executive Officer of State Street Global Advisors
David C. Phelan   50   Executive Vice President, General Counsel and Assistant Secretary
Edward J. Resch   55   Executive Vice President and Chief Financial Officer
Stanley W. Shelton   53   Executive Vice President

        All executive officers are appointed by the Board of Directors. All officers hold office at the discretion of the Board. There are no family relationships among any of our directors and executive officers.

        Mr. Logue joined State Street in 1990. He has served as President since 2001 and Chief Operating Officer since 2000. In June 2004, he was appointed Chairman and Chief Executive Officer.

        Mr. Antonellis joined State Street in 1991. In 2003, he was named head of Information Technology and Global Securities Services. In 2006, he was appointed Vice Chairman with additional responsibility as head of Investor Services in North America and Global Investment Manager Outsourcing Services.

        Mr. Hooley joined State Street in 1986. Since 2002, he has served as Executive Vice President and head of Investor Services. In 2006, he was appointed Vice Chairman and global head of Investment Servicing and Investment Research and Trading.

        Mr. Carp joined State Street in January 2006 as Executive Vice President and Chief Legal Officer. In 2006, he was also appointed Secretary. From April 2004 until December 2005, Mr. Carp served as executive vice president and general counsel of Massachusetts Financial Services, an investment management and research company. From 1989 until 2004, Mr. Carp was a senior partner at the law firm of Hale and Dorr LLP, where he was an attorney since 1982.

        Mr. Chow first joined State Street in 1990, retired in 2003, and rejoined State Street in 2004. When he retired in 2003, he was Executive Vice President and head of Credit and Risk Policy. Since 2004, he has served as Executive Vice President, Risk and Corporate Administration, and is engaged in a variety of strategic and management initiatives across the organization.

        Mr. Malerba joined State Street in November 2004 as Deputy Corporate Controller. In 2006, he was appointed Corporate Controller. Prior to joining State Street, he served as Deputy Controller at FleetBoston Financial Corporation from December 2000 and continued in that role after the merger with Bank of America Corporation in April 2004.

        Mr. O'Leary joined State Street in 2005 as Executive Vice President and head of Global Human Resources. In 2004, he served as a senior advisor to Credit Suisse First Boston Corporation, a global

20


financial services company, after serving as Managing Director from 1990 to 2003 and Global Head of Human Resources from 1988 to 2003.

        Mr. James Phalen joined State Street in 1992. As of 2003, he served as Executive Vice President of State Street and Chairman and Chief Executive Officer of CitiStreet, a global benefit provider and retirement plan recordkeeper. In February 2005, he was appointed head of Investor Services in North America. In 2006, he was appointed head of international operations for Investment Servicing and Investment Research and Trading, based in Europe. In January 2008, he was appointed Interim President and Chief Executive Officer of State Street Global Advisors.

        Mr. David Phelan joined State Street in 2006 as Executive Vice President, General Counsel and Assistant Secretary. From 1995 until 2006, he was a senior partner at the law firm of Hale and Dorr LLP (and, following a merger, of Wilmer Cutler Pickering Hale and Dorr LLP), where he was an attorney since 1993.

        Mr. Resch joined State Street in 2002 as Executive Vice President and Chief Financial Officer. He also served as Treasurer from 2006 until January 2008.

        Mr. Shelton joined State Street in 1984. Since prior to 2003, he has served as Executive Vice President and head of State Street Global Markets.

21

PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET FOR REGISTRANT'S COMMON EQUITY

        Our common stock is listed on the New York Stock Exchange under the ticker symbol STT. There were 4,432 shareholders of record at December 31, 2007. Information concerning the market prices of, and dividends on, our common stock during the past two years is included in this Form 10-K under Item 8, under the caption "Quarterly Summarized Financial Information."

        In March 2007, our Board of Directors authorized the purchase of up to 15 million shares of common stock for general corporate purposes, including mitigating the dilutive impact of shares issued under employee benefit plans, in addition to its previous authorization in 2006 of up to 15 million shares, of which 12.2 million shares remained available for purchase at December 31, 2006. We generally employ third-party broker/dealers to acquire shares on the open market in connection with our common stock purchase program.

        Under the above-described authorization, during 2007 we repurchased 13.4 million shares of our common stock, and an additional .6 million shares in January 2008, in connection with a $1 billion accelerated share repurchase program that concluded on January 18, 2008. As of that date, approximately 13.2 million shares remained available for future purchase under the combined authorization described above.

RELATED STOCKHOLDER MATTERS

        As a bank holding company, the parent company is a legal entity separate and distinct from its principal banking subsidiary, State Street Bank, and its non-bank subsidiaries. The right of the parent company to participate as a shareholder in any distribution of assets of State Street Bank upon its liquidation, reorganization or otherwise is subject to the prior claims by creditors of State Street Bank, including obligations for federal funds purchased and securities sold under repurchase agreements and deposit liabilities. Payment of dividends by State Street Bank is subject to the provisions of Massachusetts banking law, which provide that dividends may be paid out of net profits provided (i) capital stock and surplus remain unimpaired, (ii) dividend and retirement fund requirements of any preferred stock have been met, (iii) surplus equals or exceeds capital stock, and (iv) losses and bad debts, as defined, in excess of reserves specifically established for such losses and bad debts, have been deducted from net profits.

        Under the Federal Reserve Act, the approval of the Federal Reserve Board would be required if dividends declared by State Street Bank in any year exceeded the total of its net profits for that year combined with retained net profits for the preceding two years, less any required transfers to surplus. Information about dividends from our subsidiary banks is in note 14 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8. Future dividend payments of State Street Bank and other non-bank subsidiaries cannot be determined at this time.

22

SHAREHOLDER RETURN PERFORMANCE PRESENTATION

        The graph presented below compares the cumulative total shareholder return on State Street's common stock to the cumulative total return of the S&P 500 Index and the S&P Financial Index for the five fiscal years which commenced January 1, 2003 and ended December 31, 2007. The cumulative total shareholder return assumes the investment of $100 in State Street common stock and in each index on December 31, 2002, and also assumes reinvestment of dividends. The S&P Financial Index is a publicly available measure of 92 of the Standard & Poor's 500 companies, representing 30 diversified financial services companies, 24 banking companies, 24 insurance companies, and 14 real estate companies.


Comparison of Five-Year Cumulative Total Shareholder Return

GRAPHIC

      2002     2003     2004     2005     2006     2007

State Street Corporation
 
$
100
 
$
135
 
$
129
 
$
148
 
$
183
 
$
223

S&P 500 Index
 
 
100
 
 
129
 
 
143
 
 
150
 
 
173
 
 
183

S&P Financial Index
 
 
100
 
 
131
 
 
145
 
 
155
 
 
184
 
 
150

23

ITEM 6.    SELECTED FINANCIAL DATA

(Dollars in millions, except per share amounts or where otherwise noted)

FOR THE YEAR ENDED DECEMBER 31:

   2007
   2006
   2005
   2004
   2003
  
Total fee revenue   $ 6,599   $ 5,186   $ 4,551   $ 4,048   $ 3,556  
Net interest revenue     1,730     1,110     907     859     810  
Provision for loan losses     —     —     —     (18 )   —  
Gains (Losses) on sales of available-for-sale investment securities, net     7     15     (1 )   26     23  
Gain on sale of Private Asset Management business, net of exit and other associated costs     —     —     16     —     285  
Gain on sale of Corporate Trust business, net of exit and other associated costs     —     —     —     —     60  
   
 
 
 
 
 
Total revenue     8,336     6,311     5,473     4,951     4,734  
Total operating expenses     6,433     4,540     4,041     3,759     3,622  
   
 
 
 
 
 
Income from continuing operations before income tax expense     1,903     1,771     1,432     1,192     1,112  
Income tax expense from continuing operations     642     675     487     394     390  
   
 
 
 
 
 
Income from continuing operations     1,261     1,096     945     798     722  
Income (Loss) from discontinued operations     —     10     (107 )   —     —  
   
 
 
 
 
 
Net income   $ 1,261   $ 1,106   $ 838   $ 798   $ 722  
   
 
 
 
 
 
PER COMMON SHARE:                                
Basic earnings:                                
  Continuing operations   $ 3.50   $ 3.31   $ 2.86   $ 2.38   $ 2.18  
  Net income     3.50     3.34     2.53     2.38     2.18  
Diluted earnings:                                
  Continuing operations     3.45     3.26     2.82     2.35     2.15  
  Net income     3.45     3.29     2.50     2.35     2.15  
Cash dividends declared     .88     .80     .72     .64     .56  
Closing price of common stock (at year end)     81.20     67.44     55.44     49.12     52.08  

AT YEAR END:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities   $ 74,559   $ 64,992   $ 59,870   $ 37,571   $ 38,215  
Total assets     142,543     107,353     97,968     94,040     87,534  
Deposits     95,789     65,646     59,646     55,129     47,516  
Long-term debt     3,636     2,616     2,659     2,458     2,222  
Shareholders' equity     11,299     7,252     6,367     6,159     5,747  

Assets under custody (in billions)
 
$
15,299
 
$
11,854
 
$
10,121
 
$
9,497
 
$
9,370
 
Assets under management (in billions)     1,979     1,749     1,441     1,354     1,106  

Number of employees
 
 
27,110
 
 
21,700
 
 
20,965
 
 
19,668
 
 
19,850
 

RATIOS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations:                                
  Return on shareholders' equity     13.4 %   16.2 %   15.3 %   13.3 %   13.9 %
  Return on average assets     1.02     1.03     .95     .84     .87  
  Dividend payout     25.2     24.2     25.3     26.9     25.9  
Net income:                                
  Return on shareholders' equity     13.4     16.4     13.6     13.3     13.9  
  Return on average assets     1.02     1.04     .84     .84     .87  
  Dividend payout     25.2     24.0     28.5     26.9     25.9  
Average shareholders' equity to average total assets     7.6     6.3     6.2     6.3     6.3  
Tier 1 risk-based capital     11.2     13.7     11.7     13.3     14.0  
Total risk-based capital     12.7     15.9     14.0     14.7     15.8  
Tier 1 leverage ratio     5.3     5.8     5.6     5.5     5.6  
Tangible common equity to adjusted total assets     3.5     5.1     4.8     4.5     4.5  

24

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

        State Street Corporation is a financial holding company organized under the laws of the Commonwealth of Massachusetts. All references in this Management's Discussion and Analysis to "the parent company" are to State Street Corporation. Unless otherwise indicated or unless the context requires otherwise, all references in this Management's Discussion to "State Street," "we," "us," "our" or similar terms mean State Street Corporation and its subsidiaries on a consolidated basis. State Street Bank and Trust Company is referred to as "State Street Bank." At December 31, 2007, we had total assets of $142.54 billion, total deposits of $95.79 billion, total shareholders' equity of $11.30 billion and employed 27,110. With $15.30 trillion of assets under custody and $1.98 trillion of assets under management at year-end 2007, we are a leading specialist in meeting the needs of institutional investors worldwide.

        We report two lines of business: Investment Servicing and Investment Management. These lines of business provide a full range of products and services for our customers, which include mutual funds and other collective investment funds, corporate and public retirement plans, insurance companies, foundations, endowments and other investment pools, and investment managers. Investment Servicing provides services to support institutional investors, such as custody, product- and participant-level accounting, daily pricing and administration; master trust and master custody; recordkeeping; shareholder services, including mutual fund and collective investment fund shareholder accounting; foreign exchange, brokerage and other trading services; securities finance; deposit and short-term investment facilities; loans and lease financing; investment manager and hedge fund manager operations outsourcing; and performance, risk and compliance analytics. Investment Management provides a broad array of services for managing financial assets, such as investment research services and investment management, including passive and active U.S. and non-U.S. equity and fixed-income strategies. For additional information about our lines of business, see the "Line of Business Information" section of this Management's Discussion and Analysis and note 22 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

        This Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in this Form 10-K under Item 8. Certain previously reported amounts presented have been reclassified to conform to current period classifications. We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S., referred to as "GAAP". The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions in the application of certain accounting policies that materially affect the reported amounts of assets, liabilities, revenue, and expenses. Accounting policies that require management to make assumptions that are difficult, subjective, or complex about matters that are uncertain and may change in subsequent periods are discussed in more depth in the "Significant Accounting Estimates" section of this Management's Discussion and Analysis.

        This Management's Discussion and Analysis contains statements that are considered "forward-looking statements" within the meaning of U.S. federal securities laws. Forward-looking statements are based on our current expectations about revenue and market growth, acquisitions and divestitures, new technologies, services and opportunities, earnings and other factors. These forward-looking statements involve certain risks and uncertainties which could cause actual results to differ materially. We undertake no obligation to revise the forward-looking statements contained in this Management's Discussion and Analysis to reflect events after the date we file this Form 10-K with the SEC. Additional information about forward-looking statements and related risks and uncertainties is included in the Risk Factors section of this Form 10-K under Item 1A.

25

OVERVIEW OF FINANCIAL RESULTS

Years ended December 31,
   2007(1)
   2006
   2005
  
(Dollars in millions, except per share amounts)

    
    
    
  
Total fee revenue   $ 6,599   $ 5,186   $ 4,551  
Net interest revenue     1,730     1,110     907  
Provision for loan losses     —     —     —  
Gains (Losses) on sales of available-for-sale investment securities, net     7     15     (1 )
Gain on sale of divested business     —     —     16  
   
 
 
 
Total revenue     8,336     6,311     5,473  
Total operating expenses(2)     6,433     4,540     4,041  
   
 
 
 
Income from continuing operations before income tax expense     1,903     1,771     1,432  
Income tax expense from continuing operations     642     675     487  
   
 
 
 
Income from continuing operations     1,261     1,096     945  
Income (Loss) from discontinued operations     —     10     (107 )
   
 
 
 
Net income   $ 1,261   $ 1,106   $ 838  
   
 
 
 
Earnings per share from continuing operations:                    
  Basic   $ 3.50   $ 3.31   $ 2.86  
  Diluted     3.45     3.26     2.82  
Earnings per share:                    
  Basic   $ 3.50   $ 3.34   $ 2.53  
  Diluted     3.45     3.29     2.50  
Average shares outstanding (in thousands):                    
  Basic     360,675     331,350     330,361  
  Diluted     365,488     335,732     334,636  
Return on shareholders' equity from continuing operations     13.4 %   16.2 %   15.3 %
Return on shareholders' equity     13.4     16.4     13.6  
(1)
Financial results for the year ended December 31, 2007 include results of the acquired Investors Financial business for the third and fourth quarters of 2007.

(2)
Operating expenses for the year ended December 31, 2007 include merger and integration costs of $198 million associated with the acquisition of Investors Financial and a net charge of $467 million related to certain active fixed-income strategies at State Street Global Advisors.

Summary

        Our financial results for 2007 reflect our overall objectives of consistent revenue growth, managing growth in operating expenses and balancing growth in operating expenses with growth in revenue.

26

        Certain financial information is presented and discussed in the following sections on both a GAAP basis and on an "operating" basis. Management measures certain financial information on an operating basis to provide for meaningful comparisons from period to period, and to present comparable financial trends with respect to our normal ongoing business operations. Management believes that operating-basis financial information, which includes the impact of revenue from non-taxable sources and excludes the impact of non-recurring expenses, 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.

Financial Highlights

        For 2007, we recorded income from continuing operations of $1.3 billion, or $3.45 per diluted share, compared to $1.1 billion, or $3.26 per diluted share, for 2006. Total revenue increased 32% from 2006, and return on equity from continuing operations was 13.4% compared to 16.2% for 2006. Results for 2007 included two significant expenses. First, we recorded aggregate merger and integration costs of $198 million, or $129 million after-tax, in connection with our acquisition of Investors Financial. Second, we recorded a net pre-tax charge of $467 million, or $279 million after-tax, in connection with the establishment of a reserve to address legal exposure and other costs associated with the underperformance of certain active fixed-income strategies managed by SSgA, and customer concerns as to whether the execution of these strategies was consistent with the customers' investment intent. These costs are more fully discussed in the "Consolidated Results of Operations—Operating Expenses" section of this Management's Discussion and Analysis.

        Our results for 2006 included income from discontinued operations of $10 million (pre-tax income of $16 million reduced by related income tax expense of $6 million), or $.03 per diluted share, the result of the finalization of certain legal, selling and other costs recorded in connection with our divestiture of Bel Air Investment Advisors LLC.

        Total revenue for 2007 grew 32% from 2006. Total fee revenue for 2007, which grew 27%, reflected consistent growth throughout the year in servicing fees and management fees, up 24% and 21%, respectively, compared to 2006, and trading services and securities finance revenue, up 34% and 76%, respectively. Generally, servicing fees benefited from the inclusion of the acquired Investors Financial

27


business, net new business and favorable equity markets, and management fees benefited primarily from net new business and favorable equity markets. Trading services revenue grew primarily as a result of increases in customer volumes and the inclusion of the acquired Investors Financial business, with respect to foreign exchange revenue, and as a result of the inclusion of revenue from the acquired Currenex business, with respect to other trading services revenue. Securities finance revenue benefited from increases in volumes of securities loaned, both from new customers and from growth in volume from existing customers, and increases in spreads.

        Net interest revenue increased 56% compared to 2006, and net interest margin increased to 1.71% from 1.25%. This growth was the result of several favorable trends—(1) favorable rates and volumes on non-U.S. deposits; (2) the addition of interest-earning assets from Investors Financial's balance sheet; and (3) the favorable impact of fixed-rate investments.

        Total operating expenses increased 42% from 2006, partly reflective of the $665 million aggregate impact of merger and integration costs associated with Investors Financial and a net pre-tax charge associated with certain SSgA active fixed-income strategies. If these aggregate costs are excluded, total operating expenses for 2007 totaled $5.768 billion ($6.433 billion less $665 million), an increase of 27% from $4.54 billion for 2006, as we continued to carefully manage operating expenses and balance growth in operating expenses with growth in revenue. Most of the increase resulted from the inclusion of the operating expenses of the acquired Investors Financial business for the second half of 2007, as well as increased incentive compensation due to improved performance and increased staffing levels to support new business, particularly internationally. Excluding the aggregate $665 million of merger and integration costs and the net pre-tax charge, as a result of year-over-year growth in revenue of 32% and year-over-year growth in total operating expenses of 27% as described above, we generated positive operating leverage of approximately 500 basis points. We define positive operating leverage as a rate of total revenue growth that exceeds the rate of growth of total operating expenses, determined on an operating basis.

        SSgA was a significant contributor to our overall results for 2007. Its total revenue increased 25% for 2007 over 2006, and comprised about 18% of our total consolidated revenue for 2007, compared to 19% for 2006. In addition, SSgA generated net new business in assets under management, which we expect will generate management fee revenue in future years, of approximately $116 billion for 2007, compared to $86 billion for 2006. The decline in SSgA's relative contribution to our consolidated total revenue was the result of the impact of the acquired Investors Financial business's revenue on total revenue of our Investment Servicing line of business, which increased 34% for 2007 over 2006.

        We continue to expand our business outside of the U.S., particularly in Europe and the Asia/Pacific region. For 2007, approximately $3.42 billion, or 41% of our consolidated total revenue of $8.336 billion, was generated from non-U.S. activities, compared to 43% for 2006. The 2007 percentage reflects revenue from the acquired Investors Financial business, which was predominantly generated in the U.S. For illustrative purposes, if we exclude total revenue from the acquired Investors Financial business for 2007 of $456 million, non-U.S. revenue of $3.42 billion for 2007 comprised approximately 43% of consolidated total revenue for 2007 of $7.88 billion ($8.336 billion less $456 million). At year-end 2007, we employed 9,500 outside the U.S., compared to 8,630 at year-end 2006. Our goal is to eventually generate 50% of our consolidated total revenue from outside the United States.

        Assets under custody and assets under management both increased from year-end 2006, with assets under custody at $15.30 trillion, up 29% from $11.85 trillion a year ago, and assets under management at $1.98 trillion, up 13% from $1.75 trillion a year ago. The acquired Investors Financial business contributed $1.9 trillion of assets under custody. Assets under custody have grown at a compound annual rate of 13% since year-end 2003, with U.S. assets growing by 12% and non-U.S. assets growing by 16%, while assets under management have grown at a compound annual rate of 16% over the same period.

28

CONSOLIDATED RESULTS OF OPERATIONS

        This section discusses our consolidated results of operations for 2007 compared to 2006, and should be read in conjunction with the consolidated financial statements and accompanying notes included in this Form 10-K under Item 8. A comparison of consolidated results of operations for 2006 with those for 2005 is provided in the "Comparison of 2006 and 2005—Overview of Consolidated Results of Operations" section of this Management's Discussion and Analysis.

TOTAL REVENUE

Years ended December 31,
   2007
   2006
   2005
   Change
2006-2007
  
(Dollars in millions)

    
    
    
    
  
Fee revenue:                        
Servicing fees   $ 3,388   $ 2,723   $ 2,474   24 %
Management fees     1,141     943     751   21  
Trading services     1,152     862     694   34  
Securities finance     681     386     330   76  
Processing fees and other     237     272     302   (13 )
   
 
 
     
Total fee revenue     6,599     5,186     4,551   27  
Net interest revenue:                        
Interest revenue     5,212     4,324     2,930   21  
Interest expense     3,482     3,214     2,023   8  
   
 
 
     
Net interest revenue     1,730     1,110     907   56  
Provision for loan losses     —     —     —      
   
 
 
     
Net interest revenue after provision for loan losses     1,730     1,110     907   56  
Gains (Losses) on sales of available-for-sale investment securities, net     7     15     (1 )    
Gain on sale of Private Asset Management business     —     —     16      
   
 
 
     
Total revenue   $ 8,336   $ 6,311   $ 5,473   32  
   
 
 
     

        We are one of the world's leading specialists in servicing mutual funds, other collective investment funds and pension plans. We are consistently gaining business globally, and for 2007, our non-U.S. revenue was approximately 41% of our total revenue, compared to 43% for 2006 and 24% for 2002. We provide a broad range of reliable, easy-to-integrate investment services that are global and enable our customers to develop and launch competitive new investment products. We also provide active management products, including enhanced indexing, hedge fund strategies and quantitative management, and passive investment management products and strategies.

        We provide fund accounting, custody, investment management, securities finance, transfer agency services, and operations outsourcing for investment managers and hedge fund managers. These services support the complex financial strategies and transactions of our customers worldwide, in any time zone across multiple currencies. Our focus on the total needs of the customer allows us to develop active, long-term relationships that result in high customer retention, cross-selling opportunities, and recurring revenue. The servicing markets in which we compete are very price-competitive, and we consistently focus on winning and retaining customer business. This focus requires a strong commitment to customers while constantly working toward providing services at lower costs.

        Our broad range of services generates fee revenue and net interest revenue. Fee revenue generated by investment servicing and investment management is augmented by securities finance, trading services and other processing fee revenue. We earn net interest revenue from customers' deposits and short-term investment activities, by providing deposit services and short-term investment vehicles, such as repurchase agreements and commercial paper, to meet customers' needs for high-grade liquid investments, and investing these sources of funds and additional borrowings in assets yielding a higher rate.

29

Fee Revenue

        Servicing and management fees are the largest components of fee revenue, and collectively comprised approximately 69% of total fee revenue for 2007 and 71% for 2006. These fees are a function of several factors, including the mix and volume of assets under custody and assets under management, securities positions held and the volume of portfolio transactions, and the types of products and services used by customers, and are affected by changes in worldwide equity and fixed-income valuations.

        Generally, servicing fees are impacted, in part, by changes in daily average valuations of assets under custody, while management fees are impacted by changes in month-end valuations of assets under management. Additional factors, such as the level of transaction volumes, changes in service level, balance credits, customer minimum balances, pricing concessions and other factors may have a significant impact on servicing fee revenue. Generally, management fee revenue is more sensitive to market valuations than servicing fee revenue. Management fees also include performance fees, which amounted to approximately 6% of management fees for 2007 compared to 9% for 2006. Performance fees are generated when the performance of managed funds exceeds benchmarks specified in the management agreements, and we experience more volatility with performance fees than with more traditional management fees.

        In light of the above, we estimate, assuming all other factors remain constant, that a 10% increase or decrease in worldwide equity values would result in a corresponding change in our total revenue of approximately 2%. If fixed-income security values were to increase or decrease by 10%, we would anticipate a corresponding change of approximately 1% in our total revenue.

        The following table presents selected equity market indices. Daily averages and the averages of month-end indices demonstrate worldwide equity market valuation changes that impact servicing and management fee revenue, respectively. Year-end indices impact the value of assets under custody and management at those dates. The index names listed in the table and elsewhere in this Management's Discussion and Analysis are service marks of their respective owners.

INDEX

 
   Daily Averages of Indices
   Average of Month-End Indices
   Year-End Indices
  
 
   2007
   2006
   Change
   2007
   2006
   Change
   2007
   2006
   Change
  
S&P 500®   1,477   1,310   13 % 1,478   1,318   12 % 1,468   1,418   4 %
NASDAQ®   2,578   2,263   14   2,588   2,279   14   2,652   2,415   10  
MSCI EAFE®   2,212   1,858   19   2,230   1,883   18   2,253   2,074   9  

FEE REVENUE

Years ended December 31,
   2007
   2006
   2005
   Change
2006-2007
  
(Dollars in millions)

    
    
    
    
  
Servicing fees   $ 3,388   $ 2,723   $ 2,474   24 %
Management fees(1)     1,141     943     751   21  
Trading services     1,152     862     694   34  
Securities finance     681     386     330   76  
Processing fees and other     237     272     302   (13 )
   
 
 
     
Total fee revenue   $ 6,599   $ 5,186   $ 4,551   27  
   
 
 
     
(1)
Includes performance fees of $72 million, $84 million and $41 million for 2007, 2006 and 2005, respectively.

30

        Approximately 61% of the $1.4 billion increase in total fee revenue over 2006 was generated from servicing and management fees.

Servicing Fees

        Servicing fees include fee revenue from U.S. mutual funds, collective investment funds worldwide, corporate and public retirement plans, insurance companies, foundations, endowments, and other investment pools. Products and services include custody; product- and participant-level accounting; daily pricing and administration; recordkeeping; investment manager and hedge fund manager operations outsourcing services; master trust and master custody; and performance, risk and compliance analytics.

        The increase in servicing fees of $665 million from 2006 primarily resulted from the inclusion of $304 million of servicing fee revenue from the acquired Investors Financial business, net new business from existing and new customers, higher average equity market valuations and higher customer transaction volumes. Net new business is defined as new business net of lost business. For 2007, servicing fees generated from customers outside the U.S. were approximately 41% of total servicing fees, down from 44% in 2006. The decrease in the non-U.S. proportion reflected the contribution of servicing fees from the acquired Investors Financial business, which are generated predominantly in the U.S.

        We are the largest provider of mutual fund custody and accounting services in the United States. We distinguish ourselves from other mutual fund service providers by offering customers a broad array of integrated products and services, including accounting, daily pricing and fund administration. We calculate more than 34% of the U.S. mutual fund prices provided to NASDAQ that appear daily in The Wall Street Journal and other publications with an accuracy rate of 99.9%.

        We have a leading position for servicing U.S. tax-exempt assets for corporate and public pension funds. We provide trust and valuation services for more than 4,000 daily-priced portfolios, making us a leader for both monthly and daily valuation services.

        We are a leading service provider outside of the U.S. as well. In Germany, we provide Depotbank services for approximately 16% of retail and institutional fund assets. In the United Kingdom, we provide custody services for 18% of pension fund assets and provide administration services to more than 24% of mutual fund assets. We service approximately 23% of the hedge fund market and more than $650 billion of offshore assets, primarily domiciled in Ireland and Luxembourg. We have more than $1 trillion in assets under administration in the Asia/Pacific region, and are the largest non-domestic trust bank in Japan.

        At year-end 2007, our total assets under custody were $15.30 trillion, compared to $11.85 trillion a year earlier. The value of assets under custody is a broad measure of the relative size of various markets served. Changes in the value of assets under custody do not necessarily result in proportional changes in revenue. Assets under custody consisted of the following at December 31:

ASSETS UNDER CUSTODY

As of December 31,
   2007
   2006
   2005
   2004
   2003
   2006-2007
AGR
   2003-2007
CAGR
  
(Dollars in billions)

    
    
    
    
    
    
    
  
Mutual funds   $ 4,803   $ 3,738   $ 3,442   $ 3,088   $ 3,094   28 % 12 %
Collective funds     3,199     1,665     1,001     911     1,153   92   29  
Pension products     3,960     3,713     3,358     3,254     3,026   7   7  
Insurance and other products     3,337     2,738     2,320     2,244     2,097   22   12  
   
 
 
 
 
         
Total   $ 15,299   $ 11,854   $ 10,121   $ 9,497   $ 9,370   29   13  
   
 
 
 
 
         

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FINANCIAL INSTRUMENT MIX OF ASSETS UNDER CUSTODY

As of December 31,
   2007
   2006
   2005
(In billions)

    
    
    
Equities   $ 8,653   $ 5,821   $ 4,814
Fixed-income     4,087     4,035     3,797
Short-term and other investments     2,559     1,998     1,510
   
 
 
Total   $ 15,299   $ 11,854   $ 10,121
   
 
 

GEOGRAPHIC MIX OF ASSETS UNDER CUSTODY(1)

As of December 31,
   2007
   2006
   2005
(In billions)

    
    
    
United States   $ 11,792   $ 8,962   $ 7,773
Other Americas     698     607     508
Europe/Middle East/Africa     2,163     1,815     1,454
Asia/Pacific     646     470     386
   
 
 
Total   $ 15,299   $ 11,854   $ 10,121
   
 
 
(1)
Geographic mix is based on the location where the assets are serviced.

Management Fees

        We provide a broad range of investment management strategies, specialized investment management advisory services and other financial services for corporations, public funds, and other sophisticated investors. These services are offered through SSgA. Based upon assets under management, SSgA is the largest manager of institutional assets worldwide, the largest manager of assets for tax-exempt organizations (primarily pension plans) in the United States, and the third largest investment manager overall in the world. SSgA offers a broad array of investment management strategies, including passive and active, such as enhanced indexing and hedge fund strategies, using quantitative and fundamental methods for both U.S. and global equities and fixed income securities. SSgA also offers exchange traded funds, or "ETFs," such as the SPDR® Dividend ETFs.

        The $198 million increase in management fees from 2006 primarily resulted from net new business and higher equity market valuations. Performance fees decreased from $84 million in 2006 to $72 million in 2007. Management fees generated from customers outside the United States were approximately 41% of total management fees, up from 32% for 2006.

        At year-end 2007, assets under management were $1.98 trillion, compared to $1.75 trillion at year-end 2006. While certain management fees are directly determined by the value of assets under management and the investment strategy employed, management fees reflect other factors as well, including our relationship pricing for customers who use multiple services, and the benchmarks specified in the respective management agreements related to performance fees. Accordingly, no direct correlation necessarily exists between the value of assets under management, market indices and management fee revenue. Assets under management consisted of the following at December 31:

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ASSETS UNDER MANAGEMENT

As of December 31,
   2007
   2006
   2005
   2004
   2003
   2006-2007
AGR
   2003-2007
CAGR
  
(Dollars in billions)

    
    
    
    
    
    
    
  
Equities:                                        
  Passive   $ 803   $ 691   $ 625   $ 600   $ 519   16 % 12 %
  Active and other     206     181     147     122     81   14   26  
  Company stock/ESOP     79     85     76     77     76   (7 ) 1  
   
 
 
 
 
         
Total equities     1,088     957     848     799     676   14   13  
Fixed-income:                                        
  Passive     216     180     128     106     81   20   28  
  Active     43     34     28     35     10   26   44  
Cash and money market     632     578     437     414     339   9   17  
   
 
 
 
 
         
Total fixed-income and cash     891     792     593     555     430   13   20  
   
 
 
 
 
         
Total   $ 1,979   $ 1,749   $ 1,441   $ 1,354   $ 1,106   13   16  
   
 
 
 
 
         

GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT(1)

As of December 31,
   2007
   2006
   2005
(In billions)

    
    
    
United States   $ 1,353   $ 1,202   $ 1,023
Other Americas     36     30     24
Europe/Middle East/Africa     427     384     275
Asia/Pacific     163     133     119
   
 
 
Total   $ 1,979   $ 1,749   $ 1,441
   
 
 
(1)
Geographic mix is based on the location where the assets are managed.

        The following table presents a roll-forward of assets under management for the three years ended December 31, 2007:

ASSETS UNDER MANAGEMENT

Years Ended December 31,
   2007
   2006
   2005
(In billions)

    
    
    
Balance at beginning of year   $ 1,749   $ 1,441   $ 1,354
Net new business     116     86     36
Market appreciation     114     222     51
   
 
 
Balance at end of year   $ 1,979   $ 1,749   $ 1,441
   
 
 

Trading Services

        Trading services revenue includes revenue from foreign exchange trading and brokerage and other trading services. We offer a complete range of foreign exchange services under an account model that focuses on the global requirements of our customers to execute trades and receive market insights in any time zone. In March 2007, we acquired Currenex's electronic foreign exchange trading platform. The Currenex business serves hedge funds, banks and other commercial enterprises in the active-trading segment of the foreign exchange market. We have exclusive ownership of FX Connect®, the world's first foreign exchange trading platform, and we provide quantitatively-based research into investor behavior, as well as consultative services that use quantitative tools designed to optimize our

33


customers' returns. Foreign exchange trading revenue is influenced by three principal factors: the volume and type of customer foreign exchange transactions; currency volatility; and the management of currency market risks.

        For 2007, foreign exchange trading revenue increased 31%, to $802 million from $611 million in 2006, and benefited from the disruption in the global securities markets that occurred in the second half of the year. The increase was mainly driven by a 39% increase in customer volumes, but also was the result of the inclusion of $43 million of foreign exchange revenue from the acquired Investors Financial business. These increases were partly offset by an unfavorable transaction mix influenced by lower margin transactions and a 5% decline in currency volatility.

        We also offer a range of brokerage and other trading products tailored specifically to meet the needs of the global pension community, including transition management, commission recapture and self-directed brokerage. These products are differentiated by our position as an agent of the institutional investor. Brokerage and other trading fees were $350 million in 2007, up 39% compared to 2006. The increase was attributable to the contribution of revenue from the acquired Currenex business and an increase in revenue from transition management.

Securities Finance

        Securities finance provides liquidity to the financial markets and an effective means for customers to earn revenue on their existing portfolios. By acting as a lending agent and coordinating loans between lenders and borrowers, we lend securities and provide liquidity to customers around the world. Borrowers provide collateral in the form of cash or securities to State Street in return for loaned securities. For cash collateral, we pay a usage fee to the provider of the cash collateral, and invest the cash collateral in certain investment vehicles. The spread between the yield on the investment vehicle and the usage fee paid to the provider of the collateral is split between the lender of the securities and State Street as agent. For non-cash collateral, the borrower pays a fee for the loaned securities, and the fee is split between the lender of the securities and State Street.

        Securities finance revenue is principally a function of the volume of securities loaned and the interest-rate spreads earned on the collateral. For 2007, securities finance revenue increased 76% from a year earlier, as loan volumes increased 30%, with this volume resulting from both new customer demand and increased demand from existing customers. Consolidated spread also increased, primarily in the domestic and non-U.S. equity portfolios and the corporate bond and fixed-income portfolios. Spreads benefited from reductions in federal funds rates during 2007, as well as from the above-mentioned market disruption.

Processing Fees and Other

        Processing fees and other revenue includes diverse types of fees and other revenue, including fees from our structured products business, fees from software licensing and maintenance, profits and losses from unconsolidated subsidiaries, gains and losses on sales of leased equipment and other assets, and amortization of investments in tax-advantaged financings. Processing fees and other revenue decreased 13% from 2006, with an additional $32 million of revenue from the acquired Investors Financial business and improved joint venture performance more than offset by reduced revenue from the structured products business, primarily from the asset-backed commercial paper program, and the absence of revenue from our tax-exempt investment program. The absence of revenue from the tax-exempt investment program resulted from the impact of the consolidation of the program onto our balance sheet on September 30, 2006. As a result of this consolidation, revenue from the program, previously recorded in processing fees and other, is now recorded in net interest revenue.

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NET INTEREST REVENUE

Years ended December 31,

   2007
   2006
   2005
  
 
   Average
Balance
   Interest
Revenue/
Expense
   Rate
   Average
Balance
   Interest
Revenue/
Expense
   Rate
   Average
Balance
   Interest
Revenue/
Expense
   Rate
  

(Dollars in millions; fully
taxable-equivalent basis)

    
    
    
    
    
    
    
    
    
  
Federal funds sold and securities purchased under resale agreements   $ 14,402   $ 756   5.25 % $ 12,820   $ 663   5.17 % $ 12,890   $ 412   3.20 %
Investment securities     70,990     3,649   5.14     61,579     2,956   4.80     51,153     1,817   3.55  
Loans and leases     10,753     394   3.67     7,670     288   3.75     6,013     193   3.21  
Other     8,405     471   5.60     10,596     462   4.36     17,730     550   3.10  
   
 
     
 
     
 
     
Total interest-earning assets   $ 104,550   $ 5,270   5.04   $ 92,665   $ 4,369   4.72   $ 87,786   $ 2,972   3.39  
   
 
     
 
     
 
     
Deposits   $ 68,220   $ 2,298   3.37 % $ 55,635   $ 1,891   3.40 % $ 49,703   $ 1,132   2.28 %
Short-term borrowings     22,024     959   4.36     25,699     1,145   4.46     26,708     753   2.82  
Long-term debt     3,402     225   6.62     2,621     178   6.77     2,461     138   5.63  
   
 
     
 
     
 
     
Total interest-bearing liabilities   $ 93,646   $ 3,482   3.72   $ 83,955   $ 3,214   3.83   $ 78,872   $ 2,023   2.57  
   
 
     
 
     
 
     
Interest-rate spread               1.32 %             .89 %             .82 %
Net interest revenue - fully taxable-equivalent basis(1)         $ 1,788             $ 1,155             $ 949      
         
           
           
     
Net interest margin - fully taxable-equivalent basis               1.71 %             1.25 %             1.08 %

Net interest revenue —
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  GAAP basis         $ 1,730             $ 1,110             $ 907      
(1)
Amounts include fully taxable-equivalent adjustments of $58 million for 2007, $45 million for 2006 and $42 million for 2005.

        Net interest revenue is defined as the total of interest revenue on interest-earning assets less interest expense on interest-bearing liabilities. Interest-earning assets, which consist of investment securities, loans and leases and money market assets, are financed primarily by customer deposits and short-term borrowings. Additional detail about the components of interest revenue and interest expense is in note 16 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

        On a fully taxable-equivalent basis, net interest revenue increased 55% (56% on a GAAP basis) compared to 2006, and net interest margin increased to 1.71% from 1.25%. This growth was the result of several favorable trends. First, transaction deposit volume, particularly with respect to non-U.S. deposits, increased 28%, and spread increased 29%. Volume increases resulted from net new business in non-U.S. assets under custody, as we continue to grow our servicing business internationally, and spreads increased because deposit rates lagged rate increases by foreign central banks during 2006 and 2007. Second, the acquired Investors Financial business added interest-earning assets and related net interest revenue. Third, as fixed-rate investment securities matured, they were replaced by higher yielding investments.

        Net interest margin represents the relationship between net interest revenue and average interest-earning assets. Changes in the components of interest-earning assets, as well as interest-bearing liabilities, are discussed in more detail below.

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        Average federal funds sold and securities purchased under resale agreements increased 12.3% or $1.58 billion, from $12.82 billion in 2006 to $14.40 billion for 2007. The increase was primarily the result of excess liquidity.

        Our average investment securities portfolio increased from approximately $61.58 billion to approximately $70.99 billion, primarily due to the acquisition of investment securities of Investors Financial and increases in our tax-exempt securities portfolio. The investment portfolio now includes a higher percentage of collateralized mortgage obligations and mortgage- and asset- backed securities compared to a year earlier. These increases did not adversely affect overall risk, as we continued to invest conservatively in "AA" and "AAA" rated securities. Securities rated "AA" and "AAA" comprised approximately 95% of the investment securities portfolio, with approximately 89% "AAA" rated, at December 31, 2007.

        Loans and leases averaged $10.75 billion, up 40% from $7.67 billion in 2006. The increase was related to higher levels of customer overdraft activity. Approximately 70% of the loans and leases portfolio is composed of U.S. and non-U.S. short-duration advances, primarily related to the processing of custodied customer investments, which averaged approximately $7.53 billion for 2007, up from $5.21 billion in 2006.

        The $12.59 billion increase in average interest-bearing deposits from 2006 was mainly due to the acquisition of Investors Financial and an increase in low cost customer deposits, primarily non-U.S. deposits. This deposit growth funded the $11.89 billion increase in average interest-earning assets.

        Average short-term borrowings decreased primarily due to the liquidity provided by the increase in customer deposits, and long-term debt increased due to debt issuances associated with the Investors Financial acquisition.

        Several factors could affect future levels of net interest revenue and margin, including the Federal Reserve's ongoing actions to manage short-term interest rates, the level and pace of changes in non-U.S. interest rates, particularly as a result of actions of the European Central Bank and the Bank of England, the mix of customer liabilities, and the shapes of the various yield curves around the world.

Gains (Losses) on Sales of Available-for-Sale Securities, Net

        Our management of the investment securities portfolio has many objectives, the foremost of which are to provide liquidity and to serve as a source of collateral for customer activities. These objectives may entail strategic sales of specific securities as market conditions warrant. We recorded net gains of $7 million on sales of available-for-sale securities for 2007, compared to net gains of $15 million for 2006. At December 31, 2007, approximately 94% of the investment securities portfolio, or $70.33 billion, was classified as available for sale. Additional information about available-for-sale securities, and the gross gains and losses that comprise the net gains, is in note 3 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

36

OPERATING EXPENSES

Years Ended December 31,
   2007
   2006
   2005
   Change
2006—2007
  
(Dollars in millions)

    
    
    
    
  
Salaries and employee benefits   $ 3,256   $ 2,652   $ 2,231   23 %
Information systems and communications     546     501     486   9  
Transaction processing services     619     496     449   25  
Occupancy     408     373     391   9  
Provision for legal exposure     600     —     —   —  
Merger and integration costs     198     —     —   —  
Other     806     518     484   56  
   
 
 
     
Total operating expenses   $ 6,433   $ 4,540   $ 4,041   42  
   
 
 
     
Number of employees at year-end     27,110     21,700     20,965      

        The 23% increase in salaries and employee benefits from 2006 was driven primarily by the inclusion of approximately $180 million of salaries and benefits expense of the acquired Investors Financial business and salaries and benefits expense of the acquired Currenex business, higher incentive compensation costs due to improved performance which were offset by the reduction of incentive compensation recorded as part of the net pre-tax charge related to SSgA discussed later in this section, and the impact of higher staffing levels. Staffing levels increased to support growth in our Investment Servicing business, particularly in Europe, and in our Investment Management business, as well as in information technology and risk management.

        The increase in information systems and communications expense included approximately $21 million from the acquired Investors Financial business, as well as increased spending internationally to support growth.

        Transaction processing services expenses are volume-related, and include equity trading services and fees related to securities settlement, sub-custodian fees and external contract services. The 25% increase included approximately $39 million from the acquired Investors Financial business, specifically sub-custody costs, higher transaction volumes, and external contract services, primarily in Europe.

        Occupancy expense was up 9% from 2006, primarily due to additional leased space acquired as part of the Investors Financial acquisition, as well as higher occupancy costs in support of growth in Europe.

        During the fourth quarter of 2007, we recorded a net pre-tax charge of $467 million in connection with the establishment of a reserve to address litigation exposure and other costs associated with certain active fixed-income strategies managed by SSgA and customer concerns as to whether the execution of these strategies was consistent with customers' investment intent. The net charge had the following components—a provision for legal exposure of $625 million offset by $25 million of insurance coverage; a $156 million reduction of salaries and benefits expense related to reduced incentive compensation primarily associated with SSgA, offset by $15 million of severance costs; and $8 million of other expenses related to professional fees. More information about this litigation exposure is included in note 10 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

        During the second half of 2007, in connection with the Investors Financial acquisition, we recorded merger and integration costs of $198 million. These costs consisted only of direct and incremental costs to integrate the acquired Investors Financial business into our operations, and did not include on-going expenses of the combined organization. The costs included a non-cash charge of approximately $91 million resulting from the termination of an operating lease related to one of our office buildings in Boston. This termination was completed in connection with an overall evaluation of our requirements for office space as a result of the acquisition.

37

        The merger and integration costs also included $42 million associated with employee retention and other compensation, and $22 million associated with the integration of the acquired Investors Financial business's accounting and management systems. In addition, subsequent to the completion of the acquisition, we redeemed an aggregate of $500 million of unsecured junior subordinated debentures issued by the parent company to two of our statutory business trusts, composed of $200 million of 7.94% debentures issued in 1996 and $300 million of 8.035% debentures issued in 1997. We paid the trusts the outstanding amount on the debentures plus accrued interest and an aggregate redemption premium of approximately $20 million, which was included in the merger and integration costs.

        The 56% increase in other expenses from 2006 primarily resulted from the acquired Investors Financial business, increases in professional services, securities processing costs, higher sales promotion costs and increased amortization of intangibles that resulted from the acquisitions of Investors Financial and Currenex.

Income Taxes

        Income tax expense totaled $642 million for 2007, compared to $675 million from continuing operations a year ago. The decrease was primarily the result of the absence of the impact of federal tax legislation that increased income tax expense for 2006. The overall effective tax rate for 2007 was 33.7%, compared to 38.1% for 2006. Additional information about income tax expense is in note 20 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

        The 2006 income tax expense from discontinued operations of $6 million was related to $16 million of income associated with the finalization of certain costs recorded in connection with our divestiture of Bel Air, which was completed during 2006.

        Information about income tax contingencies related to our leveraged lease portfolio is in note 10 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

LINE OF BUSINESS INFORMATION

        We report two lines of business: Investment Servicing and Investment Management. Given our services and management organization, the results of operations for these lines of business are not necessarily comparable with those of other companies, including companies in the financial services industry. Information about revenue, expense and capital allocation methodologies is in note 22 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

        The following is a summary of line of business results. Results presented exclude the income (loss) from discontinued operations related to our divestiture of Bel Air. The amount presented in the "Other/One-Time" column for 2007 represents merger and integration costs recorded in connection with our acquisition of Investors Financial. The amount presented in the same column for 2005 represents additional gain from our sale of the Private Asset Management business. The amount

38


presented in the net charge line items are associated with the underperformance of certain active fixed-income strategies managed by SSgA.

 
   Investment Servicing
   Investment Management
   Other/One-Time
   Total
  
Years ended December 31,
   2007
   2006
   2005
   2007
   2006
   2005
   2007
   2006
   2005
   2007
   2006
   2005
  
(Dollars in millions, except where otherwise noted)

    
    
    
    
    
    
    
    
    
    
    
    
  
Fee revenue:                                                                        
Servicing fees   $ 3,388   $ 2,723   $ 2,474                                     $ 3,388   $ 2,723   $ 2,474  
Management fees     —     —     —   $ 1,141   $ 943   $ 751                     1,141     943     751  
Trading services     1,152     862     694     —     —     —                     1,152     862     694  
Securities finance     518     292     260     163     94     70                     681     386     330  
Processing fees and other     162     208     221     75     64     81                     237     272     302  
   
 
 
 
 
 
                 
 
 
 
Total fee revenue     5,220     4,085     3,649     1,379     1,101     902                     6,599     5,186     4,551  
Net interest revenue     1,573     986     826     157     124     81                     1,730     1,110     907  
Provision for loan losses     —     —     —     —     —     —                     —     —     —  
   
 
 
 
 
 
                 
 
 
 
Net interest revenue after provision for loan losses     1,573     986     826     157     124     81                     1,730     1,110     907  
Gains (Losses) on sales of available-for-sale investment securities, net     7     15     (1 )   —     —     —                     7     15     (1 )
Gain on sale of divested business     —     —     —     —     —     —             $ 16     —     —     16  
   
 
 
 
 
 
           
 
 
 
 
Total revenue     6,800     5,086     4,474     1,536     1,225     983               16     8,336     6,311     5,473  
Operating expenses     4,787     3,742     3,363     981     798     678                     5,768     4,540     4,041  
Net charge:                                                                        
Provision for legal exposure     —     —     —     600     —     —                     600     —     —  
Reduction of incentive compensation     (47 )   —     —     (109 )   —     —                     (156 )   —     —  
Severance and professional fees     —     —     —     23     —     —                     23     —     —  
   
 
 
 
 
 
                 
 
 
 
Total net charge     (47 )   —     —     514     —     —                     467     —     —  
Merger and integration costs     —     —     —     —     —     —   $ 198               198     —     —  
   
 
 
 
 
 
 
     
 
 
 
 
Total operating expenses     4,740     3,742     3,363     1,495     798     678     198         —     6,433     4,540     4,041  
   
 
 
 
 
 
 
     
 
 
 
 
Income from continuing operations before income taxes   $ 2,060   $ 1,344   $ 1,111   $ 41   $ 427   $ 305   $ (198 )     $ 16   $ 1,903   $ 1,771   $ 1,432  
   
 
 
 
 
 
 
     
 
 
 
 
Pre-tax margin     30 %   26 %   25 %   3 %   35 %   31 %                                  
Average assets (in billions)   $ 120.0   $ 103.4   $ 96.9   $ 3.5   $ 3.0   $ 2.9                   $ 123.5   $ 106.4   $ 99.8  

Investment Servicing

        The 34% increase in total revenue from 2006 was primarily driven by increases in servicing fees and trading services and securities finance revenue, as well as a 60% increase in net interest revenue, slightly offset by a decline in processing fees and other revenue.

        Servicing fees increased from 2006 primarily due to the contribution of fees from the acquired Investors Financial business, increases in net new business from existing and new customers, higher equity valuations and higher customer transaction volumes. The increase in trading services revenue reflected a higher dollar volume of foreign exchange trades for customers and a higher volume of fixed-income transition management business. Securities finance revenue increased as a result of higher lending volumes and increased spreads. Processing fees and other revenue declined from 2006, primarily as a result of declines in revenue associated with the commercial paper conduits and our

39


tax-exempt investment program, the latter of which was consolidated onto our balance sheet in 2006. Revenue from this program is now recorded in net interest revenue.

        Servicing fees, trading services revenue and net gains (losses) on sales of available-for-sale securities for our Investment Servicing business line are identical to the respective consolidated results. Refer to the "Servicing Fees," "Trading Services" and "Gains (Losses) on Sales of Available-For-Sale Securities, Net" captions in the "Total Revenue" section of this Management's Discussion and Analysis for a more in-depth discussion. A discussion of processing fees and other revenue is provided under the caption "Processing Fees and Other" in the "Total Revenue" section.

        Net interest revenue increased 60% from 2006 due to an increase in average interest-earning assets, including those from the acquired Investors Financial business, as well as higher yields on our investment securities portfolio A portion of net interest revenue is recorded in the Investment Management business line based on the volume of customer liabilities attributable to that business.

        Operating expenses increased from 2006, driven primarily by the inclusion of the operating expenses of the acquired Investors Financial business and Currenex, as well as higher incentive compensation costs due to improved performance and the impact of higher staffing levels. Staffing levels increased to support growth in business, particularly in Europe. Transaction processing costs increased due to a higher volume of sub-custodian fees, particularly from the acquired Investors Financial business. Other expenses increased as a result of the inclusion of expenses of the acquired Investors Financial business, increases in professional services, securities processing costs and increased amortization of intangibles that resulted from the Investors Financial and Currenex acquisitions.

Investment Management

        Total revenue for 2007 increased 25% from 2006. Management fees for the Investment Management business line, which were up 21%, are identical to the respective consolidated results. Refer to the "Management Fees" caption in the "Total Revenue" section of this Management's Discussion and Analysis for a more in-depth discussion. Securities finance revenue for 2007 was up 73% from 2006, reflecting higher lending volumes and increased spreads. Net interest revenue improved due to higher volumes of customer liabilities, primarily resulting from the growth of our non-U.S. operations, as well as a more favorable mix of deposits.

        Operating expenses of $981 million, which do not include the net pre-tax charge allocated to Investment Management of $514 million, increased 23% from $798 million in 2006, primarily due to the cost of increases in staffing levels to support growth in business, and related increases in information systems and communications expenses. The net pre-tax charge was recorded in connection with the establishment of a reserve to address legal exposure and other costs associated with the under-performance of certain active fixed-income strategies managed by SSgA and customer concerns as to whether the execution of these strategies was consistent with the customers' investment intent. The net charge had the following components—a provision for legal exposure of $625 million offset by $25 million of insurance coverage; a $109 million reduction of salaries and benefits expense related to reduced incentive compensation offset by $15 million of severance costs; and $8 million of other expenses related to professional fees. More information about this charge is included in the "Consolidated Results of Operations—Operating Expenses" section of this Management's Discussion and Analysis.

        The pre-tax margin for Investment Management, which is the percentage of the business line's pre-tax income to its total revenue, was 3% for 2007 compared to 35% for 2006 and 31% for 2005. The significant decrease in margin was the result of the net charge described above. Without the net charge, Investment Management's pre-tax income would have been $555 million ($41 million plus $514 million), and its pre-tax margin would have been 36% for 2007.

40

        During the second half of 2007, the global markets for fixed-income securities, particularly the markets for financial instruments collateralized by sub-prime mortgages, experienced significant disruption. This disruption affected the liquidity and pricing of securities traded in these markets, as well as the returns of, and levels of redemptions in, investment vehicles investing in those instruments. Additional information about the impact of these market conditions on the asset-backed commercial paper conduits administered by State Street is provided in the "Off Balance Sheet Arrangements" section of this Management's Discussion and Analysis and in the Risk Factors section included under Item 1A of this Form 10-K.

        As of December 31, 2007, global fixed-income assets under management totaled approximately $259 billion, an increase of approximately $45 billion compared to $214 billion at December 31, 2006, with approximately $43 billion under active management. This amount included approximately $6.1 billion of SSgA customer assets which were invested in strategies that were adversely affected by a combination of holdings in financial instruments collateralized by sub-prime mortgages, illiquidity in the fixed-income markets generally, and customer redemptions. These strategies included approximately $2.2 billion of institutional customer investments in non-registered pooled investment funds; approximately $2.1 billion of unit investments by other SSgA investment funds in the same non-registered pooled investment funds; approximately $1.6 billion of institutional customer investments in separately-managed customer accounts; and approximately $0.2 billion of customer investments in mutual funds.

        Information about recent proceedings, legal exposure and related costs and other similar matters associated with SSgA's active fixed-income strategies, including the establishment of a reserve of approximately $625 million, is included in "Risk Factors—Litigation Risks" included under Item 1A; the "Consolidated Results of Operations—Operating Expenses" section of this Management's Discussion and Analysis; and note 10 of the Notes to Consolidated Financial Statements included under Item 8 of this Form 10-K.

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COMPARISON OF 2006 AND 2005

OVERVIEW OF CONSOLIDATED RESULTS OF OPERATIONS

Years ended December 31,
   2006
   2005
   $ Change
   % Change
  
(Dollars in millions, except per share amounts)

    
    
    
    
  
Total fee revenue   $ 5,186   $ 4,551   $ 635   14 %
Net interest revenue     1,110     907     203   22  
Provision for loan losses     —     —     —   —  
Gains (Losses) on sales of available-for-sale investment securities, net     15     (1 )   16   —  
Gain on sale of divested business     —     16     (16 ) —  
   
 
 
     
Total revenue     6,311     5,473     838   15  
Total operating expenses     4,540     4,041     499   12  
   
 
 
     
Income from continuing operations before income tax expense     1,771     1,432     339   24  
Income tax expense from continuing operations     675     487     188   39  
   
 
 
     
Income from continuing operations     1,096     945     151   16  
Income (Loss) from discontinued operations     10     (107 )   117   —  
   
 
 
     
Net income   $ 1,106   $ 838   $ 268   32  
   
 
 
     
Earnings per share from continuing operations:                        
  Basic   $ 3.31   $ 2.86   $ .45   16  
  Diluted     3.26     2.82     .44   16  
Earnings per share:                        
  Basic   $ 3.34   $ 2.53            
  Diluted     3.29     2.50            
Return on shareholders' equity from continuing operations     16.2 %   15.3 %          
Return on shareholders' equity     16.4 %   13.6 %          

        The income from discontinued operations in 2006 of $10 million, or $.03 per share, resulted from the finalization of legal, selling and other costs recorded in connection with our divestiture of Bel Air. The loss in 2005 of $107 million, or $.32 per share, was the result of our agreement to divest Bel Air.

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TOTAL REVENUE

Years ended December 31,
   2006
   2005
   $ Change
   % Change
  
(Dollars in millions)

    
    
    
    
  
Fee revenue:                        
Servicing fees   $ 2,723   $ 2,474   $ 249   10 %
Management fees     943     751     192   26  
Trading services     862     694     168   24  
Securities finance     386     330     56   17  
Processing fees and other     272     302     (30 ) (10 )
   
 
 
     
Total fee revenue     5,186     4,551     635   14  
Net interest revenue:                        
Interest revenue     4,324     2,930     1,394   48  
Interest expense     3,214     2,023     1,191   59  
   
 
 
     
Net interest revenue     1,110     907     203   22  
Provision for loan losses     —     —     —   —  
   
 
 
     
Net interest revenue after provision for loan losses     1,110     907     203   22  
Gains (Losses) on sales of available-for-sale investment securities, net     15     (1 )   16      
Gain on sale of Private Asset Management business     —     16     (16 )    
   
 
 
     
Total revenue   $ 6,311   $ 5,473   $ 838   15  
   
 
 
     

        The increase in total revenue for 2006 compared to 2005 primarily reflected growth in fee revenue, which mainly reflected growth in servicing and management fees, with almost 70% of the overall growth in fee revenue generated from these two services.

        The increase in servicing fees was the result of new business from existing and new customers, and higher equity market valuations. Our business continued to grow outside the U.S., with approximately 44% of our servicing fees derived from non-U.S. customers, up from 40% in 2005. Assets under custody increased to $11.85 trillion at December 31, 2006, up 17% from $10.12 trillion a year earlier.

        The increase in management fees reflected net new business and higher average month-end equity market valuations. Approximately 32% of management fees were derived from customers outside the U.S. in 2006, up from 30% for 2005. Assets under management increased to $1.75 trillion at December 31, 2006, up $308 billion from $1.44 trillion a year earlier.

        The growth in trading services revenue, which includes foreign exchange trading and brokerage and other trading revenue, reflected an increase in foreign exchange trading revenue of $143 million, primarily due to increased transaction volumes, a favorable transaction mix related to custody foreign exchange services, and an increase in foreign exchange trading profits. Brokerage and other fees increased from $251 million in 2006, up 11% compared to 2005 due to a significant increase in other trading services and trading profits, offset by a slight decrease in brokerage revenue, the result of a decline in commission recapture revenue.

        The increase in securities finance revenue reflected the effect of improved interest rate spreads and a 22% increase in securities lending volumes.

        The decline in processing fees and other revenue reflected a decrease of $30 million in payments made by Deutsche Bank AG in consideration of net interest revenue earned from acquired customer deposits, largely offset by an increase in revenue from our structured products business. The deposits were held by Deutsche Bank until customers and their related deposits were converted to our systems. Net gains on sales of available-for-sale securities of $15 million in 2006 compared to net losses of $1 million in 2005.

        The increase in net interest revenue reflected an increase in the size of our average balance sheet and the impact of investment securities portfolio repositioning and increasing the average size of the portfolio.

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OPERATING EXPENSES

Years ended December 31,
   2006
   2005
   $ Change
   % Change
  
(Dollars in millions)

    
    
    
    
  
Salaries and employee benefits   $ 2,652   $ 2,231   $ 421   19 %
Information systems and communications     501     486     15   3  
Transaction processing services     496     449     47   10  
Occupancy     373     391     (18 ) (5 )
Other     518     484     34   7  
   
 
 
     
Total operating expenses   $ 4,540   $ 4,041   $ 499   12  
   
 
 
     

        The increase in operating expenses from 2005 reflected higher expenses for salaries and employee benefits, information systems and communications, transaction processing and other expenses, somewhat offset by a decline in occupancy.

        The increase in salaries and employee benefits was driven by higher incentive compensation costs due to improved performance, the impact of higher staffing levels associated with the growth of the Investment Servicing business in Europe, annual merit increases and planned benefit increases.

        Information systems and communications expense slightly increased due to higher telecommunications costs and third-party software expenditures to support overseas growth.

        Transaction processing services expenses, which in large part are volume-related, include equity trading services and fees related to securities settlement, sub-custodian fees and external contract services. The increase resulted from a higher transaction volumes, as well as expansion of our operations in Europe.

        Occupancy expense decreased primarily due to the absence of the $26 million charge recorded in 2005 related to a long-term sub-lease agreement for space in our headquarters building, offset by a slight increase in energy and other utility costs.

        The increase in other operating expenses was primarily due to increased costs to support growth initiatives, offset by a decline in professional services fees related to information technology and the restructuring of our Global Treasury function, which occurred in 2005.

Income Taxes

        The increase in income tax expense from continuing operations for 2006 compared to 2005 resulted from increased pre-tax earnings, as well as additional income tax expense recorded in 2006 primarily related to federal tax legislation and certain leveraged leases. The effective tax rate for continuing operations for 2006 was 38.1%. Our effective rate for 2005 was 34%. The 2005 income tax benefit from discontinued operations of $58 million was related to the loss of $165 million recorded in connection with our agreement to divest Bel Air in 2005.

SIGNIFICANT ACCOUNTING ESTIMATES

        Our consolidated financial statements are prepared in accordance with GAAP. Our significant accounting policies are described in note 1 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

        The majority of these accounting policies do not involve difficult, subjective or complex judgments or estimates in their application, or the variability of the estimates is not material to the consolidated financial statements. However, certain of these accounting policies, by their nature, require management to make judgments, involving significant estimates and assumptions, about the effects of matters that are inherently uncertain. These estimates and assumptions are based on information available as of the date of the financial statements, and changes in this information over time could

44


materially impact amounts of assets, liabilities, revenue and expenses reported in subsequent financial statements.

        Based on the sensitivity of reported financial statement amounts to the underlying policies, estimates and assumptions, the relatively more significant accounting policies applied by State Street have been identified by management as accounting for fair value of financial instruments; accounting for special purpose entities; accounting for goodwill; and accounting for income taxes. These policies require the most subjective or complex judgments, and related estimates and assumptions could be most subject to revision as new information becomes available. An understanding of the judgments, estimates and assumptions underlying these accounting policies is essential in order to understand our reported consolidated financial condition and results of operations.

        The following is a brief discussion of the above-mentioned significant accounting policies. Management of State Street has discussed these significant accounting estimates with the Examining and Audit Committee of our Board of Directors.

Fair Value of Financial Instruments

        We carry certain of our assets and liabilities at fair value in our consolidated financial statements, including trading assets, investment securities available for sale and derivative instruments. At December 31, 2007, approximately $75.43 billion of our assets and approximately $4.57 billion of our liabilities were carried at fair value. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in an arm's length transaction between willing parties, other than in a forced or liquidation sale. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices and observable market inputs. For a significant amount of our assets and liabilities which are measured at fair value, those fair values are determined based upon quotations provided by independent third-party pricing services or observable market inputs, and as a result there is little or no management judgment involved in determining fair value. Prices provided by independent third-party pricing services are subject to review by management. In developing their quotations, the independent pricing services seek to utilize observable inputs, including trade and market information. However, because many fixed-income securities do not trade regularly, the pricing services' quotations may also be based on proprietary financial models that incorporate available information, such as benchmarking to similar securities, sector groupings or matrix pricing.

        Quotations may not always be available for some securities or in markets where trading activity has slowed or ceased. When quotations are not available, and are not provided by third-party pricing services, management judgment is necessary to determine fair value. In situations involving management judgment, fair value is determined using discounted cash flow analysis or other valuation models, which incorporate available market information, including appropriate benchmarking to similar instruments, analysis of default and recovery rates, estimation of prepayment characteristics and implied volatilities.

        Discounted cash flow analysis is dependent upon estimated future cash flows and the level of interest rates. Expected cash flows are discounted using market interest rates commensurate with the credit quality and duration of the investment. Valuation models use as their basis independently-sourced market inputs including, for example, interest rate yield curves and foreign currency exchange rates. Our valuation process using models considers factors such as credit quality, product structure, third-party enhancements and guarantees. We apply judgment in the application of these factors. Other factors can affect our estimates of fair value, including market dislocations, incorrect model assumptions and unexpected correlations. These valuation methods could expose us to materially different results should the models used or underlying assumptions be inaccurate.

        We determine fair value for trading account assets primarily by using quoted market prices for identical or similar instruments in active markets for those securities. Fair value for investment

45


securities available for sale is determined using quotations from independent third-party pricing services, which generally are based on observable market inputs for identical or similar instruments in active and non-active markets for those securities. We value derivative instruments primarily by using valuation models. These models generally do not involve material subjectivity because the methodologies used do not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets, for instance with over-the-counter interest-rate swap and option contracts, and foreign exchange forward and option contracts.

        Management reviews the fair value of the portfolio at least quarterly, and evaluates individual securities for declines in fair value that may be other than temporary. This review considers factors such as current and expected future interest rates, external credit ratings, dividend payments, the financial health of the issuer and other pertinent information. Other pertinent information includes current developments with respect to the issuer, the length of time the cost basis has exceeded the fair value, the severity of the impairment measured as the ratio of fair value to amortized cost and management's intent and ability to hold the security.

        The review includes all investment securities for which we have issuer specific concerns regardless of quantitative factors. The review considers current economic conditions, adverse situations that might affect our ability to fully collect interest and principal, the timing of future payments, the credit quality and performance of underlying collateral and guarantees and other relevant factors. If declines are deemed other than temporary, an impairment loss is recognized and the amortized cost basis of the investment security is written down to its current fair value, which becomes the new cost basis.

        Additional information about fair values of financial instruments and fair value estimates is included in note 24 of the Notes to Consolidated Financial Statements included under Item 8 of this Form 10-K.

Special Purpose Entities

        In the normal course of business, we utilize three types of special purpose entities, referred to as "SPEs," two of which are not recorded in our consolidated financial statements. Information about the activities of these SPEs, which are used in connection with our tax-exempt investment program, our involvement with managed investment vehicles and our asset-backed commercial paper program, is in notes 10 and 11 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8. Additional information about SPEs used in connection with our commercial paper program is provided below.

        In our role as a financial intermediary, we administer four third-party asset-backed commercial paper conduits, which are structured as bankruptcy-remote, limited liability companies, and which are not included in our consolidated financial statements. These conduits purchase a variety of financial assets from third-party financial institutions, and fund these purchases by issuing commercial paper. The financial assets purchased by the conduits are not originated by us, and we do not hold any equity ownership interest in the conduits. Additional information about the conduits and their business activities is in the "Off-Balance Sheet Arrangements" section of this Management's Discussion and Analysis and in note 11 of the Notes to Consolidated Financial Statements included under Item 8 of this Form 10-K.

        Our accounting for the conduits' activities, and our conclusion that we are not required to include each or all of the conduits' assets and liabilities in our consolidated financial statements, is based on our application of the provisions of FASB Interpretation No. 46(R), which governs our accounting for the conduits and which is discussed in more detail in note 11. Expected losses, which we estimate using a financial model as described below, form the basis for our application of the provisions of FIN 46(R). Expected losses, as defined by FIN 46(R), are not economic losses. Instead, expected losses are calculated by comparing projected possible cash flows, which are probability-weighted, with expected cash flows for the risk(s) the entity was designed to create and distribute; they represent the variability

46


in potential cash flows of the entity's designated risks. We believe that credit risk is the predominant risk that is designed to be created and distributed by these entities. There is also a modest amount of basis risk within each conduit. Basis risk arises when commercial paper funding costs move at a different rate than the comparable floating-rate asset benchmark rates (generally LIBOR). This risk is mitigated through the use of derivative instruments, principally basis swaps, which remove this variability from each conduit. Accordingly, basis risk is not a significant assumption in the financial model.

        Any credit losses of the conduits would be absorbed by (1) investors in the subordinated debt, commonly referred to as "first-loss notes," issued by the conduits; (2) State Street; and (3) the holders of the conduits' commercial paper, in order of priority. The investors in the first-loss notes, which are independent third parties, would absorb the first dollar of any credit loss on the conduits' assets. If credit losses exceeded the first-loss notes, we would absorb credit losses through our credit facilities provided to the conduits. The commercial paper holders would absorb credit losses after the first-loss notes and State Street's credit facilities have been exhausted. We have developed a financial model to estimate and allocate each conduit's expected losses. Our model has determined that, as of December 31, 2007, the amount of first-loss notes of each conduit held by the third-party investors causes them to absorb a majority of each conduit's expected losses, as defined by FIN 46(R), and, accordingly, the investors in the first-loss notes are considered to be the primary beneficiary of the conduits. The aggregate amount of first-loss notes issued by the conduits totaled approximately $32 million as of December 31, 2007.

        In order to estimate expected losses as required by FIN 46(R), we estimate possible defaults of the conduits' assets. These expected losses are allocated to the conduits' variable interest holders based on the order in which actual losses would be absorbed, as described above. We use the model to estimate expected losses based on hundreds of thousands of probability-weighted loss scenarios. These simulations incorporate published rating agency data to estimate expected losses due to credit risk. Primary assumptions incorporated into the financial model relative to credit risk variability, such as default probabilities and loss severities, are directly linked to the conduit's underlying assets. These default probabilities and loss severity assumptions vary by asset class and ratings of individual conduit assets. Accordingly, the model's calculation of expected losses is significantly affected by the credit ratings and asset mix of each conduit's assets. These statistics are reviewed by management regularly and more formally on an annual basis. If downgrades and asset mix change significantly, or if defaults occur on the conduits' underlying assets, we may conclude that the current level of first-loss notes is insufficient to absorb a majority of the conduits' expected losses.

        We perform stress tests and sensitivity analyses, with respect to each conduit individually, in order to model potential scenarios that could cause the amount of first-loss notes to be insufficient to absorb the majority of the conduits' expected losses. As part of these analyses, we have identified certain conduit assets that could be more susceptible to credit downgrade because of their underlying credit characteristics. Our scenario testing specifically addresses asset classes that have experienced significant price erosion and/or have little observed market activity. Examples of scenarios that are designed to measure the sensitivity of the sufficiency of the first-loss notes include performing a downgrade of all assets which have underlying monoline insurance provider support, and a downgrade scenario on certain other conduit securities where our analysis of the timing and amount of expected cash flows for selected security default expectations does not re-affirm the security's current external credit rating. These simulations do not include a scenario whereby all positions are simultaneously downgraded, the possibility of which we consider remote. In addition, a scenario could arise where one or more defaults could be so severe that the associated losses would exhaust the conduits' total first-loss notes currently outstanding.

        We believe that the current level of first-loss notes of approximately $32 million as of December 31, 2007 is sufficient to support default scenarios that we believe are more likely, including the stress tests previously described. However, in the future, if the determination and allocation of

47


conduit expected losses by the financial model indicates that the current level of first-loss notes is insufficient to absorb a majority of the conduits' expected losses, we would be required to either (1) issue additional first-loss notes to third parties; (2) change the composition of conduit assets; or (3) take other actions in order to avoid being determined to be the primary beneficiary of the conduits. If we were unable to accomplish any of the above, we would be determined to be the primary beneficiary of the conduits, and would be required to consolidate the conduits' assets and liabilities. For illustrative purposes only, if consolidation of all four of the conduits had been required on December 31, 2007, we would have recognized an extraordinary after-tax loss of approximately $530 million in our consolidated statement of income. In addition, the consolidation of the conduit's assets would have had a direct impact on our leverage capital ratios. The illustrative impact of consolidation of the conduits and the assumptions underlying its calculation are discussed in the "Off-Balance Sheet Arrangements" section of this Management's Discussion and Analysis.

        The conduits do not regularly trade their assets. That is, the design of the conduits is such that conduit assets are purchased with the intent to hold to them to their maturities. Accordingly, changes in the fair values of the conduits' assets do not impact the day-to-day management of the conduits. However, we closely monitor changes in fair values of the conduits' assets to ensure that the default assumptions in our financial model continue to be appropriate. As of December 31, 2007, total assets in the unconsolidated conduits were approximately $28.76 billion, and the pre-tax unrealized loss on those assets was approximately $850 million, or $530 million after-tax. We believe the fair values of the conduits' assets are impacted by a number of factors, including the lack of liquidity of mortgage- and asset-backed securities, supply and demand imbalance in the market, and a risk aversion premium being demanded by investors for certain asset types. We do not believe that the current fair values of some of the conduits' assets are necessarily indicative of a change in marketplace participants' view of the default probabilities for these assets.

Goodwill

        Goodwill is created when the purchase price exceeds the assigned value of net assets of acquired businesses, and represents the value attributable to unidentifiable intangible elements being acquired. Almost all of our goodwill has resulted from business acquisitions of our Investment Servicing line of business. As a result, substantially all of the total goodwill recorded in our consolidated statement of condition was recorded by this business line, with the remainder recorded by Investment Management.

        The sustained value of the majority of this goodwill is supported ultimately by revenue from our investment servicing business. A decline in earnings as a result of a lack of growth, or our inability to deliver cost-effective services over sustained periods, could lead to a perceived impairment of goodwill, which would be evaluated and, if necessary, be recorded as a write-down of the reported amount of goodwill through a charge to earnings in our consolidated statement of income.

        On an annual basis, or more frequently if circumstances dictate, management reviews goodwill and evaluates events or other developments that may indicate impairment in the carrying amount. We perform this evaluation at the reporting unit level, which is one level below our two major business lines. The evaluation methodology for potential impairment is inherently complex and involves significant management judgment in the use of estimates and assumptions.

        We evaluate impairment using a two-step process. First, we compare the aggregate fair value of the reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, no impairment exists. If the carrying amount of the reporting unit exceeds the fair value, then we compare the "implied" fair value of the reporting unit's goodwill with its carrying amount. If the carrying amount of the goodwill exceeds the implied fair value, then goodwill impairment is recognized by writing the goodwill down to the implied fair value. The implied fair value of the goodwill is determined by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit, as if the unit had been acquired in a business combination and the overall fair value of the unit was the purchase price.

48

        To determine the aggregate fair value of the reporting unit being evaluated for goodwill impairment, we use one of two principal methodologies—external or independent valuation, using quoted market prices in active markets; or an analysis of comparable recent external sales or market data, such as multiples of earnings or similar performance measures. In limited circumstances, these methodologies are not available, and as such, we estimate future cash flows using present-value techniques.

        Events that may indicate goodwill impairment include significant or adverse changes in the business, economic or political climate; an adverse action or assessment by a regulator; unanticipated competition; and a more-likely-than-not expectation that we will sell or otherwise dispose of a business to which the goodwill relates. Our goodwill impairment testing for 2007 indicated that none of our goodwill was impaired. Goodwill recorded in our consolidated statement of condition at December 31, 2007 totaled approximately $4.57 billion.

        Additional information about goodwill, including information by line of business, is in note 5 of the Notes to Consolidated Financial Statements included under Item 8 of this Form 10-K.

Income Taxes

        Our overall tax position is fundamentally complex, and management judgment is involved in the analysis of income tax assets and liabilities. We are subject to the income tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which we operate. These tax laws can be subject to different interpretations by the taxpayer and the taxing authorities.

        In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. Disputes over interpretations of the tax laws may be adjudicated by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or administrative appeal.

        Management's determination of the likelihood that deferred tax assets can be realized is subjective and involves estimates and assumptions about matters that are inherently uncertain. The realization of deferred tax assets arises from future taxable income, including foreign-source income, and the achievement of tax planning strategies. Underlying estimates and assumptions can change over time, influencing our overall tax positions, as a result of unanticipated events or circumstances.

        Management continually monitors and evaluates the worldwide impact of tax legislation, decisions, rulings and other current developments on the estimates and assumptions underlying our calculations of current and deferred taxes and our analysis of the expected realization of deferred tax assets. Additional information about income taxes is in notes 10 and 20 of the Notes to Consolidated Financial Statements included under Item 8 of this Form 10-K.

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FINANCIAL CONDITION

Years ended December 31,
   2007 Average Balance
   2006 Average Balance
(In millions)

    
    
Assets:            
Interest-bearing deposits with banks   $ 7,433   $ 9,621
Securities purchased under resale agreements     12,466     12,543
Federal funds sold     1,936     277
Trading account assets     972     975
Investment securities     70,990     61,579
Loans     10,753     7,670
   
 
  Total interest-earning assets     104,550     92,665
Cash and due from banks     3,272     2,977
Other assets     15,660     10,802
   
 
  Total assets   $ 123,482   $ 106,444
   
 
Liabilities and shareholders' equity:            
Interest-bearing deposits:            
  U.S.    $ 7,557   $ 2,453
  Non-U.S.      60,663     53,182
   
 
Total interest-bearing deposits     68,220     55,635
Securities sold under repurchase agreements     16,132     20,883
Federal funds purchased     1,667     2,777
Other short-term borrowings     4,225     2,039
Long-term debt     3,402     2,621
   
 
Total interest-bearing liabilities     93,646     83,955
Noninterest-bearing deposits     10,640     8,274
Other liabilities     9,769     7,471
Shareholders' equity     9,427     6,744
   
 
  Total liabilities and shareholders' equity   $ 123,482   $ 106,444
   
 

Overview of Consolidated Statement of Condition

        The structure of our consolidated statement of condition, or balance sheet, is primarily driven by the liabilities generated by our core Investment Servicing and Investment Management businesses. As our customers execute their worldwide cash management and investment activities, they use short-term investments and deposits that constitute the majority of our liabilities. These liabilities are generally in the form of non-interest-bearing demand deposits; interest-bearing transaction account deposits, which are denominated in a variety of currencies; and repurchase agreements, which generally serve as short-term investment alternatives for our customers.

        Our customers' needs and our operating objectives determine the volume, mix and currency denomination of our consolidated balance sheet. Deposits and other liabilities generated by customer activities are invested in assets that generally match the liquidity and interest-rate characteristics of the liabilities. As a result, our assets consist primarily of high-quality, marketable securities held in our available-for-sale or held-to-maturity investment securities portfolio and short-term money-market instruments, such as interest-bearing deposits, federal funds sold and securities purchased under resale agreements. The actual mix of assets is determined by the characteristics of the customer liabilities and our desire to maintain a well-diversified portfolio of high-quality assets. Managing our consolidated

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balance sheet structure is a disciplined process conducted within specific Board-approved policies for interest-rate risk, credit risk and liquidity.

        For 2007, the growth in average interest-bearing liabilities of $9.7 billion was primarily composed of a $12.6 billion increase in customer deposits, $7.5 billion of which were foreign, offset by a decline in repurchase agreements of $4.8 billion. These changes are representative of the higher levels of customer activity outside the U.S. Average interest-earning assets in 2007 increased $11.9 billion from 2006, consistent with the increased level of customer liabilities. Additional information about our average balance sheet, primarily interest-earning assets and interest-bearing liabilities, is included in the "Consolidated Results of Operations—Net Interest Revenue" section of this Management's Discussion and Analysis.

Investment Securities

        The carrying values of investment securities were as follows as of December 31:

(In millions)
   2007
   2006
   2005
Available for sale:                  
U.S. Treasury and federal agencies:                  
  Direct obligations   $ 8,181   $ 7,612   $ 10,214
  Mortgage-backed securities     14,585     11,454     11,138
Asset-backed securities     25,069     25,634     23,842
Collateralized mortgage obligations     11,892     8,476     5,527
State and political subdivisions     5,813     3,749     1,868
Other debt investments     4,041     3,027     1,695
Money-market mutual funds     243     201     232
Other equity securities     502     292     463
   
 
 
Total   $ 70,326   $ 60,445   $ 54,979
   
 
 
Held to maturity:                  
U.S. Treasury and federal agencies:                  
  Direct obligations   $ 757   $ 846   $ 1,657
  Mortgage-backed securities     940     1,084     925
Collateralized mortgage obligations     2,190     2,357     2,086
Other investments     346     260     223
   
 
 
Total   $ 4,233   $ 4,547   $ 4,891
   
 
 

        We consider a well-diversified, high-credit quality investment securities portfolio to be an important element in the management of our consolidated balance sheet. The portfolio continues to be concentrated in securities with high credit quality, with approximately 95% of the carrying value of the

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portfolio "AAA" or "AA" rated. The percentages of the carrying value of the investment securities portfolio by external credit rating were as follows as of December 31:

 
   2007
   2006
  
AAA(1)   89 % 88 %
AA   6   6  
A   3   4  
BBB   1   1  
Non-rated   1   1  
   
 
 
    100 % 100 %
   
 
 
(1)
Includes U.S. Treasury securities.

        The investment securities portfolio is also diversified with respect to asset class. The majority of the portfolio is in high-grade mortgage-backed and asset-backed securities. The largely floating-rate asset-backed portfolio consists of home-equity loan, credit card, auto- and student-loan securities. Mortgage-backed securities are split between securities of Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and large-issuer collateralized mortgage obligations. As of December 31, 2007, the asset-backed securities in the portfolio included $6.2 billion collateralized by sub-prime mortgages. Of this total, 71% were AAA rated and 29% were AA rated.

        We had $1.105 billion of net pre-tax unrealized losses on available-for-sale investment securities at December 31, 2007, or $678 million after-tax. Net pre-tax unrealized losses on available-for-sale securities at December 31, 2006 were $378 million, or $227 million after tax. Management considers the aggregate decline in fair value and the resulting net unrealized losses to be temporary and not the result of any material changes in the credit characteristics of the investment securities portfolio. Management has the ability and the intent to hold the securities until recovery in market value.

        We intend to continue managing our investment securities portfolio to align with interest-rate and duration characteristics of our customer liabilities and in the context of our overall balance sheet structure, which is maintained within internally approved risk limits, and in consideration of the global interest-rate environment. Even with material changes in unrealized losses on available-for-sale securities, we may not experience material changes in our interest-rate risk profile, or experience a material impact on our net interest revenue. Additional information about these and other unrealized losses is in notes 3 and 12 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

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        The carrying amounts, by contractual maturity, of debt securities available for sale and held to maturity, and the related weighted-average contractual yields, were as follows as of December 31, 2007:

 
   Under 1 Year
   1 to 5 Years
   6 to 10 Years
   Over 10 Years
  
(Dollars in millions)
   Amount
   Yield
   Amount
   Yield
   Amount
   Yield
   Amount
   Yield
  
Available for sale(2):                                          
U.S. Treasury and federal agencies:                                          
  Direct obligations   $ 5,683   4.43 % $ 1,072   3.91 % $ 520   6.27 % $ 906   7.63 %
  Mortgage-backed securities     116   4.16     1,384   4.31     4,152   4.90     8,933   5.18  
Asset-backed securities     1,304   4.68     11,321   5.13     8,223   5.21     4,221   5.21  
Collateralized mortgage obligations     170   4.90     3,156   5.07     3,617   5.48     4,949   5.45  
State and political subdivisions(1)     370   5.94     1,997   5.74     1,644   5.60     1,802   5.41  

Other investments
 
 
1,686
 
6.46
 
 
1,405
 
5.48
 
 
906
 
5.33
 
 
44
 
5.61
 
   
     
     
     
     
Total   $ 9,329       $ 20,335       $ 19,062       $ 20,855      
   
     
     
     
     
Held to maturity(2):                                          
U.S. Treasury and federal agencies:                                          
  Direct obligations   $ 256   3.89 % $ 501   4.38 %                    
  Mortgage-backed securities     —   —     30   3.95   $ 329   4.85 % $ 581   5.35 %
Collateralized mortgage obligations     —   —     725   4.94     970   5.03     495   5.03  
Other investments     163   1.99     119   5.81     61   6.02     3   7.16  
   
     
     
     
     
Total   $ 419       $ 1,375       $ 1,360       $ 1,079      
   
     
     
     
     
(1)
Yields have been calculated on a fully taxable-equivalent basis, using applicable federal and state income tax rates.

(2)
The maturities of mortgage-backed securities, asset-backed securities and collateralized mortgage obligations are based upon expected principal payments.

Loans and Lease Financing

        U.S. and non-U.S. loans and lease financing as of December 31, and average loans and lease financing, were as follows for the years ended December 31:

(In millions)
   2007
   2006
   2005
   2004
   2003
U.S.:                              
  Commercial and financial   $ 9,402   $ 3,480   $ 2,298   $ 1,826   $ 2,344
  Lease financing     396     415     404     373     395
   
 
 
 
 
    Total U.S.      9,798     3,895     2,702     2,199     2,739
Non-U.S.:                              
  Commercial and financial     4,420     3,137     1,854     526     424
  Lease financing     1,584     1,914     1,926     1,904     1,858
   
 
 
 
 
    Total non-U.S.      6,004     5,051     3,780     2,430     2,282
   
 
 
 
 
    Total loans   $ 15,802   $ 8,946   $ 6,482   $ 4,629   $ 5,021
   
 
 
 
 
Average loans and lease financing   $ 10,753   $ 7,670   $ 6,013   $ 5,689   $ 5,568

        At December 31, 2007, approximately 11% of our consolidated total assets consisted of loans and lease financing. The aggregate increase in loans from 2006 reflected an increase in overdrafts, which result primarily from securities settlement activities of our customers. Overdrafts included in loans were $11.65 billion and $5.69 billion at December 31, 2007 and December 31, 2006, respectively. Average

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overdrafts were approximately $7.53 billion and $5.21 billion for the years ended December 31, 2007 and 2006, respectively. These balances do not represent significant credit risk because of their short-term nature, which is generally overnight, the lack of significant concentration, and their occurrence in the normal course of the cash and securities settlement process.

        As of December 31, 2007 and 2006, unearned income included in lease financing was $1.29 billion and $1.01 billion for non-U.S. leases, respectively, and $212 million and $129 million for U.S. leases, respectively.

        Maturities for loan and lease financing categories were as follows as of December 31, 2007:

 
   YEARS
(In millions)
   Total
   Under 1
   1 to 5
   Over 5
U.S.:                        
  Commercial and financial   $ 9,402   $ 9,372   $ 10   $ 20
  Lease financing     396     8     —     388
   
 
 
 
    Total U.S.      9,798     9,380     10     408
Non-U.S.:                        
  Commercial and financial     4,420     4,419     1     —
  Lease financing     1,584     —     53     1,531
   
 
 
 
    Total non-U.S.      6,004     4,419     54     1,531
   
 
 
 
    Total   $ 15,802   $ 13,799   $ 64   $ 1,939
   
 
 
 

        The following table presents the classification of loans and leases due after one year according to sensitivity to changes in interest rates as of December 31, 2007:

(In millions)
    
Loans and leases with predetermined interest rates   $ 1,973
Loans and leases with floating or adjustable interest rates     30
   
  Total   $ 2,003
   

Cross-Border Outstandings

        Cross-border outstandings, as defined by bank regulatory rules, are amounts payable to State Street by residents of foreign countries, regardless of the currency in which the claim is denominated, and local country claims in excess of local country obligations. These cross-border outstandings consist primarily of deposits with banks, loans and lease financing and investment securities.

        In addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers may be unable to meet their contractual repayment obligations of principal and/or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations.

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        Cross-border outstandings to countries in which we do business which amounted to at least 1% of our consolidated total assets were as follows as of December 31:

(In millions)
   2007
   2006
   2005
United Kingdom   $ 5,951   $ 5,531   $ 2,696
Canada     4,565     —     1,463
Australia     3,567     1,519     1,441
Netherlands     —     —     992
Germany     2,944     2,696     4,217
   
 
 
Total cross-border outstandings   $ 17,027   $ 9,746   $ 10,809
   
 
 

        The total cross-border outstandings presented in the table represented 12%, 9% and 11% of our consolidated total assets as of December 31, 2007, 2006 and 2005, respectively. There were no cross-border outstandings to countries which totaled between .75% and 1% of our consolidated total assets as of December 31, 2007. Aggregate cross-border outstandings to countries which totaled between .75% and 1% of our consolidated total assets at December 31, 2006, amounted to $1.05 billion (Canada) and at December 31, 2005, amounted to $1.86 billion (Belgium and Japan).

Capital

        Regulatory and economic capital management both use key metrics evaluated by management to ensure that our actual level of capital is commensurate with our risk profile, is in compliance with all regulatory requirements, and is sufficient to provide us with the financial flexibility to undertake future strategic business initiatives.

Regulatory Capital

        Our objective with respect to regulatory capital management is to maintain a strong capital base in order to provide financial flexibility for our business needs, including funding corporate growth and supporting customers' cash management needs, and to provide protection against loss to depositors and creditors. We strive to maintain an optimal level of capital, commensurate with our risk profile, on which an attractive return to shareholders will be realized over both the short and long term, while protecting our obligations to depositors and creditors and satisfying regulatory requirements. Our capital management process focuses on our risk exposures, our capital position relative to our peers, regulatory capital requirements and the evaluations of the major independent credit rating agencies that assign ratings to our public debt. The Capital Committee, working in conjunction with the Asset and Liability Committee, referred to as "ALCO," oversees the management of regulatory capital, and is responsible for ensuring capital adequacy with respect to regulatory requirements, internal targets and the expectations of the major independent credit rating agencies.

        The primary regulator of both State Street and State Street Bank for regulatory capital purposes is the Federal Reserve Board. Both State Street and State Street Bank are subject to the minimum capital requirements established by the Federal Reserve Board and defined in the Federal Deposit Insurance Corporation Improvement Act of 1991. State Street Bank must meet the regulatory capital thresholds for "well capitalized" in order for the parent company to maintain its status as a financial holding company.

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        Regulatory capital ratios and related regulatory guidelines for State Street and State Street Bank were as follows as of December 31:

 
   REGULATORY GUIDELINES
   STATE STREET
   STATE STREET BANK
  
 
   Minimum
   Well
Capitalized
   2007
   2006
   2007
   2006
  
Regulatory capital ratios:                          
  Tier 1 risk-based capital   4 % 6 % 11.2 % 13.7 % 11.2 % 12.0 %
  Total risk-based capital   8   10   12.7   15.9   12.7   14.1  
  Tier 1 leverage ratio(1)   4   5   5.3   5.8   5.5   5.6  
(1)
Regulatory guideline for well capitalized applies only to State Street Bank.

        At December 31, 2007, State Street's and State Street Bank's regulatory capital ratios decreased compared to year-end 2006. Growth in capital from earnings and the issuance of our common stock to acquire Investors Financial were offset by the repurchase of our common stock under the accelerated share repurchase program and the impact of goodwill and other intangible assets recorded in connection with the Currenex and Investors Financial acquisitions. Total risk-weighted assets increased year over year, as balance sheet risk-weighted assets, partly from the Investors Financial acquisition, and off-balance sheet equivalent risk-weighted assets both grew from year-end 2006. All ratios for State Street and State Street Bank exceeded the regulatory minimum and well-capitalized thresholds.

        To manage fluctuations in the tier 1 and total risk-based capital of State Street and State Street Bank resulting from foreign currency translation, we have entered into foreign exchange forward contracts to hedge a portion of our net foreign investment in non-U.S. subsidiaries. The notional value of these contracts was €100 million, or approximately $146 million, at December 31, 2007.

        In 2004, the Committee on Banking Supervision released the final version of its capital adequacy framework, commonly referred to as "Basel II". In 2006, the four U.S. banking regulatory agencies jointly issued their second draft of implementation rules, with industry comment provided by the end of March 2007. Additional supervisory guidance from the agencies was released late in February 2007; comments to the agencies were provided by the end of May 2007, and the final rules were released on December 7, 2007, with a stated effective date of April 1, 2008. State Street previously established a comprehensive implementation program to ensure these regulatory requirements are met within prescribed timeframes. We anticipate adopting the most advanced approaches for assessing capital adequacy.

        In March 2007, our Board of Directors authorized the purchase of up to 15 million shares of common stock for general corporate purposes, including mitigating the dilutive impact of shares issued under employee benefit plans, in addition to its previous authorization in 2006 of up to 15 million shares, of which 12.2 million shares remained available for purchase at December 31, 2006. We generally employ third-party broker-dealers to acquire shares on the open market in connection with our stock purchase program.

        Under the above-described authorization, during 2007 we repurchased 13.4 million shares of our common stock, and an additional .6 million shares in January 2008, in connection with a $1 billion accelerated share repurchase program that concluded on January 18, 2008. As of that date, approximately 13.2 million shares remain available for future purchase under the combined authorization described above.

        We have increased our quarterly dividend twice each year since 1978. Over the last ten years, dividends per share have grown at a 15% compound annual growth rate. Funds for cash distributions to our shareholders by the parent company are derived from a variety of sources. The level of dividends

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to shareholders on our common stock, which totaled $320 million in 2007, is reviewed regularly and determined by the Board of Directors considering our liquidity, capital adequacy and recent earnings history and prospects, as well as economic conditions and other factors deemed relevant. Federal and state banking regulations place certain restrictions on dividends paid by subsidiary banks to the parent holding company. In addition, bank regulators have the authority to prohibit bank holding companies from paying dividends if they deem such payment to be an unsafe or unsound practice. Information concerning limitations on dividends from our subsidiary banks is in note 14 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

Economic Capital

        We define economic capital as the common equity required to protect debt holders against unexpected economic losses over a one-year period at a level consistent with the solvency of a firm with our target "AA" debt rating. Our entire economic capital process is the responsibility of our Capital Committee. The framework and methodologies used to quantify economic capital for each of the risk types described below have been developed by our Enterprise Risk Management, Global Treasury and Finance groups, and are designed to be generally consistent with our risk management principles. This framework has been approved by senior management and has been reviewed by the Executive Committee of the Board. Due to the evolving nature of quantification techniques, we expect to periodically refine the methodologies used to estimate our economic capital requirements, which could result in a different amount of capital needed to support our risk profile.

        We quantify capital requirements for the risks inherent in our business activities and group them into one of the following broadly-defined categories:

        Economic capital for each of these five categories is estimated on a stand-alone basis using statistical modeling techniques applied to internally generated and, in some cases, external data. These individual results are then aggregated at the State Street consolidated level. A capital reduction or diversification benefit is then applied to reflect the unlikely event of experiencing an extremely large loss in each risk type at the same time.

Liquidity

        The objective of liquidity management is to ensure that we have the ability to meet our financial obligations in a timely and cost-effective manner, and that we maintain sufficient flexibility to fund strategic corporate initiatives as they arise. Effective management of liquidity involves assessing the potential mismatch between the future cash needs of our customers and our available sources of cash under normal and adverse economic and business conditions. Uses of liquidity consist primarily of meeting deposit withdrawals; funding outstanding commitments to extend credit or purchase securities

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as they are drawn upon; overdraft facilities; and liquidity asset purchase agreements. Liquidity is provided by the maintenance of broad access to the global capital markets and our balance sheet asset structure.

        Global Treasury is responsible for the day-to-day management of our global liquidity position, which is conducted within risk guidelines established and monitored by ALCO. Management maintains a liquidity measurement framework to assess the sources and uses of liquidity that is continuously monitored by Global Treasury and Enterprise Risk Management. Embedded in this framework is a process that outlines several levels of potential risk to our liquidity and identifies "triggers" that we use as early warning signals of a possible difficulty. These triggers are a combination of internal and external measures of potential increases in cash needs or decreases in available sources of cash and possible impairment of our ability to access the global capital markets. Another important component of the framework is a contingency funding plan that is designed to identify and manage through a potential liquidity crisis. The plan defines roles, responsibilities and management actions to be undertaken in the event of a deterioration in our liquidity profile caused by either a State Street-specific event or a broader disruption in the capital markets. Specific actions are linked to the levels of "triggers."

        We generally manage our liquidity risk on a global basis at the consolidated level. We also manage parent company liquidity, and in certain cases branch liquidity, separately. State Street Bank generally has broader access to funding products and markets limited to banks, specifically the federal funds market and the Federal Reserve's discount window. The parent company is managed to a more conservative liquidity profile, reflecting narrower market access. We typically hold enough cash, primarily in the form of interest-bearing deposits with subsidiary banks, to meet current debt maturities and cash needs, as well as those projected over the next one-year period.

        Sources of liquidity come from two primary areas: access to the global capital markets and liquid assets maintained on our consolidated balance sheet. Our ability to source incremental funding at reasonable rates of interest from wholesale investors in the capital markets is the first source of liquidity we would tap to accommodate the uses of liquidity described below. On-balance sheet liquid assets are also an integral component of our liquidity management strategy. These assets provide liquidity through maturities of the assets, but more importantly, they provide us with the ability to raise funds by pledging the securities as collateral or through outright sales. Each of these sources is used in the management of daily cash needs and in a crisis scenario where we would need to accommodate potential large, unexpected demand for funds.

        Uses of liquidity result from four primary areas: withdrawals of unsecured customer deposits; draws on unfunded commitments to extend credit or purchase securities, generally provided through lines of credit; overdraft facilities; and liquidity asset purchase agreements supporting the four commercial paper conduits that we administer. Customer deposits are generated largely from our investment servicing activities, and are invested in a combination of term investment securities and short-term money market assets whose mix is determined by the characteristics of the deposits. Most of the customer liabilities are payable upon demand or are short-term in nature, which means that withdrawals can potentially occur quickly and in large amounts. Similarly, customers can request disbursement of funds under commitments to extend credit, or can overdraw deposit accounts rapidly and in large volumes.

        Material risks to sources of short-term liquidity would include, among other things, external rating agency downgrades of our deposits and debt securities, which would restrict our ability to access the capital markets and may lead to withdrawals of unsecured deposits by our customers. In addition, a large volume of unanticipated funding requirements, such as fundings under liquidity asset purchase agreements that have met draw conditions, or large draw-downs of existing lines of credit, could require additional liquidity. During the summer of 2007, the disruption in the global fixed-income securities

58


markets, which largely stemmed from sub-prime mortgages and securities collateralized by them and later spread to asset-backed securities in general, caused us to invoke some elements of our contingency funding plan, resulting in more active monitoring of our liquidity position and more frequent reporting to management. Of primary concern was our ability to replace maturing commercial paper issued by the conduits. As more fully discussed in the "Off-Balance Arrangements" section of this Management's Discussion and Analysis, we have been able to reissue the paper, but with some difficulty and at higher rates of interest because of a significant decline in the demand for asset-backed commercial paper in the market generally. One action we have taken to improve our liquidity position has been the issuance of term wholesale certificates of deposit and the placement of those funds into short-term money market assets where they would be available to meet cash needs. This portfolio stood at $4.57 billion as of December 31, 2007. It is important to note that we did not experience any deterioration in our customer deposit base; it was stable to growing during 2007.

        While maintenance of our high investment-grade credit rating is of primary importance to our liquidity management program, on-balance sheet liquid assets represent significant liquidity that we can directly control, and provide a source of cash in the form of principal maturities and the ability to borrow from the capital markets using our securities as collateral. Our liquid assets consist primarily of short-term money-market assets, such as federal funds sold and interest-bearing deposits with banks, the latter of which are multicurrency instruments invested with major multinational banks; and high-quality, marketable investment securities not already pledged, which generally are more liquid than other types of assets and can be sold or borrowed against to quickly generate cash. As of December 31, 2007, the cash value of our liquid assets, as defined, totaled $55.14 billion. Securities carried at $39.84 billion as of December 31, 2007 were designated as pledged for public and trust deposits, borrowed funds and for other purposes as provided by law, and are excluded from the liquid assets calculation. Included in liquid assets are securities that have been pledged to the Federal Reserve Bank of Boston in order to secure our ability to borrow from the discount window should the need arise. This access to the discount window, including the Federal Reserve's recently announced term auction facility, is an important source of back-up liquidity for State Street Bank. As of December 31, 2007, we had no outstanding borrowings from the discount window.

        Based upon our level of liquid assets and our ability to access the capital markets for additional funding when necessary, management considers overall liquidity at December 31, 2007 more than sufficient to meet State Street's current commitments and business needs, including accommodating the transaction and cash management needs of its customers.

        In April 2007, the parent company issued $700 million of senior debt, consisting of $250 million of floating-rate notes due in 2012 and $450 million of 5.375% notes due in 2017. In addition, State Street Capital Trust IV, a Delaware statutory trust wholly owned by the parent company, issued $800 million in aggregate liquidation amount of floating-rate capital securities and used the proceeds to purchase a like amount of floating-rate junior subordinated debentures from the parent company. The capital securities represent an undivided preferred beneficial interest in those junior subordinated debentures, which are the only assets of the trust. The junior subordinated debentures have an initial scheduled maturity in June 2037 and an initial final repayment date in June 2067, each of which we may extend by ten years in specified circumstances. In accordance with existing accounting standards, we did not record the trust in our consolidated financial statements. The junior subordinated debentures qualify for inclusion in tier 1 regulatory capital.

        In connection with the issuance of the junior subordinated debentures, the parent company entered into a replacement capital covenant in which it agreed, for the benefit of the holders of its junior subordinated debentures due 2028 underlying the floating-rate capital securities issued by State Street Capital Trust I, that it will not repay, redeem or repurchase, and that none of its subsidiaries will purchase, any part of the newly issued debentures or the floating-rate capital securities on or before June 1, 2047, unless the repayment, redemption or repurchase is made from the net cash proceeds of

59


the issuance of certain qualified securities and pursuant to the other terms and conditions set forth in the covenant.

        In July 2007, we redeemed an aggregate of $500 million of unsecured junior subordinated debentures issued by the parent company to two of our statutory business trusts, State Street Capital Trusts A and B, composed of $200 million of 7.94% debentures issued in 1996 and $300 million of 8.035% debentures issued in 1997. We paid the trusts the outstanding amount on the debentures plus accrued interest and an aggregate redemption premium of approximately $20 million. This redemption premium was included in the merger and integration costs which we recorded during the third quarter of 2007 in connection with the Investors Financial acquisition. Additional information about these costs is in the "Consolidated Results of Operations—Operating Expenses" section of this Management's Discussion and Analysis.

        In July 2007, the trusts, consistent with the terms of their applicable governing documents, redeemed their respective outstanding capital securities, with an aggregate liquidation amount of $500 million, corresponding to the debentures. The trusts paid to the holders of the outstanding capital securities the same amount that was paid by the parent company to the trusts to redeem the debentures.

        In January 2008, State Street Capital Trust III, a Delaware statutory trust wholly owned by the parent company, issued $500 million in aggregate liquidation amount of 8.250% fixed-to-floating rate normal automatic preferred enhanced capital securities, referred to as "normal APEX," and used the proceeds to purchase a like amount of remarketable 6.001% junior subordinated debentures due 2042 from the parent company. In addition, the trust entered into stock purchase contracts with the parent company under which the trust agrees to purchase, and the parent company agrees to sell, on the stock purchase date, a like amount in aggregate liquidation amount of the parent company's non-cumulative perpetual preferred stock, series A, $100,000 liquidation preference per share. State Street will make contract payments to the trust at an annual rate of 2.249% of the stated amount of $100,000 per stock purchase contract. The normal APEX are beneficial interests in the trust. The trust will pass through, as distributions on or the redemption price of normal APEX, amounts that it receives on its assets that are the corresponding assets for the normal APEX. The corresponding assets for each normal APEX, $1,000 liquidation amount, initially are $1,000 principal amount of the 6.001% junior subordinated debentures and a 1/100th, or a $1,000, interest in a stock purchase contract for the purchase and sale of one share of the Series A preferred stock for $100,000. The stock purchase date is expected to be March 15, 2011, but it may occur on an earlier date or as late as March 15, 2012. From and after the stock purchase date, the corresponding asset for each normal APEX will be a 1/100th, or a $1,000, interest in one share of the Series A preferred stock. In accordance with existing accounting standards, we did not record the trust in our consolidated financial statements. The 6.001% junior debentures qualify for inclusion in tier 1 regulatory capital.

        As stated previously, our ability to maintain consistent access to liquidity is fostered by the maintenance of high investment-grade ratings on our debt, as measured by the major independent credit rating agencies. Factors essential to retaining high credit ratings include diverse and stable core earnings; strong risk management; strong capital ratios; diverse liquidity sources, including the global capital markets and customer deposits; and strong liquidity monitoring procedures. High ratings on debt minimize borrowing costs and enhance our liquidity by ensuring the largest possible market for our debt. A downgrade or reduction of these credit ratings could have an adverse impact to our ability to access funding at favorable interest rates. Following our January 3, 2008 announcement of a net charge to establish a reserve associated with certain active fixed-income strategies managed by SSgA, the major national rating agencies affirmed their ratings for State Street and State Street Bank. However, Moody's Investors Service and Fitch changed their outlook from stable to negative. These

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changes have not had a material impact on our liquidity position or on our ability to access the global capital markets at reasonable rates of interest.

 
   Standard & Poor's
   Moody's Investors Service
   Fitch
   DBRS
State Street Corporation:                
Short-term commercial paper   A-1 + P-1   F1 + R-1(mid)
Senior debt   AA - Aa3   AA - AA (low)
Subordinated debt   A + A1   A +    A (high)
Capital securities   A   A1   A +    A (high)

State Street Bank:
 
 
 
 
 
 
 
 
Short-term deposits   A-1 + P-1   F1 + R-1(high)
Long-term deposits   AA   Aa1   AA   AA
Senior debt   AA - Aa1   AA - AA
Subordinated debt   AA - Aa2   A + AA (low)
Outlook   Stable   Negative   Negative   Stable

CONTRACTUAL CASH OBLIGATIONS

 
   PAYMENTS DUE BY PERIOD
As of December 31, 2007
(In millions)
   Total
   Less than
1 year
   1-3
years
   4-5
years
   Over 5
years
Long-term debt(1)   $ 7,339   $ 188   $ 357   $ 877   $ 5,917
Operating leases     1,880     225     418     324     913
Capital lease obligations     823     52     104     104     563
   
 
 
 
 
Total contractual cash obligations   $ 10,042   $ 465   $ 879   $ 1,305   $ 7,393
   
 
 
 
 
(1)
Long-term debt above excludes capital leases (reported as a separate line item) and the effect of interest-rate swaps. Interest payments were calculated at the stated rate with the exception of floating-rate debt, for which payments were calculated using the indexed rate in effect on December 31, 2007.

        The obligations presented in the table are recorded in our consolidated statement of condition at December 31, 2007. The table does not include obligations which will be settled in cash, primarily in less than one year, such as deposits, federal funds purchased, securities sold under repurchase agreements and other short-term borrowings. Additional information about deposits, federal funds purchased, securities sold under repurchase agreements and other short-term borrowings is in notes 7 and 8 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

        The table does not include obligations related to derivative instruments, because the amounts included in our consolidated statement of condition at December 31, 2007 related to derivatives do not represent the amounts that may ultimately be paid under the contracts. Additional information about derivative contracts is in note 15 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8. We have obligations under pension and other post-retirement benefit plans, which are more fully described in note 17 of the Notes to Consolidated Financial Statements, which are not included in the above table.

        Additional information about contractual cash obligations related to long-term debt and operating and capital leases is in notes 9 and 18 of the Notes to Consolidated Financial Statements. The consolidated statement of cash flows, included in this Form 10-K under Item 8, provides additional liquidity information.

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OTHER COMMERCIAL COMMITMENTS

 
   TENURE OF COMMITMENT
As of December 31, 2007
(In millions)
   Total
amounts
committed(1)
   Less than
1 year
   1-3
years
   4-5
years
   Over 5
years
Indemnified securities financing   $ 558,368   $ 558,368                  
Liquidity asset purchase agreements     34,947     29,321   $ 1,569   $ 2,379   $ 1,678
Unfunded commitments to extend credit     17,404     13,555     1,175     2,599     75
Standby letters of credit     4,505     925     2,567     1,002     11
   
 
 
 
 
Total commercial commitments   $ 615,224   $ 602,169   $ 5,311   $ 5,980   $ 1,764
   
 
 
 
 
(1)
Total amounts committed are reported net of participations to independent third parties.

        Additional information about the commercial commitments disclosed in this section is in note 10 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

Risk Management

        The global scope of our business activities requires that we balance what we perceive to be the primary risks in our businesses with a comprehensive and well-integrated risk management function. The measurement, monitoring and mitigation of risks are essential to the financial performance and successful management of our businesses. These risks, if not effectively managed, can result in current losses to State Street as well as erosion of our capital and damage to our reputation. Our systematic approach also allows for a more precise assessment of risks within a framework for evaluating opportunities for the prudent use of capital.

        We have a disciplined approach to risk management that involves all levels of management. The Board of Directors provides extensive review and oversight of our overall risk management programs, including the approval of key risk management policies and the periodic review of State Street's key risk indicators. These indicators are designed to identify major business activities of State Street with significant risk content, and to establish quantifiable thresholds for risk measurement. Key risk indicators are reported regularly to the Executive Committee of the Board, and are reviewed periodically for appropriateness. Modifications to the indicators are made to reflect changes in our business activities or refinements to existing measurements. Enterprise Risk Management, or ERM, a dedicated corporate group, provides oversight, support and coordination across business units and is responsible for the formulation and maintenance of enterprise-wide risk management policies and guidelines. In addition, ERM establishes and reviews approved limits, and with business line management, monitors key risks. The head of ERM meets regularly with the Board or a Board committee, as appropriate, and has the authority to escalate issues as necessary.

        The execution of duties in the management of people, products, business operations and processes is the responsibility of business unit managers. The function of risk management is responsible for designing, orchestrating and directing the implementation of risk management programs and processes consistent with corporate and regulatory standards. Accordingly, risk management is a shared responsibility between ERM and the business lines and requires joint efforts in goal setting, program design and implementation, resource management, and performance evaluation between business and functional units.

        Responsibility for risk management is overseen by a series of management committees. The Major Risk Committee, or MRC, is responsible for the formulation and recommendation of policies, and the approval of guidelines and programs governing the identification, analysis, measurement and control of material risks across State Street. Chaired by the head of ERM, the MRC focuses on the review of

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business activities with significant risk content and the assessment of risk management programs and initiatives. The Capital Committee, chaired by the Chief Financial Officer, oversees the management of our regulatory and economic capital, the determination of the framework for capital allocation and strategies for capital structure and debt and equity issuances. ALCO, chaired by the Treasurer, oversees the management of our consolidated balance sheet, including management of our global liquidity and interest-rate risk positions. The Fiduciary Review Committee reviews the criteria for the acceptance of fiduciary duties, and assists our business lines with their fiduciary responsibilities executed on behalf of customers. The Credit Committee, chaired within ERM, acts as the credit policy committee for State Street. The Operational Risk Committee, chaired within ERM, provides cross-business oversight of operational risk to identify, measure, manage and control operational risk in an effective and consistent manner across State Street. The Model Assessment Committee, chaired within ERM, provides unbiased recommendations concerning technical modeling issues and independently validates qualifying financial models utilized by our businesses. Several other committees with specialized risk management functions report to the MRC.

        Corporate Audit serves in a complementary role to our program of risk management, providing the Board and management with continuous monitoring and control assessments to ensure adherence to State Street's policies and procedures and the effectiveness of its system of internal controls. Additionally, the internal control environment is evaluated through external examinations and regulatory compliance efforts. The Corporate Compliance, Regulatory and Industry Affairs, and Legal groups also serve essential roles in risk management. Corporate Compliance is responsible for the design, implementation and oversight of policies, guidelines and programs to ensure our compliance with applicable laws and regulations wherever we conduct business. The Regulatory and Industry Affairs group monitors proposed changes in rules and legislation, and the Legal group provides counsel that enables us to deal with complex legal and regulatory environments, maximize business opportunities and minimize legal, regulatory and other risks.

        While we believe that our risk management program is effective in managing the risks in our businesses, external factors may create risks that cannot always be identified or anticipated. For example, a material counterparty failure or a default of a material obligor could have a material adverse effect on our consolidated results of operations.

Market Risk

        Market risk is defined as the risk of adverse financial impact due to fluctuations in interest rates, foreign exchange rates and other market-driven rates or prices. We are exposed to market risk both in our trading and non-trading, or asset and liability management, activities. We manage our overall market risk through a comprehensive risk management framework. This framework includes risk management groups that report independently to senior management through ERM. The process of managing market risk for these activities, discussed in further detail below, applies to both on-balance sheet and off-balance sheet exposures.

Trading Activities

        We primarily engage in trading and investment activities to serve our customers' needs and to contribute to overall corporate earnings and liquidity. In the conduct of these activities, we are subject to, and assume, market risk. The level of market risk that we assume is a function of our overall objectives and liquidity needs, customer requirements and market volatility. Interest-rate risk, a component of market risk, is more thoroughly discussed in the "Asset and Liability Management" portion of this "Market Risk" section.

        Market risk associated with foreign exchange and trading activities is controlled through established limits on aggregate and net open positions, sensitivity to changes in interest rates, and

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concentrations, which are supplemented by stop-loss thresholds. We use an array of risk management tools and methodologies, including value-at-risk, to measure, monitor and control market risk. All limits and measurement techniques are reviewed and adjusted as necessary on a regular basis by business managers, the market risk management group and the Trading and Market Risk Committee.

        We use a variety of derivative financial instruments to support customers' needs, conduct trading activities and manage our interest-rate and currency risk. These activities are designed to create trading revenue or to hedge volatility in net interest revenue. In addition, we provide services related to derivative financial instruments in our role as both a manager and servicer of financial assets.

        Our customers use derivative financial instruments to manage the financial risks associated with their investment goals and business activities. With the growth of cross-border investing, customers have an increasing need for foreign exchange forward contracts to convert currency for international investment and to manage the currency risk in international investment portfolios. As an active participant in the foreign exchange markets, we provide foreign exchange forward contracts and options in support of these customer needs.

        As part of our trading activities, we assume positions in the foreign exchange and interest-rate markets by buying and selling cash instruments and using derivative financial instruments, including foreign exchange forward contracts, foreign exchange and interest-rate options and interest-rate swaps. As of December 31, 2007, the notional amounts of all of these derivative financial instruments were $796.19 billion, of which $732.01 billion were foreign exchange forward contracts. In the aggregate, long and short foreign exchange forward positions are closely matched to minimize currency and interest-rate risk. All foreign exchange contracts are valued daily at current market rates.

        We use a variety of risk measurement and estimation techniques, including value-at-risk. Value-at-risk is an estimate of potential loss for a given period within a stated statistical confidence interval. We use a system of risk management to estimate value-at-risk daily for all material trading positions. We have adopted standards for estimating value-at-risk, and we maintain capital for market risk in accordance with applicable regulatory guidelines. Value-at-risk is estimated for a 99% one-tail confidence interval and an assumed one-day holding period using a historical observation period of greater than one year. A 99% one-tail confidence interval implies that daily trading losses should not exceed the estimated value-at-risk more than 1% of the time, or approximately three days out of the year. The methodology uses a simulation approach based on observed changes in market prices and takes into account the resulting diversification benefits provided from the mix of our trading positions.

        Like all quantitative risk measures, value-at-risk is subject to certain limitations and assumptions inherent in the methodology. Our methodology gives equal weight to all market-rate observations regardless of how recently the market rates were observed. The estimate is calculated using static portfolios consisting of positions held at the end of the trading day. Implicit in the estimate is the assumption that no intraday action is taken by management during adverse market movements. As a result, the methodology does not represent risk associated with intraday changes in positions or intraday price volatility.

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        The following table presents market risk related to our trading activities as measured by our value-at-risk methodology:

VALUE-AT-RISK

 
   2007
   2006
Years ended December 31,
(In millions)
   Annual
Average
   Maximum
   Minimum
   Annual
Average
   Maximum
   Minimum
Foreign exchange products   $ 1.8   $ 4.0   $ .7   $ 1.7   $ 4.3   $ .7
Interest-rate products     1.4     3.7     .1     .8     1.8     .2

        We compare daily profits and losses from trading activities to estimated one-day value-at-risk. For the years ended December 31, 2007, 2006 and 2005, we did not experience any trading losses in excess of our end-of-day value-at-risk estimate.

Asset and Liability Management Activities

        The primary objective of asset and liability management is to provide sustainable and growing net interest revenue, or "NIR," under varying economic environments, while protecting the economic values of our balance sheet assets and liabilities from the adverse effects of changes in interest rates. Most of our NIR is earned from the investment of deposits generated by our core Investment Servicing and Investment Management businesses. We structure our balance sheet assets to generally conform to the characteristics of our balance sheet liabilities, but we manage our overall interest-rate risk position in the context of current and anticipated market conditions and within internally approved risk guidelines.

        Our overall interest-rate risk position is maintained within a series of policies approved by the Board and guidelines established and monitored by ALCO. Our Global Treasury unit has responsibility for managing State Street's day-to-day interest-rate risk. To effectively manage the consolidated balance sheet and related NIR, Global Treasury has the authority to take a limited amount of interest-rate risk based on market conditions and its views about the direction of global interest rates over both short-term and long-term time horizons. Global Treasury manages our exposure to changes in interest rates on a consolidated basis, and they have organized themselves into three regional treasury units, North America, Europe, and Asia/Pacific, to reflect the growing, global nature of our exposures and to capture the impact of change in regional market environments on our total risk position.

        Our investment activities and our use of derivative financial instruments are the primary tools used in managing interest-rate risk. We invest in financial instruments with currency, repricing, and maturity characteristics we consider appropriate to manage our overall interest-rate risk position. In addition to on-balance sheet assets, we use certain derivatives, primarily interest-rate swaps, to alter the interest-rate characteristics of specific balance sheet assets or liabilities. The use of derivatives is subject to ALCO-approved guidelines. Additional information about our use of derivatives is in note 15 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

        As a result of growth in our non-U.S. operations, non-U.S. dollar denominated customer liabilities are a significant portion of our consolidated balance sheet. This growth results in exposure to changes in the shape and level of non-U.S. dollar yield curves, which we include in our consolidated interest-rate risk management process.

        Because no one individual measure can accurately assess all of our risks to changes in rates, we use several quantitative measures in our assessment of current and potential future exposures to changes in interest rates and their impact on net interest revenue and balance sheet values. Net interest revenue simulation is the primary tool used in our evaluation of the potential range of possible net interest revenue results that could occur under a variety of interest-rate environments. We also use

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market valuation and duration analysis to assess changes in the economic value of balance sheet assets and liabilities caused by assumed changes in interest rates. Finally, gap analysis—the difference between the amount of balance sheet assets and liabilities re-pricing within a specified time period—is used as a measurement of our interest-rate risk position.

        To measure, monitor, and report on our interest-rate risk position, we use (1) NIR simulation, or "NIR-at-risk," which measures the impact on NIR over the next twelve months to immediate, or "rate shock," and gradual, or "rate ramp," changes in market interest rates; and (2) economic value of equity, or "EVE," which measures the impact on the present value of all NIR-related principal and interest cash flows of an immediate change in interest rates. NIR-at-risk is designed to measure the potential impact of changes in market interest rates on NIR in the short term. EVE, on the other hand, is a long-term view of interest-rate risk, but with a view toward liquidation of State Street. Both of these measures are subject to ALCO-established guidelines, and are monitored regularly, along with other relevant simulations, scenario analyses and stress tests by both Global Treasury and ALCO.

        In calculating our NIR-at-risk, we start with a base amount of NIR that is projected over the next twelve months, assuming that the then-current yield curve remains unchanged over the period. Our existing balance sheet assets and liabilities are adjusted by the amount and timing of transactions that are forecasted to occur over the next twelve months. That yield curve is then "shocked," or moved immediately, ±100 basis points in a parallel fashion, or at all points along the yield curve. Two new twelve-month NIR projections are then developed using the same balance sheet and forecasted transactions, but with the new yield curves, and compared to the base scenario. We also perform the calculations using interest rate ramps, which are ±100 basis point changes in interest rates that are assumed to occur gradually over the next twelve-month period, rather than immediately as we do with interest-rate shocks.

        EVE is based on the change in the present value of all NIR-related principal and interest cash flows for changes in market rates of interest. The present value of existing cash flows with a then-current yield curve serves as the base case. We then apply an immediate parallel shock to that yield curve of ±200 basis points and recalculate the cash flows and related present values. A large shock is used to better capture the embedded option risk in our mortgage-backed securities that results from the borrower's prepayment opportunity.

        Key assumptions used in the models described above include the timing of cash flows; the maturity and repricing of balance sheet assets and liabilities, especially option-embedded financial instruments like mortgage-backed securities; changes in market conditions; and interest-rate sensitivities of our customer liabilities with respect to the interest rates paid and the level of balances. These assumptions are inherently uncertain and, as a result, the models cannot precisely calculate future NIR or predict the impact of changes in interest rates on NIR and economic value. Actual results could differ from simulated results due to the timing, magnitude and frequency of changes in interest rates and market conditions, changes in spreads and management strategies, among other factors. Projections of potential future streams of NIR are assessed as part of our forecasting process.

        The following table presents the estimated exposure of NIR for the next twelve months, calculated as of December 31, 2007 and 2006, due to an immediate ± 100 basis point shift in then-current interest rates. Estimated incremental exposures presented below are dependent on management's assumptions about asset and liability sensitivities under various interest-rate scenarios, such as those previously discussed, and do not reflect any actions management may undertake in order to mitigate some of the adverse effects of interest-rate changes on State Street's financial performance.

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NIR-AT-RISK

 
   Estimated Exposure to Net Interest Revenue
  
(In millions)
   2007
   2006
  
Rate change:              
+100 bps shock   $ (98 ) $ (90 )
-100 bps shock     7     52  

+100 bps ramp
 
 
(44
)
 
(57
)
-100 bps ramp     20     46  

        The following table presents estimated EVE exposures, calculated as of December 31, 2007 and 2006, assuming an immediate and prolonged shift in interest rates, the impact of which would be spread over a number of years.

ECONOMIC VALUE OF EQUITY

 
   Estimated Exposure to Economic Value of Equity
  
(In millions)
   2007
   2006
  
Rate change:              
+200 bps shock   $ (1,195 ) $ (1,023 )
- 200 bps shock     48     371  

        With respect to the December 31, 2007 information presented in the tables above, the balance sheet of Investors Financial is reflected in the estimated NIR-at-risk and the estimated EVE exposure. Information for prior periods was not restated. The incremental increases in the levels of NIR-at-risk and EVE exposure to upward shifts in interest rates are largely attributable to increased purchases of fixed-rate securities in the first quarter of 2007, slower projected prepayment speeds for mortgage-backed securities effective in the fourth quarter of 2007, and the contribution of the acquired Investors Financial business during the third quarter of 2007. While the dollar amount of NIR-at-risk increased, its rate of increase was lower than the reported growth rate for NIR.

        While the measures presented in the tables above are not a prediction of future NIR or valuations, they do suggest that if all other variables remained constant, in the short term, falling interest rates would lead to NIR that is higher than it would otherwise have been, and rising rates would lead to lower NIR. Other important factors that impact the levels of NIR are balance sheet size and mix; interest-rate spreads; the slope and interest-rate level of U.S. dollar and non-U.S. dollar yield curves and the relationship between them; the pace of change in market interest rates; and management actions taken in response to the preceding conditions.

        One of the most important assumptions in our management of interest rate risk is the response of customer liabilities to changes in market interest rates. As such, we regularly reassess the characteristics of customer liabilities. Our most recent assessment was completed during the second quarter of 2007 and resulted in a small lengthening in the estimated duration of customer liabilities. The impact of this longer estimated duration for customer liabilities reduced both NIR-at-risk and EVE exposure to increases in market interest rates, partially mitigating the factors responsible for higher interest-rate risk detailed above.

Credit Risk

        Credit and counterparty risk is defined as the risk of financial loss if a borrower or counterparty is either unable or unwilling to repay borrowings or settle in accordance with contractual terms. The extension of credit and acceptance of counterparty risk by State Street are governed by corporate

67


guidelines based on the prospective customer's risk profile, the markets served, counterparty and country concentrations, and regulatory compliance. Our focus on large institutional investors and their businesses requires that we assume concentrated credit risk in a variety of forms to certain highly-rated entities. This concentration risk is mitigated by comprehensive guidelines and procedures to monitor and manage all aspects of credit and counterparty risk that we undertake. Exposures are evaluated on an individual basis at least annually.

        We provide, on a limited basis, traditional loan products and services to key customers and prospects in a manner that enhances customer relationships, increases profitability and minimizes risk. We employ a relationship model in which credit decisions are based upon credit quality and the overall institutional relationship. This model is typical of financial institutions that provide credit to institutional customers in the markets that we serve.

        An allowance for loan losses is maintained to absorb probable credit losses in the loan portfolio and is reviewed regularly by management for adequacy. An internal rating system is used to assess potential risk of loss based on customer investment profile, current economic and/or customer financial indicators. The provision for loan losses is a charge to earnings to maintain the overall allowance for loan losses at a level considered adequate relative to the level of credit risk in the loan and lease financing portfolio. No provision was recorded in either 2007, 2006 or 2005.

        At December 31, 2007 and 2006, the allowance for loan losses was $18 million. Changes in the allowance for loan losses were as follows for the years ended December 31:

(In millions)
   2007
   2006
   2005
   2004(1)
   2003
U.S.:                              
Balance at beginning of year   $ 18   $ 18   $ 17   $ 43   $ 43
Provision for loan losses     —     —     —     (15 )   —
Loan charge-offs—commercial and financial     —     —     —     —     —
Recoveries—commercial and financial     —     —     —     —     —
Reclassification     —     —     —     (14 )   —
   
 
 
 
 
Balance at end of year—U.S.      18     18     17     14     43

Non-U.S.:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year     —     —     1     18     18
Provision for loan losses     —     —     —     (3 )   —
Reclassification     —     —     —     (11 )   —
   
 
 
 
 
Balance at end of year—Non-U.S.      —     —     1     4     18
   
 
 
 
 
Total balance at end of year   $ 18   $ 18   $ 18   $ 18   $ 61
   
 
 
 
 
(1)
In 2004, we reclassified $25 million of the allowance for loan losses to other liabilities as a reserve for off-balance sheet commitments. Subsequent to the reclassification, the reserve for off-balance sheet commitments was reduced by $10 million, and recorded as an offset to other operating expenses. We also reversed $18 million through the provision for loan losses as a result of reduced credit risk exposures and improved credit quality.

        Past-due loans are loans on which principal or interest payments are over 90 days delinquent, but where interest continues to be accrued. There were no past-due loans as of December 31, 2007, 2006, 2005, 2004 and 2003.

        We generally place loans on non-accrual status once payments are 60 days past due, or earlier if management determines that full collection is not probable. Loans 60 days past due, but considered both well-secured and in the process of collection, may be excluded from non-accrual status. For loans

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placed on non-accrual status, revenue recognition is suspended. There were no non-accrual loans at year-end 2007, 2006, 2005, 2004 and 2003.

        We purchase securities under agreements to resell. Risk is minimized by establishing the acceptability of counterparties; limiting purchases almost exclusively to low-risk U.S. government securities; taking possession or control of transaction assets; monitoring levels of underlying collateral; and limiting the duration of the agreements. Securities are revalued daily to determine if additional collateral is necessary from the borrower. Most repurchase agreements are short-term, with maturities of less than 90 days.

        We also provide customers with off-balance sheet liquidity and credit enhancement facilities in the form of letters of credit, lines of credit and liquidity asset purchase agreements. These exposures are subject to an initial credit analysis, with detailed approval and review processes. These facilities are also actively monitored and reviewed on an annual basis. We maintain a separate reserve for probable credit losses related to certain of these off-balance sheet activities. Management reviews the adequacy of this reserve on a regular basis.

        On behalf of our customers, we lend their securities to creditworthy banks, broker/dealers and other institutions. In most circumstances, we indemnify our customers for the fair market value of those securities against a failure of the borrower to return such securities. Though these transactions are well-collateralized, the substantial volume of these activities necessitates thorough credit-based underwriting and monitoring processes. State Street requires the borrowers to provide collateral in an amount equal to or in excess of 100% of the fair market value of the securities borrowed. Collateral funds received in connection with our securities lending services are held by us as agent and are not recorded in our consolidated statement of condition. The borrowed securities and collateral are revalued daily to determine if additional collateral is necessary. State Street held, as agent, cash and securities totaling $572.93 billion and $527.37 billion as collateral for indemnified securities financing at December 31, 2007 and 2006, respectively.

        Processes for credit approval and monitoring are in place for other credit extensions. As part of the approval and renewal process, appropriate due diligence is conducted based on the size and term of the exposure, as well as the quality of the counterparty. Exposures to these entities are aggregated and evaluated by ERM.

        Investments in debt and equity securities, including investments in affiliates, are monitored regularly by Corporate Finance and ERM. To the extent necessary, procedures are in place for evaluating potentially impaired securities, as discussed in notes 1 and 3 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8. Total non-performing investment securities were $3 million and $4 million at December 31, 2007 and 2006, respectively.

Operational Risk

        We define operational risk as the potential for loss resulting from inadequate or failed internal processes, people and systems, or from external events. As a leading provider of services to institutional investors, our customers have a broad array of complex and specialized servicing, confidentiality and fiduciary requirements. Active management of operational risk is an integral component of all aspects of our business, and responsibility for the management of operational risk lies with every individual at State Street. Our Operational Risk Policy Statement defines operational risk and details roles and responsibilities for managing operational risk. The Policy Statement is reinforced by the Operational Risk Guidelines, which codify our approach to operational risk. The Guidelines document our sound practices and provide a mandate within which programs, processes, and regulatory elements are implemented to ensure that operational risk is identified, measured, managed and controlled in an effective and consistent manner across State Street.

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        We maintain an operational risk governance structure to ensure that responsibilities are clearly defined and to provide independent oversight of operational risk management. Business units periodically review the status of the business controls and monitor and report key risk indicator results. ERM oversees the overall operational risk management program. The MRC and the Operational Risk Committee review key risk indicators and policies related to operational risk, provide oversight to ensure compliance with the operational risk program, and escalate operational risk issues of note to the Executive Committee of the Board. Corporate Audit performs independent reviews of the application of operational risk management practices and methodologies and reports to the Examining and Audit Committee of the Board.

        State Street's internal control environment is designed to provide a sound operational environment. Our discipline in managing operational risk provides the structure to identify, evaluate, control, monitor, measure, mitigate and report operational risk.

Business Risk

        We define business risk as the risk of adverse changes in our earnings related to business factors, including changes in the competitive environment, changes in the operational economics of business activities and the potential effect of strategic and reputation risks, not already captured as market, interest-rate, credit or operational risks. We incorporate business risk into our assessment of our economic capital needs. Active management of business risk is an integral component of all aspects of our business, and responsibility for the management of business risk lies with every individual at State Street.

        It is sometimes difficult to separate the effects of a potential material adverse event into operational and business risks. For instance, the direct financial impact of an unfavorable event in the form of fines or penalties would be classified as an operational risk loss, while the impact on our reputation and the potential loss of customers and corresponding decline in revenue would be classified as a business risk loss. An additional example of business risk is the integration of a major acquisition. Failure to successfully integrate the operations of an acquired business, and the resultant inability to retain customers, would be classified as a business risk loss.

        Business risk is managed with a long-term focus. Techniques include the careful development of business plans and appropriate management oversight. The potential impact of the various elements of business risk is difficult to quantify with any degree of precision. We use a combination of historical earnings volatility, scenario analysis, stress-testing and management judgment to help assess the potential effect on State Street attributable to business risk. Management and control of business risks are generally the responsibility of the business units as part of their overall and strategic planning and internal risk management processes.

OFF-BALANCE SHEET ARRANGEMENTS

        In the normal course of business, we hold assets under custody and assets under management in a custodial or fiduciary capacity for our customers, and, in accordance with GAAP, we do not record these assets in our consolidated statement of condition. Similarly, collateral funds associated with our securities finance activities are held by us as agent; therefore, we do not record these assets in our consolidated statement of condition. Additional information about these and other off-balance sheet activities is in note 10 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

        In the normal course of business, we utilize derivative financial instruments to support our customers' needs, to conduct trading activities and to manage our interest-rate and foreign currency risk. Additional information about our use of derivatives is in note 15 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

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        In the normal course of business, we utilize three types of special purpose entities, referred to as SPEs, two of which are not recorded in our consolidated financial statements. Information about the activities of these SPEs, which are used in connection with our tax-exempt investment program, our involvement with managed investment vehicles and our asset-backed commercial paper conduits, is in notes 10 and 11 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8. Additional information about the commercial paper conduits is provided below.

        The risks associated with providing administration, liquidity, and/or credit enhancements to these special purpose entities are reviewed as part of our corporate risk management process in a manner that is consistent with applicable policies and guidelines. We believe that we have sufficient liquidity and have provided adequate credit reserves to cover any risks associated with these activities.

Asset-Backed Commercial Paper Programs

        As further described in note 11 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8, we administer four third-party-owned, special-purpose, multi-seller asset-backed commercial paper programs, commonly referred to as "conduits," the first of which was established in 1992. These conduits, which are structured as bankruptcy-remote entities and are not recorded in our consolidated financial statements under existing accounting standards, are designed to satisfy the demand of our institutional customers, particularly mutual fund customers, for commercial paper.

        Total assets in the four unconsolidated conduits were approximately $28.76 billion at December 31, 2007 and $25.25 billion at December 31, 2006. The conduits obtain funding through the issuance of commercial paper and hold diversified portfolios of investments, which are predominately composed of securities purchased in the capital markets. These investments are collateralized by mortgages, student loans, automobile and equipment loans and credit card receivables, most of which securities are investment grade. Conduit assets are not sourced from our consolidated balance sheet.

        The following tables provide additional information regarding the composition of the conduits' asset portfolios, in the aggregate, as of December 31, 2007. As of this date, none of the conduits' portfolio securities were predominantly collateralized by sub-prime real estate mortgages.

CONDUIT ASSETS BY COLLATERAL TYPE
   Amount
   Percent of Total Conduit Assets
  
(Dollars in billions)

    
    
  
Australian residential mortgage-backed securities   $ 4.7   16 %
European residential mortgage-backed securities     4.7   16  
U.S. residential mortgage-backed securities     4.2   15  
United Kingdom residential mortgage-backed securities     2.3   8  
Student loans     3.3   11  
Auto and equipment loans     2.8   10  
Credit cards     2.0   7  
Other(1)     4.8   17  
   
 
 
Total conduit assets   $ 28.8   100 %
   
 
 

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CONDUIT ASSETS BY CREDIT RATING
   Amount
   Percent of Total Conduit Assets
  
(Dollars in billions)

    
    
  
AAA/Aaa   $ 17.7   61 %
AA/Aa     4.5   16  
A/A     2.3   8  
BBB/Baa     1.5   5  
Not rated(2)     2.8   10  
   
 
 
Total conduit assets   $ 28.8   100 %
   
 
 

CONDUIT ASSETS BY ASSET ORIGIN
   Amount
   Percent of Total Conduit Assets
  
(Dollars in billions)

    
    
  
U.S.    $ 12.2   42 %
Australia     6.1   21  
Great Britain     2.9   10  
Spain     1.9   7  
Italy     1.9   7  
Portugal     0.7   2  
Germany     0.7   2  
Netherlands     0.5   2  
Greece     0.3   1  
Other     1.6   6  
   
 
 
Total conduit assets   $ 28.8   100 %
   
 
 

        Since the conduits were first organized beginning in 1992, we have entered into contractual obligations in the form of liquidity asset purchase agreements to support most or all of the liquidity of the conduits. We also provide credit enhancement to the conduits in the form of standby letters of credit. Other institutions can and do provide contractual liquidity to the conduits. As provided for in these agreements, we provide back-up liquidity in the event that the conduits cannot meet their funding needs through the issuance of commercial paper. In the event that maturing commercial paper cannot be reissued into the market by the conduits' dealer group, we and the other institutions providing liquidity may be required to provide liquidity by purchasing portfolio assets from the conduits. State Street may also provide liquidity by purchasing commercial paper or providing other extensions of credit to the conduits. As of December 31, 2007, State Streets' commitments under these liquidity asset purchase agreements and back-up lines of credit totaled approximately $28.37 billion, and our commitments under standby letters of credit totaled $1.04 billion.

        The conduits generally sell commercial paper to third-party investors; however, we sometimes purchase commercial paper from the conduits. At December 31, 2007, we held on our consolidated balance sheet an aggregate of approximately $2 million of commercial paper issued by the conduits. The highest total overnight position in the conduits' commercial paper held by State Street was approximately $1.25 billion during 2007. This was higher than the levels of commercial paper we have historically held, and was reflective of both the reduced liquidity in the asset-backed commercial paper markets during the third and fourth quarters and our desire to provide short-term stability to funding costs given the lack of liquidity in the marketplace. There were no draw-downs on the liquidity asset purchase agreements or standby letters of credit during 2007.

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        As the third quarter of 2007 progressed and investors became increasingly concerned about the credit quality of the underlying assets generally held in asset-backed commercial paper conduits and similar vehicles, the resulting reduction in liquidity in the global fixed-income securities markets made the funding of the State Street-administered conduits more challenging than in normal market conditions, and the yields that issuers had to pay on asset-backed commercial paper increased. Consistent with the experience of other market participants, commercial paper was generally being placed by the State Street-administered conduits with shorter maturities and higher investor yields than historically experienced. This compressed the spread between the rate earned on the conduits' assets and the conduits' funding costs. The weighted-average maturity of the conduits' commercial paper was approximately 20 days as of December 31, 2007, compared to approximately 23 days as of December 31, 2006. However, the conduits continue to roll over the commercial paper as it matures, i.e., place the commercial paper with market participants, including State Street.

        We intend to continue to manage the liquidity of the programs, if and as needed, through purchases of commercial paper as necessary; however, if due to further deterioration in the liquidity of the fixed-income markets or otherwise, it would become necessary to purchase assets from the conduits, we anticipate that we could fund those purchases.

        During 2007, we did not experience any losses in our role as a liquidity and credit enhancement provider to the conduits, although the margins that we generated from administration of the conduits were lower than the levels historically achieved on commercial paper issued by the conduits. The fee revenue we generated from our involvement with the conduits was approximately $66 million for 2007, $62 million for 2006 and $58 million for 2005. We earn fees from our role as administrator, liquidity or credit enhancement provider and as one of the dealers, which fees are priced on a market basis. These fees are recorded in processing fees and other revenue in our consolidated statement of income. Our overall conduit business activities generated pre-tax income, which included the fee revenue described above, of approximately $23 million for 2007, compared to pre-tax income of $49 million for 2006 and $45 million for 2005. The decrease in this income from 2006 to 2007 primarily resulted from the change in fair value of basis swaps, as well as other conduit operating expenses.

        As described above, we provide the conduits with contractual liquidity in the form of liquidity asset purchase agreements. If a conduit experienced a problem with an asset, such as a default or credit rating downgrade, subject to certain conditions, the liquidity asset purchase agreement could be invoked by the conduit, requiring State Street to purchase the asset from the conduit at prices which may exceed the fair value of the assets. If that occurred, we would be required to recognize a loss upon purchase of the asset. Any loss from a credit default would first be offset by the level of funding provided by the first-loss note holders. Currently, in light of the recent reduction in liquidity in the markets, with spreads on virtually all asset classes except U.S. treasuries having widened, we expect that an asset purchase would result in a loss. This loss may be recovered in future periods, depending on State Street's actions after the asset is purchased and market conditions.

        It is also possible that we would be required to consolidate one or more of the conduits' assets and liabilities onto our consolidated balance sheet. This consolidation would occur if we were determined to be the primary beneficiary of the conduits as defined in FIN 46(R). For example, if we updated our expected loss model assumptions as a result of changes in market conditions or a downgrade of securities, we may be required to increase the amount of first-loss notes in order for the investors in the first-loss notes to continue to be considered the primary beneficiaries of the conduits. If the conduits are not able to issue additional first-loss notes or take other actions, we may be determined to be the primary beneficiary of the conduits, and would be required to consolidate the conduits' assets and liabilities onto our consolidated balance sheet. Additional information about our use of an expected loss model and the third-party investors in first-loss notes is provided in the "Significant Accounting Estimates—Special Purpose Entities" section of this Management's Discussion and Analysis and in note 11 of the Notes to Consolidated Financial Statements included in this Form 10-K under

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Item 8. Our accounting treatment of the conduits is reviewed at least quarterly, and more frequently if specific events warrant.

        As a result of the events in the global fixed-income securities markets, we reviewed the underlying assumptions incorporated in our FIN 46(R) expected loss model. We concluded as of December 31, 2007, that our model assumptions were appropriate and were reflective of market participant assumptions, and appropriately considered the probability of, and potential for, the recurrence of these events.

        If consolidation were to occur because we were determined to be the primary beneficiary of the conduits as defined in FIN 46(R), we would consolidate the conduits' assets and liabilities onto our consolidated balance sheet at fair value. We expect that we would recognize an extraordinary loss on the date of consolidation if the fair value of the conduits' liabilities exceeded the fair value of the conduits' assets, as they do currently. This loss would be recovered back into income over the remaining lives of the assets, assuming that the assets were held to maturity and that we recovered the full principal amount of the securities.

        Purchasing or consolidating all or a significant portion of the assets of the conduits would affect the size and composition of our consolidated balance sheet and alter our financial and regulatory capital ratios, and may affect our earnings. In light of our continued ability to manage the liquidity of the commercial paper, we do not currently anticipate that this action will become necessary. However, for illustrative purposes only, assuming estimated fair values of the conduits' assets as of December 31, 2007, if all of the conduits' assets were purchased under the liquidity asset purchase agreements, or if the conduits' assets and liabilities were consolidated onto our consolidated balance sheet, we estimate that we would recognize an after-tax loss of approximately $530 million in our consolidated statement of income.

        This estimate assumes that all of the conduits, with total assets of approximately $28.76 billion as of December 31, 2007, are consolidated on that date; that the assets of the conduits are recorded at fair value, which is based on State Street's consistent application of its pricing policies for conduit assets; and that the pre-tax loss is tax-effected at a 40% marginal income tax rate. If this consolidation were to occur in the future, or we were required to purchase assets pursuant to the liquidity asset purchase agreements at prices in excess of the fair value of the assets, the ultimate amount of loss will be based upon market conditions at the date such a determination is made, which could differ from the estimate provided above. If the assets were consolidated for accounting purposes pursuant to FIN 46(R), we expect that this loss would be recorded as an extraordinary loss, after income from continuing operations. If we were to purchase the assets under the liquidity asset purchase agreements, to the extent that a loss was incurred, we expect that the loss would be recognized in continuing operations.

        We consider the activities of the conduits in our liquidity management process, as more fully described in the "Liquidity" section of this Management's Discussion and Analysis. We would be able to access multiple sources of liquidity to fund required asset purchases, including sales of other assets, asset repurchase agreements, the issuance of corporate commercial paper, the issuance of bank certificates of deposit and time deposits, and accessing the Federal Reserve discount window or similar facilities in other jurisdictions in which we maintain significant banking operations. The consolidation of the conduits for accounting purposes alone would not require additional funding or liquidity for the conduits to fund their asset portfolios. However, if the reasons for consolidation related to an inability of the conduits to issue commercial paper, the conduits would require additional liquidity.

        If we were required to consolidate the conduits' assets and liabilities, our regulatory capital ratios would be negatively impacted for a period of time. With respect to regulatory capital, the consolidation of the conduits' assets and liabilities would cause a reduction of our tier 1 and total risk-based capital ratios. The impact of consolidation on our tier 1 leverage ratio would be more significant, but the

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degree of impact would depend on how and when consolidation occurred, since this ratio is a function of our consolidated total average assets over an entire quarter.

        Assuming estimated fair values of the conduits' assets as of December 31, 2007, priced as described above, if all of the conduits' assets and liabilities were consolidated onto our consolidated balance sheet on December 31, 2007, and no other management actions were taken with respect to regulatory capital, the following table presents the estimated impact on State Street's and State Street Bank's regulatory capital ratios.

 
   State Street
   State Street Bank
  
 
   Reported as of December 31, 2007
   Adjusted as of December 31, 2007
   Reported as of December 31, 2007
   Adjusted as of December 31, 2007
  
Tier 1 leverage ratio   5.3 % 4.9 % 5.5 % 5.0 %
Tier 1 risk-based capital ratio   11.2   10.3   11.2   10.3  
Total risk-based capital ratio   12.7   11.8   12.7   11.8  

RECENT ACCOUNTING DEVELOPMENTS

        Information with respect to recent accounting developments is in note 1 of the Notes to Consolidated Financial Statements included in this Form 10-K under Item 8.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The information set forth in the "Market Risk" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in this Form 10-K under Item 7, is incorporated by reference herein.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        Additional information about restrictions on the transfer of funds from State Street Bank to the parent company is included in this Form 10-K under Item 5, and in the "Financial Condition Capital" section of Management's Discussion and Analysis of Financial Condition and Results of Operations under Item 7.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
STATE STREET CORPORATION

        We have audited the accompanying consolidated statement of condition of State Street Corporation as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of State Street Corporation at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of State Street Corporation's internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 14, 2008 expressed an unqualified opinion thereon.

        As discussed in note 1 to the consolidated financial statements, in 2007 the Corporation has adopted Financial Accounting Standards Board Staff Position FAS 13-2, "Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction" and Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes."

GRAPHIC

Boston, Massachusetts

February 14, 2008

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CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statement of Income

Years ended December 31,
   2007
   2006
   2005
  
(Dollars in millions, except per share amounts)

    
    
    
  
Fee revenue:                    
Servicing fees   $ 3,388   $ 2,723   $ 2,474  
Management fees     1,141     943     751  
Trading services     1,152     862     694  
Securities finance     681     386     330  
Processing fees and other     237     272     302  
   
 
 
 
Total fee revenue     6,599     5,186     4,551  
Net interest revenue:                    
Interest revenue     5,212     4,324     2,930  
Interest expense     3,482     3,214     2,023  
   
 
 
 
Net interest revenue     1,730     1,110     907  
Provision for loan losses     —     —     —  
   
 
 
 
Net interest revenue after provision for loan losses     1,730     1,110     907  
Gains (Losses) on sales of available-for-sale investment securities, net     7     15     (1 )
Gain on sale of Private Asset Management business     —     —     16  
   
 
 
 
Total revenue     8,336     6,311     5,473  
Operating expenses:                    
Salaries and employee benefits     3,256     2,652     2,231  
Information systems and communications     546     501     486  
Transaction processing services     619     496     449  
Occupancy     408     373     391  
Provision for legal exposure     600     —     —  
Merger and integration costs     198     —     —  
Other     806     518     484  
   
 
 
 
Total operating expenses     6,433     4,540     4,041  
   
 
 
 
Income from continuing operations before income tax expense     1,903     1,771     1,432  
Income tax expense from continuing operations     642     675     487  
   
 
 
 
Income from continuing operations     1,261     1,096     945  
Income (Loss) from discontinued operations before income tax expense     —     16     (165 )
Income tax expense (benefit) from discontinued operations     —     6     (58 )
   
 
 
 
Income (Loss) from discontinued operations     —     10     (107 )
   
 
 
 
Net income   $ 1,261   $ 1,106   $ 838  
   
 
 
 
Earnings per share from continuing operations:                    
  Basic   $ 3.50   $ 3.31   $ 2.86  
  Diluted     3.45     3.26     2.82  
Income (Loss) per share from discontinued operations:                    
  Basic     —   $ .03   $ (.33 )
  Diluted     —     .03     (.32 )
Earnings per share:                    
  Basic   $ 3.50   $ 3.34   $ 2.53  
  Diluted     3.45     3.29     2.50  
Average shares outstanding (in thousands):                    
  Basic     360,675     331,350     330,361  
  Diluted     365,488     335,732     334,636  

The accompanying notes are an integral part of these consolidated financial statements.

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Consolidated Statement of Condition

As of December 31,
   2007
   2006
  
(Dollars in millions, except per share amounts)

    
    
  
Assets              
Cash and due from banks