State Street Corporation

10-K 1 d10-k.htm STATE STREET CORPORATION 10-K State Street Corporation

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

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

For the fiscal year ended December 31, 2001

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

Commission File No. 0-5108

STATE STREET CORPORATION

(Exact name of registrant as specified in its charter)

MASSACHUSETTS
(State or other jurisdiction
of incorporation)
225 Franklin Street
Boston, Massachusetts
(Address of principal
executive office)

04-2456637
(I.R.S. Employer
Identification No.)
02110
(Zip Code)

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

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

(Title of Class)		(Name of each exchange on which registered)

Common Stock, $1 par value Preferred share purchase rights		Boston Stock Exchange New York Stock Exchange Pacific Stock Exchange

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

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate 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. [X]

The aggregate market value of the Registrant's Common Stock held by non-affiliates (persons other than directors and executive officers) of the registrant on January 31, 2002 was $17,369,638,954.

The number of shares of the Registrant's Common Stock outstanding on January 31, 2002 was 324,681,124.

Portions of the following documents are incorporated into the Parts of this Report on Form 10-K indicated below:

(1) The Registrant's definitive Proxy Statement for the 2002 Annual Meeting to be filed pursuant to Regulation 14A on or before April 30, 2002 (Part III)

STATE STREET CORPORATION
FORM 10-K INDEX
For the Year Ended December 31, 2001

		Page Number
PART I
Item 1	Business	1–11
Item 2	Properties	11-12
Item 3	Legal Proceedings	12
Item 4	Submission of Matters to a Vote of Security Holders	12
Item 4A	Executive Officers of the Registrant	12

PART II
Item 5	Market for Registrant's Common Equity and Related Stockholder Matters	13
Item 6	Selected Financial Data	14
Item 7	Management's Discussion and Analysis of Financial Condition and Results of Operations	15–42
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	43
Item 8	Financial Statements and Supplementary Data	43–77
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	78

PART III
Item 10	Directors and Executive Officers of the Registrant	78
Item 11	Executive Compensation	78
Item 12	Security Ownership of Certain Beneficial Owners and Management	78
Item 13	Certain Relationships and Related Transactions	78

PART IV
Item 14	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	79–81
Signatures		82
Exhibits

Part I

I T E M 1. Business

The business of State Street Corporation and its subsidiaries is further described in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

General Development of Business

State Street Corporation (“State Street” or the “Corporation”) is a financial holding company organized under the laws of the Commonwealth of Massachusetts. State Street, through its subsidiaries, provides a full range of products and services for sophisticated global investors.

State Street was organized in 1970 and conducts its business principally through its subsidiary, State Street Bank and Trust Company (“State Street Bank” or the “Bank”), which traces its beginnings to the founding of the Union Bank in 1792. The charter under which State Street Bank now operates was authorized by a special act of the Massachusetts Legislature in 1891, and its present name was adopted in 1960.

With $6.2 trillion of assets under custody and $775 billion of assets under management at year-end 2001, State Street is a leading specialist in meeting the needs of sophisticated global investors. Clients include mutual funds and other collective investment funds, corporate and public pension funds, investment managers, and others. For information as to non-U.S. activities, refer to Note V that appears in the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data.”

Services are provided from 30 offices in the United States, and from offices in Australia, Belgium, Canada, Cayman Islands, Chile, Czech Republic, France, Germany, Ireland, Japan, Luxembourg, Netherlands, Netherlands Antilles, New Zealand, People's Republic of China, Singapore, South Korea, Switzerland, Taiwan, United Arab Emirates and the United Kingdom. State Street's executive offices are located at 225 Franklin Street, Boston, Massachusetts.

Lines of Business

State Street reports two lines of business: Investment Servicing and Investment Management. Historical operating results for the commercial banking business, sold in 1999, are discussed separately under the heading “Business Divestiture.” In 2001, revenue from Investment Servicing comprised 84% of State Street's total revenue. Revenue from Investment Management comprised the remaining 16%. For additional information on State Street's lines of business, see Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Lines of Business”.

Competition

State Street operates in a highly competitive environment in all areas of its business on a worldwide basis. State Street faces competition from other deposit-taking institutions, investment management firms, private trustees, insurance companies, mutual funds, broker/dealers, investment banking firms, law firms, benefits consultants, leasing companies, and business service and software companies. As State Street expands globally, additional sources of competition are encountered.

State Street believes there are certain key competitive considerations in these markets. These considerations include, for investment servicing: quality of service, efficiencies 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.

State Street's competitive success depends upon its 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; and to continue and expand its relationships with existing clients and attract new clients.

Employees

At December 31, 2001, State Street had 19,753 employees, of whom 19,105 were full-time.

Regulation and Supervision

G e n e r a l . State Street is registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the “Act”). The Act, with certain exceptions, limits the activities that may be engaged in by State Street and its non-bank subsidiaries, which includes non-bank companies for which State Street owns or controls more than 5% of a class of voting shares, to those which are considered by the Federal Reserve Board to be closely related to banking or managing or controlling banks. 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 or ownership or control constitutes a serious r isk to the financial safety, soundness or stability of a subsidiary bank and is inconsistent with sound banking principles or statutory purposes. In the opinion of management, all of State Street's present subsidiaries are within the statutory standard or are otherwise permissible. The Act also requires a bank holding company to obtain prior approval of the Federal 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.

State Street has also elected to become a financial holding company under the Gramm-Leach-Bliley Act of 1999 (the “GLBA”). GLBA reduces to some extent the restrictions on activities of certain bank holding companies, such as State Street, which qualify as financial holding companies. GLBA also lifts the Glass-Steagall Act prohibitions on banks associating with, or having management interlocks with, business organizations engaged in securities activities. By electing to become a financial holding company under GLBA, a bank holding company such as State Street may acquire new powers not otherwise available to it. In order to qualify, each bank holding company's depository subsidiaries must be well capitalized and well managed, and must be meeting its Community Reinvestment Act obligations. Once qualified as a financial holding company, a bank holding company must continue to meet the app licable capital and management standards. Failure to maintain such standards may ultimately permit the Federal Reserve Board to take certain enforcement actions against such company.

Financial holding companies are permitted to engage in those activities that are determined by the Federal Reserve Board, working with the Secretary of the Treasury, to be financial in nature, incidental to an activity that is financial in nature, or complementary to a financial activity and that does not pose a safety and soundness risk. GLBA defines certain activities as financial in nature, including, but 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.

C a p i t a l A d e q u a c y . Bank holding companies, such as State Street, are subject to Federal Reserve Board minimum risk-based capital and leverage ratio guidelines. At December 31, 2001, State Street's consolidated Tier 1 capital and total capital ratios were 13.6% and 14.5%, respectively. For further information as to the Corporation's capital position and capital adequacy, refer to Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Liquidity and Capital”, and to Note K in the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data”.

State Street Bank is subject to similar risk-based capital and leverage ratio guidelines. State Street Bank exceeded the applicable minimum capital requirements as of December 31, 2001. Failure to meet capital requirements could subject a bank to a variety of enforcement actions, including the termination of deposit insurance by the Federal Deposit Insurance Corporation (the “FDIC”), and to certain restrictions on its business, which are described further in this section.

In January 2001, the Basel Committee on Banking Supervision issued a proposal for a new Basel Capital Accord (“New Accord”). A new consultative package will be issued in early 2002. The New Accord, which will apply to all “significant” banks, as well as to holding companies that are parents of banking groups, is intended to be finalized by year-end 2002. Implementation of the new framework, to the extent it is adopted and promulgated by the Federal Reserve Board, is to begin in 2005. The Corporation is monitoring the status and progress of the New Accord.

S u b s i d i a r i e s . The Federal Reserve System is the primary federal banking agency responsible for regulating State Street and its subsidiaries, including State Street Bank, for both U.S. and international operations. State Street is also subject to the Massachusetts bank holding company statute. The Massachusetts statute requires prior approval by the Massachusetts Board of Bank Incorporation for the acquisition by State Street of more than 5% of the voting shares of any additional bank and for other forms of bank acquisitions.

State Street's banking 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. State Street's non-U.S. banking subsidiaries are subject to regulation by the regulatory authorities of the countries in which they are located. T he capital of each of these banking subsidiaries is in excess of the minimum legal capital requirements as set by those authorities.

State Street and its non-bank subsidiaries are affiliates of State Street Bank under the federal banking laws, which impose certain restrictions on transfers of funds in the form of loans, extensions of credit, investments or asset purchases by State Street Bank to State Street and its non-bank subsidiaries. Transfers of this kind to State Street and its non-bank subsidiaries by State Street Bank are limited to 10% of State Street Bank's capital and surplus with respect to each affiliate and to 20% in the aggregate, and are subject to certain collateral requirements. A bank holding 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 stan dards 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-qualified 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.

S u p p o r t o f S u b s i d i a r y B a n k s . Under Federal Reserve Board policy, a bank holding company is required to act as a source of financial and managerial strength to its subsidiary banks. Under this policy, State Street is expected to commit resources to its subsidiary banks in circumstances where it might not do so absent such policy. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority payment.

Dividends

As a bank holding company, State Street is a legal entity separate and distinct from State Street Bank and its non-bank subsidiaries. The right of State Street to participate as a stockholder in any distribution of assets of State Street Bank upon its liquidation or 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 provisions of the 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 Board of Governors of the Federal Reserve System would be required if dividends declared by the Bank in any year would exceed 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. Under applicable federal and state law restrictions, at December 31, 2001, State Street Bank had $1.3 billion of retained earnings available for distribution to State Street in the form of dividends. Future dividend payments of the Bank and non-bank subsidiaries cannot be determined at this time.

Economic Conditions and Government Policies

Economic policies of the government and its agencies influence the operating environment of State Street. Monetary policy conducted by the Federal Reserve Board directly affects the level of interest rates and overall credit conditions of the economy. 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 regulations of banks and bank holding companies are intended primarily for the protection of depositors of the banks, rather than of the stockholders of the institutions.

Factors Affecting Future Results

From time to time, information provided by State Street, statements made by its employees, or information included in its filings with the Securities and Exchange Commission (including this Form 10-K), may contain statements which are not historic facts (so-called “forward looking statements”), including statements about the Corporation's confidence and strategies and its expectation about revenue and market growth, new technologies, services and opportunities, and earnings. These statements may be identified by such forward looking terminology as “expect,” “look,” “believe,” “anticipate,” “may,” “will,” or similar statements or variations of such terms. These forward-looking statements involve certain risks and uncertainties, which could cause actual results to differ materially. Factors that may cause such differences includ e, but are not limited to, the factors appearing in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Financial Goals and Factors That May Affect Them,” factors further described in conjunction with the forward-looking information, and factors elsewhere mentioned in this Form 10-K. Each of these factors, and others, are also discussed from time to time in the Corporation's other filings with the Securities and Exchange Commission, including its reports on Form 10-Q. The forward-looking statements contained in this Form 10-K speak only as of the time the statements were given, and the Corporation does not undertake to revise those forward-looking statements to reflect events after the date of this report.

Selected Statistical Information

The following tables contain State Street's consolidated statistical information relating to, and should be read in conjunction with the financial information provided in Part II, Item 8, “Financial Statements and Supplementary Data;” Part II, Item 6, “Selected Financial Data;” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations.”

Interest revenue on non-taxable investment securities and loans includes the effect of taxable-equivalent adjustments, using a federal income tax rate of 35%, adjusted for applicable state income taxes, net of the related federal tax benefit.

D i s t r i b u t i o n o f A v e r a g e A s s e t s , L i a b i l i t i e s a n d S t o c k h o l d e r ' E q u i t y ; I n t e r e s t R a t e s a n d I n t e r e s t D i f f e r e n t i a l

The average statements of condition and net interest revenue analysis for the years indicated are presented below.

	2001			2000			1999

(Dollars in millions; taxable equivalent)	Average Balance	Interest	Average Rate	Average Balance	Interest	Average Rate	Average Balance	Interest	Average Rate
Assets
Interest-bearing deposits with banks	$20,548	$821	3.99%	$16,399	$743	4.53%	$13,043	$497	3.81%
Securities purchased under resale agreements and securities borrowed	19,768	798	4.04	18,531	1,159	6.26	15,663	786	5.02
Federal funds sold	716	27	3.84	1,186	75	6.30	652	32	4.95
Trading account assets	1,190	55	4.61	1,083	54	4.99	645	24	3.68
Investment securities:
U.S. Treasury and federal agencies	8,434	447	5.30	8,308	520	6.26	7,230	399	5.51
State and political subdivisions	1,653	107	6.47	1,932	133	6.91	1,691	102	6.05
Other investments	7,258	385	5.31	4,954	324	6.54	3,780	222	5.89
Commercial and financial loans	4,130	133	3.22	3,785	186	4.90	5,377	297	5.53
Lease financing	1,951	149	7.66	1,659	127	7.69	1,408	118	8.32

Total Interest-Earning Assets	65,648	2,922	4.45	57,837	3,321	5.74	49,489	2,477	5.00
Cash and due from banks	1,271			1,267			1,244
Other assets	4,406			3,819			3,362

Total Assets	$71,325			$62,923			$54,095

Liabilities and Stockholders' Equity
Interest-bearing deposits:
Savings	$2,845	101	3.55	$2,466	132	5.35	$2,656	103	3.89
Time	2,058	81	3.94	313	21	6.75	522	26	4.93
Non-U.S.	27,094	674	2.49	24,615	859	3.49	20,098	583	2.90

Total interest-bearing deposits	31,997	856	2.68	27,394	1,012	3.69	23,276	712	3.06
Securities sold under repurchase agreements	20,426	739	3.62	19,867	1,182	5.95	16,988	810	4.77
Federal funds purchased	2,745	100	3.63	729	46	6.33	842	41	4.90
Other short-term borrowings	1,097	42	3.86	673	40	6.04	508	23	4.62
Long-term debt	1,218	93	7.64	1,080	82	7.62	922	70	7.63

Total Interest-Bearing Liabilities	57,483	1,830	3.18	49,743	2,362	4.75	42,536	1,656	3.89

Noninterest-bearing deposits	6,929			7,198			6,527
Other liabilities	3,279			3,052			2,553
Stockholders' equity	3,634			2,930			2,479

Total Liabilities and Stockholders' Equity	$71,325			$62,923			$54,095

Net Interest Revenue		$1,092			$959			$821

Excess of rate earned over rate paid			1.27%			.99%			1.11%
Net Interest Margin(1)			1.66%			1.66%			1.66%

(1) Net interest margin is taxable equivalent net interest revenue divided by average interest-earning assets.

The table below summarizes changes in interest revenue and interest expense due to changes in volume of interest-earning assets and interest-bearing liabilities, and changes in interest rates. Changes attributed to both volume and rate have been allocated based on the proportion of change in each category.

	2001 Compared to 2000			2000 Compared to 1999
(Dollars in millions; taxable equivalent)	Change in Volume	Change in Rate	Net Increase (Decrease)	Change in Volume	Change in Rate	Net Increase (Decrease)
Interest revenue related to:
Interest-bearing deposits with banks	$ 189	$ (111)	$ 78	$ 128	$ 118	$ 246
Securities purchased under resale agreements and securities borrowed	78	(439)	(361)	144	229	373
Federal funds sold	(30)	(18)	(48)	27	16	43
Trading account assets	5	(4)	1	16	14	30
Investment securities:
U.S. Treasury and federal agencies	8	(81)	(73)	59	62	121
State and political subdivisions	(19)	(7)	(26)	14	17	31
Other investments	150	(89)	61	69	33	102
Commercial and financial loans	17	(70)	(53)	(88)	(24)	(112)
Lease financing	22		22	20	(10)	10

Total Interest-Earning Assets	420	(819)	(399)	389	455	844

Interest expense related to:
Deposits:
Savings	20	(51)	(31)	(7)	36	29
Time	118	(58)	60	(10)	5	(5)
Non-U.S.	86	(271)	(185)	131	145	276
Securities sold under repurchase agreements	33	(476)	(443)	137	235	372
Federal funds purchased	128	(74)	54	(5)	10	5
Other short-term borrowings	26	(24)	2	8	9	17
Long-term debt	11		11	12		12

Total Interest-Bearing Liabilities	422	(954)	(532)	266	440	706

Net Interest Revenue	$(2)	$135	$133	$123	$15	$138

I n v e s t m e n t P o r t f o l i o

Investment securities consisted of the following at December 31:

(Dollars in millions)	2001	2000	1999
Held to Maturity (at amortized cost):
U.S. Treasury and federal agencies	$1,296	$1,272	$1,219
Other investments	147	48	48

Total	$1,443	$1,320	$1,267

Available for Sale (at fair value):
U.S. Treasury and federal agencies	$ 10,248	$5,875	$6,865
State and political subdivisions	1,463	1,680	1,877
Asset-backed securities	3,638	3,280	3,237
Collateralized mortgage obligations	795	1,009	831
Other debt investments	572	553	610
Money market mutual funds and other equity securities	2,622	23	16

Total	$19,338	$12,420	$13,436

The maturities of debt investment securities at December 31, 2001 and the weighted average yields (fully taxable-equivalent basis) were as follows:


	Under 1		1 to 5		6 to 10		Years Over 10
(Dollars in millions)	Amount	Yield	Amount	Yield	Amount	Yield	Amount	Yield
Held to Maturity (at amortized cost):
U.S. Treasury and federal agencies	$216	6.50%	$1,080	3.85%
Other investments	99	2.45	36	6.87	$12	6.87%

Total	$315		$1,116		$12

Available for Sale (at fair value):
U.S. Treasury and federal agencies	$949	2.62%	$7,626	4.00%	$921	5.96%	$ 752	6.78%
State and political subdivisions	476	4.11	663	4.52	322	4.36	2	5.03
Asset-backed securities	441	6.43	2,689	5.65	386	5.89	122	6.69
Collateralized mortgage obligations	73	7.16	498	6.43	172	6.31	52	7.71
Other investments	127	4.41	388	4.89	10	4.00	47	6.11

Total	$2,066		$11,864		$1,811		$975

L o a n P o r t f o l i o

U.S. and non-U.S. loans at December 31, and average loans outstanding for the years ended December 31, were as follows:

(Dollars in millions)	2001	2000	1999	1998	1997
U.S.:
Commercial and financial	$2,479	$2,502	$ 1,908	$ 4,306	$ 3,623
Lease financing	413	433	418	415	296
Real estate				90	74

Total U.S.	2,892	2,935	2,326	4,811	3,993

Non-U.S.:
Commercial and industrial	725	837	514	505	829
Lease financing	1,639	1,364	1,124	917	669
Banks and other financial institutions	71	119	311	60	59
Other	14	18	18	16	12

Total Non-U.S.	2,449	2,338	1,967	1,498	1,569

Total loans	$5,341	$5,273	$4,293	$6,309	$5,562

Average loans outstanding	$6,081	$5,444	$6,785	$6,347	$5,351

At December 31, 2001, loans comprised 8% of State Street's assets. State Street's loan policies limit the size of individual loan exposures to reduce risk through diversification. Loans are evaluated on an individual basis to determine the appropriateness of renewing each loan. State Street does not have a general rollover policy. Unearned revenue included in leases was $1.2 billion and $1.0 billion for non-U.S. leases, and $160 million and $184 million for U.S. leases, as of December 31, 2001 and 2000, respectively.

Loan maturities for selected loan categories at December 31, 2001 were as follows:

	Years

(Dollars in millions)	Under 1	1 to 5	Over 5
U.S. — Commercial and financial	$2,192	$224	$63
Non-U.S.	786	8	1,655

The following table shows the classification of loans due after one year according to sensitivity to changes in interest rates at December 31, 2001:

(Dollars in millions)
Loans and leases with predetermined interest rates	$2,067
Loans with floating or adjustable interest rates	296

Total	$2,363

N o n - a c c r u a l L o a n s . It is State Street's policy to place loans on a non-accrual basis when they become 60 days past due as to either principal or interest, or when in the opinion of management, full collection of principal or interest is unlikely. Loans eligible for non-accrual, but considered both well secured and in the process of collection, are treated as exceptions and may be exempted from non-accrual status. When the loan is placed on non-accrual, the accrual of interest is discontinued and previously recorded but unpaid interest is reversed and charged against net interest revenue.

Non-accrual loans were less than $1 million, $4 million, $9 million, $12 million and $2 million as of December 31, 2001 back through December 31, 1997, respectively. There were no non-accrual loans to non-U.S. clients at December 31, 2001 and 2000, $5 million at year-end 1999, none at year-end 1998 and less than $1 million at year-end 1997.

The interest revenue for the year ended December 31, 2001, which would have been recorded for non-accrual loans is less than $1 million for U.S. loans. There was no interest revenue recorded in 2001 prior to placing loans on non-accrual status.

P a s t D u e L o a n s . Past due loans are loans on which principal or interest payments are over 90 days delinquent, but where interest continues to be accrued. Past due loans were less than $1 million as of each year ended December 31, 2001 through 1997. Past due loans included in loans to non-U.S. clients were less than $1 million at year-end 2001, none at year-end 2000, and less than $1 million at year-end 1999, 1998 and 1997.

A l l o w a n c e f o r L o a n L o s s e s a n d C r e d i t Q u a l i t y

The changes in the allowance for loan losses for the years ended December 31, were as follows:

(Dollars in millions)	2001	2000	1999	1998	1997
U.S.:
Balance at beginning of year	$41	$33	$65	$68	$63
Provision for loan losses	8	7	10	13	6
Loan charge-offs — commercial and financial	(9)		(9)	(19)	(1)
Loan charge-offs — real estate					(1)
Recoveries — commercial and financial		1	3	2	1
Recoveries — real estate				1
Transferred upon sale(1)			(36)

Balance at end of year — U.S.	40	41	33	65	68

Non-U.S.:
Balance at beginning of year	16	15	19	15	10
Provision for loan losses	2	2	4	4	10
Loan charge-offs		(1)	(8)		(6)
Recoveries					1
Balance at end of year — Non-U.S.	18	16	15	19	15

Total balance at end of year	$58	$57	$48	$84	$83

Ratio of net charge-offs (recoveries) to average loans outstanding	.14%	(.02)%	.22%	.24%	.11%

(1) On October 1, 1999, State Street completed the sale of its commercial banking business, which included the transfer of $36 million of the allowance for loan loss.

State Street establishes an allowance for loan losses to absorb probable credit losses. Management's review of the adequacy of the allowance for loan losses is ongoing throughout the year and is based, among other factors, on previous loss experience, current economic conditions and adverse situations that may affect the borrowers' ability to repay, timing of future payments, estimated value of the underlying collateral and the performance of individual credits in relation to contract terms, and other relevant factors.

While the allowance is established to absorb probable losses inherent in the total loan portfolio, management allocates the allowance for loan losses to specific loans, selected portfolio segments and certain off-balance sheet exposures and commitments. Adversely classified loans in excess of $1 million are reviewed individually to evaluate risk of loss and assigned a specific allocation of the allowance. The allocations are based on an assessment of potential risk of loss and include evaluations of the borrowers' financial strength, discounted cash flows, collateral, appraisals and guarantees. The allocations to portfolio segments and off-balance sheet exposures are based on management's evaluation of relevant factors, including the current level of problem loans and current economic trends. These allocations are also based on subjective estimates and management's judgment, and are su bject to change from quarter to quarter. In addition, a portion of the allowance remains unallocated as a general reserve for the entire loan portfolio, and takes into account factors such as portfolio concentrations, historical losses and current economic conditions.

At December 31, 2001, the allowance for loan losses was $58 million, or 1.09% of total loans. This compares with an allowance of $57 million, or 1.08% of total loans a year ago. In 2001, the measures of credit quality continued to be satisfactory.

The provision for loan losses is a charge to earnings for the current period that is required to maintain the total allowance at a level considered adequate in relation to the level of risk in the loan portfolio. The provision for loan losses was $10 million, $9 million and $14 million in 2001, 2000 and 1999, respectively.

For 2001, net charge-offs were $9 million versus net recoveries of less than $1 million in 2000. Net charge-offs for 2001, as a percentage of average loans, were .14% compared to net recoveries of .02% for 2000.

N o n - p e r f o r m i n g A s s e t s . At December 31, 2001, total non-performing assets were $32 million, a $25 million increase from year-end 2000. Non-performing assets include less than $1 million and $4 million of non-accrual loans at year-end 2001 and 2000, respectively; $27 million and $3 million of other real estate owned in 2001 and 2000, respectively; and $5 million and $8 million at year-end 2001 and 2000, respectively, of a non-performing investment security.

C r o s s - B o r d e r O u t s t a n d i n g s

Countries within which State Street has cross-border outstandings (primarily deposits and letters of credit to banks and other financial institutions) of at least 1% of its total assets at December 31, were as follows:

(Dollars in millions)	2001	2000	1999
Germany	$3,532	$2,191	$2,502
United Kingdom	3,232	2,424	1,891
Japan	1,248	3,475	4,253
Canada	1,144	2,178	1,547
Australia	1,100	910	1,095
Netherlands	1,075	941	987
France	803	1,126	702

Total outstanding	$12,134	$13,245	$12,977

Aggregate of cross-border ouststandings in countries having between .75% and 1% of total assets at December 31, 2001 was $668 million (Italy); there were no individual countries with aggregate cross-border outstandings between .75% and 1% of total assets at December 31, 2000 and 1999.

D e p o s i t s

The average balance and rates paid on interest-bearing deposits for the years ended December 31, were as follows:

	2001		2000		1999



(Dollars in millions)	Average Balance	Average Rate	Average Balance	Average Rate	Average Balance	Average Rate
U.S.:
Noninterest-bearing deposits	$6,848		$7,122		$6,453
Savings deposits	2,845	3.55%	2,466	5.35%	2,656	3.89%
Time deposits	2,058	3.94	313	6.75	522	4.93

Total U.S.	$11,751		$9,901		$9,631

Non-U.S.:
Noninterest-bearing deposits	$81		$76		$74
Interest-bearing deposits	27,094	2.49%	24,615	3.48%	20,098	2.90%

Total non-U.S.	$27,175		$24,691		$20,172

Non-U.S. noninterest-bearing deposits at December 31, 2001, 2000 and 1999 were $49 million, $263 million, and $35 million, respectively.

Maturities of U.S. certificates of deposit of $100,000 or more at December 31, 2001 were as follows:

(Dollars in millions)
3 to 6 months	$690
6 to 12 months	9
Over 12 months	10

Total	$709

At December 31, 2001, substantially all non-U.S. time deposit liabilities were in amounts of $100,000 or more.

R e t u r n o n E q u i t y a n d A s s e t s a n d C a p i t a l R a t i o s

The return on equity, return on assets, dividend payout ratio, equity to assets ratio and capital ratios for reported results for the years ended or as of December 31, were as follows:

	2001	2000	1999
Net income to:
Average stockholders' equity	17.3%	20.3%	25.0%
Average total assets	.88	.95	1.14
Dividends declared to net income	21.0	18.7	15.6
Average stockholders' equity to average assets	5.1	4.7	4.6
Risk-based capital ratios:
Tier 1 capital	13.6	14.5	14.7
Total capital	14.5	15.6	14.7
Tier 1 leverage ratio	5.4	5.4	5.6

S h o r t - T e r m B o r r o w i n g s

The following table reflects the amounts outstanding and weighted average interest rates of the primary components of short-term borrowings as of and for the years ended December 31:

	Federal Funds Purchased			Securities Sold Under Repurchase Agreement

(Dollars in millions)	2001	2000	1999	2001	2000	1999
Balance at December 31	$3,315	$955	$1,054	$19,006	$21,351	$18,399
Maximum outstanding at any month end	4,970	1,645	1,547	22,584	23,796	18,444
Average outstanding during the year	2,745	729	842	20,426	19,867	16,988
Weighted average interest rate at end of year	1.87%	6.30%	5.17%	1.62%	6.17%	5.03%
Weighted average interest rate during the year	3.63	6.33	4.90	3.62	5.95	4.77

I T E M 2. Properties

State Street's headquarters are located in the State Street Bank Building, a 34-story building at 225 Franklin Street, Boston, Massachusetts, which was built in 1965. State Street leases approximately 500,000 square feet (or approximately 54% of the space in this building). The initial lease term was 30 years with two successive extension options of 20 years each at negotiated rental rates. State Street exercised the first of these two options, which became effective on January 1, 1996 for a term of 20 years.

State Street owns five buildings located in Quincy, Massachusetts, a city south of Boston. Four of the buildings, containing a total of approximately 1,365,000 square feet, function as State Street Bank's operations facilities. The fifth building, with 186,000 square feet, is leased to Boston Financial Data Services, Inc., a 50% owned affiliate. Additionally, State Street owns a 92,000 square foot building in Westborough, Massachusetts, which is used as a data center, and is currently constructing a 130,000 square foot data center in Shrewsbury, Massachusetts which is scheduled for completion in 2003.

The remaining offices and facilities of State Street and its subsidiaries are leased. As of December 31, 2001, the aggregate mortgages and lease payments, net of sublease revenue, payable within one year amounted to $152 million plus assessments for real estate tax, cleaning and operating expenses.

For additional information relating to premises, see Note E in the Notes to the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data.”

I T E M 3. Legal Proceedings

State Street is subject to pending and threatened legal actions that arise in the normal course of business. In the opinion of management, after discussion with counsel, these can be successfully defended or resolved without a material adverse effect on State Street's financial position or results of operations.

I T E M 4. Submission of Matters to a Vote of Security Holders

None

I T E M 4 A. Executive Officers of the Registrant

The following table sets forth certain information with regard to each executive officer of State Street. As used herein, the term “executive officer” corresponds to those positions designated as such for SEC and Internal Revenue Service purposes.

Name	Age	Position	Year Elected
David A. Spina	59	Chairman and Chief Executive Officer	2000
Ronald E. Logue	56	President and Chief Operating Officer	2001
John R. Towers	60	Vice Chairman and Chief Administrative Officer	2000
Timothy B. Harbert	50	Executive Vice President; Chairman and Chief Executive Officer, State Street Global Advisors	2001
Maureen Scannell Bateman	58	Executive Vice President and General Counsel	1997
Ronald L. O'Kelley	56	Executive Vice President, Chief Financial Officer and Treasurer	1995

All executive officers are elected by the Board of Directors. The Chairman and Treasurer have been elected to hold office until the next annual meeting of stockholders or until their respective successors are chosen and qualified. Other executive officers hold office at the discretion of the Board. There are no family relationships among any of the directors and executive officers of State Street. With the exception of Ms. Bateman, all of the executive officers have been officers of State Street for five years or more.

Ms. Bateman was hired as an executive officer of State Street in 1997. Prior to joining State Street, she was Managing Director and General Counsel of United States Trust Company of New York. Prior to that, she had been Vice President and Counsel at Bankers Trust Company.

Part II

I T E M 5. Market for Registrant's Common Equity and Related Stockholder Matters

Information concerning the market prices of and dividends on State Street's common stock during the past two years appears in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Capital.” There were 5,648 stockholders of record at December 31, 2001. State Street's common stock is listed on the New York Stock Exchange, ticker symbol: STT. State Street's common stock is also listed on the Boston and Pacific Stock Exchanges.

Directors who are also employees of the Corporation or the Bank do not receive any compensation for serving as directors or as members of committees. Directors who are not employees of the Corporation or the Bank received an annual retainer of $50,000, payable at their election in shares of Common Stock of the Corporation or in cash, plus a fee of $1,500 for each meeting of the Board of Directors and each committee meeting attended, as well as travel accident insurance and reimbursement for travel expenses, and an award of 956 shares of deferred stock payable when the director leaves the Board or retires, for the period April 2001 through March 2002. For this period, all outside directors elected to receive their annual retainer in shares of Common Stock. The directors may elect to defer either 50% or 100% of all fees and compensation payable during any calendar year pursuant to the Corporation' s Deferred Compensation Plan for Directors. At December 31, 2001, three directors have elected to defer compensation. In 2001, an aggregate of 14,308 shares were issued as retainers, and rights to receive an aggregate of 16,698 deferred shares were awarded. Exemption from registration of the shares is claimed by the Corporation under Section 4(2) of the Securities Act of 1933.

I T E M 6. Selected Financial Data

(Dollars in millions, except per share data; per share data restated for 2-for-1 stock split in 2001; taxable equivalent)	2001	2000	1999	1998	1997	96-01 CAGR
For the years ended December 31,
Operating Results:
Fee revenue:
Servicing fees	$1,624	$1,425	$1,170	$1,024	$861
Management fees	511	581	600	480	391
Foreign exchange trading	368	387	306	289	245
Processing fees and other	329	272	236	204	176

Total fee revenue	2,832	2,665	2,312	1,997	1,673	17%
Net interest revenue after provision for loan losses	1,082	950	807	768	669	13

Total operating revenue	3,914	3,615	3,119	2,765	2,342	16
Operating expenses	2,867	2,644	2,336	2,068	1,734	15

Income before income taxes	1,047	971	783	697	608	17
Income taxes	319	311	254	221	184
Taxable equivalent adjustment	67	65	40	40	44

Operating Earnings	$661	$595	$489	$436	$380	18

Operating earnings per share:
Basic	$2.03	$1.85	$1.52	$1.35	$1.18	17
Diluted	2.00	1.81	1.49	1.33	1.16	18
Cash dividends declared per share	.405	.345	.300	.260	.220	16
Operating return on equity	18.2%	20.3%	19.7%	20.2%	20.6%
Reported Results:
Total revenue	$3,864	$3,615	$3,344	$2,765	$2,342	15
Net Income	628	595	619	436	380	17
Earnings per share:
Basic	$1.94	$1.85	$1.93	$1.35	$1.18	16
Diluted	1.90	1.81	1.89	1.33	1.16	16
Return on equity	17.3%	20.3%	25.0%	20.2%	20.6%
As of December 31,
Total assets	$69,896	$69,298	$60,896	$47,082	$37,975
Long-term debt	1,217	1,219	921	922	774
Stockholders' equity	3,845	3,262	2,652	2,311	1,995
Closing price per share of common stock	52.25	62.11	36.53	35.06	29.09
Number of employees	19,753	17,604	17,213	16,816	14,199

Operating results exclude significant, non-recurring special items to present the results and trends of the Corporation's ongoing business activities. For the year ended December 31, 2001, operating results exclude the write-off of State Street's total investment in Bridge Information Systems, Inc. of $50 million, equal to $33 million after tax, or $.10 per diluted share, recorded in March 2001. For the year ended December 31, 1999, operating results exclude the gain on the sale of the commercial banking business of $282 million, net of exit and other associated costs, and a one-time charge of $57 million on sales of securities related to the repositioning of the investment portfolio. Combined, these items increased reported net income by $130 million after tax, or $.40 per diluted share.

Results above include State Street's retirement investment and benefits outsourcing services through March 31, 2000. On April 1, 2000, those services were contributed to CitiStreet, a 50/50 joint venture accounted for using the equity method, thereby reducing revenue and expenses subsequent to CitiStreet's formation.

I T E M 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Highlights of Our 209th Year

H I G H L I G H T S

(Dollars in millions, except per share data; taxable equivalent)	2001(1)	2000	Change
Total Operating Revenue	$3,914	$ 3,615	8%
Operating Earnings	661	595	11
Operating Earnings Per Share:(3)
Basic	2.03	1.85	10
Diluted	2.00	1.81	10
Cash Dividends Declared Per Share(3)	.405	.345	17
Operating return on Equity	18.2%	20.3%

(1) Excluded from operating results for the year ended December 31, 2001, is the write-off of State Street's total investment in Bridge Information Systems, Inc. of $50 million, equal to $33 million after tax, or $.10 per diluted share, recorded in March 2001.

(2) Excluded from operating results for the year ended December 31, 1999, is the gain on the sale of the commercial banking business of $282 million, net of exit and other associated costs, and a one-time charge of $57 million on sales of securities related to the repositioning of the investment portfolio. Combined, these items increased reported net income by $130 million after tax, or $.40 per diluted share.

(3) Per share amounts have been restated to reflect the 2-for-1 stock split in the form of a 100% stock dividend distributed on May 30, 2001, to stockholders of record as of April 30, 2001.

Letter to Our Stockholders

The year 2001 was marked by unique challenges and opportunities. The environment in which we operated was difficult in many ways. Economic growth slowed significantly in all regions of the world. Stock market performance was weak for the second consecutive year — the first such downturn in the United States since 1973, and the first in global markets since 1982. The terrorist attacks and unprecedented market disruption in September filled the world with political uncertainty and a sense of anxiety.

Despite these considerable challenges, State Street turned in strong performance in many areas in 2001. We achieved our 24th consecutive year of double-digit growth in operating earnings per share. We brought in an impressive amount of new business in all products in all parts of the world. We launched transfer agency systems in Luxembourg and the United Kingdom. We were recognized as a great place for women to work. We devoted 1.5% of our pre-tax profits to support community needs throughout the world as we have for more than 20 years. And we continued to develop as a team. All in all, 2001 was a year of considerable achievement for State Street.

Financial Results

Our primary financial goal is to achieve sustainable real growth in earnings per share. In 2001, operating earnings per share increased 10%, to $2.00 on a diluted basis. Our ten-year growth rate for operating earnings per share is 16% compounded annually.

Operating revenue, driven by new business from existing and new clients, increased 8%, to $3.9 billion, in 2001. In the fourth quarter, we achieved $1 billion in revenue — a record result. Facing a challenging environment, we tempered our year-over-year expense growth to 8%, in step with revenue growth, while continuing to invest in the technology and infrastructure needed to drive our future growth.

We continue to differentiate ourselves by stating a goal for revenue growth. We have reaffirmed our goal of achieving 12.5% real compound annual growth from 2000 through 2010, although, as has been true in the past, we do not expect to achieve that rate every year in the ten-year period.

Our supporting goal for return on stockholders' equity is to achieve 18% annually. In 2001, we exceeded that goal by delivering operating ROE of 18.2%.

We distributed a two-for-one stock split in the form of a 100% stock dividend on May 30, 2001, and we increased our quarterly cash dividend declared twice during the year for the 23rd consecutive year. Cash dividends declared in 2001 increased 17% from the prior year.

Seizing Opportunity

For me personally, our ability to perform so well in such a difficult year served to crystallize some important conclusions. First, I believe that our fundamental strategy — focusing on serving the needs of sophisticated investors around the world — is sound. Second, I believe that we have enormous opportunities to leverage our leadership in financial services and grow around the world.

State Street clearly distinguished itself in the marketplace in 2001. Most notably, we did an excellent job of serving our clients. State Street people are passionately committed to making our clients successful. We use our insight and technology to integrate our products and services into solutions that work effectively for them. We have the vision and fortitude to deliver excellence consistently, day in and day out — as is evidenced by the experience of clients such as Federated Investors, who has been growing with us for more than 40 years.

Of equal importance is the fact that we have positioned ourselves to benefit from some very powerful global trends. These trends are (1) ongoing convergence in the financial services industry, (2) a worldwide sense of urgency about the need for retirement security, and (3) a growing trend by investment managers to outsource activities that aren't part of their core competencies.

It is not enough simply to be “in the right place at the right time.” To benefit fully from the effects of these trends, State Street is thinking ahead in dynamic and creative ways. Then we implement — and State Street is an expert at getting things done.

Convergence in the financial services industry provides State Street with an opportunity to assume a leadership role. The new global players who are emerging are looking for a partner who can offer a full range of integrated service solutions and is highly experienced in dealing with financial operations worldwide — including different regulations and technologies. These requirements coincide perfectly with State Street's core strengths — strengths we have proven in serving clients such as Chuo Mitsui, Merrill Lynch and UBSWarburg.

Another global trend that benefits State Street is a growing sense of urgency about retirement security, driven by increasing life expectancy in most parts of the world. This trend is putting pressure on retirement systems, leading governments and employers to devise new strategies to help workers invest for their futures. These efforts are creating growing pools of retirement assets, which must be managed and serviced. State Street's deep expertise in global financial markets, as well as our position as a world leader in pension fund servicing — is a strong advantage for us. We participate by providing services to investment managers and by managing assets ourselves through innovative solutions such as exchange-traded funds (ETFs) and enhanced indexing.

The move toward operations outsourcing is another area in which State Street has a clear advantage. We are creating a scaleable solution for investment managers who need complete servicing of their back and middle office operations. Our success with Pacific Investment Management Company (PIMCO) and Scottish Widows has made us the leading candidate in current searches.

Strategic Focus

We are deepening our position as the trusted partner of sophisticated investors by building on our strengths. Among these strengths are:

A s t r a t e g i c c l i e n t o r i e n t a t i o n Partnering with clients to deliver State Street's best capabilities in responsive, trust-based relationships that meet true client needs.

A g l o b a l f o c u s Integrating service delivery and providing for local differences on behalf of clients everywhere.

A t e c h n o l o g i c a l a d v a n t a g e Using innovative technology to deliver efficient, client-friendly solutions.

One of State Street's greatest assets is the quality of our people. Our achievement of solid results this year in the face of such difficult economic and market conditions is a testament to our team's focus, commitment to client service and integrity.

In December 2001, our Board of Directors elected Ron Logue as President and Chief Operating Officer of State Street. Ron and I have worked together closely for more than a decade, and I look forward to continuing our partnership. Ron's strong client focus, his understanding of the potential offered by technology and his proven ability to deliver both innovation and reliability contribute significantly to our success in maintaining our competitive advantage and advancing our global leadership.

I am very pleased with our performance in the past year and am both confident and enthusiastic about our prospects for the future. I want to thank our 19,800 employees in 22 countries for their hard work. I also want to thank our stockholders for their continued support. In 2002 and beyond, we will seize more and more opportunities to grow, to deliver value to our clients and stockholders and to continue to build on State Street's reputation as a world leader in financial services.

Sincerely,

/s/ David A. Spina

David A. Spina
Chairman and Chief Executive Officer

Ready For The Future

State Street is 210 years old in 2002. Over two centuries of experience in international financial markets is a great strength for us. As a leader in the evolution of these markets, we have a rich perspective and a depth of practical expertise that are invaluable to our clients.

Experience alone, however, is no guarantee of success. State Street has continued to grow and win because we have consistently planned for the future — designing innovative solutions so our clients can succeed in rapidly changing business and technological environments.

Today, State Street offers sophisticated investors the solutions they need to achieve their goals in a quickly changing and uncertain global environment. Our broad capabilities enable us to provide seamless management of investment information, highly reliable investment servicing solutions, performance-oriented investment management and cutting-edge research and trading services to investors around the world.

Our other offering — perhaps less tangible but immeasurably powerful — is our ability to share our strengths with clients through collaborative working partnerships.

We Are Global

Being a truly global firm requires a lot more than simply having offices in multiple countries. Our clients need a global infrastructure that is so complete and so interconnected that they can view the world as one seamless marketplace.

State Street is an expert in supplying global applications and adapting for differences in local markets and cultures. As a result, more and more investment managers worldwide are choosing to outsource non-core activities to State Street. Partnering with us in this way enables them to focus more productively and confidently on their core businesses.

Clients around the world also rely on us for the expertise that helps them address the challenges created by quickly expanding businesses and changing industry regulations. In China, for example, we're working with our partner, the Industrial Commercial Bank of China, and the Chinese government to shape the country's emerging mutual fund business. In Brazil, we are collaborating with Banco Itau to expand the bank's services for pension funds and multinational companies, and to help design new services.

We Are Experts in Applying Technology

State Street clients count on us to use innovative technology to deliver efficient, client-friendly solutions. We are committed to investing in technology and technology professionals and have been for decades. As a result, State Street's technology today is open, reliable, scaleable and global — enabling us to support a wide range of investment strategies.

One reason for our technological edge is our industry-leading, multi-currency accounting system — among the most robust in the world. Our unique capability has proven particularly important to investment clients such as AMVESCAP, Barclays Capital and GE Asset Management (GEAM), whose strategies lead them to offer multiple investment products across many markets and time zones. As the largest net asset value calculator in the United States, we supply over 7,000 multi-currency daily pricing valuations to U.S.-registered mutual funds. We also calculate net asset values for nearly 3,500 retirement funds every day.

Our clients count on our people to help them apply technology to their businesses in new ways. In addition to consulting to individual clients about technology-related issues, State Street has established a reputation as a thought leader in the use of new technologies in world financial markets. In China, for example, we recently signed a memorandum of understanding with Zhejiang University, located in Hangzhou, Zhejiang Province to participate in the creation of a technology center jointly operated by State Street and the University.

State Street's commitment to technology is evidenced by our recent inclusion in Computerworld Magazine's annual ranking of “the top 100 places to work for information technology professionals.” We are honored to be considered one of the great global technology companies.

Our Range of Services is Fully Integrated

True integration is a key advantage to the success of sophisticated investors in today's complex financial markets. State Street works with clients as a collaborative partner to assemble complete solutions that cross all aspects of the investment process. We deliver these solutions in responsive, trust-based relationships that meet our clients' precise needs.

The need for this level of integration and capability is increasing most dramatically in Europe. From our Luxembourg office, the world's second-largest mutual fund market and Europe's largest cross-border investment center, we have been instrumental in meeting the unique requirements of investment managers who wish to distribute and manage funds in Europe, Latin America and Japan.

In 2001, State Street worked side-by-side with many new clients to develop integrated investment servicing solutions. These clients included Lord Abbett, the New York State Teachers' Retirement System (NYSTRS) and Philips Pensioenfonds (Philips Electronics N.V.). We are providing an expanded spectrum of integrated services to clients of long standing as well — companies such as ABP Investments (Alegemen Burgerlijk Pensioenfonds), California Public Employees' Retirement Systems (CalPERS), the Government Pension Investment Fund (formerly Nenpuku), Merrill Lynch and UBSWarburg.

We Manage with a Long-Term View

Our clients tell us they value our clear point of view about the way financial markets will evolve, and our plans for seizing opportunities that will come with changes in investment climates, vehicles, technologies and regulations.

Our insight into global markets gives us a competitive edge in developing investment servicing solutions that are reliable and accurate, flexible and scaleable. We are continually enhancing our acknowledged industry-leading electronic trading platforms and investment research services. In our investment management business, we offer a broad range of investment styles and capabilities.

State Street's ability to think ahead is demonstrated by our development and adoption of new investment products. For example, we were one of the architects of exchange-traded funds (ETFs) and remain the investment manager and trustee for the first and still the largest ETF—the S&P 500 SPDR (“Spider”) trust, launched in partnership with the American Stock Exchange.

No other company can offer the type of market intelligence that State Street provides to our clients through State Street Global Link.® Global Link is a powerful online worldwide network that combines proprietary market research, portfolio analytics and electronic trading technology to support clients' decision making processes, maximize their efficiency, facilitate trading, reduce risk and optimize returns. Today, 54 of the world's 100 largest money managers use Global Link.

We are well positioned for continued growth. We remain committed to delivering the highest-quality solutions to our clients. We remain committed to delivering value to our stockholders. With a heritage of leadership and innovation, State Street is ready for the future.

Management's Discussion and Analysis of
Results of Operations and Financial Condition

Results of Operations

Summary

State Street recorded its 24th consecutive year of double-digit operating earnings-per-share growth in 2001.

State Street's operating earnings per share were $2.00 in 2001, an increase of 10% over 2000 earnings per share of $1.81. Total taxable-equivalent operating revenue was $3.9 billion, an increase of 8% from 2000. Operating earnings were $661 million, up 11% from 2000 net income of $595 million. Operating return on stockholder's equity was 18.2%.

State Street's 2001 reported earnings per share were $1.90, its reported net income was $628 million, and its reported total taxable-equivalent revenue was $3.9 billion. Reported results for 2001 differ from operating results, which exclude the write-off of State Street's total investment in Bridge Information Systems, Inc. (“Bridge”) of $50 million, equal to $33 million after tax, or $.10 per diluted share. In March 2001, following a bankruptcy filing by Bridge, State Street determined that the value of this investment was permanently impaired.

State Street's primary financial goal is to achieve sustainable, real (inflation-adjusted) growth in earnings per share. Over the last five years, diluted operating earnings per share increased at an 18% compound annual growth rate.

In 2001, the Corporation's total operating revenue was $3.9 billion, an increase of $299 million, or 8%, over 2000. On April 1, 2000, State Street contributed its retirement investment and benefits outsourcing services to a 50/50 joint venture, CitiStreet, accounted for using the equity method, thereby reducing revenue and expenses of State Street subsequent to CitiStreet's formation. Adjusted to exclude the revenue and expenses of services contributed to CitiStreet from the first quarter of 2000 ("adjusted for the formation of CitiStreet"), the growth in total operating revenue was 10%.

In 2001, servicing fees and net interest revenue drove revenue growth. Growth in servicing fees primarily reflects several large client wins installed starting in the latter half of 2000 and continuing throughout 2001, and a significant increase in securities lending fees. Strength in securities lending revenue resulted primarily from wider interest rate spreads in a favorable 2001 U.S. interest rate environment. Declines in equity market values worldwide offset some of the growth in servicing fees. Both securities lending and net interest revenue benefited from the unusual occurrence of eleven reductions in the U.S. federal funds target rate during 2001. Additionally, growth in State Street's balance sheet, primarily from clients' investment activities, was a significant factor in the growth of net interest revenue. Management fees were down 12%, reflecting declining equity values worldwid e. Foreign exchange trading revenue was down 5%, reflecting decreased currency volatility. Lower management fees and foreign exchange trading revenue partially offset the growth in servicing fees and net interest revenue.

Reducing the rate of expense growth was a key factor in State Street's 2001 performance. State Street continues to invest for the future by carefully pacing spending on strategic initiatives and technology projects that are critical to long-term growth. Operating expenses were $2.9 billion, an increase of 8% over 2000. Adjusted for the formation of CitiStreet, operating expenses grew 10%, significantly lower than the comparable 20% expense growth in 2000. The 10% year-over-year growth in expenses reflects higher salaries and employee benefits expense, partially offset by lower incentive-based compensation, and higher information systems and communications expense.

State Street has two supporting financial goals, one for total revenue and one for return on stockholders' equity. State Street's total revenue goal is 12.5% real compound annual growth from 2000 through 2010; although, as has been true in the past, State Street does not expect to achieve that growth rate every year in the ten-year period. State Street still expects to meet its goal over the stated period. Operating return on stockholders' equity for 2001 was 18.2%, exceeding State Street's long-term goal of 18%.

State Street's strategy of focusing on providing sophisticated global investors with a complete, integrated range of products and services has proven successful for over two decades under varying economic and financial conditions. State Street focuses on total client relationships. This focus results in a high rate of client retention, cross-selling opportunities and recurring revenue. Services are integrated and priced based on each client's total business relationship. While most of State Street's client services result in management or servicing fees, clients use a wide variety of additional services that are recorded in their respective revenue categories, such as foreign exchange trading revenue or net interest revenue. Management focuses on increasing total revenue.

State Street's ability to serve clients' expanding needs is critical to its success. Long-term, global trends driving demand for State Street's services remain robust and support continuing growth: ongoing convergence in the financial services industry, a worldwide sense of urgency about the need for retirement security and a growing trend by investment managers to outsource activities that are not part of their core competencies. By continuing to invest in technology, integrated products and services that span the entire investment process, and expansion into new markets, State Street is positioned to benefit from these trends.

State Street's solid performance in 2001 was the result of strong new business with existing and new clients, a diverse service offering, and market expertise that enabled State Street to take advantage of an unprecedented interest rate environment, as well as the commitment and abilities of State Street's global employee team.

Revenue

State Street is one of the world's leading specialists in serving mutual funds, collective funds and pension plans. The Corporation provides investment management and industry-leading technology and information services to support financial strategies and transactions for sophisticated global investors. State Street has integrated its products and services to meet client needs throughout every phase of the investment cycle. This integration positions State Street to grow with its clients by providing additional products and services globally as client requirements expand. State Street's focus on total client relationships results in high client retention, cross-selling opportunities and recurring revenue. During 2001, clients continued to increase the number of State Street products they use. The Corporation's 1,000 largest clients used an average of 7.3 products in 2001, up from an av erage of 7.1 in 2000. The top 100 largest clients used an average of 11.3 products in 2001, up from an average of 11.2 in 2000.

State Street benefits significantly from its ability to derive revenue from the transaction flows of clients. This occurs through the management of cash positions, including deposit balances and other short-term investment activities, using State Street's balance sheet capacity. Significant foreign currency transaction volumes provide potential for foreign exchange trading revenue as well.

F e e R e v e n u e

Total operating fee revenue was $2.8 billion in 2001, compared to $2.7 billion in 2000, an increase of 6%. Adjusted for the formation of CitiStreet, the growth in fee revenue was 8%.

Growth in servicing fees of $199 million, or 14%, was the primary contributor to the increase in fee revenue. This growth primarily reflects several large client wins installed starting in the latter half of 2000 and continuing throughout 2001, and strength in fee revenue from securities lending. Declines in equity market values worldwide offset some of the growth in servicing fees. Management fees were down 5%, adjusted for the formation of CitiStreet, reflecting the decline in the worldwide equity markets. Foreign exchange trading revenue was down 5%, reflecting lower currency volatility, and processing fees and other revenue was up 21%, primarily due to gains on the sales of investment securities.

Servicing and management fees are a function of several factors, including the mix and volume of assets under custody and assets under management, securities positions held, and portfolio transactions, as well as types of products and services used by clients. State Street estimates, based on a study conducted in 2000, that a 10% increase or decrease in worldwide equity values would cause a corresponding change in State Street's total revenue of approximately 2%. If bond values were to increase or decrease by 10%, State Street would anticipate a corresponding change of approximately 1% in its total revenue.

Securities lending revenue in 2001 increased approximately 40% over 2000. Securities lending revenue is reflected in both servicing fees and management fees. Securities lending revenue is a function of the volume of securities lent and interest rate spreads. While volumes increased in 2001, the year-over-year increase is primarily due to wider interest rate spreads resulting from the unusual occurrence of eleven reductions in the U.S. federal funds target rate during 2001.

F E E R E V E N U E

(Dollars in millions)	2001(1)	2000	1999(2)	Change 00-01	Adjusted Change 00-01(3)
Servicing fees	$1,624	$1,425	$1,170	14%	14%
Management fees	511	581	600	(12)	(5)
Foreign exchange trading	368	387	306	(5)	(5)
Processing fees and other	329	272	236	21	21

Total fee revenue	$2,832	$2,665	$2,312	6	8

(1) 2001 results exclude the write-off of State Street's total investment in Bridge of $50 million

(2) 1999 results exclude the one-time charge of $57 million related to the repositioning of the investment portfolio

(3) 2000 results adjusted for the formation of CitiStreet

Servicing Fees

In 2001, servicing fees were $1.6 billion, up 14% from 2000. Growth in servicing fees primarily reflects several large client wins installed starting in the latter half of 2000 and continuing throughout 2001, and strength in securities lending revenue. Declines in equity market values worldwide offset some of the growth in servicing fees. State Street provides solutions to meet the needs of managers of mutual funds, collective funds, pension and retirement plans and other institutional investors worldwide through offices and a global custodian network that spans 100 geographic markets.

M u t u a l F u n d s a n d C o l l e c t i v e F u n d s Servicing fees include fee revenue from U.S. mutual funds, collective funds worldwide, non-U.S. retirement plans and other non-U.S. investment pools. Products and services provided include custody, accounting, daily pricing and administration; trustee and recordkeeping; investment manager operations outsourcing; and securities lending. In 2001, revenue growth from servicing U.S. mutual funds and collective funds was primarily due to new business from new and existing clients.

State Street is the largest mutual fund custodian and accounting agent in the United States. State Street provides custody services for 44% of registered U.S. mutual funds and is distinct from other mutual fund service providers because clients make extensive use of a number of related services, including accounting, daily pricing and fund administration. The Corporation provides fund accounting and valuation services for more than four times the assets serviced by the next largest accounting service provider. State Street calculates approximately 30% of the U.S. mutual fund prices that appear daily in The Wall Street Journal.

A long-term revenue driver is the number of mutual funds the Corporation services. In 2001, the total number of funds State Street serviced increased by 341, or 8%, to 4,680. There were 689 new funds serviced, 524 from existing clients and 165 from new clients, partially offset by 348 funds no longer serviced due primarily to fund liquidations and consolidations.

State Street is committed to expanding globally by serving the worldwide needs of both its U.S. and non-U.S. clients. Growth in servicing revenue in Europe was primarily attributable to previously announced acquisitions, alliances and new business in the United Kingdom. Growth in servicing fees in Asia/Pacific included fees from new business, primarily in Japan.

In 2000, State Street announced plans to expand its services to investment managers to include operations outsourcing services. Through these services, State Street provides global asset managers with a comprehensive suite of services, from trade order management through settlement. Services include securities trade order processing, custodian communications for settlements, accounting systems, and networks and information technology development.

U . S . P e n s i o n , I n s u r a n c e a n d O t h e r I n v e s t m e n t P o o l s State Street provides master trust, master custody, securities lending, and performance, risk and compliance analytics to corporate and public pension funds, other institutional retirement funds, insurance companies, foundations, endowments and corporate and public treasurers. These clients make extensive use of many other products and services, including securities lending, investment management, and foreign exchange and equity trade execution. In 2001, revenue growth was driven primarily by increased securities lending revenue.

At 26% market share, State Street has a leading position in the market for servicing U.S. tax-exempt assets for corporate and public pension funds. Additionally, State Street provides trust and valuation services for over 3,900 daily-priced, unitized defined contribution accounts, making State Street a leader in this market.

A s s e t s U n d e r C u s t o d y At year-end 2001, total assets under custody were $6.2 trillion, up $85 billion, or 1%, from 2000. The value of assets under custody is a broad measure of the relative size of various markets served. Changes to the value of assets under custody do not result in proportional changes in revenue. State Street uses relationship pricing for clients who take advantage of multiple services. Many services are priced on factors other than asset values, including the mix of assets under custody, securities positions held, portfolio transactions, and types of products and services. Assets under custody were comprised of the following at December 31:

A S S E T S U N D E R C U S T O D Y A S O F D E C E M B E R 3 1 ,

(Dollars in billions)	2001	2000	1999	1998	1997	1-year AGR	96-01 CAGR
Clients in the U.S.:
Mutual funds	$2,794	$2,664	$2,769	$2,144	$1,705	5%	17%
Pensions, insurance and other investment pools	2,737	2,803	2,669	2,306	1,932	(2)	13
Clients outside the U.S.	672	651	514	362	266	3	27

Total	$6,203	$6,118	$5,952	$4,812	$3,903	1	16

M I X O F A S S E T S U N D E R C U S T O D Y A S O F D E C E M B E R 3 1 ,

(Dollars in billions)	2001	Percentage of Total AUC	2000	Percentage of Total AUC
Equities	$2,942	47%	$3,290	54%
Fixed income	2,055	33	1,722	28
Short-term investments	1,206	20	1,106	18

Total	$6,203	100%	$6,118	100%

Non-U.S. securities		13%		14%

Market value changes, as measured by indices at year-end, had a significant impact on the value of assets under custody. At December 31, 2001, the S&P 500® index was down 13% from year-end 2000, the NASDAQ® index, down 21%, the MSCI® EAFE index, down 23%, and the Lehman Brothers Aggregate BondSM index, up 8%. [The index names mentioned in this report are service marks of their respective owners.]

Management Fees

In 2001, management fees were $511 million, down $70 million, or 12%, from 2000. Adjusted for the formation of CitiStreet, these fees decreased $26 million, or 5%, from 2000 to 2001. In the investment management business, fees are generally asset-based, and the decline in equity markets significantly reduced management fees on a year-over-year basis. 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 State Street's relationship pricing for clients who use multiple services and performance-related fees. Revenue growth from acquisitions, securities lending and new business partially offset the unfavorable impact of declines in market values.

The decrease in management fee revenue in 2001 does not correlate with the year-over-year change in the value of assets under management at year-end because management fees are based on average asset values throughout the year. Year-end 2001 assets under management reflected strong in-flows, primarily in the fixed income and money market strategies in late 2001. Additionally, year-end assets under management increased as a result of the acquisition of the passive equity business of Gartmore Investment Management plc in October 2001.

State Street provides an extensive range of investment management strategies, securities lending, specialized investment management advisory services and other financial services for corporations, public funds, high-net-worth individuals and other sophisticated investors. These services are offered through State Street Global Advisors® (SSgA®). SSgA is the seventh largest investment manager in the world and the largest manager of tax-exempt (primarily pension) assets in the United States.

SSgA offers a broad array of investment strategies, including passive, enhanced and active management using quantitative and fundamental methods for both U.S. and global equities and fixed income securities. Fees are based on the investment strategy, the amount of the investment and the client's total relationship with State Street.

Management fees earned outside the U.S. increased in 2001 reflecting new business in State Street's Tokyo and London offices and the partial year revenue from clients gained in the acquisition of a passive equity business in the United Kingdom, which was acquired in October 2001.

A s s e t s U n d e r M a n a g e m e n t At year-end 2001, assets under management increased $64 billion to $775 billion, or 9%, from year-end 2000. Securities issued outside of the U.S. comprised 24% of total securities. Market value changes, as measured by indices at year-end, had a significant impact on the value of assets under management. At December 31, 2001, the S&P 500® index was down 13% from year-end 2000, the NASDAQ® index, down 21%, the MSCI® EAFE index, down 23%, and the Lehman Brothers Aggregate BondSM index, up 8%. [The index names mentioned in this report are service marks of their respective owners.]

Assets under management were comprised of the following at December 31:

A S S E T S U N D E R M A N A G E M E N T A S O F D E C E M B E R 3 1 ,

(Dollars in billions)	2001	2000	1999	1998	1997	1-year AGR	96-01 CAGR
Equities:
Passive	$398	$365	$366	$237	$168	9%	27%
Active	39	44	42	34	26	(11)	14
Employer securities	76	75	76	59	51	1	14
Fixed income	54	44	39	32	28	23	18
Money market	208	183	144	123	117	14	18

Total	$775	$711	$667	$485	$390	9	22

Foreign Exchange Trading

In 2001, foreign exchange trading revenue decreased 5%, to $368 million. Foreign exchange trading revenue is influenced by the mix of three principal factors: the volume of foreign exchange transactions, currency volatility and the number of clients transacting business with State Street. In 2001, trading volumes were strong, both in the number and total U.S.-dollar value of transactions. The impact of volume growth was offset by decreased volatility in 2001, as measured by State Street's index of 43 currencies. State Street has increased its foreign exchange trading client base with State Street Global Link,® a sophisticated research and execution delivery network for investment managers. Global Link continues to attract new clients worldwide with information and advisory services, electronic trade execution, and trade confirmation and reporting capabilities. Global Link is now installed a t over 400 investment management sites with over 360 investment firms in 22 countries.

Development of a comprehensive range of foreign exchange services to meet the needs of institutional investors helped State Street earn the number one ranking for “Best FX Service Overall” in the most recently conducted worldwide survey of global foreign exchange providers by Global Investor magazine.

Processing Fees and Other

Processing fees and other revenue includes fees from brokerage services, software licensing and maintenance, credit services, investment banking, trade banking, profits and losses from joint ventures, gains and losses on sales of investment securities, gains and losses on sales of leased equipment and other assets, trading account profits and losses, and amortization of investments in tax-advantaged financings.

Processing fees and other revenue of $329 million was up $57 million, or 21%, from 2000, excluding the write-off of Bridge recorded in 2001. Brokerage fees were $89 million, down $6 million from the prior year, driven by lower client trading activities and lower portfolio transition and rebalancing management. Securities gains were $43 million in 2001, up from $2 million in 2000, reflecting State Street's total return strategy. Additional revenue resulted from the acquisition of a portfolio accounting service acquired in June 2001.

N e t I n t e r e s t R e v e n u e

In serving sophisticated global investors, State Street provides short-term funds management, deposit services and repurchase agreements for cash positions associated with clients' investment activities.

N E T I N T E R E S T R E V E N U E

(Dollars in millions; taxable equivalent)	2001	2000	1999	Change 00-01
Interest revenue	$2,855	$3,256	$2,437
Taxable equivalent adjustment	67	65	40

	2,922	3,321	2,477
Interest expense	1,830	2,362	1,656

Net interest revenue	1,092	959	821	14%
Provision for loan losses	(10)	(9)	(14)

Net interest revenue after provision for loan losses	$1,082	$950	$807	14

Net interest revenue on a taxable-equivalent basis was $1.1 billion in 2001, compared to $959 million in 2000, an increase of $133 million, or 14%. Growth in State Street's balance sheet, driven by clients' investment activities, was a significant factor in the growth in net interest revenue. Net interest revenue benefited significantly from the favorable U.S. interest rate environment that resulted from the unusual occurrence of eleven reductions in the U.S. federal funds target rate during 2001, and a favorable global interest rate environment. The excess of rates earned over rates paid increased from .99% to 1.27%. The growth in net interest revenue due to the growth in balance sheet size and the favorable interest rate environment was partially offset by lower client demand deposit volumes, reflecting the reduction in client transactions during the year.

The average balance sheet for 2001 increased $8.4 billion over 2000, primarily from increased client investment activity. State Street's clients, in conjunction with their worldwide investment activities, increased their level of time deposits and securities sold under repurchase agreements.

Operating Expenses

Operating expenses were $2.9 billion, an increase of 8% over 2000. Adjusted for the formation of CitiStreet, operating expenses grew 10%. Expense growth in 2001 of 10% is significantly lower than the comparable 20% expense growth for 2000 compared to 1999. State Street successfully reduced the growth rate of expenses as revenue growth slowed during the latter half of 2000 and early 2001. The expense growth in 2001 reflects higher expenses for salaries and employee benefits, as well as information systems and communications.

O P E R A T I N G E X P E N S E S

(Dollars in millions)	2001	2000	1999	Change 00-01	Adjusted Change 00-01(1)
Salaries and employee benefits	$1,663	$1,524	$1,313	9%	11%
Information systems and communications	365	305	287	20	22
Transaction processing services	247	268	237	(8)	(7)
Occupancy	229	201	188	15	16
Other	363	346	311	5	7

Total operating expenses	$2,867	$2,644	$2,336	8	10

Number of employees	19,753	17,604	17,213	12

(1) 2000 results adjusted for the formation of CitiStreet

Expenses related to salaries and employee benefits increased $139 million in 2001, or $163 million when adjusted for the formation of CitiStreet. The adjusted increase reflects more than 2,100 additional staff to support the large client wins and new business from existing clients and acquisitions. This expense increase was partially offset by lower incentive-based compensation.

Information systems and communications expense was $365 million in 2001, up 20% from the prior year. Adjusted for the formation of CitiStreet, information systems and communications expense increased 22%. This growth reflects both continuing investment in software and hardware, as well as the technology costs associated with increased staffing levels.

Expenses related to transaction processing services were $247 million, down $21 million, or 8%. These expenses are volume related and include external contract services, subcustodian fees, brokerage services and fees related to securities settlement. Lower mutual fund shareholder activities, and lower subcustodian fees resulting from both the decline in asset values and lower transaction volumes, drove the decline.

Occupancy expense was $229 million, up 15%. The increase is due to expenses necessary to support State Street's global growth, and expenses incurred for leasehold improvements and other operational costs.

Other expenses were $363 million, up $17 million, or 5%. These expenses include professional services, advertising and sales promotion, and internal operational expenses. The increase over prior year is due to a $21 million increase in the amortization of goodwill, primarily from acquisitions in 2001. In accordance with recent accounting pronouncements, goodwill amortization expense will be eliminated in 2002. State Street recorded approximately $38 million, or $.08 per share after tax, of goodwill amortization expense in 2001. State Street's cost containment efforts, which reduced discretionary spending, partially offset the increase in other expenses.

Income Taxes

Income tax expense was $319 million in 2001, excluding the tax effect of the write-off of State Street's total investment in Bridge, compared to $311 million in 2000. In 2001, the effective tax rate was 32.6%, excluding the tax effect of the write-off of Bridge, compared to 34.3% in 2000. The lower rate reflects a change in income mix, with a lesser share of income coming from taxable revenue as non-taxable revenue grew.

Acquisitions and Joint Venture

In executing its strategic plan, from time to time State Street may enter into business acquisitions and strategic alliances, and may divest non-strategic operations. Acquisitions and strategic alliances enhance established capabilities by adding new products, services or technologies, expanding geographic reach, or selectively expanding market share. State Street continuously reviews and assesses various business opportunities related to this strategy.

In October 2001, State Street completed the cash purchase of the passive equity business of Gartmore Investment Management plc (“Gartmore”) in the United Kingdom. Gartmore's passive equity business had $25 billion of assets under management as of the date of purchase. Under the terms of the agreement, SSgA hired the Gartmore team that manages, services and administers the passive equity business.

In June 2001, State Street purchased DST Portfolio Systems, Inc. (“DPS”) for 1,483,000 shares of State Street common stock and cash in a transaction accounted for as a purchase. Included in the purchase was the Portfolio Accounting System of DPS, an integrated system that automates mutual fund accounting and investment management recordkeeping processes, such as securities pricing and dividend calculations, income and expense accruals, securities inventories, accounting for daily shareholder activity and calculation of daily net asset values.

In February 2001, State Street purchased Bel Air Securities LLC and a majority interest in Bel Air Investment Advisors LLC (“Bel Air”) for 1,007,000 shares (2,015,000 shares post split) of State Street common stock and cash in a transaction accounted for as a purchase. Bel Air is a Los Angeles-based investment management firm with assets under management of $4 billion at the date of purchase, focused on providing wealth management services to ultra-high-net worth individuals.

In April 2000, State Street and Citigroup formed CitiStreet LLC, a 50/50 joint venture designed to service employee benefit programs. State Street's contribution to the joint venture consisted of its retirement investment and total benefits outsourcing services.

Comparison of 2000 versus 1999

State Street reported 2000 earnings per share of $1.81, an increase of 21% over its 1999 operating earnings per share of $1.49. Operating results for 1999 exclude a pre-tax gain of $282 million, or $.50 per diluted share after tax, from the sale of State Street's commercial banking business; and a one-time charge, reported in other fee revenue, of $57 million, or $.10 per diluted share, on sales of securities relating to the repositioning of State Street's investment portfolio. Net income was $595 million in 2000, up 22% from 1999 operating earnings of $489 million. On a taxable-equivalent basis, total revenue was $3.6 billion, an increase of 16% over 1999 operating revenue of $3.1 billion. Return on stockholders equity was 20.3%.

Total revenue grew in all services and was driven by new business worldwide, including existing clients' use of additional products and services and new relationships. Revenue growth was partially reduced by the formation of CitiStreet on April 1, 2000, a joint venture accounted for using the equity method, which reduced revenue and expenses for the remaining three quarters of the year 2000, and was slightly accretive to earnings. Adjusted to exclude the results of services contributed to CitiStreet from 2000 and 1999 operating results, revenue growth was 21%. Growth in net interest revenue of 17% was achieved despite the impact of the divestiture of the commercial banking business on October 1, 1999.

Lines of Business

State Street reports two lines of business: Investment Servicing and Investment Management. Historical operating results for the commercial banking business, sold in 1999, are presented separately under the caption Business Divestiture. Given the nature of State Street's services and management organization, the results of operations for these lines of business are not necessarily comparable with those of other companies.

Revenue and expenses are directly charged or allocated to the lines of business through algorithm-based management information systems. State Street prices its products and services on total client relationships and other factors; therefore, revenue may not necessarily reflect market pricing on products within the business lines in the same way as it would for independent business entities. Assets and liabilities are allocated according to rules that support management's strategic and tactical goals. Capital is allocated based on risk-weighted assets employed and management's judgment. The capital allocations may not be representative of the capital that might be required if these lines of business were independent business entities.

The table below excludes the write-off in 2001 of State Street's total investment in Bridge of $50 million, and 1999 results exclude the gain of $282 million on the sale of the commercial banking business and a one-time charge of $57 million related to the repositioning of the investment portfolio. See Note L in the Notes to the Consolidated Financial Statements for further information.

Certain products, including brokerage, previously included in Investment Management, are now classified under Investment Servicing. Management changes were implemented in order to focus the Investment Management business primarily on asset management and to align asset servicing activities more closely with the Investment Servicing line of business. Results in the table that follows reflect the current alignment of services between lines of business for all years presented.

The following is a summary of the lines of business and business divestiture operating results for the years ended December 31:

L I N E S O F B U S I N E S S

	Investment Servicing			Investment Management			Business Divestiture

(Dollars in millions; taxable equivalent)	2001(1)	2000	1999(2)	2001(1)	2000	1999(2)	1999(2)
Fee revenue:
Servicing fees	$1,624	$1,425	$1,170
Management fees				$511	$581	$600
Foreign exchange trading	368	387	306
Processing fees and other	305	268	211	24	4	10	$ 15

Total fee revenue	2,297	2,080	1,687	535	585	610	15
Net interest revenue after provision for loan losses	1,009	853	688	73	97	46	73

Total revenue	3,306	2,933	2,375	608	682	656	88
Operating expense	2,337	2,115	1,746	530	529	552	38

Income before income taxes	$969	$818	$629	$78	$153	$104	$50

Pre-tax margin	29%	28%	26%	13%	22%	16%	57%
Average assets (billions)	$69.5	$61.7	$51.1	$1.8	$1.2	$1.2	$1.8

(1) 2001 results exclude the write-off of State Street's total investment in Bridge of $50 million

(2) 1999 results exclude the $282 million gain on the sale of commercial banking and a one-time charge of $57 million related to the repositioning of the investment portfolio.

I n v e s t m e n t S e r v i c i n g

Investment Servicing includes custody, accounting, daily pricing and administration; master trust and master custody; trustee and recordkeeping; foreign exchange; securities lending; deposit and short-term investment facilities; lease financing; investment manager operations outsourcing; and performance, risk and compliance analytics to support institutional investors. State Street provides shareholder services, which includes mutual fund and collective fund shareholder accounting, through 50%-owned affiliates, Boston Financial Data Services, Inc. and the International Financial Data Services group of companies.

Total revenue in 2001 increased to $3.3 billion, up 13% from $2.9 billion in 2000. Servicing fees and net interest revenue drove revenue growth. Growth in servicing fees primarily reflects several large client wins installed starting in the latter half of 2000 and continuing throughout 2001, and an increase in securities lending fees of approximately 40%. Declines in equity market values worldwide offset some of the growth in servicing fees. Strength in securities lending revenue resulted from wider interest rate spreads in a favorable U.S. interest rate environment. Growth in State Street's balance sheet, primarily driven by clients' investment activities, was a major factor in the growth of net interest revenue. Both securities lending and net interest revenue benefited from the unusual occurrence of eleven reductions in the U.S. federal funds target rate during 2001. Foreign exchange tra ding revenue was down 5% from 2000, reflecting decreased currency volatility.

Fee revenue in 2001 increased $217 million from $2.1 billion in 2000. Servicing fees and foreign exchange trading revenue for the Investment Servicing line of business are identical to the respective total consolidated results. Please refer to the “Servicing Fees” and “Foreign Exchange Trading” captions in the “Fee Revenue” section of this Financial Review for a more in-depth discussion. Processing fees and other revenue for Investment Servicing are nearly identical to the consolidated information provided under the caption “Processing Fees and Other” in the “Fee Revenue” section of this Financial Review. Processing fees and other revenue includes fees from brokerage services, software licensing and maintenance, credit services, investment banking, trade banking, profits and losses from joint ventures other than CitiStreet and other entities included in the Investment Management line of business, gains and losses on sales of investment securities, gains and losses on sales of leased equipment and other assets, trading account profits and losses, and amortization of investments in tax-advantaged financings.

Net interest revenue on a taxable-equivalent basis was $1.0 billion in 2001, compared to $853 million in 2000, an increase of $156 million, or 18%. Net interest revenue for Investment Servicing is nearly identical to the consolidated net interest revenue discussed under the “Net Interest Revenue” caption in the “Revenue” section of this Financial Review. A small amount of net interest revenue is recorded in the Investment Management line of business, reflecting earnings on deposit balances from Investment Management clients.

Operating expenses were $2.3 billion, an increase of 10% over 2000. Investment Servicing successfully reduced the growth rate of expenses as revenue growth slowed during the latter half of 2000 and early 2001. The year-over-year growth reflects higher expenses for salaries and employee benefits, partially offset by lower incentive-based compensation, and higher information systems and communications expense. The increase in salaries and employee benefits expense reflects more than 1,900 additional staff to support large client wins and other new business. Information systems and communications expense increased due to continuing investment in software and hardware supporting business growth, as well as the telecommunications, hardware and software costs associated with increased staffing levels.

I n v e s t m e n t M a n a g e m e n t

Investment Management offers a broad array of services for managing financial assets, including investment management, investment research and trading services for both institutions and individual investors worldwide. These services include active and passive U.S. and non-U.S. equity and fixed income strategies, and other related services, such as securities lending.

Total revenue in 2001 was $608 million, down $74 million from $682 million in 2000. Adjusted for the formation of CitiStreet, revenue decreased $29 million.

In 2001, management fees were $511 million, down $70 million, or 12%, from 2000. Adjusted for the formation of CitiStreet, these fees decreased $26 million, or 5%, from 2000 to 2001. Management fees for the Investment Management line of business are identical to the respective total consolidated results. Please refer to the “Management Fees” caption in the “Fee Revenue” section of this Financial Review for a more in-depth discussion.

Operating expenses in 2001 were $530 million, relatively flat compared to 2000. Adjusted for the formation of CitiStreet, operating expenses grew 10%. This adjusted expense growth in 2001 reflects higher salaries and employee benefits expense from the addition of approximately 200 staff, offset by lower incentive compensation, and higher goodwill amortization expense resulting from the Bel Air and Gartmore transactions.

B u s i n e s s D i v e s t i t u r e

Business divestiture includes historical operating results for the commercial banking business. On October 1, 1999, State Street sold this business, which consisted of a $2.4 billion loan portfolio, a $36 million allowance for loan losses and $1.1 billion in deposits. The historical revenue and expenses of this business include allocations of other items in accordance with existing methodologies for line of business presentation.

Financial Goals and Factors That May Affect Them

State Street's primary financial goal is sustainable real growth in earnings per share. The Corporation has two supporting goals, one for total revenue growth and one for return on common stockholders' equity (ROE). The long-term revenue goal is 12.5% real (inflation-adjusted) compound annual growth rate of revenue for 2000 through 2010. At present, this equates to approximately a 15.3% nominal compound annual growth rate. The annual ROE goal is 18%.

State Street considers these to be financial goals, not projections or forward-looking statements. However, the discussion in this Financial Review, and in other portions of the Annual Report, may contain statements that are considered “forward-looking statements” within the meaning of the U.S. federal securities laws. These statements may be identified by such forward-looking terminology as “expect,” “look,” “believe,” “anticipate,” “may,” “will,” or similar statements or variations of such terms. The Corporation's financial goals and such forward-looking statements involve certain risks and uncertainties, including the issues and factors listed below and factors further described in conjunction with the forward-looking information, which could cause actual results to differ materially. The following issues and factors should be carefully considered. The forward-looking statements contained in the Annual Report speak only as of the time the statements were given. The Corporation does not undertake to revise those forward-looking statements to reflect events after the date of this report.

C r o s s - b o r d e r i n v e s t i n g . Increased cross-border investing by clients worldwide benefits State Street's revenue. Future revenue may increase or decrease depending upon the extent of increases or decreases in cross-border investments made by clients or future clients. Economic and political uncertainties resulting from terrorist attacks and subsequent military actions could result in decreased cross-border investment activities.

S a v i n g s r a t e o f i n d i v i d u a l s . State Street benefits from the savings of individuals that are invested in mutual funds and other collective funds or in defined contribution plans. Changes in savings rates or investment styles may affect revenue.

V a l u e o f w o r l d w i d e f i n a n c i a l m a r k e t s . As worldwide financial markets increase or decrease in value, State Street's opportunities to invest and service financial assets may change. Since a portion of the Corporation's fees are based on the value of assets under custody and management, fluctuations in the valuation of worldwide securities markets will affect revenue. State Street estimates, based on a study conducted in 2000, that a 10% increase or decrease in worldwide equity values would cause a corresponding change in State Street's total revenue of approximately 2%. If bond values worldwide were to increase or decrease by 10%, State Street would anticip ate a corresponding change of approximately 1% in its total revenue.

D y n a m i c s o f m a r k e t s s e r v e d . Changes in markets served, including the growth rate of collective funds worldwide, outsourcing decisions, mergers, acquisitions and consolidations among clients and competitors and the pace of debt issuance, can affect revenue. In general, State Street benefits from increases in the volume of financial market transactions serviced.

State Street provides services worldwide. Global and regional economic factors and changes or potential changes in laws and regulations affecting the Corporation's business — including volatile currencies, pace of inflation, changes in monetary policy, and social and political instability — could affect results of operations. For example, the significant slowing of economic growth globally is affecting worldwide equity values and business growth. The terrorist attacks that took place in the United States on September 11, 2001, and subsequent military and terrorist activities, have caused economic and political uncertainties. These activities and the national and global efforts to combat terrorism have affected and may further adversely affect economic growth, and may have other adverse effects on many companies, including State Street, in ways that are not predictable.

Legislation enacted in 1999 by the U.S. Congress may cause changes in the competitive environment in which State Street operates, which could include, among other things, broadening the scope of activities of significant competitors, or facilitating consolidation of competitors into stronger entities, or attracting large and well-capitalized new competitors into State Street's traditional businesses. Such factors and changes and the ability of the Corporation to address and adapt to the regulatory and competitive challenges may affect future results of operations.

I n t e r e s t r a t e s . The levels of market interest rates, the shape of the yield curve and the direction of interest rate changes affect net interest revenue and securities lending revenue, which is recorded in both servicing and management fees. All else being equal, in the short term, State Street's net interest revenue and securities lending revenue benefit from falling interest rates and are negatively affected by rising rates because interest-bearing liabilities reprice sooner than interest-earning assets. In general, sustained lower interest rates have a constraining effect on the net interest revenue growth rate.

L i q u i d i t y . Any occurrence which may limit the Corporation's access to the funds markets, such as a decline in the confidence of debt purchasers, depositors or counterparties participating in the funds markets in general or with State Street in particular, or a downgrade of State Street's debt rating, may adversely affect State Street.

C a p i t a l . Under regulatory capital adequacy guidelines, State Street and State Street Bank must meet guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items, subject to qualitative judgments by regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements could have a direct material effect on State Street's financial condition; failure to maintain the status of “well capitalized” under the regulatory framework could affect State Street's status as a financial holding company and eligibility for streamlined review process for acquisition proposals. In addition, failure to maintain the status of "well capitalized" could affect the confidence of State Street's clients in the Corporation and would adversely affect its business.

V o l a t i l i t y o f c u r r e n c y m a r k e t s . The degree of volatility in foreign exchange rates can affect the amount of foreign exchange trading revenue. In general, State Street benefits from currency volatility.

P a c e o f p e n s i o n r e f o r m . State Street expects to benefit from worldwide pension reform that creates additional pools of assets that use custody and related services, and investment management services. The pace of pension reform and resulting programs, including public and private pension schemes, may affect the pace of revenue growth.

P r i c i n g / c o m p e t i t i o n . Future prices the Corporation is able to obtain for its products may increase or decrease from current levels depending upon demand for its products, its competitors' activities and the introduction of new products into the marketplace.

P a c e o f n e w b u s i n e s s . The pace at which State Street attracts new clients, and the pace at which existing and new clients use additional services and assign additional assets to State Street for management or custody, will affect future results of operations.

B u s i n e s s m i x . Changes in business mix, including the mix of U.S. and non-U.S. business, may affect future results of operations.

B u s i n e s s c o n t i n u i t y . State Street has business continuity and disaster recovery plans in place. However, events, including terrorist or military actions and resulting political and social turmoil, could arise that would cause unforeseen damage to State Street's physical facilities or could cause delays or disruptions to operational functions, including information processing and financial market settlement functions. Additionally, State Street's clients, vendors and counterparties could suffer from such events. Should these events affect State Street, or the clients, vendors or counterparties with which it conducts business, State Street's results of operations could be negatively affected.

R a t e o f t e c h n o l o g i c a l c h a n g e . Technological change creates opportunities for product differentiation and reduced costs, as well as the possibility of increased expenses. Developments in the securities processing industry, including shortened settlement cycles and straight-through-processing, will result in changes to existing procedures. Alternative delivery systems have emerged, including the widespread use of the Internet. State Street's financial performance depends in part on its ability to develop and market new and innovative services, and to adopt or develop new technologies that differentiate State Street's products or provide cost efficiencies.

The risks inherent in this process include rapid technological change in the industry, the Corporation's ability to access technical and other information from clients, and the significant and ongoing investments required to bring new services to market in a timely fashion at competitive prices. A further risk is the introduction by competitors of services that could replace or provide lower-cost alternatives to State Street services.

State Street uses appropriate trademark, trade secret, copyright and other proprietary rights procedures to protect its technology, and has applied for a limited number of patents in connection with certain software programs. However, in the event a third party asserts a claim of infringement of its proprietary rights, obtained through patents or otherwise, against the Corporation, State Street may be required to spend significant resources to defend against such claims, develop a non-infringing program or process, or obtain a license to the infringed process.

A c q u i s i t i o n s a n d a l l i a n c e s . Acquisitions of complementary businesses and technologies and development of strategic alliances are an active part of State Street's overall business strategy. The Corporation has completed several acquisitions and alliances in recent years. However, there can be no assurance that services, technologies, key personnel or businesses of acquired companies will be effectively assimilated into State Street's business or service offerings or that alliances will be successful.

Financial Condition

Balance Sheet

State Street provides deposit and other balance sheet services to its institutional investor clients. In executing their worldwide cash management activities, State Street's clients use short-term investments and deposit accounts that comprise the majority of State Street's liabilities. These client investment activities affect the Corporation's approach to managing interest rate sensitivity, liquidity and credit risk.

L i a b i l i t i e s

The growth in State Street's balance sheet is primarily driven by growth in liabilities from clients' activities. State Street uses its balance sheet capacity to support clients' transactions and short-term investment strategies. State Street's objectives and clients' needs determine the volume, mix and currencies of the liabilities.

Average interest-bearing liabilities increased $7.7 billion, or 16%, in 2001, primarily from client investment activities. The most significant growth in liabilities occurred in interest-bearing deposits, used by both non-U.S. and U.S. clients. Interest-bearing liabilities not denominated in U.S. dollars represent 25% of total interest-bearing liabilities. Non-U.S. deposits increased 10%, to $27.1 billion; 44% of this balance consists of transaction account balances, which pay lower interest rates than other interest-bearing sources of funds.

Average noninterest-bearing deposits decreased $270 million, or 4%. Clients use noninterest-bearing deposit accounts for transaction settlements and as compensation to Street Street for services.

A s s e t s

State Street's assets consist primarily of short-term money market assets and investment securities, which are generally more marketable than other types of assets. Investment securities, principally classified as available-for-sale, include U.S. Treasury and federal agency securities, highly-rated municipal securities, asset-backed securities, money market mutual funds and non-U.S. government bonds. Interest-bearing deposits with banks are short-term, multicurrency instruments invested with major multinational banks.