State Street Corporation Form 10-K

10-K 1 d11805-10k.htm FORM 10-K State Street Corporation Form 10-K

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, 2002

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

225 Franklin Street Boston, Massachusetts (Address of principal executive office)	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 Each Class)	(Name of each exchange on which registered)

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

SPACES ^SM *	New York Stock Exchange
* SPACES is a service mark of Goldman, Sachs & Co.

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|

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No |_|

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, 2003 was $13,095,920,991.

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 28, 2002) was $14,423,974,353.

The number of shares of the Registrant’s Common Stock outstanding on January 31, 2003 was 332,163,024. 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 2003 Annual Meeting to be filed pursuant to Regulation 14A on or before April 30, 2003 (Part III)

STATE STREET CORPORATION
FORM 10-K INDEX
For the Year Ended December 31, 2002

		Page Number

PART I
Item 1	Business	1	-12
Item 2	Properties	12	-13
Item 3	Legal Proceedings	13
Item 4	Submission of Matters to a Vote of Security Holders	13
Item 4A	Executive Officers of the Registrant	13	-14

PART II
Item 5	Market for Registrant’s Common Equity and Related Stockholder Matters	14
Item 6	Selected Financial Data	15	-17
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18	-50
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	51
Item 8	Financial Statements and Supplementary Data	51	-91
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	92

PART III
Item 10	Directors and Executive Officers of the Registrant	92
Item 11	Executive Compensation	92
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	93	-94
Item 13	Certain Relationships and Related Transactions	94
Item 14	Controls and Procedures	94

PART IV
Item 15	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	95	-100
Signatures		101
Certifications		102	-104
Exhibits		105	-110

Part I

I T E M 1 . B u s i n e s s

The business of State Street Corporation (“State Street” or the “Corporation”) and its subsidiaries is further described in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

State Street’s Internet address is www.statestreet.com, and the Corporation maintains a website at that address. State Street makes available on or through its Internet website, without charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, and since November 15, 2002, those reports have been made available on its website on the day such material was electronically filed with the Securities and Exchange Commission or if not reasonably practical on that day, on the first business day following electronic filing with the SEC.

General Development of Business

State Street 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 $763 billion of assets under management at year-end 2002, 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 the financial results of non-U.S. activities, refer to Note 23 that appears in the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data.”

Services are provided from 26 offices in the United States, and from offices in Australia, Belgium, Canada, Cayman Islands, Chile, 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. In 2002, revenue from Investment Servicing comprised 86% of State Street’s total revenue, excluding the gain on the sale of State Street’s corporate trust business. Revenue from Investment Management comprised the remaining 14%. 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 worldwide. State Street faces competition from other financial services institutions, 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, it encounters additional sources of competition.

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

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, 2002, State Street had 19,501 employees, of whom 18,952 were full-time.

Completion of the Sale of the Corporate Trust Business

On December 31, 2002, State Street completed the sale of its corporate trust business to U.S. Bank, N.A., the lead bank of U.S. Bancorp. The gain on the sale, net of exit and other associated costs, totaled $495 million, equal to $296 million, or $.90 per diluted share after tax, and was recorded in the fourth quarter of 2002. The premium received at closing on the sale was $650 million. An additional $75 million was placed in escrow pending the successful transition of the business over the next 18 months. Exit and other associated costs were $155 million. The after-tax proceeds from this transaction provided partial funding for the acquisition by State Street of substantial parts of the global securities services business of Deutsche Bank AG in January 2003.

Acquisition of Substantial Parts of the Global Securities Services Business of Deutsche Bank AG

On January 31, 2003, State Street completed the primary closing of its acquisition of a substantial part of the global securities services business (“GSS”) of Deutsche Bank AG. Under the terms of the definitive agreements, first announced on November 5, 2002, State Street’s initial payment to Deutsche Bank for all business units to be acquired was approximately $1.1 billion. A separate closing will be held in the near future for business units in Italy and Austria, upon receipt of applicable regulatory approvals. In the period ending on the one-year anniversary of the closing, State Street will make additional payments of up to an estimated €360 million, based upon performance of the acquired business. The restructuring costs associated with the acquisition are expected to be $90–$110 million on a pre-tax basis, approximately half of which will be recorded in the first quarter of 2003 and the balance recorded over the next three quarters. GSS had approximately $2.2 trillion of assets under custody.

Approximately half of the initial payment was financed using existing resources, including the net proceeds from the sale of the corporate trust business mentioned above. State Street financed $595 million of the purchase price by issuance of equity, equity-related and capital securities to the public under an existing shelf registration statement. In January 2003, State Street issued $345 million, or 7.2 million shares of common stock, $345 million, or 1.7 million units of SPACES(SM), and $345 million of floating-rate, medium-term capital securities due 2008. SPACES are collateralized, forward purchase contract units for additional shares of common stock of State Street. Each SPACES has a stated amount of $200 and consists of PACES(SM), a fixed-share purchase contract and treasury securities, and COVERS(SM), a variable-share repurchase contract. The SPACES investors will receive total annual payments of 6.75% on the units, payable quarterly, consisting of an annual 2.75% coupon on the PACES and an annual 4.00% contract payment on the COVERS. State Street did not receive the proceeds from the SPACES at closing, but will receive proceeds of $345 million and issue common stock upon the settlement of the fixed share purchase contracts underlying the SPACES units on November 15, 2005. The floating rate capital securities were issued at LIBOR plus 50 basis points, and are subject to mandatory redemption on December 15, 2005, provided certain regulatory requirements are met, and otherwise are due on February 15, 2008. After the close of the financing transactions in January 2003, $469 million of State Street’s shelf registration was available for further issuance.

2 | State Street Corporation

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 in which State Street and its non-bank subsidiaries may engage, including non-bank companies for which State Street owns or controls more than 5% of a class of voting shares, to those that the Federal Reserve Board considers 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 risk 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 (“FHC”), which reduces to some extent the restrictions on activities of certain bank holding companies that qualify, such as State Street. FHC status allows banks to associate with, or have management interlocks with, business organizations engaged in securities activities. In order to qualify, each bank holding company’s depository subsidiaries must be well capitalized and well managed, and it must be meeting its Community Reinvestment Act obligations. Once qualified as an FHC, a bank holding company must continue to meet the applicable 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. Activities defined to be financial in nature, include, but are not limited to, the following: providing financial or investment advice; underwriting; dealing in or making markets in securities; merchant banking, subject to significant limitations; and any activities previously found by the Federal Reserve Board to be closely related to banking.

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, 2002, State Street’s consolidated Tier 1 and total risk-based capital ratios were 17.1% and 18.0%, 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 12 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, 2002. 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 that are described further in this section.

In January 2001, the Basel Committee on Banking Supervision issued a second consultative paper, “Proposal for a New Basel Capital Accord” or the “New Accord”. The New Accord, which will apply to all banks as well as to holding companies that are parents of banking groups, is expected to be finalized by year-end 2003. Implementation of the new framework, to the extent it is adopted and promulgated by the Federal Reserve Board, is expected to begin at year-end 2006. 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

State Street Corporation | 3

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. State Street’s U.S. broker-dealer subsidiary is subject to regulation by the Securities and Exchange Commission and is a member of the National Association of Securities Dealers, a self-regulatory organization. The 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 from 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 standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions involving other non-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.

State Street’s international banking operations are subject to the Federal Reserve Board’s Regulation K and related federal laws. Most of State Street’s international operations are conducted through State Street Bank’s Edge corporation subsidiary or through international branches of State Street Bank. An Edge corporation is a member bank subsidiary organized under the authority of the Federal Reserve Board that, in general, conducts only international activity. With the approval of the Federal Reserve Board, State Street Bank may invest more than 10 percent but not more than 20 percent of its capital and surplus in its Edge corporation subsidiary. State Street Bank has previously utilized this authority, and, in connection with the recent Deutsche Bank transaction (see “Acquisition of Substantial Parts of the Global Securities Services Business of Deutsche Bank AG”), received approval to raise its investment in its Edge corporation to the maximum amount permitted by law. Notwithstanding the 20 percent Edge corporation limit, State Street may continue to make new investments abroad directly (through the parent company or through direct, non-bank, subsidiaries of the parent company) or through international bank branch expansion, which investments are not subject to a similar limitation. As State Street Bank’s capital and surplus grows, State Street Bank could also make incremental investments in the Edge corporation subsidiary without exceeding the 20 percent limitation. Historically, State Street, in general, has found it more optimal from an operational and financial standpoint to expand abroad by increasing its investment in State Street Bank’s Edge corporation subsidiary. State Street cannot predict with certainty the impact on the pace of its future international expansion in light of having reached the Edge corporation subsidiary investment limitation, but believes that, in light of available alternatives, such limitation will not affect materially its ability to expand internationally in a manner that is acceptable from an operational and financial standpoint.

4 | State Street Corporation

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, 2002, State Street Bank had $1.8 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 that are considered “forward looking statements” within the meaning of U.S. federal securities laws, including statements about the Corporation’s confidence and strategies and its expectations about revenue and market growth, acquisitions and divestitures, 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 include, 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.

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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.”

Distribution of Average Assets, Liabilities and Stockholders’ Equity;
Interest Rates and Interest Differential

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

					2002						2001						2000

	Average				Average		Average				Average		Average				Average
(Dollars in millions; taxable equivalent)	Balance		Interest		Rate		Balance		Interest		Rate		Balance		Interest		Rate
A s s e t s
Interest-bearing deposits with banks	$	24,341	$	622	2.56	%	$	20,548	$	821	3.99	%	$	16,399	$	743	4.53	%
Securities purchased under resale agreements
and securities borrowed		21,070		370	1.76			19,768		798	4.04			18,531		1,159	6.26
Federal funds sold		516		9	1.66			716		27	3.84			1,186		75	6.30
Trading account assets(2)		1,040		31	2.95			1,190		55	4.61			1,083		54	4.99
Investment securities:
U.S. Treasury and federal agencies		12,051		404	3.35			8,434		447	5.30			8,308		520	6.26
State and political subdivisions(2)		1,801		97	5.42			1,653		107	6.47			1,932		133	6.91
Other investments		7,323		287	3.93			7,258		385	5.31			4,954		324	6.54
Commercial and financial loans		3,022		82	2.70			4,130		133	3.22			3,785		186	4.90
Lease financing(2)		2,083		133	6.40			1,951		149	7.66			1,659		127	7.69

Total Interest-Earning Assets(2)		73,247		2,035	2.78			65,648		2,922	4.45			57,837		3,321	5.74
Cash and due from banks		1,165						1,271						1,267
Other assets		4,673						4,406						3,819

Total Assets	$	79,085					$	71,325					$	62,923

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 s ’ E q u i t y
Interest-bearing deposits:
Savings	$	2,171		20	0.92		$	2,845		101	3.55		$	2,466		132	5.35
Time		7,301		133	1.82			2,058		81	3.94			313		21	6.75
Non-U.S.		26,393		345	1.31			27,094		674	2.49			24,615		859	3.49

Total interest-bearing deposits		35,865		498	1.39			31,997		856	2.68			27,394		1,012	3.69
Securities sold under repurchase agreements		23,881		356	1.49			20,426		739	3.62			19,867		1,182	5.95
Federal funds purchased		3,085		50	1.63			2,745		100	3.63			729		46	6.33
Other short-term borrowings		1,242		20	1.60			1,097		42	3.86			673		40	6.04
Long-term debt		1,259		71	5.68			1,218		93	7.64			1,080		82	7.62

Total Interest-Bearing Liabilities		65,332		995	1.52			57,483		1,830	3.18			49,743		2,362	4.75

Noninterest-bearing deposits		6,141						6,929						7,198
Other liabilities		3,406						3,279						3,052
Stockholders’ equity		4,206						3,634						2,930

Total Liabilities and Stockholders’ Equity	$	79,085					$	71,325					$	62,923

Net Interest Revenue			$	1,040					$	1,092					$	959

Excess of rate earned over rate paid					1.26	%					1.27	%					.99	%
Net Interest Margin(1)					1.42						1.66						1.66


(1)	Net interest margin is taxable equivalent net interest revenue divided by average interest-earning assets.
(2)	Interest revenue on non-taxable investment securities and loans includes the effect of taxable-equivalent adjustments, a method of presentation in which interest income on tax-exempt securities is adjusted to present the earnings performance on a basis equivalent to interest earned on fully taxable securities with a corresponding charge to income tax expense. The adjustment is computed using a federal income tax rate of 35%, adjusted for applicable state income taxes, net of the related federal tax benefit. The taxable equivalent adjustments included in interest revenue above were $61 million, $67 million and $65 million for the years ended December 31, 2002, 2001 and 2000, respectively.
6 \| State Street Corporation

The table below summarizes changes in taxable-equivalent 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.

				2002 Compared to 2001							2001 Compared to 2000

	Change in			Change in			Net Increase			Change in			Change in			Net Increase
(Dollars in millions; taxable equivalent)	Volume				Rate			(Decrease)		Volume				Rate		(Decrease)
I n t e r e s t r e v e n u e r e l a t e d t o :
Interest-bearing deposits with banks	$	150		$	(349	)	$	(199	)	$	189		$	(111	)	$	78
Securities purchased under resale agreements
and securities borrowed		52		(480		)		(428	)		78			(439	)		(361	)
Federal funds sold		(7	)		(11	)		(18	)		(30	)		(18	)		(48	)
Trading account assets		(7	)		(17	)		(24	)		5			(4	)		1
Investment securities:
U.S. Treasury and federal agencies		192		(235		)		(43	)		8			(81	)		(73	)
State and political subdivisions		9			(19	)		(10	)		(19	)		(7	)		(26	)
Other investments		4		(102		)		(98	)		150			(89	)		61
Commercial and financial loans		(35	)		(16	)		(51	)		17			(70	)		(53	)
Lease financing		10			(26	)		(16	)		22						22

Total Interest-Earning Assets		368		(1,255		)		(887	)		420			(819	)		(399	)

I n t e r e s t e x p e n s e r e l a t e d t o :
Deposits:
Savings		(24	)		(57	)		(81	)		20			(51	)		(31	)
Time		207		(155		)		52			118			(58	)		60
Non-U.S.		(18	)		(311	)		(329	)		86			(271	)		(185	)
Securities sold under repurchase agreements		125		(508		)		(383	)		33			(476	)		(443	)
Federal funds purchased		12			(62	)		(50	)		128			(74	)		54
Other short-term borrowings		6			(28	)		(22	)		26			(24	)		2
Long-term debt		3			(25	)		(22	)		11						11

Total Interest-Bearing Liabilities		311		(1,146		)		(835	)		422			(954	)		(532	)

Net Interest Revenue	$	57		$	(109	)	$	(52	)	$	(2	)	$	135		$	133


Investment Portfolio

Investment securities consisted of the following at December 31:

(Dollars in millions)					2002						2001						2000
H e l d t o M a t u r i t y ( a t a m o r t i z e d c o s t ) :
Held to Maturity (at amortized cost):
U.S. Treasury and federal agencies				$	1,327					$	1,296					$	1,272
Other investments					216						147						48

Total				$	1,543					$	1,443					$	1,320

A v a i l a b l e f o r S a l e ( a t f a i r v a l u e ) :
U.S. Treasury and federal agencies				$	15,760					$	10,248					$	5,875
State and political subdivisions					2,018						1,463						1,680
Asset-backed securities					4,276						3,638						3,280
Collateralized mortgage obligations					548						795						1,009
Other debt investments					703						572						553
Money market mutual funds					3,057						2,518
Other equity securities					166						104						23

Total				$	26,528					$	19,338					$	12,420

State Street Corporation | 7

The maturities of debt investment securities at December 31, 2002, and the weighted average taxable-equivalent yields were as follows:

	Years
	Under 1				1 to 5				6 to 10				Over 10

(Dollars in millions)	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield

H e l d t o M a t u r i t y
( a t a m o r t i z e d c o s t ) :
U.S. Treasury and federal agencies	$	726	3.34	%	$	601	2.70	%
Other investments		168	2.69			48	2.68

Total	$	894			$	649


A v a i l a b l e f o r S a l e
( a t f a i r v a l u e ) :
U.S. Treasury and federal agencies	$	5,863	1.98	%	$	7,947	2.43	%	$	1,080	4.09	%	$	870	5.60	%
State and political subdivisions(1)		429	3.48			592	3.56			483	3.95			514	3.84
Asset-backed securities(1)		756	5.67			3,212	4.58			196	4.52			112	4.04
Collateralized mortgage obligations		48	5.53			423	5.28			59	5.48			18	6.33
Other investments		292	4.80			330	4.44			10	4.00			71	6.15

Total	$	7,388			$	12,504			$	1,828			$	1,585

(1)

Yields calculated for interest revenue on non-taxable investment securities includes the effect of taxable-equivalent adjustments, a method of presentation in which interest income on tax-exempt securities is adjusted to present the earnings performance on a basis equivalent to interest earned on fully taxable securities with a corresponding charge to income tax expense. The adjustment is computed using a federal income tax rate of 35%, adjusted for applicable state income taxes, net of the related federal tax benefit. The taxable equivalent adjustment included in interest revenue to calculate the yields above was $31 million for the year ended December 31, 2002.

Loan Portfolio

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)	2002		2001		2000		1999		1998
U . S . :
Commercial and financial	$	1,578	$	2,479	$	2,502	$	1,908	$	4,306
Lease financing		403		413		433		418		415
Real estate										90

Total U.S.		1,981		2,892		2,935		2,326		4,811

N o n - U . S . :
Commercial and industrial		289		725		837		514		505
Lease financing		1,719		1,639		1,364		1,124		917
Banks and other financial institutions		177		71		119		311		60
Other		8		14		18		18		16

Total Non-U.S.		2,193		2,449		2,338		1,967		1,498

Total loans	$	4,174	$	5,341	$	5,273	$	4,293	$	6,309

Average loans outstanding	$	5,105	$	6,081	$	5,444	$	6,785	$	6,347

At December 31, 2002, loans comprised 5% 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

8 | State Street Corporation

revenue included in leases was $1.1 billion and $1.2 billion for non-U.S. leases, and $140 million and $160 million for U.S. leases, as of December 31, 2002 and 2001, respectively.

Loan maturities for selected loan categories at December 31, 2002, were as follows:

					Years

(Dollars in millions)	Under 1		1 to 5		Over 5
U.S. — Commercial and financial	$	1,337	$	175	$	66
Total non-U.S.		454		9		1,730

The following table shows the classification of loans due after one year according to sensitivity to changes in interest rates at December 31, 2002:

(Dollars in millions)
Loans and leases with predetermined interest rates	$	2,131
Loans with floating or adjustable interest rates		252

Total	$	2,383

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 status, the accrual of interest is discontinued and previously recorded but unpaid interest is reversed and charged against net interest revenue.

At year-end, there were no non-accrual loans in 2002, less than $1 million in 2001, $4 million in 2000, $9 million in 1999 and $12 million in 1998. There were no non-accrual loans to non-U.S. clients at December 31, 2002, 2001 and 2000, $5 million at year-end 1999, and none at year-end 1998.

There was less than $1 million of interest revenue related to non-accrual U.S. loans, which would have been otherwise recorded for the year ended December 31, 2002. There was less than $1 million of interest revenue recorded in 2002 before placing loans on non-accrual.

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. There were no past due loans as of year ended December 31, 2002 and there were less than $1 million as of each year ended December 31, 2001 through 1998. There were no past due loans included in loans to non-U.S. clients at the year-end 2002, less than $1 million at year-end 2001, none at year-end 2000, and less than $1 million at year-end 1999 and 1998.

State Street Corporation | 9

Allowance for Loan Losses and Credit Quality

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

(Dollars in millions)	2002			2001			2000			1999			1998
U . S . :
Balance at beginning of year	$	40		$	41		$	33		$	65		$	68
Provision for loan losses		4			8			7			10			13
Loan charge-offs — commercial and financial		(3	)		(9	)					(9	)		(19	)
Loan charge-offs — real estate
Recoveries — commercial and financial		3						1			3			2
Recoveries — real estate														1
Transferred upon sale(1)		(1	)								(36	)

Balance at end of year — U.S.		43			40			41			33			65


N o n - U . S . :
Balance at beginning of year		18			16			15			19			15
Provision for loan losses					2			2			4			4
Loan charge-offs								(1	)		(8	)
Recoveries

Balance at end of year — Non-U.S.		18			18			16			15			19

Total balance at end of year	$	61		$	58		$	57		$	48		$	84

Ratio of net charge-offs (recoveries) to average loans
outstanding		.04	%		.14	%		(.02	)%		.22	%		.24	%

(1)

In December 2002, State Street completed the sale of a non-strategic business, which included the transfer of $1 million of the allowance for loan loss. 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 on many factors, including 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. State Street uses an internal rating system to assess loss exposure potential of loans based on current economic or client financial indicators. Loans adversely classified using State Street’s internal rating system 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 subject 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, current economic conditions and other risk factors.

At December 31, 2002, the allowance for loan losses was $61 million, or 1.46% of total loans. This compares with an allowance of $58 million, or 1.09% of total loans a year ago. In 2002, in the opinion of management, the measures of credit quality continued to be satisfactory.

10 | State Street Corporation

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 $4 million, $10 million and $9 million in 2002, 2001 and 2000, respectively.

For 2002, net charge-offs were less than $1 million versus net charge-offs of $9 million in 2001. Net charge-offs for 2002, as a percentage of average loans, were .04% compared to .14% for 2001.

N o n - p e r f o r m i n g A s s e t s . At December 31, 2002, total non-performing assets were $11 million, down from $32 million at year-end 2001. Non-performing assets include $11 million and $5 million at year-end 2002 and 2001, respectively, of non-performing investment securities, $27 million of other real estate owned at year-end 2001, and less than $1 million of non-accrual loans at year-end 2001.

Cross-Border Outstandings

Countries within which State Street has cross-border outstandings (primarily deposits) of at least 1% of its total assets at December 31, were as follows:

(Dollars in millions)		2002		2001		2000
United Kingdom	$	4,433	$	3,232	$	2,424
Germany		3,223		3,532		2,191
Canada		1,283		781		1,806
Australia		1,198		1,067		851
Japan		947		1,248		3,475
Netherlands				1,075		941
France				803		1,125

Total outstanding	$	11,084	$	11,738	$	12,813

Aggregate of cross-border ouststandings in countries having between .75% and 1% of total assets at December 31, 2002 was $783 million (Netherlands); at December 31, 2001, $668 million (Italy). There were no individual countries with aggregate cross-border outstandings between .75% and 1% of total assets at December 31, 2000.

Deposits

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

			2002				2001				2000

	Average		Average		Average		Average		Average		Average
(Dollars in millions)		Balance	Rate		Balance		Rate		Balance		Rate
U . S . :
Noninterest-bearing deposits	$	6,091			$	6,848			$	7,122
Savings deposits		2,171	0.92	%		2,845	3.55	%		2,466	5.35	%
Time deposits		7,301	1.82			2,058	3.94			313	6.75

Total U.S.	$	15,563			$	11,751			$	9,901


N o n - U . S . :
Noninterest-bearing deposits	$	50			$	81			$	76
Interest-bearing deposits		26,393	1.31	%		27,094	2.49	%		24,615	3.48	%

Total non-U.S.	$	26,443			$	27,175			$	24,691

State Street Corporation | 11

Non-U.S. noninterest-bearing deposits at December 31, 2002, 2001 and 2000 were $37 million, $49 million and $263 million, respectively.

Maturities of U.S. certificates of deposit of $100,000 or more at December 31, 2002 were as follows:

(Dollars in millions)
3 months or less	$	6,947
3 to 6 months		296
6 to 12 months		219
Over 12 months		30

Total	$	7,492

At December 31, 2002, substantially all non-U.S. time deposit liabilities were in amounts of $100,000 or more.

Return on Equity and Assets and Capital Ratios

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:

	2002	⁽¹⁾	2001		2000
Net income to:
Average stockholders’ equity	24.1	%	17.3	%	20.3	%
Average total assets	1.28		.88		.95
Dividends declared to net income	15.4		21.0		18.7
Average stockholders’ equity to average assets	5.3		5.1		4.7
Risk-based capital ratios:
Tier 1 capital	17.1		13.6		14.5
Total capital	18.0		14.5		15.6

Tier 1 leverage ratio	5.6		5.4		5.4

(1)	2002 net income includes the gain on the sale of the corporate trust business of $296 million after tax.

Short-Term Borrowings

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:

										Securities Sold Under
		Federal Funds Purchased								Repurchase Agreement

(Dollars in millions)		2002			2001			2000			2002			2001			2000
Balance at December 31	$	3,895		$	3,315		$	955		$	21,963		$	19,006		$	21,351
Maximum outstanding at any month end		4,925			4,970			1,645			26,553			22,584			23,796
Average outstanding during the year		3,085			2,745			729			23,881			20,426			19,867
Weighted average interest rate at end of year		1.25	%		1.87	%		6.30	%		1.12	%		1.62	%		6.17	%
Weighted average interest rate during the year		1.63			3.63			6.33			1.49			3.62			5.95

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.

12 | State Street Corporation

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 principal 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.

State Street has leased 1,000,000 square feet of a building under construction in Boston, Massachusetts for an initial term of 20 years. The building is anticipated to be available for occupancy in June 2003, at which time annual lease payments of approximately $60 million will commence. Upon availability, State Street anticipates utilizing a substantial portion of the leased space in this building for office and operational facilities.

The remaining offices and facilities of State Street and its subsidiaries are leased. As of December 31, 2002, the aggregate mortgages and lease payments, net of sublease revenue, payable within one year amounted to $191 million plus assessments for real estate tax, cleaning, and operating expenses.

For additional information relating to premises, see Note 5 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	60	Chairman and Chief Executive Officer	2000
Ronald E. Logue	57	President and Chief Operating Officer	2001
John R. Towers	61	Vice Chairman	2000
Timothy B. Harbert	51	Executive Vice President; Chairman and Chief Executive	2001
		Officer, State Street Global Advisors
Maureen Scannell Bateman	59	Executive Vice President and General Counsel	1997
Edward J. Resch	50	Executive Vice President and Chief Financial Officer	2002
Stefan M. Gavell	49	Executive Vice President and Treasurer	2002

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. All of the executive officers have been officers of State Street for five years or more, with the exception of Mr. Resch.

State Street Corporation | 13

Mr. Resch was hired as an executive officer of State Street in 2002. Prior to joining State Street, he was managing director and chief financial officer of Pershing, a subsidiary of Credit Suisse First Boston, which provides brokerage processing and investment services. Prior to that, he served as managing director and chief accounting officer at Donaldson, Lufkin & Jenrette, Inc.

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.” Information concerning securities authorized for issuance under equity compensation plans appears in Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” There were 5,454 stockholders of record at December 31, 2002. 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 of travel expenses, and an award of 1,366 shares of deferred stock payable when the director leaves the Board or retires, for services he or she provides during the period April 2002 through March 2003. In 2002, 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 in either cash or stock during any calendar year pursuant to the Corporation’s Deferred Compensation Plan for Directors. Four directors have elected to defer all, or a portion of their retainer compensation. An aggregate of 10,167 shares were issued for the annual retainers, and rights to receive an aggregate of 23,228 shares (deferred retainers and awards) were deferred, in 2002. The Corporation claims exemption from registration of the shares under Section 4(2) of the Securities Act of 1933.

14 | State Street Corporation

I T E M 6 . Selected Financial Data

Selected Financial Data
(Dollars in millions, except per share data)	2002			2001			2000			1999			1998
Y e a r s e n d e d D e c e m b e r 31 ,

Fee revenue:
Servicing fees	$	1,716		$	1,648		$	1,447		$	1,189		$	1,043
Management fees		526			516			584			600			480
Foreign exchange trading		300			368			387			306			289
Brokerage fees		124			89			95			67			36
Processing fees and other		184			148			177			159			160

Total fee revenue		2,850			2,769			2,690			2,321			2,008
Net interest revenue:
Interest revenue		1,974			2,855			3,256			2,437			2,237
Interest expense		995			1,830			2,362			1,656			1,492

Net interest revenue		979			1,025			894			781			745
Provision for loan losses		4			10			9			14			17

Net interest revenue after provision for loan losses		975			1,015			885			767			728
Gains (losses) on the sales of available-for-sale investment
securities, net		76			43			2			(45	)		10
Gain on the sale of corporate trust business, net of exit and
other associated costs		495
Gain on the sale of commercial banking business, net of exit
and other associated costs											282

Total revenue		4,396			3,827			3,577			3,325			2,746

Operating expenses:
Salaries and employee benefits		1,670			1,663			1,524			1,313			1,175
Information systems and communications		373			365			305			287			241
Transaction processing services		246			247			268			237			196
Occupancy		246			229			201			188			164
Other		306			393			373			332			313

Operating expenses		2,841			2,897			2,671			2,357			2,089

Income before income taxes		1,555			930			906			968			657
Income taxes		540			302			311			349			221

Net Income	$	1,015		$	628		$	595		$	619		$	436


Earnings per share:
Basic	$	3.14		$	1.94		$	1.85		$	1.93		$	1.35
Diluted		3.10			1.90			1.81			1.89			1.33

Cash dividends declared per share		.480			.405			.345			.300			.260
Return on equity		24.1	%		17.3	%		20.3	%		25.0	%		20.2	%
A s o f D e c e m b e r 31 ,
Total Assets	$	85,794		$	69,850		$	69,298		$	60,896		$	47,082
Long-term debt		1,270			1,217			1,219			921			922
Stockholders’ equity		4,787			3,845			3,262			2,652			2,311
Closing price per share of common stock		39.00			52.25			62.11			36.53			35.07
Number of employees		19,501			19,753			17,604			17,213			16,816

State Street Corporation | 15

Supplemental Financial Operating Results

State Street prepares its financial information in accordance with accounting principles generally accepted in the United States (GAAP). This financial information includes significant, non-operating items and reports goodwill amortization expense in accordance with the accounting practices applicable for those periods presented. These results are presented in the Consolidated Statement of Income and summarized on the Selected Financial Data schedule.

In order to provide information on a comparable basis from period to period and to assist stockholders, analysts, other external parties and management in analyzing the financial results and trends of ongoing businesses and operations, State Street also presents supplemental financial information on an operating results basis. State Street believes that such non-GAAP financial information assists investors and others by providing them with financial information in a format that provides comparable financial trends of ongoing business activities. Such supplemental financial operating results information is based on GAAP results and adjusted for: the results of certain significant transactions; fully taxable equivalent adjustments that increase net interest revenue to reflect investment yield on tax-free investments on an equivalent basis with taxable investments; and the exclusion of goodwill amortization expense from operating expenses in 2001 and prior years, consistent with GAAP accounting required beginning in 2002. Those financial results are summarized below.

(Dollars in millions, except per share data)	2002		⁽²⁾	2001		⁽³⁾	2000		1999		⁽⁴⁾	1998

Y e a r s e n d e d D e c e m b e r 3 1 ,

Fee revenue:
Servicing fees	$	1,716		$	1,648		$	1,447	$	1,189		$	1,043
Management fees		526			516			584		600			480
Foreign exchange trading		300			368			387		306			289
Brokerage fees		124			89			95		67			36
Processing fees and other		184			198			177		159			160

Total fee revenue		2,850			2,819			2,690		2,321			2,008

Net interest revenue:
Net interest revenue		979			1,025			894		781			745
Taxable-equivalent adjustment(1)		61			67			65		40			40

Net interest revenue – taxable equivalent		1,040			1,092			959		821			785
Provision for loan losses		4			10			9		14			17

Net interest revenue after provision for loan losses		1,036			1,082			950		807			768
Gains on the sales of available-for-sale investment
securities, net		76			43			2		12			10

Total revenue		3,962			3,944			3,642		3,140			2,786
Operating expenses(5)		2,841			2,859			2,654		2,342			2,077

Income before income taxes		1,121			1,085			988		798			709
Income taxes		341			331			317		259			225
Taxable-equivalent adjustment(1)		61			67			65		40			40

Net Income	$	719		$	687		$	606	$	499		$	444


Earnings per Share:
Basic	$	2.22		$	2.11		$	1.89	$	1.55		$	1.38
Diluted		2.20			2.08			1.85		1.52			1.35

16 | State Street Corporation

The following non-GAAP adjustments applicable to the periods presented are necessary to reconcile the consolidated statement of income prepared in accordance with GAAP to the Selected Financial Operating Results presented in the table above:
(1)	Operating Results for all years presented include a fully taxable-equivalent adjustment. This is a method of presentation in which interest income on tax-exempt securities is adjusted to present the earnings performance on a basis equivalent to interest earned on fully-taxable securities with a corresponding charge to income tax expense. The adjustment is computed using a federal income tax rate of 35%, adjusted for applicable state income taxes, net of the related federal tax benefit.
(2)	Operating Results for 2002 exclude the gain on the sale of the corporate trust business. This gain was $495 million after deductions for exit and other associated costs of $155 million. The after-tax gain was $296 million, or $.90 in diluted earnings per share. This transaction was recorded in December 2002.
(3)	Operating Results for 2001 exclude the write-off of our total investment in Bridge Information Systems, Inc. of $50 million. The after-tax loss was $33 million, or $.10 in diluted earnings per share. This write-off was recorded in March 2001.
(4)	Operating Results for 1999 exclude the gain on the sale of the commercial banking business and a one-time charge on sales of securities related to the repositioning of the investment portfolio. This gain was $282 million after deductions for exit and other associated costs of $68 million. The one-time charge for the portfolio repositioning was $57 million. The after-tax net gain of these combined items was $130 million or $.40 in diluted earnings per share. These transactions were recorded in October and December 1999.
(5)	Operating Results for each of the four years ended December 31, 2001 exclude goodwill amortization expense, as follows: 2001 – expense of $38 million, equal to $26 million, or $.08 per diluted share after tax; 2000 – expense of $17 million, equal to $11 million, or $.04 per diluted share after tax; 1999 – expense of $15 million, equal to $10 million, or $.03 per diluted share after tax; and 1998 – expense of $12 million, equal to $8 million, or $.03 per diluted share after tax.

Those adjustments are summarized below:

(Dollars in millions)	2002			2001		2000		1999			1998
Ye a r s e n d e d D e c e m b e r 31 ,
Net income – GAAP results	$	1,015		$	628	$	595	$	619		$	436
After-tax adjustments to arrive at operating results:
Deduct gain on sale of Commercial Banking business									(164	)
Add loss on portfolio repositioning									34
Add loss on investment in Bridge Information Systems					33
Deduct gain on the sale of Corporate Trust business		(296	)
Add goodwill amortization expense					26		11		10			8

Net income – Operating Results	$	719		$	687	$	606	$	499		$	444

State Street Corporation | 17

I T E M 7 . M a n a g e m e n t ’ s D i s c u s s i o n a n d A n a l y s i s o f F i n a n c i a l C o n d i t i o n a n d
R e s u l t s o f O p e r a t i o n s

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

Results of Operations

Summary

Financial Information

State Street prepares its financial information in accordance with accounting principles generally accepted in the United States (GAAP). This financial information includes significant non-operating items and reports goodwill amortization expense in accordance with the accounting practices applicable for those periods presented. These financial results are presented in the Consolidated Statement of Income and summarized on the Selected Financial Data schedule.

Comparisons between periods are primarily made based on information in the Consolidated Statement of Income with additional comparisons made using supplemental financial data prepared on an operating basis where it would provide additional information to the reader.

Business Summary

State Street is focused on providing sophisticated investors with a complete, integrated range of products and services anywhere in the world. State Street continually evaluates its business mix, and has sharpened its focus by divesting those businesses considered to be non-strategic and acquiring businesses to support this focus. In the past five years, State Street has divested its commercial banking, its trade banking and its corporate trust businesses, while acquiring several investment management and investment servicing businesses, most recently, International Fund Services, a provider of services for alternative investment portfolios such as hedge funds, in 2002, and a substantial portion of Deutsche Bank’s Global Securities Servicing business in 2003. While shaping its future, State Street delivered a twenty-five year record of growth in operating earnings per share.

State Street’s employees are focused on client service and enhancing the total client relationship with State Street. As a result, State Street has a high rate of recurring and cross-selling revenues. While most of State Street’s client services result in management or servicing fees, clients use a variety of other services that are recorded in foreign exchange, processing, or net interest revenue. Management remains focused on increasing total revenue.

While most of State Street’s revenue derives from its substantial market share in U.S. pension plans and mutual fund servicing, it continues to invest in developing businesses. These include servicing collective funds in the United Kingdom and continental Europe, offering outsourcing of middle- and back-office services and wealth management services, developing services for alternative investments, providing analysis and data analytics to enhance foreign exchange and equity execution, and offering enhanced-index investment management strategies.

State Street’s solid performance in 2002, despite a third consecutive year of declining values in equity markets worldwide and a somewhat flat interest rate environment, was due to winning business from new and existing clients, expanding its product offering, and closely managing its expenses.

18 | State Street Corporation

Financial Summary

State Street’s earnings per share were $3.10 in 2002, up $1.20 from $1.90 in 2001. The results for 2002 include a gain on the sale of State Street’s corporate trust business of $495 million, equal to $296 million after tax, or $.90 of diluted earnings per share. The results for 2001 included 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 of diluted earnings per share, and by the effect of goodwill amortization expense of $38 million, equal to $26 million after tax, or $.08 of diluted earnings per share. Adjusting 2002 results to exclude the gain on the sale of the corporate trust business, resulting earnings per share would be $2.20. Adjusting 2001 results to exclude the write-off of Bridge and goodwill amortization expense, resulting earnings per share would be $2.08 for 2001.

Net income was $1.0 billion, up $387 million from net income of $628 million in 2001. Of this increase, $355 million is attributable to non-operating items, including the net after-tax gain on the sale of State Street’s corporate trust business in 2002, and the after-tax write-off of Bridge and after-tax goodwill amortization expense in 2001. Adjusting these results to reflect ongoing operations without such items, current year net income was up $32 million over 2001.

The Corporation’s total revenue was $4.4 billion, an increase of $569 million from total revenue of $3.8 billion in 2001. Of this increase, $545 million is attributable to non-operating items, including the gain on the sale of the corporate trust business in 2002, and the write-off of Bridge in 2001. Adjusting these results to reflect ongoing operations without such items, 2002 total revenue increased $24 million from 2001.

The increase in total revenue of $24 million from ongoing operations was driven by growth in servicing and management fees, brokerage fees and gains on the sales of available-for-sale securities, largely offset by declines in foreign exchange trading fee revenue and net interest revenue.

Servicing fees for 2002 of $1.7 billion were up $68 million from 2001. New business from existing and new clients, including business gained through an acquisition in July 2002, drove growth in servicing fees, more than offsetting constraints imposed by the decline in comparable average equity market valuations and lower securities lending revenue. Assets under custody were $6.2 trillion, down $32 billion from a year ago, reflecting declines in equity market valuations, largely offset by the installation of new business.

State Street Corporation | 19

Management fees of $526 million in 2002 were up $10 million from the prior year, reflecting continued sales success over the last twelve months, significantly offset by lower equity market valuations. Assets under management were $763 billion, down from $775 billion a year ago.

Foreign exchange trading revenue was $300 million, compared to $368 million a year ago, with the decrease reflecting a lower number of customer trades and lower currency volatility in the currencies in which State Street trades. Net interest revenue was $979 million, a decline of $46 million from 2001. Lower yields on assets, reflecting the continuing decline in interest rates, offset growth in the balance sheet and lower liability costs.

Brokerage fee revenue was $124 million in 2002, compared to $89 million a year ago, driven primarily by significantly higher equity trading volumes. Securities gains were $76 million, compared to $43 million a year ago reflecting opportunities created by continued declines in market yields on fixed-income securities.

State Street’s earnings performance in 2002 was partly the result of success in reducing expenses. Operating expenses were $2.8 billion in 2002, down $56 million from 2001. Of this decrease, $38 million is attributable to goodwill amortization expense recorded in 2001, but no longer expensed in 2002 in accordance with generally accepted accounting principles. Adjusting for this accounting change, 2002 total expenses decreased $18 million. The decrease is primarily attributable to efforts by State Street to closely manage expenses, partially offset by the impact of acquisitions.

State Street’s primary financial goal is to achieve sustainable, real growth in earnings per share. State Street measures this goal on an operating basis that excludes significant, non-operating items. On an operating basis, over the last five years, diluted operating earnings per share increased at a 14% nominal compound annual growth rate.

State Street has two supporting financial goals, one for total revenue on an operating basis and one for return on stockholders’ equity on an operating basis. State Street’s total revenue goal is 12.5% real compound annual growth from 2000 through 2010. State Street expects to meet its goal over the stated period. Operating return on stockholders’ equity for 2002 was 17.1%. State Street’s goal is 18% per year.

Revenue

State Street is one of the world’s leading specialists in servicing 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.

In addition to revenue directly related to client transaction activity, State Street benefits from its ability to earn additional 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 generate foreign exchange trading revenue as well.

Fee Revenue

Total fee revenue was $2.9 billion in 2002, compared to $2.8 billion in 2001, an increase of $81 million. Of this increase, $50 million is attributable to the write-off of State Street’s total investment in Bridge recorded in 2001. The remaining increase of $31 million is primarily attributable to growth in servicing and brokerage fees, partially offset by a decline in foreign exchange trading revenue.

Servicing and management fees are the largest components of fee revenue. Combined, they comprise 79% of State Street’s total fee revenue. Collectively, servicing and management fees increased 4% over 2001, compared to a 6% increase for 2001 over 2000. Servicing and management fees are a function of several factors, including

20 | State Street Corporation

the mix and volume of assets under custody and assets under management, securities positions held, and volume of portfolio transactions, as well as types of products and services used by clients. Servicing and management fees are affected by changes in worldwide equity and fixed income valuations. In general, servicing fees are affected by changes in daily average valuations of assets under custody, and management fees are affected by changes in month-end valuations of assets under management. Management fee revenue is significantly more sensitive to market valuations than servicing fee revenue. State Street estimates, based on a recent study, 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 fixed income security values were to increase or decrease by 10%, State Street would anticipate a corresponding change of approximately 1% in its total revenue.

The following table provides selected equity market indices, which demonstrate worldwide equity market valuation changes in 2002:

	Daily Averages of Indices				Average of Month-End Indices

Index	2002	2001	Change		2002	2001	Change
S&P 500®	993.9	1194.2	(17	)%	988.6	1185.8	(17	)%
NASDAQ®	1541.4	2036.7	(24	)	1519.8	2004.6	(24	)
MSCI® EAFE	1052.8	1261.5	(17	)	1050.2	1253.0	(16	)

[The index names mentioned in this report are service marks of their respective owners.]

Securities lending revenue is reflected in both servicing fees and management fees. Securities lending revenue in 2002 decreased approximately 15% from 2001, compared to an increase of approximately 40% from 2000 to 2001. Securities lending revenue is principally a function of the volume of securities lent and interest rate spreads. While loan volumes increased in 2002, interest rate spreads decreased significantly. Interest rate spreads narrowed in 2002 compared to wider spreads resulting from the unusual occurrence of eleven reductions in the U.S. federal funds target rate in 2001.

Strong new business drove growth in both servicing fees and management fees, offsetting the impact of lower worldwide equity market valuations and lower securities lending revenue.

F E E R E V E N U E

								Change
(Dollars in millions)		2002		2001			2000	01-02
Servicing fees	$	1,716	$	1,648		$	1,447	4	%
Management fees		526		516			584	2
Foreign exchange trading		300		368			387	(18	)
Brokerage fees		124		89			95	39
Processing fees and other		184		148	⁽¹⁾		177	23

Total fee revenue	$	2,850	$	2,769		$	2,690	3

(1)	Includes the write-off of State Street’s total investment in Bridge of $50 million.

State Street Corporation | 21

S e r v i c i n g F e e s

Servicing fees for 2002 of $1.7 billion were up $68 million from 2001, primarily due to new business from existing and new clients, and State Street’s acquisition of International Fund Services, a leading servicer of alternative investments, including hedge funds, in July 2002. Growth in servicing fees was constrained by lower securities lending revenue compared to the very strong results of 2001, when declining interest rates drove revenue strength, and lower equity market valuations in 2002 compared to 2001. Assets under custody were $6.2 trillion, down $32 billion from a year ago.

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 more than 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 include custody, accounting, daily pricing and administration; trusteeship and recordkeeping; investment manager operations outsourcing; and securities lending. In 2002, revenue growth from servicing U.S. mutual funds and collective funds was primarily due to new business from new and existing clients, achieved despite unfavorable equity market valuations and cash outflows from stock mutual funds in 2002. Growth in servicing revenue outside the U.S. was primarily attributable to the acquisition of International Fund Services in July 2002.

State Street is the largest mutual fund custodian and accounting agent in the United States. State Street provides custody services for 47% of registered U.S. mutual funds and distinguishes itself 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 funds 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 2002, the total number of funds State Street serviced increased by 443, or 9%, to 5,123. There were 969 new funds serviced, 613 from existing clients and 356 from new clients, partially offset by 526 funds no longer serviced, primarily due to fund liquidations and consolidations.

State Street’s services for investment managers include operations outsourcing. Through these services, State Street provides global asset managers with a comprehensive suite of services, from trade order management through settlement, for their middle and back offices. 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 2002, revenue growth from new business from new and existing clients was not enough to offset the decline in securities lending revenue.

At 29% 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 3,600 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 2002, total assets under custody were $6.2 trillion, down $32 billion from 2001. 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

22 | State Street Corporation

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 ,

											01-02		97-02
(Dollars in billions)		2002		2001		2000		1999		1998	AGR		CAGR
Clients in the U.S.:
Mutual funds	$	2,719	$	2,794	$	2,664	$	2,769	$	2,144	(3	)%	10	%
Pensions, insurance and other
investment pools		2,734		2,737		2,803		2,669		2,306			7
Clients outside the U.S.		718		672		651		514		362	7		22

Total	$	6,171	$	6,203	$	6,118	$	5,952	$	4,812	(1	)	10

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 ,

			Percentage				Percentage
(Dollars in billions)		2002	of Total			2001	of Total
Equities	$	2,738	44	%	$	2,942	47	%
Fixed income		2,343	38			2,055	33
Short-term investments		1,090	18			1,206	20

Total	$	6,171	100	%	$	6,203	100	%

Non-U.S. securities			14	%			13	%

Market value changes, as measured by indices at year-end, had a significant impact on the value of assets under custody. At December 31, 2002, the S&P 500® index was down 23% from year-end 2001, the NASDAQ® index down 32%, the MSCI® EAFE index down 18%, and the Lehman Brothers Aggregate Bond(SM) index up 10%. [The index names mentioned in this report are service marks of their respective owners.]

M a n a g e m e n t F e e s

In 2002, management fees were $526 million, up $10 million, or 2%, from 2001. Strong new business wins drove growth in management fees, offsetting the impact of lower equity market valuations and lower securities lending revenue. 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.

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 sixth largest investment manager in the world, based upon assets under management, and the largest manager of assets for tax-exempt organizations, primarily pension plans, 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.

State Street Corporation | 23

Management fees earned outside the U.S. increased in 2002 reflecting new business from new clients and growth in business from existing clients, as well as the impact of the full year revenue from clients of a passive equity business in the United Kingdom 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 2002, assets under management were $763 billion, down $12 billion, or 2%, from year-end 2001. Securities issued outside of the U.S. comprised 22% 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, 2002, the S&P 500® index was down 23% from year-end 2001, the NASDAQ® index down 32%, the MSCI® EAFE index down 18%, and the Lehman Brothers Aggregate Bond(SM) index up 10%. [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 ,

											01-02		97-02
(Dollars in billions)	2002		2001		2000		1999		1998		AGR		CAGR
Equities:
Passive	$	343	$	398	$	365	$	366	$	237	(14	)%	15	%
Active		57		39		44		42		34	46		17

Employer securities		56		76		75		76		59	(26	)	2
Fixed income		74		54		44		39		32	37		21
Money market		233		208		183		144		123	12		15

Total	$	763	$	775	$	711	$	667	$	485	(2	)	14

F o r e i g n E x c h a n g e T r a d i n g

In 2002, foreign exchange trading revenue decreased 18%, to $300 million. Foreign exchange trading revenue is influenced by the volume of foreign exchange transactions and currency volatility. Though total volumes were up in 2002, currency volatility, as measured by State Street’s index of 43 currencies, was significantly lower than one year ago. 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.

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

B r o k e r a g e F e e s

Brokerage fees were $124 million in 2002, a record year, up from $89 million in 2001. Growth was driven by significantly higher equity trading volumes by investment managers, including commission recapture and transition management services. The number of transitions managed increased 13% in 2002 from 2001, and the volume of trading activity increased 26%.

P r o c e s s i n g F e e s a n d O t h e r

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

24 | State Street Corporation

Processing fees and other revenue of $184 million was up $36 million from 2001. Excluding the write-off of Bridge of $50 million recorded in 2001, processing fees and other revenue was down $14 million year over year.

Net Interest Revenue

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

										Change
(Dollars in millions)		2002			2001			2000		01-02
Interest revenue	$	1,974		$	2,855		$	3,256
Interest expense		995			1,830			2,362

Net interest revenue		979			1,025			894		(5	)%
Provision for loan losses		(4	)		(10	)		(9	)

Net interest revenue after provision for loan losses	$	975		$	1,015		$	885		(4	)

Net interest revenue was $979 million in 2002, compared to $1.0 billion in 2001, a decrease of $46 million, or 5%. Lower prevailing yields on assets, as maturing assets were reinvested at the lower market rates during 2002, more than offset growth in the balance sheet and lower liability costs. Net interest revenue in 2001 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 and a favorable global interest rate environment. The excess of rates earned over rates paid decreased slightly from 1.27% in 2001 to 1.26% in 2002, on a taxable equivalent basis. Taxable equivalent basis is a method of calculation in which interest income on tax-exempt securities is adjusted to present the earnings performance on a basis equivalent to interest earned on fully-taxable securities. The adjustment is computed using a federal income tax rate of 35%, adjusted for applicable state income taxes, net of the related federal tax benefit.

The average balance sheet for 2002 increased $7.8 billion over 2001 to $79.1 billion, primarily from increased client investment activity, as well as balance sheet positions to take advantage of short-term market opportunities. State Street’s clients, in conjunction with their worldwide investment activities, increased the level of their U. S. time deposits and securities sold under repurchase agreements in 2002, driving the growth in the balance sheet.

Gains on Sales of Available-For-Sale Investment Securities

Securities gains were $76 million in 2002, up from $43 million in 2001. State Street took advantage of opportunities created by continued declines in market yields on fixed-income securities. Market yields on the two-year U.S. Treasury note dropped from 3.03% at year-end 2001 to 1.60% at year-end 2002. As of December 31, 2002, State Street had $26.5 billion of available-for-sale securities with $171 million in unrealized appreciation.

Operating Expenses

Operating expenses were $2.8 billion, a decrease of $56 million from 2001. Of this decrease, $38 million is attributable to goodwill amortization expense recorded in 2001 that was not recorded in 2002 in accordance with a new pronouncement from the Financial Accounting Standards Board, effective January 1, 2002. Lower other expenses, reflecting reduced professional services and advertising expenses, contributed to the decline in total expenses. State Street maintained rigorous expense management throughout 2002.

State Street Corporation | 25

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

							Change
(Dollars in millions)		2002		2001		2000	01-02
Salaries and employee benefits	$	1,670	$	1,663	$	1,524
Information systems and communications		373		365		305	2	%
Transaction processing services		246		247		268
Occupancy		246		229		201	7
Other		306		393		373	(22	)

Total operating expenses	$	2,841	$	2,897	$	2,671	(2	)

Number of employees at year-end		19,501		19,753		17,604	(1	)

Salaries and employee benefits expense increased $7 million in 2002. Slightly higher salary and pension expenses were largely offset by reduced contract services and lower incentive compensation expense.

Information systems and communications expense was $373 million in 2002, up 2% from the prior year. The low level of growth reflects management’s prioritization of projects and success in reducing costs.

Transaction processing services expense was $246 million, down $1 million from 2001. These expenses are volume related and include external contract services, subcustodian fees, equity trading services and fees related to securities settlement. Lower mutual fund shareholder activities resulting from both the decline in asset values and lower transaction volumes were largely offset by higher expenses associated with the growth in equity trading transactions.

Occupancy expense was $246 million, up $17 million from 2001. State Street continued to grow globally, with new facilities in Europe and Canada in 2002.

Other expenses were $306 million, down $87 million. Of this decrease, $38 million is attributable to goodwill that is no longer amortized. The decrease in other expenses included reduced professional services and advertising and sales promotion in 2002.

Income Taxes

Income tax expense was $540 million in 2002, up $238 million compared to $302 million in 2001. In 2002, $199 million of tax expense is attributable to tax on the gain on the sale of the corporate trust business. In 2001, tax expense was reduced by $17 million for the write-off of Bridge. Excluding these non-operating items, income tax expense was $341 million in 2002, compared to $319 million in 2001. In 2002, the effective tax rate was 32.1%, excluding the gain on the sale of corporate trust business, down slightly from 32.6% in 2001, which excludes the write-off of Bridge.

Acquisitions and Divestiture

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.

On December 31, 2002, State Street completed the sale of its corporate trust business to U.S. Bank, N.A., the lead bank of U.S. Bancorp. The premium received on the sale was $725 million, $75 million of which was placed in escrow pending the successful transition of the business. Escrow payments, if made, will be paid on the 12-month and 18-month anniversaries of the closing. Exit costs associated with the sale totaled approximately

26 | State Street Corporation

$118 million, and other associated costs were $37 million. The after-tax gain, net of exit and other associated costs, totaled approximately $296 million, or $0.90 in diluted earnings per share.

In July 2002, State Street completed the purchase of International Fund Services (IFS), a leading provider of fund accounting and administration as well as securities trade support and operational services for hedge funds. As one of the largest providers of hedge funds services, IFS services over 100 large asset management firms and private equity fund managers, representing more than 350 funds globally. IFS is headquartered in New York City, with operations centers in New York City and Dublin, Ireland with approximately 500 employees.

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.

State Street Corporation | 27

Comparison of 2001 versus 2000

State Street’s earnings per share were $1.90 in 2001, an increase of 5% over 2000 earnings per share of $1.81. Total revenue was $3.8 billion, an increase of 7% from 2000. Net income was $628 million, up 6% from 2000 net income of $595 million. Return on stockholder’s equity was 17.3%. Results for 2001 include 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. The write-off of Bridge reduced the return on stockholders’ equity from 18.2% to 17.3%.

The Corporation’s total revenue was $3.8 billion, an increase of $250 million, or 7%, 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”) and excluding the write-off of Bridge of $50 million in 2001, the growth in total operating revenue increased 10%. In 2001, servicing fees and net interest revenue drove revenue growth.

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 a significant increase in securities lending fees. Strength in securities lending revenue was primarily driven by wider interest rate spreads in a favorable 2001 U.S. interest rate environment as a result of the unusual occurrence of eleven reductions in the U.S. federal funds target rate during 2001. Declines in equity market values worldwide offset some of the growth in servicing fees.

In 2001, management fees were $516 million, down $68 million, or 12%, from 2000. Adjusted for the formation of CitiStreet, these fees decreased $24 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. Revenue growth from acquisitions, securities lending and new business partially offset the unfavorable impact of declines in market values.

In 2001, foreign exchange trading revenue decreased 5%, to $368 million. In 2001, trading volumes were strong, both in the number and total U.S.-dollar value of transactions. The impact of volume growth was more than offset by decreased volatility in 2001, as measured by State Street’s index of 43 currencies.

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.

Processing fees and other revenue of $148 million were down $29 million from 2000. Excluding the write-off of Bridge, processing fees and other were up $21 million. Additional revenue resulted from the acquisition of a portfolio accounting service acquired in June 2001.

Net interest revenue was $1.0 billion in 2001, compared to $894 million in 2000, an increase of $131 million, or 15%. 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, up $8.4 billion over 2000, and the favorable interest rate environment was partially offset by lower client demand deposit volumes, reflecting the reduction in client transactions during the year.

Securities gains were $43 million in 2001, up from $2 million in 2000, reflecting State Street’s total return strategy.

28 | State Street Corporation

Reducing the rate of expense growth was a key factor in State Street’s 2001 earnings performance. State Street continued to invest for the future by carefully pacing spending on strategic initiatives and technology projects that were critical to long-term growth. Operating expenses were $2.9 billion, an increase of $226 million, or 8% over 2000. Adjusted for the formation of CitiStreet, operating expenses grew 10%, significantly lower than the comparable 20% expense growth in 2000 over 1999. The 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.

Salaries and employee benefits expense 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 $393 million, up $20 million from 2000. These expenses include professional services and advertising and sales promotion. The increase over prior year is due to a $21 million increase in the amortization of goodwill, primarily from acquisitions in 2001. State Street’s cost containment efforts, which reduced discretionary spending, partially offset the increase in other expenses.

Income tax expense was $302 million in 2001, down from $311 million in 2000. Tax expense for 2001 included a benefit of $17 million for the write-off of State Street’s investment in Bridge. In 2001, the effective tax rate, excluding the write-off of Bridge, was 32.6% compared to 34.3% in 2000.

State Street Corporation | 29

Lines of Business

State Street reports two lines of business: Investment Servicing and Investment Management. 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.

State Street measures its line of business results on an operating basis. As such, the table below includes an “Other” category for the gain in 2002 for the sale of the corporate trust business of $495 million, the write-off in 2001 of State Street’s total investment in Bridge of $50 million and goodwill amortization expense in 2001 and 2000. See Note 13 in the Notes to the Consolidated Financial Statements for further information.

The following is a summary of the results for lines of business 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														Other							Total

(Dollars in millions)	2002			2001			2000		2002			2001			2000			2002		2001			2000			2002		2001		2000
F e e r e v e n u e :
Servicing fees	$	1,716		$	1,648	$	1,447																			$	1,716	$	1,648	$	1,447
Management fees									$	526		$	516		$	584											526		516		584
Foreign exchange trading		300			368		387																				300		368		387
Brokerage fees		124			89		95																				124		89		95
Processing fees and other		151			174		173			33			24			4				$	(50	)					184		148		177


Total fee revenue		2,291			2,279		2,102			559			540			588					(50	)					2,850		2,769		2,690
Net interest revenue after provision for loan losses		936			956		800			39			59			85											975		1,015		885

Gains on sales of available-for-sale securities, net		76			43		2																				76		43		2

Gain on sale of corporate trust business, net																		$	495								495


Total revenue		3,303			3,278		2,904			598			599			673			495		(50	)					4,396		3,827		3,577
Operating expenses		2,330			2,343		2,120			511			516			534					38		$	17			2,841		2,897		2,671

Income before income taxes	$	973		$	935	$	784		$	87		$	83		$	139		$	495	$	(88	)	$	(17	)	$	1,555	$	930	$	906

Pre-tax margin		29	%		29%		27	%		15	%		14	%		21	%
Average assets (billions)	$	77.2		$	69.5	$	61.7		$	1.9		$	1.8		$	1.2										$	79.1	$	71.3	$	62.9

Note: Certain previously reported amounts have been reclassified to conform to the current year method of presentation.

30 | State Street Corporation

Investment Servicing

Investment Servicing includes custody, accounting, daily pricing and administration; master trust and master custody; trusteeship 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 2002 increased to $3.3 billion, up $25 million, or less than 1% from 2001. Servicing fees, brokerage fees and gains on the sales of available-for-sale securities drove revenue growth, largely offset by declines in foreign exchange trading revenue and net interest revenue. Growth in servicing fees primarily reflects new business from existing and new clients, including clients gained from an acquisition in July 2002. Growth in servicing fees was constrained by lower securities lending revenue and lower equity market valuations in 2002 compared to 2001. Growth in brokerage fees reflected higher equity trading volumes by investment managers, including commission recapture and transition management services. Higher gains on the sales of available-for-sale securities reflected opportunities created by continued declines in market yields on fixed income securities. Foreign exchange trading revenue was down $68 million from 2001, reflecting decreased currency volatility and customer trades. Net interest revenue after provision for loan losses declined $20 million from 2001 due to lower yields on reinvested assets, offset somewhat by balance sheet growth and lower liability costs. Net interest revenue in 2001 benefited significantly from the unusual occurrence of eleven reductions in the U.S. federal funds target rate and a favorable global interest rate environment.

Servicing fees, foreign exchange trading revenue and brokerage fees for the Investment Servicing line of business are identical to the respective total consolidated results. Please refer to the “Servicing Fees,” “Foreign Exchange Trading” and “Brokerage Fees” 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 software licensing and maintenance, credit services, investment banking, structured products, trade banking, profits and losses from joint ventures, gains and losses on sales of leased equipment and other assets, other trading profits and losses, and amortization of investments in tax-advantaged financings.

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.

Operating expenses were $2.3 billion, a decrease of $13 million from 2001. Increases in salaries and pension costs were more than offset by lower contract services, incentive-based compensation and State Street’s cost containment efforts.

Investment Management

Investment Management offers a broad array of services for managing financial assets, including investment management and investment research 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 2002 was $598 million, down $1 million from $599 million in 2001.

State Street Corporation | 31

In 2002, management fees were $526 million, up $10 million, or 2%, from 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. Processing and other fee revenue includes profits and losses from joint ventures and other revenue.

Operating expenses in 2002 were $511 million, down $5 million from 2001. Lower expenses reflect State Street’s cost containment efforts.

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 a 12.5% real (inflation-adjusted) compound annual growth rate of revenue for 2000 through 2010. At present, this equates to approximately a 15% 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 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. Economic and political uncertainties resulting from terrorist attacks, subsequent military actions or other events 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 generally benefits when individuals invest their savings in mutual funds and other collective funds or in defined contribution plans. Changes in savings rates or investment styles may affect revenue. If there is a decline in the savings rates of individuals, or if there is a change in investment preferences that leads to fewer investments in mutual funds, other collective funds, and defined contribution plans, State Street’s revenue may be adversely affected.

A s s e t v a l u e s i n 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 asset values in worldwide financial markets increase or decrease, 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 fixed income security values worldwide were to increase or decrease by 10%, State Street would anticipate a corresponding change of approximately 1% in its total revenue.

32 | State Street Corporation

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, the pace of inflation, changes in monetary policy, changes in domestic and international banking supervisory regulations including capital requirements, 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, the national and global efforts to combat terrorism, and other potential military activities and outbreaks of hostilities 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.

In a similar manner, financial reporting irregularities involving large and well-known companies may have other adverse effects on State Street in ways which are not predictable. In addition, State Street cannot predict the final form of, or the effects of, the regulatory accord on international banking institutions to be reached by the Basel Committee on Banking Supervision.

Legislation 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, 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.

A c c o u n t i n g p o l i c i e s . Changes in accounting principles generally accepted in the United States applicable to State Street could have a material impact on the Corporation’s reported results of operations. While such changes may not have an economic impact on the business of State Street, these changes could affect the attainment of the current measures of the Corporation’s financial goals.

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 relative to the currency mix of the Corporation’s interest-bearing assets and liabilities affect net interest revenue and securities lending revenue, which is recorded in both servicing and management fees. 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. Sustained lower interest rates and a flat yield curve may have a constraining effect on the net interest revenue and securities lending revenue growth.

State Street Corporation | 33

L i q u i d i t y . Any occurrence that 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’s ability to raise capital and, in turn, its liquidity.

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 a 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 could adversely affect its business.

Also, under Federal Reserve Board regulations and related federal laws, there are limits on investment of the capital and surplus of State Street Bank in subsidiaries that, in general, conduct only international activities. State Street Bank is near the limit on such permitted use of capital and surplus. This limit may affect the pace of future international expansion by State Street Bank through these subsidiaries, although there are available alternatives for international expansion by State Street and State Street Bank. This limit may not have a similar impact on those competitors of the Corporation which are significantly larger than State Street and State Street Bank.

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. Accordingly, foreign exchange revenue is likely to decrease during times of decreased currency volatility.

P a c e o f p e n s i o n r e f o r m . State Street expects its business 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. If the pace of pension reform and resulting programs, including public and private pension schemes, slows down or if pension reform does not occur, then revenue growth may be adversely affected.

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 ; B u s i n e s s m i x . A decline in 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 adversely affect future results of operations. A decline in the rate at which clients outsource functions such as their internal accounting activities, would also adversely affect results of operations. In addition, changes in business mix and in the source of revenue, including the mix of U.S. and non-U.S. business, may affect future results of operations, depending on the economic conditions of those geographic areas at the time.

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 adversely affected.

34 | State Street Corporation

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 often 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 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. Despite these efforts, State Street cannot be certain that the steps taken by it to prevent unauthorized use of proprietary rights are sufficient to prevent misappropriation of technology, particularly outside the United States where laws or law enforcement practices may not protect proprietary rights as fully as in the United States. In addition, no assurance can be given that the courts will adequately enforce contractual agreements that State Street has entered into to protect its proprietary technology. If any of its proprietary information were misappropriated by or otherwise disclosed to its competitors, State Street’s competitive position could be adversely affected. 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 l l i a n c e s a n d d i v e s t i t u r e s . Acquisitions of complementary businesses and technologies and development of strategic alliances and divestitures of portions of its business are an active part of State Street’s overall business strategy. The Corporation has completed several acquisitions, alliances and divestitures 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. In addition, State Street may not be able to successfully complete any divestiture on satisfactory terms, if at all, and divestitures may result in a reduction of total revenue and net income.

State Street Corporation | 35

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.

Liabilities

The growth in State Street’s balance sheet is primarily driven by growth in liabilities from clients’ activities, as well as balance sheet positions to take advantage of short-term market opportunities. 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 $7.8 billion, or 14%, in 2002, primarily from client investment activities. The most significant growth in liabilities occurred in U.S. interest-bearing deposits. Clients are managing cash positions more aggressively due to weak financial markets and are shifting to short-term interest-bearing investments. U.S. interest-bearing deposits rose $4.6 billion, or 93%.

Average noninterest-bearing deposits decreased $788 million, or 11%. Clients use noninterest-bearing deposit accounts for transaction settlements and as compensation to State Street for services.

Assets

State Street’s assets consist primarily of short-term money market assets and investment securities, which are generally more liquid 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. Money market assets include securities purchased under resale agreements, securities borrowed, federal funds sold and interest-bearing deposits with banks that are short-term, multicurrency instruments invested with major multinational banks.

36 | State Street Corporation

Average interest-earning assets increased $7.6 billion, or 12%, in 2002. Total investment securities increased $3.8 billion, or 22%, from 2001, primarily due to investments in U.S. Treasuries and U.S. federal agencies. Securities purchased under resale agreements grew $1.3 billion, or 7%, from 2001, primarily from the reinvestment of additional funds from client repurchase activities. Interest-bearing deposits with banks increased 18% from 2001, to $24.3 billion. Average loans decreased $976 million, to $5.1 billion, due to lower average client overdraft balances.

Fair Value of Financial Instruments

The short duration of State Street’s assets and liabilities results in the fair value of its financial instruments equating to or closely approximating their balance sheet value. See Note 22 in the Notes to the Consolidated Financial Statements for further discussion.

Further quantitative information on State Street’s assets and liabilities is furnished in Notes 3 through 9 in the Notes to the Consolidated Financial Statements.

Liquidity and Capital

Liquidity

The primary objective of State Street’s liquidity management is to ensure that the Corporation has sufficient funds to meet its commitments and business needs, including accommodating the transaction and cash management requirements of its clients. Liquidity is provided by State Street’s access to global debt markets, its ability to gather additional deposits from its clients, maturing short-term assets, sales of securities and repayment of clients’ loans. Client deposits and other funds provide multicurrency, geographically diverse sources of liquidity.

State Street maintains a large portfolio of liquid assets. When liquidity is measured by the ratio of liquid assets to total assets, State Street ranks among the highest 10% of U.S. bank holding and financial holding companies. At December 31, 2002, the Corporation’s liquid assets were 88% of total assets.

State Street Bank can issue bank notes with an aggregate limit of $750 million and with original maturities ranging from 14 days to five years. At December 31, 2002, no notes payable were outstanding and all $750 million was available for issuance. State Street Corporation can issue commercial paper with an aggregate limit of $1.0 billion and with original maturities of up to 270 days from the date of issue. At December 31, 2002, State Street had $998 million of commercial paper outstanding. State Street maintains a universal shelf registration statement that allows for the offering and sale of unsecured debt securities, capital securities, common stock, depositary shares and preferred stock, and warrants to purchase such securities, including any shares into which the preferred stock and depositary shares may be convertible, or any combination thereof. In August 2002, State Street filed a registration statement on Form S-3 to increase the available amount of securities to be issued from $700 million to $1.5 billion. At December 31, 2002, $1.5 billion of the shelf registration was available for issuance. In January 2003, State Street issued securities from this shelf registration as described below. See Notes 8 and 9 in the Notes to the Consolidated Financial Statements for further information.

On January 31, 2003, State Street completed the primary closing of its acquisition of a substantial part of the global securities services business of Deutsche Bank AG. Under the terms of the definitive agreements, first announced on November 5, 2002, State Street’s initial payment to Deutsche Bank for all business units to be acquired was approximately $1.1 billion. Approximately half of the initial payment was financed using existing resources, including the net proceeds from the sale of the corporate trust business. State Street financed $595 million of the purchase price by issuance of equity, equity-related and capital securities to the public under an existing shelf registration statement. See Note 25 in the Notes to the Consolidated Financial Statements for further information.

State Street Corporation | 37

State Street endeavors to maintain high ratings on its debt, as measured by independent credit rating agencies. High ratings on debt minimize borrowing costs and enhance State Street’s liquidity by ensuring the largest possible market for the Corporation’s debt. State Street’s senior debt is rated AA– by Standard & Poor’s, Aa3 by Moody’s Investors Service and AA by Fitch, Inc. State Street Bank’s long-term deposits are rated AA by Standard & Poor’s, Aa2 by Moody’s Investors Service and AA+ by Fitch, Inc.

The Consolidated Statement of Cash Flows provides additional liquidity information.

Capital

State Street’s objective in managing its capital is to maintain a strong capital base in order to provide financial flexibility for its business needs, including funding corporate growth and supporting clients’ cash management needs.

As a state chartered bank and member of the Federal Reserve System, State Street Bank and Trust Company, State Street’s principal subsidiary, is primarily regulated by the Federal Reserve Board, which has established guidelines for minimum capital ratios. State Street has developed internal capital adequacy policies to ensure that State Street Bank meets or exceeds the level required for the “well capitalized” category, the highest of the Federal Reserve Board’s five capital categories. State Street Bank must meet the regulatory designation of “well capitalized” in order for State Street to maintain its status as a financial holding company. State Street’s capital management emphasizes risk exposure rather than simple asset levels; at 16.4%, State Street Bank’s Tier 1 risk-based capital ratio significantly exceeds the regulatory minimum of 4% and is among the highest for U.S. banks, according to published industry statistics. State Street’s Tier 1 risk-based capital ratio of 17.1% is likewise among the highest for U.S. bank holding companies. See Note 12 in the Notes to the Consolidated Financial Statements for further information.

State Street’s Board of Directors has authorized the purchase of State Street common stock for use in employee benefit programs and for general corporate purposes. At December 31, 2002, 8.3 million shares remain available for purchase within the program. State Street employs a third-party broker-dealer to acquire shares for the Corporation’s stock purchase program on the open market. Additionally, State Street purchases shares of State Street common stock not included as part of the stock purchase program for certain deferred compensation plans. The trusts which hold these shares employ a third-party broker-dealer to acquire the shares on the open market. In total, the Corporation bought 1.6 million shares in 2002. See Note 10 in the Notes to the Consolidated Financial Statements for further information.

D I V I D E N D S A N D C O M M O N S T O C K

					Market Price

	Dividends							End of
Quarters	Declared			Low		High		Quarter
2001:
First		$	.095	$	38.76	$	64.39		$	46.70
Second			.100		43.95		57.87			49.49
Third			.100		36.25		54.98			45.50
Fourth			.110		41.84		54.78			52.25
2002:
First		$	.11	$	48.12	$	58.36		$	55.38
Second			.12		41.25		55.68			44.70
Third			.12		34.85		45.19			38.64
Fourth			.13		32.11		47.47			39.00

38 | State Street Corporation

State Street has increased its quarterly dividend twice each year since 1978. Over the last fifteen years, dividends per share have grown at a 16% compound annual growth rate.

There were 5,454 stockholders of record of common stock as of December 31, 2002.

Risk Management

In providing services for institutional investors globally, State Street must manage and control certain inherent risks. These include counterparty risk, credit risk, fiduciary risk, operations and settlement risk, and market risk. Risk management is an integral part of State Street’s business activities and is centrally organized with close ties to the business units. This structure allows for corporate risk management across the business areas while individual line areas remain responsible for risk management in their units. While State Street believes its risk management process is effective in managing the risks of its business, no system can eliminate all risks. If there is a material failure in the risks managed by State Street, such as a material counterparty failure or a material default of a debtor, State Street’s results of operations could be adversely affected.

State Street maintains a system of internal controls that are designed to minimize risk. Management believes these internal controls are adequate to minimize such risk. This internal control environment is evaluated on an annual basis through a SAS 70 review of most of the business units and through a report on the effectiveness of internal controls over financial reporting as required by the FDIC Improvement Act of 1991.

Risk management emphasizes establishing specific authorization levels and limits. Exposure levels are reviewed and modified as required by changing conditions. Analysis of business-risk concentration includes specific industry concentrations of credit risk, country limits and individual counterparty limits. In managing country risk, State Street considers a variety of issues, including those related to credit quality, asset concentration, liquidity and settlement risk.

Credit risk results from the possibility that a loss may occur if a counterparty becomes unable to meet the terms of a contract. State Street has policies and procedures to monitor and manage all aspects of credit risk. These include a comprehensive credit review and approval process that involves the assignment of risk ratings to all loans and off-balance sheet credit exposures. Rigorous processes for credit approval cover traditional credit facilities, foreign exchange, placements, credit-enhancement services, securities lending and securities-clearing facilities.

Fiduciary risk is the risk of financial loss as a consequence of breaching a fiduciary duty to a client. Business units are responsible for operating within the rules and regulations applicable to their activities, including any corporate guidelines. The Corporate Fiduciary Review Committee and the Compliance Committee work with the business units to oversee adherence to corporate standards.

State Street is a large servicer and manager of financial assets on a global scale; therefore, oversight of operational and settlement risk is an integral part of the management process throughout the Corporation. State Street focuses on payment-system risk management, overdraft monitoring and control, and global securities clearing and settlement. In addition to specific authorization levels and limits, operational risk is mitigated by automation, standardized operating procedures, segregation of duties and controls, timely confirmation and reconciliation procedures, and insurance.

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Market Risk: Foreign Exchange and Interest Rate Sensitivity

State Street engages in trading and investment activities to serve clients’ investment and trading needs, which contribute to overall corporate earnings and enhances liquidity. In the conduct of these activities, the Corporation is subject to, and assumes, market risk. Market risk is the risk of adverse financial impact due to changes in market prices, such as interest rates and foreign exchange rates. The level of risk State Street assumes is a function of the Corporation’s overall objectives and liquidity needs, client requirements, and market volatility.

State Street manages its overall market risk through a comprehensive risk management framework. This structure includes a market risk management group that reports independently to senior management. Market risk from foreign exchange and trading activities is controlled through established limits on aggregate and net open positions, sensitivity to changes in interest rates, and concentrations. These limits are supplemented by stop-loss thresholds. The Corporation uses a variety of risk management tools and techniques, including value at risk, to measure, monitor and control market risk. All limits and measurement techniques are reviewed and adjusted as necessary on a regular basis by business managers, the market risk management group and senior management.

State Street uses foreign exchange contracts and a variety of financial derivative instruments to support clients’ needs, conduct trading activities, and manage its interest rate and currency risk. These activities are designed to create trading revenue or hedge net interest revenue. In addition, the Corporation provides services related to derivative instruments in its role as both a manager and servicer of financial assets.

State Street’s clients use derivatives to manage the financial risks associated with their investment goals and business activities. With the growth of cross-border investing, clients have an increasing need for foreign exchange forward contracts to convert currency for international investment and to manage the currency risk in international investment portfolios. As an active participant in the foreign exchange markets, State Street provides foreign exchange forward contracts and over-the-counter options in support of these client needs.

Trading Activities: Foreign Exchange and Interest Rate Sensitivity

As part of its trading activities, the Corporation assumes positions in both the foreign exchange and interest rate markets by buying and selling cash instruments and using financial derivatives, including foreign exchange forward contracts, foreign exchange and interest rate options, and interest rate swaps. As of December 31, 2002, the notional amounts of these derivative instruments was $248.4 billion, of which $227.8 billion were foreign exchange forward contracts. Long and short foreign exchange forward positions are closely matched to minimize currency and interest rate risk. All foreign exchange contracts are valued daily at current market rates.

The Corporation uses a variety of risk measurement and estimation techniques, including value at risk. Value at risk is an estimate of potential loss for a given period of time within a stated statistical confidence interval. State Street uses a risk management system, Askari RiskBook,™ to estimate value at risk daily for all material trading positions. The Corporation has adopted standards for estimating value at risk, and maintains capital for market risk, in accordance with the Federal Reserve’s Capital Adequacy Guidelines for market risk. Value at risk is estimated for a 99% one-tail confidence interval and an assumed one-day holding period using a historical observation period of greater than one year. A 99% one-tail confidence interval implies that daily trading losses should not exceed the estimated value at risk more than 1% of the time, or approximately three days out of the year. The methodology uses a simulation approach based on observed changes in interest rates and foreign exchange rates and takes into account the resulting diversification benefits provided from the mix of the Corporation’s trading positions.

Like all quantitative risk measures, value at risk is subject to certain limitations and assumptions inherent to the methodology. State Street’s methodology gives equal weight to all market rate observations regardless of how recently the market rates were observed. The estimate is calculated using static portfolios consisting of positions held at the end of the trading day. Implicit in the estimate is the assumption that no intraday action is taken by

40 | State Street Corporation

management during adverse market movements. As a result, the methodology does not represent risk associated with intraday changes in positions or intraday price volatility.

The following table presents State Street’s market risk for its trading activities as measured by its value at risk methodology:

V A L U E A T R I S K F O R T H E Y E A R E N D E D D E C E M B E R 3 1 ,

(Dollars in millions)	Average			Maximum			Minimum
2002:
Foreign exchange products		$	1.0		$	2.5		$	.4
Interest rate products			2.8			4.3			1.3

2001
Foreign exchange products		$	.9		$	2.5		$	.4
Interest rate products			4.5			6.9			3.0

State Street compares actual daily profit and losses from trading activities to estimated one-day value at risk. During 2002 and 2001, State Street did not experience any trading losses in excess of its end-of-day value at risk estimate.

Non-Trading Activities: Currency Risk

State Street had $15.2 billion of non-U.S. dollar-denominated non-trading assets as of December 31, 2002, which were funded by non-U.S. dollar-denominated deposits. State Street’s non-U.S. dollar-denominated non-trading assets included 53 currencies. Approximately 97% of these assets were in eight major currencies. Since non-trading assets are generally invested in the same currency in which the initial deposits are received, the risk associated with changes to currency exchange rates is minimal. To the extent that deposits are not reinvested in the same currency, the resulting net currency positions are managed as part of trading risk as discussed above.

In general, the maturities of these non-trading assets and liabilities are short term. To the extent duration mismatches exist, they are managed as part of State Street’s consolidated asset/liability management activities, and the related market risk is included in the following non-trading interest rate sensitivity disclosure.

Non-Trading Activities: Interest Rate Sensitivity

The objective of interest rate sensitivity management is to provide sustainable net interest revenue under various economic environments and to protect asset values from adverse effects of changes in interest rates. State Street manages the structure of interest-earning assets and interest-bearing liabilities by adjusting the mix, yields and maturity or repricing characteristics based on market conditions. Since interest-bearing sources of funds are predominantly short term, State Street maintains a generally short-term structure for its interest-earning assets, including money market assets, investments and loans. Interest rate swaps are used minimally as part of overall asset and liability management to augment State Street’s management of interest rate exposure. State Street uses three tools for measuring interest rate risk: simulation, duration and gap analysis.

Key assumptions in the simulation, duration and gap models include the timing of cash flows, maturity and repricing of financial instruments, changes in market conditions, capital planning, and deposit sensitivity. These assumptions are inherently uncertain and as a result, the models cannot precisely calculate net interest revenue or precisely predict the impact of changes in interest rates on net interest revenue and economic value. Actual results may differ from simulated results due to the timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors.

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Simulation models facilitate the evaluation of the potential range of net interest revenue under a “most likely” scenario, alternative interest rate scenarios and rate shock tests. Based upon results of the simulation model as of December 31, 2002, there would be a decrease in net interest revenue of $102 million over the following 12 months for an immediate 100-basis-point increase in all global interest rates. If interest rates immediately decreased by 100 basis points, the model shows an increase in net interest revenue of less than $72 million.

Duration measures the change in the economic value of assets and liabilities for given changes in interest rates. Based upon the results of the duration model as of December 31, 2002, there would be a decrease in the economic value of assets, net of liabilities, of $297 million, or .37% of assets, as a result of an immediate increase in all global interest rates of 100 basis points. In the event of an immediate decrease of 100 basis points to interest rates, the model shows an increase of $321 million, or .40% of assets, to the economic value of assets, net of liabilities.

The third measure of interest rate risk, gap analysis, is the difference in asset and liability repricing on a cumulative basis within a specified time period. As of year-end 2002, interest-bearing liabilities reprice faster than interest-earning assets over the next 12 months, as has been typical for State Street. If all other variables remained constant, in the short term, falling interest rates would lead to net interest revenue that is higher than it would otherwise have been. Rising rates would lead to lower net interest revenue. Other important determinants of net interest revenue are balance sheet size and mix, interest rate spreads, the slope of the yield curve, and rate levels.

Off-Balance Sheet Activities

Assets under custody and assets under management are held in a fiduciary or custodial capacity for State Street’s clients and are not recorded on the Corporation’s balance sheet in accordance with accounting principles generally accepted in the United States. Similarly, collateral funds resulting from State Street’s securities lending services are held by State Street as agent; therefore, under accounting principles generally accepted in the United States, these assets are not assets of the Corporation.

State Street sells and distributes securities for two types of variable interest entities (“VIEs”), formerly reported as special purpose entities, that are not included in the Consolidated Financial Statements of the Corporation.

One type, which State Street has administered since 1992, issues asset-backed commercial paper (“ABCP”) that is rated P-1 by Moody’s Investors Service and/or A-1 or better by Standard & Poor’s. State Street and unrelated dealers sell and distribute the commercial paper issued by the VIEs. The commercial paper represents debt issued by the VIEs. State Street holds no equity ownership interest in these VIEs, which are structured as bankruptcy-remote corporations. The assets of these VIEs include investment securities and purchased receivables that back the commercial paper. Such assets are transferred to the VIEs by unrelated third parties. State Street provides liquidity and credit enhancement facilities in the forms of liquidity asset purchase agreements, lines of credit, and standby letters of credit to the VIEs. At December 31, 2002, State Street’s commitments under liquidity asset purchase agreements and lines of credit to these VIEs were $10.0 billion, and standby letters of credit were $590 million, none of which were utilized. Amounts committed, but unused, under the liquidity asset purchase agreements, lines of credit, and standby letters of credit that State Street provides to these VIEs are included in the disclosures in Note 21 in the Notes to the Consolidated Financial Statements. Asset performance deterioration may cause the asset risk to shift from the ABCP investors to State Street as the liquidity provider for the asset as the VIE may need to repay maturing commercial paper by drawing the liquidity facilities. Fee revenue for administration, liquidity facilities and credit enhancements was $41 million in 2002. At December 31, 2002, these ABCP programs had total commercial paper outstanding of $10.3 billion in a combined U.S, European and Australian ABCP market estimated at $793 billion. See Note 1 in the Notes to the Consolidated Financial Statements for information on recent accounting pronouncements that could affect the off-balance sheet status of these VIE's.

42 | State Street Corporation

For a second type of VIE, structured as a qualified special purpose entity in accordance with accounting principles generally accepted in the United States, State Street distributes and sells equity interests in tax-exempt investment-grade assets that are primarily sold to mutual fund clients. For these VIEs, State Street transfers the assets from its investment portfolio at fair market value. Such transfers are treated as sales. The VIEs finance the acquisition of these assets from State Street by selling equity interests to third-party investors. State Street owns a minority residual interest in these VIEs of less than 3%, or $38 million. As of December 31, 2002, these trusts have a weighted average life of approximately 3.5 years. In a separate agreement, State Street provides liquidity asset purchase agreements to these entities. These liquidity asset purchase agreements obligate State Street to buy the equity interests in the underlying portfolio at par value, which approximates market value, in the event that the re-marketing agent is unable to place the equity interests of the VIE with investors. The liquidity asset purchase agreements are subject to early termination by State Street in the event of payment default, bankruptcy of issuer or credit enhancement provider, taxability, or downgrade of an asset below investment grade. Fee revenue for administrative services, liquidity asset purchase agreements and residual interest earnings totaled $42 million in 2002, before tax benefit. In connection with State Street’s balance sheet management activities, the Corporation incurred $42 million of interest expense on interest rate swap contracts designated as fair value hedges against the minority residual interest of the VIEs. As of December 31, 2002, these VIEs had total assets of $1.2 billion in a tax-exempt market estimated at $70 billion. State Street’s liquidity asset purchase agreements to these VIEs were $1.3 billion at December 31, 2002, none of which were utilized, and are included in the disclosures in Note 21 in the Notes to the Consolidated Financial Statements.

The risks associated with providing administration, liquidity, and/or credit enhancements to both types of VIEs are reviewed in State Street’s corporate risk management process in a manner that is consistent with applicable policies and guidelines. State Street believes that it has sufficient liquidity and has provided adequate operating and credit reserves to cover any risks associated with these activities.

New Accounting Developments

Information related to new accounting pronouncements appears in Note 1 in the Notes to the Consolidated Financial Statements.

Critical Accounting Estimates

Critical accounting estimates are those that require management to make assumptions that are difficult, subjective or complex about matters that are uncertain and may change in subsequent periods, resulting in changes to reported results.

State Street’s significant accounting policies are described in Note 1 in the Notes to the Consolidated Financial Statements. The majority of these accounting policies do not require management to make difficult, subjective or complex judgments or estimates or the variability of the estimates is not material. However, the following policies could be deemed critical. State Street’s management has discussed these critical accounting estimates with the Audit Committee of the Board of Directors.

Lease Financing

State Street has a leveraged lease financing portfolio, including lease-in-lease-out structures, consisting of U.S. and cross-border financings for transportation equipment, including trains, aircraft and ships. State Street has provided lease financing services since 1981, and at December 31, 2002, the portfolio aggregated $2.1 billion, and is reflected in Note 4 in the Notes to the Consolidated Financial Statements. This portfolio is recorded net of non-recourse debt, and revenue is recognized as interest revenue. Interest revenue from the lease portfolio was $104 million in 2002. Considering the long-term, cross-border nature of many of these leases and the number of assumptions, including residual values, cash flows and income tax regulations and rates, there is risk associated with this revenue should any of these assumptions change in future periods.

State Street Corporation | 43

Contingencies and Other Reserves

State Street has established reserves for risk of losses, including loan losses and tax contingencies. The allowance for loan losses represents State Street’s estimate of the probable losses that have occurred as of the date of the financial statements, as further described in Note 1 in the Notes to the Consolidated Financial Statements. In the normal course of business, State Street is subject to challenges from U.S. and non-U.S. tax authorities regarding the amount of taxes due. These challenges may result in adjustments of the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. Management believes State Street has appropriately accrued for tax exposures including lease-in-lease-out structures and real estate investment trust (REIT) dividends received deductions. If State Street prevails in a matter for which an accrual has been established or is required to pay an amount exceeding its reserves, the financial impact will be reflected in the period in which the matter is resolved.

In addition, State Street must manage and control certain inherent risks in the normal course of its business. These include counterparty risk, credit risk, fiduciary risk, operations and settlement risk, and market risk. See the Risk Management section of this Financial Review and Note 20 in the Notes to the Consolidated Financial Statements for additional information.

Revenue Recognition

Revenue from investment servicing, management, foreign exchange trading, brokerage and processing are recognized when earned based on contractual terms and are accrued based on estimates, or are recognized as transactions occur or services are provided. Revenue on interest-earning assets is recognized based on the effective yield of the financial instrument.

Revenue recognition for servicing and management fees involves the use of estimates and assumptions, including components that are calculated based on estimated asset valuations and transaction volumes. While these estimates and assumptions could be considered complex, State Street has long-standing controls and processes in place to ensure the accuracy of revenue accruals. Historically, revenue recognized using these processes has fairly matched revenue billed and collected. Furthermore, State Street’s fee revenue recognition is promptly validated by timely invoicing and cash collection from clients and counterparties. During 2002, State Street recognized servicing and management fee revenue totaling $2.2 billion. Of this amount, $402 million was in the billing and/or collection process at December 31, 2002.

Pension Accounting

State Street and certain of its subsidiaries participate in a non-contributory defined benefit plan. In addition to the primary plan, State Street has non-qualified supplemental plans that provide certain officers with defined pension benefits in excess of allowable qualified plan limits. Non-U.S. employees participate in local plans.

The reported liability associated with these plans is dependent on many factors such as the discount rate, expected return on plan assets and a series of actuarial assumptions. Management determines these estimates based upon currently available market and industry data, historical performance of the plan and its assets, and consultation with the Corporation’s actuaries. Management believes the estimates and assumptions used to determine the reported benefit obligation and pension expense are reasonable and are reflective of the terms of the plans in the current economic environment based upon information from the best available resources.

The projected benefit obligation for the primary and non-U.S. defined benefit plans was $487 million, and the plan assets were $379 million as of December 31, 2002. Pension expense in future years is affected by the variance of the assumed rate of return from the actual return on plan assets. This variance is amortized over future years. A 1% change in the actual return on plan assets or the discount rate would affect State Street's earnings by less than $.01 per share.

For more information on the Corporation’s plans, see Note 16 in the Notes to the Consolidated Financial Statements.

44 | State Street Corporation

Letter to Our Stockholders

The year 2002 was an unusually challenging time for investors — with difficult conditions in nearly every investment category around the world. Global political tensions weakened economies and financial markets, and a regular stream of news about corporate governance scandals seriously undermined investor confidence. Equity values, as measured by the S&P 500, fell to their lowest level in at least five years. Cross-border investing slowed down significantly, despite a brief pick-up in the second quarter. And interest rates were significantly lower than in the previous year.

2002 Financial Results

Against these strong headwinds, I’m happy to say that State Street was able to achieve positive financial results — exceeding our primary goal of sustainable real growth in earnings per share.

Operating earnings per share, driven by new business from existing and new clients, increased 6% in 2002. And we were successful in managing our operating costs, decreasing expenses by 1%.

We continue to differentiate ourselves by stating a goal for revenue growth. Our goal is to achieve 12.5% real compound annual growth from 2000 through 2010, although 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 2002, due to slower revenue growth, we delivered operating ROE of 17.1%.

Cash dividends declared in 2002 increased 19% from 2001.

2002 Business Highlights

State Street’s strong financial results for the year are the outcome of two achievements: we increased our revenue by winning new business — with especially strong growth outside the United States — and we continued to keep tight control of our expenses.

On the expense side, we were aggressive in eliminating spending for things that didn’t add enough value to our business proposition. We took a strategic approach to leveraging efficiencies in corporate purchasing and our day-to-day operations. We reduced staff in administrative and professional services areas. Overall, we reduced expenses 1% from 2001, after adjusting for goodwill.

In addition to keeping our focus with regard to profitability — while providing consistently excellent service to our clients — we took a number of steps aimed at positioning State Street for future growth.

The most noteworthy of these steps was our decision to purchase most of Deutsche Bank AG’s global securities services business. This business, which will be substantially integrated by 2004, brings enormous benefits to State Street. It cements our standing as the global leader in investment servicing — positioning us at the center of Europe’s high-growth investment services market and giving us new clients, employees and offices in the Asia-Pacific region. It brings us expanded Depotbank capabilities in Europe and the WM Company’s performance measurement tools. And — not inconsequentially in this environment — it provides us with substantial economies of scale and scope.

Although our agreement with Deutsche Bank was the biggest news event for us in 2002, it was only one of many investments we made in State Street’s future. Another important investment was the acquisition of International Fund Services (IFS), a leading global provider of services for alternative investment portfolios such as hedge funds. This acquisition broadened State Street’s capabilities in serving the expanding requirements of sophisticated global investors.

We also began to develop services specifically geared to the needs of asset managers who serve private clients and managed accounts. These investment management firms are operating in a highly competitive marketplace — and therefore are looking for ways to differentiate themselves with new products and services. By outsourcing

State Street Corporation | 45

administrative functions to State Street, these asset managers are freed up to focus on their core competencies, confident that the services State Street provides to them will be both innovative and reliable.

Our ongoing process of fine-tuning our focus also involves making selective changes to our business mix. We completed the sale of our corporate trust business in 2002.

Outlook for 2003

I think it’s safe to predict that 2003 will be another tough year for our clients and for State Street. We are well positioned not only to weather this current storm but also to emerge from it even stronger. That’s because we have built our business around the idea of “focus”. We focus on serving the needs of a single group of clients: sophisticated global investors. Within this market segment, we focus on ensuring that we’re the best provider and that we’re flexible enough to take maximum advantage of developments that present our clients — and State Street — with opportunities for growth.

One long-term trend that continues to offer enormous potential for us is a mounting sense of urgency about retirement security, driven by increasing life expectancy in most parts of the world. As governments and employers develop new ways to help workers invest for their retirements, they are creating new, large pools of assets that must be managed and serviced. State Street is a world leader in managing and servicing retirement funds.

We are also in an excellent position to benefit from changing patterns in the way people save and invest. In this difficult environment, investors have become more risk averse — a trend that plays to the strengths of our investment management arm, State Street Global Advisors. We offer a broad range of risk-controlled investment management options, including enhanced indexing, which offers higher returns than passive investment schemes with only slightly more risk.

A third trend that benefits State Street is convergence in the financial services industry. The large, global companies that are emerging from mergers and acquisitions are looking for a trusted partner who can offer what they need, in any part of the world. Their needs coincide perfectly with our strengths: our rich experience in developing and implementing comprehensive solutions for our clients across the globe . . . and our ability, using technology, to provide services that are truly scalable.

I believe that we will continue to win a disproportionate share of new business in 2003 — primarily because we’re very clear about our corporate purpose: to make our clients successful. If our clients succeed, we will succeed too. Nothing is more important to us than continuing to earn the trust of our clients each and every day.

Strategic Priorities

Our attention is firmly fixed on a goal we established a long time ago: sustainable growth. “Sustainability” is a key idea here — and, for a company that is more than 210 years old, it has real meaning. We understand that true success comes not from a single stroke of brilliance but from the accumulated results of many sound, strategic decisions that are executed extremely well by talented professionals. Within this philosophical framework, we have five strategic priorities.

One of these priorities is to continue to provide our clients with the best investment solutions, and the best service, it is possible to give. We’re limited in this endeavor only by the current boundaries of technology — and we’re extending those limits every day.

A second priority is to continue to grow as a global company. The acquisition of Deutsche Bank’s global securities services business dramatically expands our global presence. But this acquisition only accelerates growth that has been under way for more than a decade. Global growth opportunities for us include the development of new products, as well as physical expansion into new countries and markets. In the United Kingdom and Europe, we will focus on continuing to broaden the range of integrated solutions we offer our clients. In Asia, we will

46 | State Street Corporation

continue to specialize in serving the needs of governments and government agencies — something State Street does better than anyone else.

A third priority is to continue to improve our profit margins — an especially important objective in this challenging environment. We’re concentrating on both sides of the equation: increasing our revenue and controlling our expenses. Our growing client base gives us advantages in this area, both in terms of opportunities to sell more services and in opportunities to leverage economies of scale.

A fourth priority is to foster continued innovation in serving the emerging needs of global investors by adapting traditional business models to changing conditions. While a great deal of our growth will continue to come from providing technology, transaction and information services for large investors, we see a new source of growth in providing a broader suite of services to the front office. We plan to launch new equity execution capabilities early in 2003. We will also continue to expand our investment management product line to include new strategies in the quantitative active category.

A final priority is to offer our employees ample opportunities for personal and professional growth. As our employees learn new skills, gain new experiences and perspectives and become more satisfied in their work, they’ll be motivated to achieve great things for State Street — which, in turn, will create even better opportunities for them. This virtuous cycle has always been part of the State Street culture, and we have proven time and again that it works.

Executing on our strategic priorities will be a complex and challenging task. To maintain and deepen our leadership position, we must be successful in both finding the best opportunities to grow and in continuously shifting our resources to align them with these opportunities. We are more confident than ever that our core strategy — focusing on being the partner sophisticated global investors trust most to help them succeed — is a sound approach to long-term growth.

I want to thank my State Street colleagues around the world for your hard work and outstanding results in 2002. I also want to thank our stockholders for your continued support.

	Sincerely,

	/s/ David A. Spina

	David A. Spina Chairman and Chief Executive Officer

State Street Corporation | 47

Continuing to Grow

In a challenging market environment, what is State Street’s strategy for continued growth?

We have a very clear strategy for achieving long-term growth. It’s built around the concept of focus. We’re focused exclusively on sophisticated global investors. We believe this client segment offers superior opportunities for growth. It’s also one we are uniquely equipped to serve. We’re focused on providing everything sophisticated global investors need to invest successfully. Our aim is to offer integrated solutions that cover the entire investment cycle, from research and analytics to multi-asset class trade execution to fund accounting and administration. Our development efforts target products that offer our clients the strongest growth potential in today’s market environment. We’re also focused on strengthening our presence in high-growth geographic regions, such as Europe.

Why focus exclusively on servicing sophisticated global investors?

This client segment is extraordinarily attractive in terms of its size and rapid growth. Sophisticated global investors have a broad array of complex and specialized servicing requirements. Our clients’ needs include investment servicing, such as custody, fund accounting, transfer agency services and settlement … investment management strategies and advisory services, including portfolio construction, research, and analytics … and a range of trading services, from multi-asset class trade execution to securities lending. A key differentiator for us is our ability to integrate or customize solutions to fit each client’s specific requirements.

An important source of growth for State Street is an increasing preference on the part of sophisticated global investors to outsource their servicing requirements to an outside expert, rather than trying to handle it themselves. Global capital markets are becoming more complex with changes in investment regulations, advances in technology, and the development of global standards. This transition is creating a shift away from relatively fragmented local and regional financial markets toward a more consolidated, globally integrated market. The servicing implications of this change are tremendous. Never have sophisticated investors had more of a need for a trusted partner with global capabilities.

From State Street’s perspective, how is the financial services marketplace changing?

We see three broad trends that will have a significant effect on our business. The first is a growing sense of urgency about retirement security. Longer life expectancies and the aging of the post-World War II generation will put tremendous pressure on retirement systems worldwide. Many developed nations are considering tax-advantaged ways to strengthen their existing pension systems and encourage retirement savings. These reforms will create growing pools of assets that need to be managed and serviced.

The second trend involves changes in savings and investment preferences. The prolonged decline in equity markets has forced investment managers to look at new ways to increase their revenues while controlling risk. This trend has resulted in many product innovations — including exchange traded funds and wrap accounts — that respond to investors’ increased sensitivity to costs. Demand has also increased for risk-controlled strategies, including enhanced indexing, and non-traditional investments such as hedge funds. Our expertise in risk-controlled strategies and servicing for alternative investment products offers us an outstanding opportunity to support our clients as they expand their offerings in these areas.

The third trend is convergence in financial services. In recent years, many companies have merged with or acquired other companies whose skills and reach complement their own. These consolidations usually result in investment servicing operations in multiple countries, creating a level of complexity that is very difficult to administer. Many choose to outsource all or part of their servicing to a trusted provider like State Street. Our full range of integrated solutions and our extensive global experience give us an advantage in competing for their business.

48 | State Street Corporation

Where are the best opportunities for State Street’s future growth?

We grow our business in two ways: by winning new clients and by selling more services to our existing clients. In 2002, we won a great deal of new business, including relationships with Nuveen Investments, a U.S.-based asset manager, and UNICO Asset Management SA, a Luxembourg-based asset management company. We expect this momentum with regard to new business to continue. However, we believe enriching our relationships with existing clients by expanding the range of products and services we offer them is an even greater opportunity. Even when the market declines, we can grow by constantly innovating — looking for new ways to bring our clients the products and services they need.

Several areas hold particular promise. Trading services, particularly equity execution, offer strong growth potential. State Street’s position as the leader in global investor servicing gives us unparalleled scale and volume, as well as rich resources in research and analytics. We deliver a full range of pre-trade services, as well as multi-asset class trade executions and post-trade functions. These services can be integrated for our clients on our state-of-the-art trading platform, Global Link. Our capabilities allow us to assist global asset managers in all phases of the investment decision-making process.

Forming strategic outsourcing partnerships with asset managers is another area that continues to offer opportunities for growth. We have the depth and breadth to provide asset managers with virtually any service they need. And we can customize our offerings to focus on servicing a single area in-depth … a bundled series of functions … or the whole gamut of services that are necessary to run the investment operations side of our clients’ business. Our wide-reaching experience means we can run operations functions more efficiently and, most often, more cost-effectively than the asset managers could themselves.

In 2002, J. & W. Seligman & Co., a New-York-based investment manager, selected us as their outsourcing operations partner. We had formerly provided Seligman with fund accounting, fund administration, and custody services. Now we also handle trade support and settlement, portfolio record keeping, custodian communications for settlements, and systems network and applications support. Through this type of arrangement, partners like Seligman gain access to State Street’s enterprise technologies, fully integrated solutions, and servicing efficiencies. In addition, they benefit from greater cost control and the ability to focus on their core competency of money management.

We are also strategically expanding the scope of our integrated suite of services by focusing on growing markets. In 2002, we expanded our range of services for investment managers who serve the high-net-worth market. This market totals about $26 billion in assets, with strong growth projected for the coming years. State Street’s full range of services, from managed account servicing to account aggregation, allows wealth managers to expand their service offerings to high-net-worth clients, while also freeing them to focus on relationship development and money management. With our recent acquisition of International Fund Services, we also introduced a full line of services for alternative investments such as hedge funds. Hedge funds currently have about $600 billion in assets under management with double-digit growth projected for the coming years. In these challenging times, we believe our risk-controlled investment strategies, particularly enhanced indexing, also offer outstanding opportunities for growth.

How will the acquisition of Deutsche bank’s global securities services fit in with State Street’s strategy?

The acquisition of a substantial part of Deutche Bank’s Global Securities Services business supports our strategy to expand State Street’s scope and scale as the premier partner serving the needs of sophisticated global investors, particularly in the growing European market. No other company will be able to match the range and quality of services we can offer globally. In Europe, where collective investments and pensions are growing at faster rates than in the United States, State Street is now a big, local player, with more than double the amount of assets we service. We believe the acquisition also offers a unique opportunity to generate long-term value for our clients, stockholders, and employees.

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State Street has acquired most of Deutsche Bank’s global securities services business, including the bank’s global custody, fund administration services, Depotbank services, securities lending, performance measurement and benefit payment businesses worldwide, as well as domestic custody and securities clearing in the United States and the United Kingdom. Our ten-year contract to provide additional services to Deutsche Asset Management, the largest asset manager in continental Europe, also provides a significant revenue stream for State Street. These are all businesses we know well, which gives us confidence that the integration will proceed smoothly, yielding potentially significant benefits in terms of cost savings, economies of scale, expanded product capabilities, and cross selling opportunities.

What differentiates State Street from its competitors?

State Street has a competitive advantage in servicing the specialized needs of large, sophisticated global investors. None of our competitors has the ability to integrate products and services the way we do or the experience in doing it globally. No one else can match our scope and scale. Our size and industry commitment mean we can maintain the necessary investment in people, technology, and operations to grow and compete.

Our goal, however, is not to be the biggest financial services provider, but the best. We believe our success depends largely on our deep commitment and long-standing relationships with our clients. Our client focus helps us operate as a trusted partner, seamlessly integrating people and systems while also developing new products and strategies to help our clients build their businesses. Our modular offerings allow us to tailor outsourcing solutions to each client’s unique requirements. Our clients tell us that because we focus exclusively on serving their specialized needs we understand their business requirements and challenges better than any of our competitors. We believe State Street is uniquely positioned with the breadth of services, global experience, technology, and vision to help our clients succeed in all market conditions.

General Electric

In 1988, GE began to manage money for other companies, in addition to managing the assets of its own pension plan. GE wanted assistance with its back-office investment management operations. State Street responded with a technology integration plan and a complete analysis of GE’s investment support operation. Today, State Street values over 400 portfolios for GE each day, provides daily performance measurement and analysis, reconciles with more than 20 custodians and provides GE with a single master book of records.

AP2 — Sweden’s Second National Pension Fund

The Second Swedish National Pension Fund (AP2) is one of four buffer funds created as part of the May 2000 reorganization of Sweden’s national pension system.

Its aim is to ensure that pension assets are invested to generate a maximum long-term return at a minimum risk.

In June of 2002 — building on its existing relationship with State Street Global Advisors — AP2 appointed State Street to provide custody and fund accounting, in addition to investment management services.

State Street was chosen because of our global scale and expertise, and our ability to provide AP2 with a bundled suite of customized investment services. Because State Street is the world’s leading provider of fund accounting services, we have the experience and technology to service the sophisticated needs of multi-national pension funds.

50 | State Street Corporation

I T E M 7 A . Quantitative and Qualitative Disclosures About Market Risk

Information concerning quantitative and qualitative disclosures about market risk appears in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Risk Management.”

I T E M 8 . Financial Statements and Supplementary Data

Further discussion of restrictions on transfer of funds from State Street Bank to the Registrant is included in Part I, Item 1, “Business” under the caption “Dividends,” and the Distribution of Average Assets, Liabilities, Stockholders’ Equity; Interest Rates and Interest Differential is included in Part I, Item 1, “Business” under the caption “Selected Statistical Information.”

Report of Independent Auditors

The Stockholders and Board of Directors

State Street Corporation

We have audited the accompanying consolidated statement of condition of State Street Corporation as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of State Street Corporation at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the financial statements, in 2002 State Street Corporation changed its method of accounting for goodwill and other intangibles.

/s/ Ernst & Young LLP

Boston, Massachusetts

January 10, 2003,
except for Note 25, as to which the date is
January 31, 2003

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Consolidated Financial Statements

Consolidated Statement of Income

(Dollars in millions, except per share data)
Years ended December 31,	2002		2001		2000
F e e R e v e n u e :
Servicing fees	$	1,716	$	1,648	$	1,447
Management fees		526		516		584
Foreign exchange trading		300	&