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, 2005

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

For the transition period from __ to __
Commission File No. 0-5108

STATE STREET CORPORATION

(Exact name of registrant as specified in its charter)



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

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

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

(Title of Each Class)				(Name of each exchange on which registered)
Common Stock, $1 par value Preferred share purchase rights				Boston Stock Exchange New York Stock Exchange Archipelago Stock Exchange

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

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

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

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer \|X\|		Accelerated Filer \|_\|		Non- Accelerated filer \|_\|

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

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 30, 2005) was $16,042,859,866.

The number of shares of the registrant’s Common Stock outstanding as of January 31, 2006 was 335,192,584.

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 2006 Annual Meeting to be filed pursuant to Regulation 14A on or before April 30, 2006 (Part III).

STATE STREET CORPORATION
Table of Contents

	Description
PART I
Item 1	Business	1
Item 1A	Risk Factors	5
Item 1B	Unresolved Staff Comments	10
Item 2	Properties	10
Item 3	Legal Proceedings	10
Item 4	Submission of Matters to a Vote of Security Holders	10
Item 4A	Executive Officers of the Registrant	11

PART II
Item 5	Market for Registrant’s Common Equity and Related Stockholder Matters	12
Item 6	Selected Financial Data	14
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	58
Item 8	Financial Statements and Supplementary Data	59
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	107
Item 9A	Controls and Procedures	107
Item 9B	Other Information	110

PART III
Item 10	Directors and Executive Officers of the Registrant	110
Item 11	Executive Compensation	110
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	110
Item 13	Certain Relationships and Related Transactions	111
Item 14	Principal Accountant Fees and Services	111

PART IV
Item 15	Exhibits and Financial Statement Schedules	112
	Signatures	118
	Exhibits

PART I

ITEM 1. BUSINESS

State Street Corporation is a financial holding company organized under the laws of the Commonwealth of Massachusetts, and through its subsidiaries, provides a full range of products and services for institutional investors worldwide. Unless otherwise indicated or unless the context requires otherwise, all references in this Form 10-K to “State Street,” “we,” “us,” “our” or similar terms mean State Street Corporation and its subsidiaries on a consolidated basis. The parent company is a legal entity separate and distinct from its subsidiaries, assisting those subsidiaries by providing financial resources and management. At December 31, 2005, we had total assets of $97.97 billion, total deposits of $59.65 billion, total shareholders’ equity of $6.37 billion and 20,965 employees. Our executive offices are located at One Lincoln Street, Boston, Massachusetts 02111 (telephone (617) 786-3000).

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

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

GENERAL DEVELOPMENT OF BUSINESS

We were organized in 1970 and we conduct our business primarily through our principal banking subsidiary, State Street Bank and Trust Company, which we refer to in this Form 10-K as “State Street Bank” or “the Bank.” State Street Bank 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 $10.12 trillion of assets under custody and $1.44 trillion of assets under management at year-end 2005, we are a leading specialist in meeting the needs of institutional investors worldwide. Our customers include mutual funds and other collective investment funds, corporate and public pension funds, investment managers, and others. In addition to the United States, or “U.S.,” we operate in Australia, Austria, Belgium, Canada, Cayman Islands, Chile, France, Germany, India, Ireland, Italy, Japan, Luxembourg, Mauritius, Netherlands, New Zealand, People’s Republic of China, Singapore, South Africa, South Korea, Switzerland, Taiwan, Thailand, United Arab Emirates and the United Kingdom.

For discussions of our business activities, as well as our management of capital, liquidity, market risk, including interest-rate risk, and other risks inherent in our businesses, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included under Item 7 of this Form 10-K. Financial information with respect to our non-U.S. activities is included in Note 24 of the “Notes to Consolidated Financial Statements” included under Item 8 of this Form 10-K.

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LINES OF BUSINESS

We report two lines of business: Investment Servicing and Investment Management. For additional information about our lines of business, see the “Line of Business Information” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included under Item 7, and Note 23 of the “Notes to Consolidated Financial Statements” included under Item 8, of this Form 10-K.

COMPETITION

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

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

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

SUPERVISION AND REGULATION

We are registered with the Board of Governors of the Federal Reserve System, or “Federal Reserve Board,” as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended, or “the Act.” The Act, with certain exceptions, limits the activities in which we and our non-bank subsidiaries may engage, including non-bank companies for which we own or control 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, ownership or control constitutes a serious risk to the financial safety, soundness or stability of a subsidiary bank or is inconsistent with sound banking principles or statutory purposes. In the opinion of management, all of our present subsidiaries operate within the statutory standard or are otherwise permissible. The 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.

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

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

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Capital Adequacy

Like other bank holding companies, we are subject to Federal Reserve Board minimum risk-based capital and leverage ratio guidelines. State Street Bank is subject to similar risk-based capital and leverage ratio guidelines. As of December 31, 2005, our capital levels on a consolidated basis, and the capital levels of the Bank, exceeded the applicable minimum capital requirements. Failure to meet capital requirements could subject us to a variety of enforcement actions, including the termination of deposit insurance of the Bank by the Federal Deposit Insurance Corporation, or “FDIC,” and to certain restrictions on our business that are described further in this “Supervision and Regulation” section.

For additional information about our capital position and capital adequacy, refer to the “Capital” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7, and Note 13 of the “Notes to Consolidated Financial Statements” included under Item 8, of this Form 10-K.

Subsidiaries

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

Our 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 the Bank is located. Other subsidiary trust companies are subject to supervision and examination by the Office of the Comptroller of the Currency, other offices of the Federal Reserve System or by the appropriate state banking regulatory authorities of the states in which they are located. Our non-U.S. banking subsidiaries are subject to regulation by the regulatory authorities of the countries in which they are located. The capital of each of these banking subsidiaries is in excess of the minimum legal capital requirements as set by those authorities.

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

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

Our investment management subsidiary is registered as an investment adviser with the SEC. Our U.S. broker-dealer subsidiary is registered as a broker-dealer with the SEC, is subject to regulation by the SEC (including the SEC’s net capital rule) and is a member of the National Association of Securities Dealers, a self-regulatory organization. Many aspects of our investment management activities are subject to federal and state laws and regulations primarily intended to benefit the investment product holder. These laws and regulations generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict us from carrying on our investment management activities in the event that we fail to comply with such laws and regulations, and examination authority. Our business relating to investment management

State Street Corporation 3

and trusteeship of collective trust funds and separate accounts offered to employee benefit plans subject to ERISA is subject to regulation by the U.S. Department of Labor.

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

Most of our non-U.S. operations are conducted pursuant to Federal Reserve Board Regulation K through State Street Bank’s Edge Act corporation subsidiary or through international branches of the Bank. An Edge Act corporation is a corporation organized under federal law that, in general, conducts foreign business activities. With prior approval of the Federal Reserve Board, State Street Bank may invest up to 20% of its capital and surplus in Edge Act and Agreement corporation subsidiaries. In 2005, the Bank received approval to invest 18% of its capital and surplus, which is less than the maximum 20% permitted by law.

Historically, we generally have invested abroad through our Edge Act corporation subsidiaries. However, under Federal Reserve Board Regulation Y, we 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 without being subject to the 20% investment limitation for Edge Act corporation subsidiaries. We cannot predict with certainty the impact of the Edge Act corporation subsidiary investment limitation on the pace of our future international expansion. Nonetheless, in light of available alternatives, we do not believe that the Edge Act corporation subsidiary investment limitation will materially limit our ability to expand internationally.

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

Support of Subsidiary Banks

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

ECONOMIC CONDITIONS AND GOVERNMENT POLICIES

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

STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES

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

4 State Street Corporation

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

“Distribution of Average Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential” tables (Item 8) — presents average balance sheet amounts, related taxable-equivalent interest earned or paid, related average yields and rates paid and changes in taxable-equivalent interest income and expense for each major category of interest earning assets and interest bearing liabilities.

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

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

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

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

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

“Distribution of Average Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential” tables (Item 8) — discloses deposit information.

Note 7, “Short-Term Borrowings,” of the “Notes to Consolidated Financial Statements” (Item 8) — discloses information regarding short-term borrowings of State Street.

ITEM 1A. RISK FACTORS

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

In addition to factors mentioned elsewhere in this Form 10-K or previously disclosed in our SEC filings, including our reports on Form 10-Q and Form 8-K (accessible on the SEC’s website at www.sec.gov or on our website at www.statestreet.com), the factors discussed below, among others, could cause actual results to differ materially from those contemplated by the forward-looking statements, and future results could differ materially from historical performance. State Street undertakes no obligation to revise the forward-looking statements contained in this Form 10-K to reflect events after the date of this Form 10-K.

State Street Corporation 5

If market interest rates rise, our securities finance and net interest revenues can be negatively affected in the short term.

The levels of global market interest rates, the shape of the yield curve, the direction and speed of interest-rate changes, and the asset and liability spreads relative to the currency and geographic mix of our interest-bearing assets and interest-bearing liabilities affect our securities finance and net interest revenue. In the short term, our net interest revenue and securities finance revenue benefit from falling interest rates and are negatively affected by rising interest rates because our interest-bearing liabilities generally reprice sooner than our interest-earning assets. The rate of adjustment to higher or lower rates will depend on the relative duration of assets and liabilities. In general, sustained lower interest rates, a flat yield curve and narrow interest-rate spreads have a constraining effect on net interest revenue and securities finance revenue growth. Market interest rates, which affect the economic value of our demand deposits, also impact the value of certain derivative financial instruments whose changes in value are reflected in trading services and processing fees and other revenue in our consolidated statement of income.

If values in worldwide securities markets decline, our revenue and earnings can be adversely affected.

As asset values in worldwide financial markets increase or decrease, our opportunities to invest and service financial assets change. Because a portion of our fees is based on the value of assets under custody and management, fluctuations in the valuation of worldwide securities markets will affect revenue. We estimate that a 10% increase or decrease in worldwide equity values would result in a corresponding change in our total revenue of approximately 2%. If fixed income security values worldwide were to increase or decrease by 10%, we would anticipate a corresponding change of approximately 1% in our total revenue. Because many of the costs of providing our services are relatively fixed, a decline in revenue could have a disproportionate effect on our earnings.

If foreign exchange rate volatility decreases, our revenue can be adversely affected.

The degree of volatility in foreign exchange rates can affect our foreign exchange trading revenue. In general, we benefit from currency volatility, and foreign exchange revenue is likely to decrease during times of decreased currency volatility. In addition, as our business grows globally, our exposure to changes in foreign currency exchange rates could impact our level of revenue, expense and net income and the value of our investments in our non-U.S. operations.

If we do not maintain our capital requirements and our status as a “well-capitalized” financial holding company, there could be an adverse effect on the manner in which we do business and on the confidence of our customers in us.

Under regulatory capital adequacy guidelines, we and our principal banking subsidiary, State Street Bank, must meet guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items. Failure to meet minimum capital requirements could have a material effect on our financial condition and could subject us to a variety of enforcement actions, as well as certain restrictions on our business. Failure to maintain the status of “well capitalized” under the regulatory framework could affect our status as a financial holding company and eligibility for a streamlined review process for acquisition proposals, and deterioration in the confidence that our customers have in us, which can lead to a decline in the demand for our products and affect the prices that we are able to charge for our services. In addition to being well-capitalized, State Street and State Street Bank are subject to guidelines that involve qualitative judgments by regulators about the entities’ status as well-managed and the entities’ compliance with Community Reinvestment Act obligations.

If there is a decline in individual savings rates, our business can be adversely affected.

We generally benefit when individuals invest their savings in mutual funds, other collective funds and 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

6 State Street Corporation

investments in mutual funds, other collective investment funds, and defined contribution plans, our revenue may be adversely affected.

While increased cross-border investing by our customers worldwide benefits our revenue, increased worldwide economic and political instability can adversely affect our business.

Our revenue may increase or decrease depending upon the extent of increases or decreases in cross-border investments made by our customers. The terrorist attacks that took place in the United States on September 11, 2001, and subsequent military action and terrorist activities, have caused economic and political uncertainties. These activities and the national and global efforts to combat terrorism, and other military activities and outbreaks of hostilities have affected and may further adversely affect economic growth. Such events could result in decreased cross-border investment activities and may have other adverse effects on many companies, including ours, in ways that are not predictable.

If there is a decline in the pace at which customers outsource their middle office or investment management operations, our business can be adversely affected.

In recent years, investment manager and hedge fund manager operations outsourcing have been areas of rapid growth in our business. If the demand for these types of services declines, we could see a slowing in the growth rate of our revenue.

If we do not perform effectively under our outsourcing contracts, we may not generate the operating margins that we expect, or we may lose customers before we earn back our investment in the contracts.

We enter into long-term contracts to provide middle office or investment manager and hedge fund manager operations outsourcing services to customers. Services that we provide include trade order management, trade support and fail management, reconciliations, cash reporting and management, custodian communications for settlements, accounting systems, collateral management and information technology development. These contracts often extend eight to ten years and require considerable up-front investments by us, including technology and conversion costs. Performance risk exists in each contract, since these contracts are dependent upon the successful conversion and implementation of the activities onto our own operating platforms. Our operating margins, and as a result our profitability, are largely a function of our ability to accurately calculate pricing for our services, our ability to control our costs and our ability to maintain the relationship with the customer for an adequate period of time to recover the up-front investment. The long-term nature of these contracts creates a risk that our pricing for the products and services we provide might not be adequate to generate expected operating margins.

If we do not successfully integrate businesses that we acquire, or successfully complete divestitures, we may not realize the expected benefits of the transaction.

Acquisitions of complementary businesses and technologies, development of strategic alliances and divestitures of portions of our business are an active part of our overall business strategy. We have 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 our business or service offerings, that alliances will be successful, or that related expectations concerning future revenue growth or cost savings will be achieved. In addition, we may not be able to successfully manage the conversion of divested businesses to the buyer on satisfactory terms, if at all, and divestitures may result in a reduction of total revenue and net income.

If we are subject to changes in tax legislation, the interpretation of existing tax laws worldwide or changes in accounting principles, we may be required to report a material charge to our results of operations.

In the normal course of business, we are subject to challenges from U.S. and non-U.S. tax authorities regarding the amount of taxes due. These challenges may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. In recent years, the U.S. Internal Revenue Service, or “IRS,” has proposed to disallow tax deductions related to cross-border leasing

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transactions, which could have an adverse impact on our results of operations. Additionally, the Financial Accounting Standards Board has been considering making changes to the accounting guidance related to uncertain tax positions and leveraged leases. While such changes may not have an economic impact on our business, these changes could affect the attainment of our current financial goals.

If the pace of pension reform slows, or if pension reform does not occur, our revenue and earnings can be adversely affected.

We expect our 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 our revenue growth.

If we do not maintain compliance with governmental regulation, we can be subject to fines, penalties or restrictions of business in the jurisdiction where the violation occurred, which can adversely impact our business.

Our businesses are subject to stringent regulation and examination by U.S. federal and state governmental and regulatory agencies and self-regulatory organizations (including securities exchanges), and by non-U.S. governmental and regulatory agencies and self-regulatory organizations. In addition, our customers have a broad array of complex and specialized servicing, confidentiality and fiduciary requirements. We have established policies, procedures and systems designed to comply with these regulatory and operational risk requirements. However, as a global financial services institution, we face complexity and costs in our worldwide compliance efforts. We also face the potential for loss resulting from inadequate or failed internal processes, employee supervisory or monitoring mechanisms, or other systems or controls, and from external events, which could have a material impact on our future results of operations. Also, adverse publicity and damage to our reputation arising from the failure or perceived failure to comply with legal, regulatory or contractual requirements could affect our ability to attract and retain customers or maintain access to capital markets, or could result in enforcement actions, fines, penalties and lawsuits.

If, for regulatory reasons, we are limited in our ability to invest additional capital in subsidiaries outside the United States, we may not be able to stay competitive in those markets, and our business could suffer.

Federal laws and related regulations limit the amount that banks, including State Street Bank, may invest in non-U.S. subsidiaries. This limitation could affect the pace of future international expansion by State Street Bank through this type of subsidiary.

Investigations into the financial services industry can adversely affect our business.

We are broadly involved with the global securities industry including, in particular, the mutual fund industry. Financial reporting irregularities involving large and well-known companies, and governmental and regulatory investigations of securities and mutual fund industry practices and behavior, may have adverse effects on us in ways that are not predictable. Governmental and regulatory agencies have sought information from us in connection with investigations relating to that industry that has resulted in additional expenses and staffing resources in providing responses.

If the business continuity and disaster recovery plans that we have in place are not adequate to continue our operations in the event of a disaster, the business disruption can adversely impact our operations.

External events, including terrorist or military actions, or an outbreak of disease, such as Asian Influenza, or “bird flu,” and resulting political and social turmoil could cause unforeseen damage to our physical facilities, or could cause delays or disruptions to operational functions, including information processing and financial market settlement functions. Additionally, our customers, vendors and counterparties could suffer from such events. Should these events affect us, or the customers, vendors or counterparties with which we conduct business, our results of operations could be adversely affected.

8 State Street Corporation

If we are not able to anticipate and keep pace with rapid changes in technology, or do not respond to rapid technological changes in our industry, or if growth in the use of technology in business is not as rapid as in the past, our business can be adversely affected.

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. Our financial performance depends, in part, on our ability to develop and market new and innovative services, and to adopt or develop new technologies that differentiate our products or provide cost efficiencies. The risks inherent in this process include rapid technological change in the industry, our ability to access technical and other information from customers, 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 our services.

If we are unsuccessful in protecting our proprietary rights, or if we are found to have violated the proprietary rights of others, we can experience a decline in revenue or an increase in expenses.

We use trademark, trade secret, copyright, patent and other proprietary rights procedures to protect our technology. Despite these efforts, we cannot be certain that the steps taken by us 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 U.S. In addition, no assurance can be given that the courts will adequately enforce contractual agreements that we have entered into to protect our proprietary technology. If any of our proprietary information were misappropriated by, or otherwise disclosed to, our competitors, our 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 us, we 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.

If our access to the capital markets is limited, our capital resources and liquidity could be adversely affected.

We depend on access to global capital markets to provide us with sufficient capital resources and liquidity to meet our commitments and business needs and accommodate the transaction and cash management needs of our customers. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of debt purchasers, depositors or counterparties participating in the capital markets in general or with us in particular, or a downgrade of our debt rating, may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity.

If there is a significant economic downturn in either a country or a region, or the failure of a significant individual counterparty, our credit and counterparty risk profile could be adversely affected and result in loss.

Our focus on large institutional investors and their businesses requires that we assume credit and counterparty risk, both on- and off-balance sheet, in a variety of forms. We provide, on a limited basis, traditional loan products to customers, based upon credit quality and other factors. We also provide customers with off-balance sheet liquidity and credit enhancement facilities in the form of letters of credit, lines of credit and liquidity asset purchase agreements, subject to credit analysis and an approval and review process. We invest in financial instruments, including investment securities and derivative instruments, which are also subject to risk management processes.

The credit quality of our on- and off-balance sheet exposures may be affected by many factors, such as economic and business conditions or deterioration in the financial condition of an individual counterparty or group of counterparties. In the event of poor economic conditions in a particular country or region, or the failure of a significant counterparty or group of counterparties, there is a greater likelihood that more of our customers or counterparties could become delinquent on their loans or other obligations to us, or that the

State Street Corporation 9

special purpose entities we administer could experience deterioration in asset performance. This could result in higher levels of credit-related losses, which could adversely affect our earnings.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our headquarters are located at State Street Financial Center, One Lincoln Street, Boston, Massachusetts, a 36-story office building. We have leased the entire 1,025,000 square feet of this building, as well as the entire 366,000-square-foot parking garage at One Lincoln Street, under 20-year non-cancelable capital leases. A portion of the lease payments is offset by a sublease for 160,000 square feet of the building.

We own two buildings located in Quincy, Massachusetts. The buildings, containing a total of approximately 822,000 square feet, function as State Street Bank’s principal operations facilities. Additionally, we own a 92,000-square-foot building in Westborough, Massachusetts, and a 138,000-square-foot building in Grafton, Massachusetts, each of which is used as a data center.

Our remaining offices and facilities around the world are leased. We enter into operating leases to meet the needs of our operations and to expand our geographic reach.

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

ITEM 3. LEGAL PROCEEDINGS

We are broadly involved with the global securities industry, including the mutual fund industry. Securities industry practices and the mutual fund industry in the U.S. continue to be the subject of intense regulatory, governmental and public scrutiny. In that regard, we have received various industry-related regulatory, governmental and law enforcement inquiries and subpoenas relating to our activities and the activities of our mutual fund customers, including inquiries and subpoenas from the U.S. Department of Labor relating to market timing and late-trading activities. We continue to respond to these regulatory, governmental and law enforcement inquiries and subpoenas in the normal course of business. We are also involved in various legal proceedings that arise in the normal course of business. In the opinion of management, after discussion with counsel, these regulatory, governmental and law enforcement inquiries and subpoenas, and legal proceedings can be successfully defended or resolved without a material adverse effect on our financial position or results of operations.

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

None.

10 State Street Corporation

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information with regard to each of our executive officers. As used in this section, the term “executive officer” corresponds to those positions designated as such for SEC purposes.

Name	Age	Position	Year Elected ⁽¹⁾
Ronald E. Logue	60	Chairman and Chief Executive Officer	2004
Joseph C. Antonellis	51	Executive Vice President and Chief Information Officer	1999/2002
Jeffrey N. Carp	49	Executive Vice President and Chief Legal Officer	2006
Joseph W. Chow	53	Executive Vice President	1996
Charles C. Cutrell, III	51	Executive Vice President, General Counsel and Secretary	2004
Pamela D. Gormley	57	Executive Vice President and Corporate Controller	2004
Joseph L. Hooley	48	Executive Vice President	2000
William W. Hunt	43	Executive Vice President; President and Chief Executive Officer, State Street Global Advisors	2001/2005
Edward J. O’Brien	51	Executive Vice President and Treasurer	2001/2005
David C. O’Leary	59	Executive Vice President	2005
James S. Phalen	55	Executive Vice President	1992
Edward J. Resch	53	Executive Vice President and Chief Financial Officer	2002
Stanley W. Shelton	51	Executive Vice President	1995

(1)

For officers where two years are listed, the first year indicates the year they were elected as executive vice president, and the second year indicates the year they received the additional title as it appears in the table.

All executive officers are elected by the Board. The Chairman and Treasurer have been elected to hold office until the next annual meeting of shareholders or until their successors are chosen and qualified. Other executive officers hold office at the discretion of the Board. There are no family relationships among any of our directors and executive officers. All of the executive officers have been officers of State Street for five years or more, with the exception of Ms. Gormley and Messrs. Carp, O’Leary and Resch. Mr. Chow, who first joined State Street in 1990, left State Street in August 2003 and returned in July 2004. Mr. Phalen, who first joined State Street in 1992, left State Street in April 2000 and returned in March 2005.

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

Ms. Gormley joined State Street as an executive officer in 2004. Prior to joining State Street, she served as executive vice president and corporate controller of FleetBoston Financial Corporation, a major multi-national bank based in Boston, Massachusetts. Prior to that, she held senior positions at Cleveland-based KeyCorp, and at U.S. Bancorp in Portland, Oregon.

Mr. O’Leary joined State Street as an executive officer in 2005. Prior to joining State Street, he served as a senior advisor to Credit Suisse First Boston after serving as Managing Director and Global Head of Human Resources with that organization for more than 18 years. Prior to that, he was a vice president at Merrill Lynch.

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

State Street Corporation 11

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

MARKET FOR REGISTRANT’S COMMON EQUITY

Our Common Stock is listed on the New York, Boston and Archipelago Stock Exchanges, under the ticker symbol STT. There were 4,399 shareholders of record at December 31, 2005. Information concerning the market prices of, and dividends on, our common stock during the past two years is included in this Form 10-K under Item 8, under the caption “Quarterly Summarized Financial Information.”

Our Board authorized the purchase of our common stock for general corporate purposes, including employee benefit programs, under a publicly announced stock purchase program, first authorized by the Board in 1995. During the first quarter of 2005, 2.9 million shares were purchased under the 1995 stock purchase program. In February 2005, the 1995 stock purchase program was terminated, and in its place, the Board authorized the purchase of 15 million shares under the 2005 stock purchase program. During 2005, 10.2 million shares were purchased under the 2005 stock purchase program, and at December 31, 2005, 4.8 million shares remained available for future purchases. We employ third-party broker-dealers to acquire shares on the open market for our publicly announced stock purchase program.

Additionally, shares may be acquired by a consolidated trust, held by an external trustee, for other deferred compensation plans that are not purchased as part of the publicly announced stock purchase programs. Shares are purchased in open-market transactions by the trustee. A total of 46,000 shares were purchased by the trust during 2005.

The following table presents purchases of our common stock and related information for the three months ended December 31, 2005. The “Number of Shares Purchased” for the month of October 2005 included 11,000 shares purchased in open-market transactions during the period by an independent agent in connection with the consolidated trust for our deferred compensation plans, and were not purchased as part of our publicly announced stock purchase program.

	Number of Shares Purchased	Average Price Per Share	Number of Shares Purchased Under Publicly Announced Program	Maximum Number of Shares Yet to Be Purchased Under Publicly Announced Program
(Shares in thousands)
October 1 – October 31, 2005	938	$54.29	927	8,797
November 1 – November 30, 2005	2,089	57.03	2,089	6,708
December 1 – December 31, 2005	1,905	58.52	1,905	4,803
Total	4,932		4,921

12 State Street Corporation

RELATED STOCKHOLDER MATTERS

As a bank holding company, the parent company is a legal entity separate and distinct from its principal banking subsidiary, State Street Bank, and its non-bank subsidiaries. The right of the parent company to participate as a shareholder in any distribution of assets of State Street Bank upon its liquidation, reorganization or otherwise is subject to the prior claims by creditors of State Street Bank, including obligations for federal funds purchased and securities sold under repurchase agreements and deposit liabilities. Payment of dividends by State Street Bank is subject to 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 Federal Reserve Board would be required if dividends declared by State Street Bank in any year exceeded the total of its net profits for that year combined with retained net profits for the preceding two years, less any required transfers to surplus. Information concerning dividends from our subsidiary banks is in Note 13 of the “Notes to Consolidated Financial Statements” included in this Form 10-K under Item 8. Future dividend payments of State Street Bank and other non-bank subsidiaries cannot be determined at this time.

State Street Corporation 13

ITEM 6. SELECTED FINANCIAL DATA

	2005			2004			2003			2002			2001
(Dollars in millions, except per share data or where otherwise indicated)
FOR THE YEAR ENDED DECEMBER 31:
Total fee revenue	$	4,551		$	4,048		$	3,556		$	2,850		$	2,769
Net interest revenue		907			859			810			979			1,025
Provision for loan losses		–			(18	)		–			4			10
(Losses) gains on sales of available-for-sale investment securities, net		(1	)		26			23			76			43
Gain on sale of Private Asset Management business, net of exit and other associated costs		16			–			285			–			–
Gain on sale of Corporate Trust business, net of exit and other associated costs		–			–			60			495			–
Total revenue		5,473			4,951			4,734			4,396			3,827
Total operating expenses		4,041			3,759			3,622			2,841			2,897
Income from continuing operations before income tax expense		1,432			1,192			1,112			1,555			930
Income tax expense from continuing operations		487			394			390			540			302
Income from continuing operations		945			798			722			1,015			628
Net loss from discontinued operations		(107	)		–			–			–			–
Net income	$	838		$	798		$	722		$	1,015		$	628
PER COMMON SHARE:
Basic earnings:
Continuing operations	$	2.86		$	2.38		$	2.18		$	3.14		$	1.94
Net income		2.53			2.38			2.18			3.14			1.94
Diluted earnings:
Continuing operations		2.82			2.35			2.15			3.10			1.90
Net income		2.50			2.35			2.15			3.10			1.90
Cash dividends declared		.72			.64			.56			.48			.41
Closing price of common stock		55.44			49.12			52.08			39.00			52.25

AT YEAR-END:
Investment securities	$	59,870		$	37,571		$	38,215		$	28,071		$	20,781
Total assets		97,968			94,040			87,534			85,794			69,850
Deposits		59,646			55,129			47,516			45,468			38,559
Long-term debt		2,659			2,458			2,222			1,270			1,217
Shareholders’ equity		6,367			6,159			5,747			4,787			3,845

Assets under custody (in billions)	$	10,121		$	9,497		$	9,370		$	6,171		$	6,203
Assets under management (in billions)		1,441			1,354			1,106			763			775

Number of employees		20,965			19,668			19,850			19,501			19,753

RATIOS:
Continuing operations:
Return on shareholders’ equity		15.3	%		13.3	%		13.9	%		24.1	%		17.3	%
Return on average assets		.95			.84			.87			1.28			.88
Dividend payout		25.3			26.9			25.9			15.4			21.0
Net income:
Return on shareholders’ equity		13.6			13.3			13.9			24.1			17.3
Return on average assets		.84			.84			.87			1.28			.88
Dividend payout		28.5			26.9			25.9			15.4			21.0
Average shareholders’ equity to average assets		6.2			6.3			6.3			5.3			5.1
Tier 1 risk-based capital		11.7			13.3			14.0			17.1			13.6
Total risk-based capital		14.0			14.7			15.8			18.0			14.5
Tier 1 leverage ratio		5.6			5.5			5.6			5.6			5.4
Tangible common equity to adjusted total assets		4.8			4.5			4.5			4.9			4.7

14 State Street Corporation

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

State Street Corporation and its subsidiaries on a consolidated basis report two lines of business. Investment Servicing provides services for mutual funds and collective investment funds, corporate and public retirement plans, insurance companies, foundations, endowments, and other investment pools worldwide. Products include custody, product- and participant-level accounting, daily pricing and administration; master trust and master custody; recordkeeping; foreign exchange, brokerage and other trading services; securities finance; deposit and short-term investment facilities; loans and lease financing; investment manager and hedge fund manager operations outsourcing; and performance, risk and compliance analytics to support institutional investors. Investment Management offers a broad array of services for managing financial assets, including investment management and investment research services, primarily for institutional investors worldwide. These services include passive and active U.S. and non-U.S. equity and fixed income strategies, and other related services, such as securities finance. For financial information about these business lines, see the “Line of Business Information” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, or “Discussion and Analysis,” and Note 23 of the “Notes to Consolidated Financial Statements” included in this Form 10-K under Item 8.

This Discussion and Analysis should be read in conjunction with the “Consolidated Financial Statements,” which are prepared in accordance with accounting principles generally accepted in the United States, or “GAAP,” and the related “Notes to Consolidated Financial Statements,” included in this Form 10-K. Certain previously reported amounts presented in this Discussion and Analysis have been reclassified to conform to current period classifications. The preparation of financial statements requires management to make estimates and assumptions in the application of certain accounting policies that materially affect the reported amounts of assets, liabilities, revenue and expenses. Actual results could differ from those estimates. Estimates that require management to make assumptions that are difficult, subjective or complex about matters that are uncertain and may change in subsequent periods are discussed in more depth in the “Significant Accounting Estimates” section of this Discussion and Analysis. Information related to recent accounting developments is included in Notes 1 and 9 of the “Notes to Consolidated Financial Statements.”

Unless otherwise indicated or unless the context requires otherwise, all references in this Discussion and Analysis to “State Street,” “we,” “us,” “our” or similar terms mean State Street Corporation and its subsidiaries on a consolidated basis.

From time to time, in executing our strategic plan, we may enter into business acquisitions and strategic alliances, and may divest non-strategic operations. We continuously review and assess various business opportunities related to this strategy. For more financial information about our acquisition and divestiture activities, see Note 2 of the “Notes to Consolidated Financial Statements.”

This Discussion and Analysis contains statements that are considered “forward-looking statements” within the meaning of U.S. federal securities laws. Forward-looking statements include statements about our confidence and strategies and our expectations about revenue and market growth, acquisitions and divestitures, new technologies, services and opportunities, and earnings. These forward-looking statements involve certain risks and uncertainties which could cause actual results to differ materially. Additional information about forward-looking statements and related risks and uncertainties is included in this Form 10-K under Item 1A.

State Street Corporation 15



	(1)	2002 earnings per share included the gain on the sale of the divested Corporate Trust business of $.90 per share.
	(2)	2003 earnings per share included the combined gains on sales of the divested Corporate Trust and Private Asset Management businesses of $.68 per share, and combined charges for divestiture costs, GSS acquisition merger and integration costs, restructuring expenses, settlement of a state tax matter and a loss on real estate sold equal to $.86 per share.
	(3)	2004 earnings per share included GSS merger and integration costs of $.12 per share.

FINANCIAL HIGHLIGHTS

For 2005, we recorded net income from continuing operations of $945 million, up $147 million, or 18%, from net income of $798 million in 2004. Fully-diluted earnings per share from continuing operations were $2.82 in 2005, up 20% from $2.35 in 2004. Earnings per share for 2004 included $62 million, or $.12 per share, of merger and integration costs associated with the 2003 acquisition of a substantial portion of the Global Securities Services, or “GSS,” business of Deutsche Bank AG.

We remained focused on achieving our previously disclosed financial goals in 2005, carefully balancing revenue growth with continued expense management. This focus allowed us to generate positive operating leverage for the year, which we define as a rate of total revenue growth that exceeds the rate of growth of total operating expenses. Total revenue for 2005 grew 11% while total operating expenses increased only 8%. We continued to deepen existing customer relationships and expand new product capabilities. These factors, combined with new business growth, enabled us to achieve our financial goals in moderately improving financial markets.

We continue to see the most significant opportunities for growth outside of the U.S. For 2005, 39% of our total revenue was from non-U.S. activities, up from 37% for 2004, and approximately 7,800 employees worked outside the U.S. We expect that eventually, we will derive 50% of total revenue from outside the United States, as a result of the growth of savings and retirement assets in Europe and the Asia-Pacific region.

We managed our balance sheet to better position State Street for rising interest rates during 2005. We expanded our investment securities portfolio and adjusted the mix of investments to include higher yielding, floating-rate securities. As a result, net interest revenue in 2005 increased by 6% from 2004. Including taxable-equivalent adjustments for 2005 and 2004 of $42 million and $45 million, respectively, net interest revenue increased by 5% from 2004. Additional information is included in the “Net Interest Revenue” section.

Positive operating leverage was also generated through expense control. Managing our expenses involved careful allocation of headcount, realignment of our real estate portfolio and the establishment of other cost-efficiency measures.

16 State Street Corporation



	(1)	2002 total revenue included the gain on the sale of the divested Corporate Trust business of $495 million.
	(2)	2003 total revenue included the combined gains on sales of the divested Corporate Trust and Private Asset Management businesses of $345 million and a loss on real estate sold of $13 million.

Revenue

Total revenue for 2005 was $5.47 billion, an increase of $522 million from $4.95 billion in 2004. Revenue growth from 2004 reflected growth in servicing, management, trading and securities finance fees, as well as higher net interest revenue.

Collectively, servicing and management fees for 2005 were up $339 million, or 12%, from 2004. The increases were attributable to new business from existing and new customers and higher equity market valuations. Assets under custody increased to a record level of $10.12 trillion, up $624 billion from $9.50 trillion a year ago. Assets under management also increased to a record level of $1.44 trillion, up $87 billion from $1.35 trillion a year ago.

Trading services revenue was $694 million, up $99 million compared to $595 million a year ago, reflecting a higher dollar-volume of foreign exchange trades for customers and a higher volume of transition management business. Securities finance fees were $330 million for 2005, an improvement of $71 million from $259 million in 2004, benefiting from improved spreads and an increase in average loan volume. Processing fees and other revenue was $302 million in 2005, compared with $308 million in 2004.

Net interest revenue for 2005 was $907 million, an increase of $48 million from $859 million in 2004, due to an increase in average balance sheet size and changes in balance sheet mix, somewhat offset by increased funding costs and a flatter yield curve.

Operating Expenses

Operating expenses were $4.04 billion for 2005, up $282 million from 2004. Expense growth in 2005 was driven in part by higher salaries and employee benefits expense, primarily from increased staffing levels to accommodate new business and higher incentive compensation expense due to improved earnings. Additionally, expense growth reflected an increase in transaction processing expense related to higher transaction volumes and higher subcustodian fees resulting from higher net asset values. Higher occupancy expense in 2005 reflected a $26 million charge related to a long-term sub-lease agreement, somewhat offset by a $16 million charge in 2004, and higher occupancy costs in Europe associated with new business. Higher other expenses reflected an increase in professional services incurred for compliance and regulatory initiatives. These increases were somewhat offset by reductions in information systems and communications expense. In addition, 2004 operating expenses included $62 million of merger and integration costs related to the GSS acquisition, and $21 million of restructuring costs related to a workforce reduction.

Discontinued Operations

Results for 2005 included a net loss from discontinued operations of $107 million (pre-tax charge of $165 million reduced by related tax benefit of $58 million), or $.32 per share. During the third quarter of 2005, we committed to a plan to divest our ownership interest in Bel Air Investment Advisors LLC, or “Bel Air.” The decision to divest will allow us to further sharpen our strategic focus on accommodating the needs of global institutional investors. Additional information about the Bel Air divestiture is included in Note 2 of the “Notes to Consolidated Financial Statements” included in this Form 10-K under Item 8.

State Street Corporation 17



	Significant reconciling items between GAAP and operating-basis diluted earnings per share are described in the footnotes to the chart on page 16.

Financial Goals

In November 2004, we announced financial goals for State Street for 2005 and beyond. These financial goals are: (1) growth in operating-basis earnings per share from continuing operations between 10% and 15%; (2) growth in operating-basis revenue between 8% and 12%; and (3) operating-basis return on shareholders’ equity from continuing operations between 14% and 17%. These goals are measured on an operating basis. Operating-basis results, as defined by management, include taxable-equivalent basis net interest revenue with a corresponding charge to income tax expense, and for 2004, excluded one-time merger and integration costs of $62 million, equal to $.12 per share after tax. We measure our financial goals and related results on an operating basis to provide financial information that is comparable from period to period, and to present comparable financial trends with respect to our ongoing businesses and operations. We believe that this financial information facilitates the understanding and analysis of State Street’s ongoing activities in addition to financial information prepared in accordance with GAAP.

For 2005, we achieved our financial goals. We increased our operating-basis earnings per share from continuing operations by 14%, from $2.47 to $2.82 (or 20% from $2.35 on a GAAP basis). Our operating-basis revenue increased 10% from $5.00 billion to $5.52 billion (including taxable-equivalent adjustments of $45 million and $42 million, respectively); and we recorded return on shareholders’ equity from continuing operations of 15.3%. Our financial goals remain in place for 2006, and we expect 2006 financial results to be approximately in the middle of the above-stated ranges. Information about risks and uncertainties which could cause actual results to differ materially from those expected is included in this Form 10-K under Item 1A.

RESULTS OF OPERATIONS

Revenue

We are focused on maintaining our position as one of the world’s leading specialists in servicing collective investment funds, mutual funds and pension plans. Over the past five years, we have made great strides in gaining business outside the United States. For 2005, non-U.S. revenue was approximately 39% of our total revenue, compared to 26% in 2000. We provide reliable, easy-to-integrate investment services that are global and enable our customers to develop and launch competitive new investment products, as well as providing active, including enhanced, and passive investment management products and strategies.

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

Our broad range of services generates fee revenue and net interest revenue. Fee revenue generated by investment servicing and investment management is augmented by securities finance, trading services and other processing fee revenue. We earn net interest revenue from customer deposits and short-term investment activities. We provide deposit services and short-term investment vehicles, such as repurchase agreements

18 State Street Corporation

and commercial paper, to meet customers’ needs for high-grade liquid investments, and invest these sources of funds and additional borrowings in assets yielding a higher rate, generating net interest revenue.

Fee Revenue

Total fee revenue was $4.55 billion for 2005 compared to $4.05 billion in 2004, an increase of $503 million. Servicing and management fees are the largest components of fee revenue, and combined comprised 71% of total 2005 fee revenue. Servicing fees increased 9% over 2004, and management fees increased 21%, as a result of new business from existing and new customers and higher equity market valuations.

Servicing and management fees are a function of several factors, including the mix and volume of assets under custody and assets under management, securities positions held and the volume of portfolio transactions, as well as the types of products and services used by customers, and are affected by changes in worldwide equity and fixed income valuations. In general, servicing fees are impacted, in part, by changes in daily average valuations of assets under custody, while management fees are impacted by changes in month-end valuations of assets under management. However, additional factors, such as transaction volumes, balance credits, customer minimum balances and other factors may have a significant impact on this revenue. Management fee revenue is more sensitive to market valuations than servicing fee revenue. However, performance fees have become a larger component of management fee revenue over the last year. Performance fees are generated when the performance of managed funds exceeds peer or equity market benchmarks specified in the management agreements.

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

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

INDEX
	Daily Averages of Indices				Average of Month-End Indices				Year-End Indices
	2005	2004	Change		2005	2004	Change		2005	2004	Change

S&P 500®	1207.2	1130.6	7	%	1207.8	1134.0	7	%	1248.3	1211.9	3	%
NASDAQ®	2099.3	1986.5	6		2100.6	1992.9	5		2205.3	2175.4	1
MSCI® EAFE	1536.2	1337.5	15		1540.0	1344.2	15		1680.1	1515.5	11

State Street Corporation 19

FEE REVENUE
	2005		2004		2003		Change 2004–2005
(Dollars in millions)
Years ended December 31,
Servicing fees	$	2,474	$	2,263	$	1,950		9	%
Management fees		751		623		533		21
Trading services		694		595		529		17
Securities finance		330		259		245		27
Processing fees and other		302		308		299		(2	)
Total fee revenue	$	4,551	$	4,048	$	3,556		12

Servicing Fees:

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

Servicing fees for 2005 of $2.47 billion were up $211 million from 2004, primarily the result of new business from existing and new customers, as well as higher equity market valuations.

We are the largest provider of mutual fund custody and accounting services in the United States. We distinguish ourselves from other mutual fund service providers because customers make extensive use of a number of our services, including accounting, daily pricing and fund administration. We calculate more than 31% of the U.S. mutual fund prices provided to NASDAQ that appear daily in The Wall Street Journal and other publications with an accuracy rate of 99.9%.

With a 37% market share, we have a leading position in the market for servicing U.S. tax-exempt assets for corporate and public pension funds. We provide trust and valuations services for more than 4,500 daily-priced portfolios, making us a leader for both monthly and daily valuation services.

Our business continued to grow outside the United States. In 2005, servicing fees derived from customers outside the U.S. were approximately 40% of total servicing fees, up from 34% in 2004. We have a global custodian network that spans more than 100 geographic markets. We provide custody services for more than 20% of fund assets in Canada. In Germany, we provide Depotbank services for more than 19% of retail and institutional fund assets. In the United Kingdom, we provide custody services for 19% of pension fund assets and provide administration services to more than 21% of mutual fund assets. We service more than 10% of the hedge fund market, largely offshore, through International Fund Services, a company we acquired in 2002. In addition, we service more than $500 billion of offshore assets, primarily domiciled in the Cayman Islands, Ireland, Luxembourg, and the Channel Islands. We have more than $640 billion in assets under administration in the Asia-Pacific region, and are a leader in Japan with more than 36% of the trust assets held by non-domestic trust banks.

Our services are recognized globally and in 2005, we were named “Best at Investor Services in North America” by Euromoney, “Best Custodian” by The Asset magazine, “Best Hedge Fund Administrator” by Institutional Investors’ Alpha magazine, “European Mutual Fund Administrator of the Year” by International Custody & Fund Administration and “Top Rated” in Global Custodian’s Hedge Fund Administration Survey.

20 State Street Corporation

At year-end 2005, our total assets under custody were $10.12 trillion, compared to $9.50 trillion a year earlier. The value of assets under custody is a broad measure of the relative size of various markets served. Changes in the value of assets under custody do not necessarily result in proportional changes in revenue. Assets under custody at December 31 consisted of the following:

ASSETS UNDER CUSTODY
	2005			2004			2003			2002			2001			2004–2005 AGR			2000–2005 CAGR
(Dollars in billions)
As of December 31,
Customers in the U.S.:
Mutual funds	$	3,891		$	3,385		$	3,105		$	2,719		$	2,794			15	%		8	%
Pensions, insurance and other investment pools		4,136			4,093			3,198			2,734			2,737			1			8
Customers outside the U.S.		2,094			2,019			988			718			672			4			26
Acquired with GSS⁽¹⁾		–			–			2,079			–			–
Total	$	10,121		$	9,497		$	9,370		$	6,171		$	6,203			7			11
Non-U.S. securities as a percentage of total		23	%		22	%		12	%		14	%		13	%

(1)

Assets relating to GSS customers, the majority of which had not yet converted to our systems, at December 31, 2003. For 2005 and 2004, assets related to GSS customers were included in the other categories of assets.

MIX OF ASSETS UNDER CUSTODY
	2005		2004		2003
(Dollars in billions)
As of December 31,
Financial Instrument Mix:
Equities	$	4,814	$	4,688	$	3,479
Fixed income		3,797		3,286		2,636
Short-term and other investments		1,510		1,523		1,176
Acquired with GSS⁽¹⁾		–		–		2,079
Total	$	10,121	$	9,497	$	9,370

(1)

GEOGRAPHIC MIX OF ASSETS UNDER CUSTODY
	2005		2004		2003
(Dollars in billions)
As of December 31,
United States	$	7,951	$	7,410	$	7,506
Other Americas		330		324		255
Europe/Middle East/Africa		1,454		1,403		1,251
Asia/Pacific		386		360		358
Total	$	10,121	$	9,497	$	9,370

Management Fees:

We provide a broad range of investment management strategies, specialized investment management advisory services and other financial services for corporations, public funds, and other sophisticated investors. These services are offered through State Street Global Advisors®, or “SSgA®,” a division of State Street. Based upon assets under management, SSgA is the largest manager of institutional assets worldwide, the largest manager of assets for tax-exempt organizations (primarily pension plans) in the United States, and the second largest investment manager overall in the world. SSgA offers a broad array of investment strategies, including passive and active, such as enhanced and hedge-fund management, using quantitative and fundamental

State Street Corporation 21

methods for both U.S. and global equities and fixed income securities. SSgA also renewed its focus on exchange traded funds, or ETFs, launching new offerings such as the SPDR® Dividend ETFs, and saw growth in some of its innovative approaches such as the streetTRACKS® Gold Shares.

For 2005, management fees were $751 million, up $128 million from 2004. Management fees showed continued strength outside the United States, with approximately 30% of management fees generated from non-U.S. customers in 2005 and 2004. At year-end 2005, assets under management were $1.44 trillion, up $87 billion, or 6%, from year-end 2004.

While certain management fees are directly determined by the value of assets under management and the investment strategy employed, management fees reflect other factors as well, including our relationship pricing for customers who use multiple services and performance-related fees. Accordingly, there is not necessarily a direct correlation between the value of assets under management, market indices and management fee revenue.

Assets under management consisted of the following at December 31. Non-U.S. securities comprised 40% of total securities at year-end 2005.

ASSETS UNDER MANAGEMENT
	2005		2004		2003		2002		2001		2004–2005 AGR			2000–2005 CAGR
(Dollars in billions)
As of December 31,
Equities:
Passive	$	602	$	596	$	522	$	361	$	398		1	%		11	%
Active		172		131		78		44		39		31			31
Employer securities		76		77		76		56		76		(1	)		–
Fixed income		155		139		98		74		54		12			29
Money market		436		411		332		228		208		6			19
Total	$	1,441	$	1,354	$	1,106	$	763	$	775		6			15

Following is the geographic mix of the regions that manage the assets:

GEOGRAPHIC MIX OF ASSETS UNDER MANAGEMENT
(Dollars in billions)	2005		2004		2003
As of December 31,
United States	$	1,023	$	1,009	$	891
Other Americas		24		23		15
Europe/Middle East/ Africa		275		221		128
Asia/Pacific		119		101		72
Total	$	1,441	$	1,354	$	1,106

Following is a rollforward of assets under management for the three years ended December 31, 2005:

ASSETS UNDER MANAGEMENT
(Dollars in billions)	2005		2004		2003
Years Ended December 31,
Balance at beginning of year	$	1,354	$	1,106	$	763
Net new business		36		145		179
Market appreciation		51		103		164
Balance at end of year	$	1,441	$	1,354	$	1,106

22 State Street Corporation

Trading Services:

Trading services revenue, which includes foreign exchange trading and brokerage and other trading services, was $694 million for 2005, up $99 million, or 17%, from $595 million in 2004.

We offer a complete range of foreign exchange services under an account model that focuses on the global requirements of our customers to execute trades and receive market insights in any time zone. We have exclusive ownership of FX Connect®, the world’s first and leading foreign exchange trading platform, and we provide quantitatively based research into investor behavior, as well as advice and quantitative tools designed to optimize our customers’ returns.

In 2005, foreign exchange trading revenue increased $48 million, to $468 million, from $420 million in 2004. Foreign exchange trading revenue is influenced by three principal factors: the volume and type of customer foreign exchange transactions; currency volatility and trend; and the management of currency market risks. Customer spot, swap, forward and options trading volumes were strong in 2005, both in the volume and value of transactions, up 32% from 2004. The impact of volume increases was somewhat offset by lower currency volatility, as measured by our index of 26 currencies, down 12% from 2004.

We also offer a range of brokerage and other trading products tailored specifically to meet the needs of the global pension community, including transition management, commission recapture and self-directed brokerage. These products are differentiated by our position as an agent and partner of the institutional investor.

Brokerage and other trading fees were $226 million in 2005, compared to $175 million a year earlier. Growth was attributable to a significant increase in the global transition management business, as well as an increase in equity trading revenue in the U.S.

Securities Finance:

Securities finance provides liquidity to the financial markets and an effective means for customers to earn revenue on existing portfolios. By acting as a lending agent and coordinating loans between lenders and borrowers, we lend securities and provide liquidity in more than 35 markets around the world.

Borrowers provide collateral in the form of cash or securities to State Street in return for loaned securities. For cash collateral, we pay a usage fee to the provider of the cash collateral, and invest the cash collateral in certain investment vehicles. The spread between the yield on the investment vehicle and the usage fee paid to the provider of the collateral is split between the lender of the securities and State Street as agent. For non-cash collateral, the borrower pays a fee for the loaned securities, and the fee is split between the lender of the securities and State Street.

Securities finance revenue of $330 million in 2005 increased $71 million from a year earlier. Securities finance revenue, which is historically affected by seasonality during the second quarter of the year as a result of heavy borrowing demand from customers, is principally a function of the volume of securities lent and the interest-rate spreads earned on the collateral. Growth in fees in 2005 reflected improved interest-rate spreads and a 9% increase in securities finance volumes during 2005.

Processing Fees and Other:

Processing fees and other revenue was $302 million in 2005, down slightly compared with $308 million in 2004. Processing fees and other revenue includes multiple sources of fees and other revenue, including fees from structured products, fees from software licensing and maintenance, profits and losses from unconsolidated affiliates, gains and losses on sales of leased equipment and other assets and amortization of investments in tax-advantaged financings.

In addition, processing fees and other revenue included payments received from Deutsche Bank AG representing amounts earned on customer deposits of the acquired GSS business that had not yet converted to our systems. Once converted, GSS deposits are reflected as deposits in our consolidated statement of condition, and the related earnings on those deposits are reflected in net interest revenue. The corresponding decline of $30 million in these fees during 2005 was largely offset by an increase in structured products revenue.

State Street Corporation 23

Net Interest Revenue

In servicing sophisticated global investors, we provide short-term funds management, deposit services and repurchase agreements for cash positions associated with our customers’ investing activities.

NET INTEREST REVENUE
	2005			2004			2003			Change 2004–2005
(Dollars in millions)
Years ended December 31,
Interest revenue	$	2,930		$	1,787		$	1,539			64	%
Interest expense		2,023			928			729			118
Net interest revenue		907			859			810			6
Provision for loan losses		–			(18	)		–
Net interest revenue after provision for loan losses	$	907		$	877		$	810

Net interest revenue (taxable-equivalent basis)	$	949		$	904		$	861			5	%

Excess of rates earned over rates paid (taxable-equivalent basis)		.82	%		.95	%		1.04	%
Net interest margin (taxable-equivalent basis)		1.08			1.08			1.17

Additional detail about the components of interest revenue and interest expense is in Note 15 of the “Notes to Consolidated Financial Statements.”

Net interest revenue was $907 million for 2005, an increase of $48 million compared to $859 million in 2004, which reflected a reduction of $19 million in interest revenue due to a change in the applicable state tax rate for leveraged lease transactions. Excluding this reduction from 2004, net interest revenue would have increased by $29 million during 2005.

Higher interest revenue was principally due to an increase in the size of the average balance sheet and the impact of repositioning and increasing the average size of the investment securities portfolio. For the year ended December 31, 2005, our investment securities portfolio, on an average basis, included a higher percentage of collateralized mortgage obligations and floating-rate, asset-backed securities compared to a year earlier, and a lower percentage of U.S. Treasuries and direct obligations of federal agencies. The shift in the portfolio was designed to better position us in a rising short-term interest-rate environment, without significantly increasing overall risk, as we continued to invest conservatively in “AA” and “AAA” rated securities. “AA” and “AAA” rated securities comprised approximately 95% of the investment securities portfolio, with approximately 90% “AAA” rated, at December 31, 2005.

The provision for loan losses for 2004 reflected a reduction in the provision of $18 million attributable to reduced credit exposure and improved credit quality.

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

Our management of the investment securities portfolio has multiple objectives, the foremost of which is to generate maximum return within the parameters of modest duration and credit risk, which may entail strategic sales of specific securities as market conditions warrant. In addition, the portfolio is structured to provide liquidity and serve as a source of collateral for customer activities. Approximately 92% of the investment securities portfolio was classified as available for sale at December 31, 2005.

We recorded a net loss of $1 million on sales of available-for-sale securities in 2005, down from a net gain of $26 million in 2004. As of December 31, 2005, we had $54.98 billion in available-for-sale securities. Additional information about these gains and losses is in Note 3 of the “Notes to Consolidated Financial Statements” included under Item 8 of this Form 10-K.

24 State Street Corporation

Gain on Sale of Private Asset Management Business

In 2003, we completed the sale of our Private Asset Management, or “PAM,” business. Under the terms of the agreement, the transaction was valued at $365 million, of which approximately five percent was subject to the successful transition of the business over the subsequent 16 months. During the third quarter of 2005, we recorded an additional gain of $16 million from final settlement of the sale. Additional information about the gain is included in Note 2 of the “Notes to Consolidated Financial Statements.”

Operating Expenses

Operating expenses for 2005 were $4.04 billion, an increase of $282 million from 2004. The increase reflected higher salaries and employee benefits, transaction processing, occupancy and other expenses, somewhat offset by a decline in information systems and communications expense and the absence of GSS-related merger and integration charges and restructuring costs related to a 2004 reduction in workforce.

OPERATING EXPENSES
	2005		2004		2003		Change 2004–2005
(Dollars in millions)
Years Ended December 31,
Salaries and employee benefits	$	2,231	$	1,957	$	1,731		14	%
Information systems and communications		486		527		551		(8	)
Transaction processing services		449		398		314		13
Occupancy		391		363		300		8
Merger, integration and divestiture		–		62		110		(100	)
Restructuring		–		21		296		(100	)
Other		484		431		320		12
Total operating expenses	$	4,041	$	3,759	$	3,622		8
Number of employees at year-end		20,965		19,668		19,850

Salaries and employee benefits expense increased $274 million in 2005 to $2.23 billion. The increase was driven in large part by higher staffing levels required to accommodate new large investment manager operations outsourcing customers and the success of our hedge fund manager services. The increase also reflected higher incentive compensation costs related to improved earnings, higher average salaries due to merit increases and the higher costs of employee benefits.

Information systems and communications expense was $486 million in 2005, down $41 million from the prior year, primarily due to efficiencies gained as GSS customers were converted to our operating platforms, somewhat offset by costs for new outsourcing customers and costs of the new data center.

Transaction processing services expense was $449 million, up $51 million from $398 million a year ago. These expenses are volume-related and include equity trading services and fees related to securities settlement, subcustodian fees and external contract services. The increase resulted from a higher volume of investment activity combined with higher net asset values that impact subcustodian fees.

Occupancy expense was $391 million, up $28 million from 2004. We recognized a pre-tax charge of $26 million in 2005 related to a long-term sub-lease agreement with an unrelated third party for approximately 160,000 square feet in our headquarters building. We expect that this transaction will reduce average annual occupancy costs for this property going forward by $7 million to $8 million beginning in 2006. In 2004, occupancy expense included a loss of $16 million on a sub-lease agreement with an unrelated third party at our former headquarters building. Additionally, occupancy costs in Europe increased to accommodate new investment manager operations outsourcing customers.

Merger and integration costs of $62 million in 2004 related to the conversion of customers gained in the GSS acquisition to our systems. Restructuring costs of $21 million in 2004 related to severance and benefit costs associated with a 425-position workforce reduction completed in late 2004.

State Street Corporation 25

Other expenses were $484 million, up $53 million from $431 million in 2004, primarily due to increases in professional services related to compliance, including costs related to implementation of BASEL II and the restructuring of our treasury function, as well as growth initiatives.

Income Taxes

Income tax expense from continuing operations was $487 million for 2005, compared to $394 million a year ago, with the additional expense the result of increased pre-tax earnings. The effective tax rate for continuing operations for 2005 was 34.0%. The effective tax rate for 2004 was 33.1%, including the impact of a cumulative benefit of $18 million resulting from a change in the effective state tax rate applied to leveraged leasing transactions. Excluding this item, the effective rate for 2004 was 34.0%.

The income tax benefit attributable to the loss from discontinued operations of $165 million was $58 million.

Line of Business Information

We report two lines of business: Investment Servicing and Investment Management. Given our services and management organization, the results of operations for these lines of business are not necessarily comparable with those of other companies, including companies in the financial services industry. Information about revenue, expense and capital allocation methodologies is in Note 23 of the “Notes to Consolidated Financial Statements” included in this Form 10-K under Item 8.

The following is a summary of line of business results. These results exclude the loss from discontinued operations related to the planned divestiture of our investment interest in Bel Air as described in the “Financial Highlights” section of this Discussion and Analysis. The “Business Divestiture” column includes the revenue and expenses of the divested PAM business for 2003 prior to its divestiture. The “Other/One-Time” column for 2005 includes the additional gain from the sale of the PAM business. For 2004, this column includes merger and integration costs related to the acquisition of the GSS business. For 2003, the “Other/One-Time” column includes the gains from the sales of the PAM and Corporate Trust businesses, the loss on certain real estate sold, and restructuring and merger, integration and divestiture charges. Certain previously reported amounts have been reclassified to conform to current year presentation.

	Investment Servicing								Investment Management						Business Divestiture				Other/One-Time					Total
	2005			2004			2003		2005		2004		2003		2005	2004	2003		2005	2004	2003			2005			2004			2003
(Dollars in millions, unless otherwise noted)
Years ended December 31,
Fee revenue:
Servicing fees	$	2,474		$	2,263		$	1,950																$	2,474		$	2,263		$	1,950
Management fees		–			–			–	$	751	$	623	$	474			$	59							751			623			533
Trading services		694			595			529		–		–		–				–							694			595			529
Securities finance		260			211			206		70		48		39				–							330			259			245
Processing fees and other		221			239			277		81		69		34				1			$	(13	)		302			308			299
Total fee revenue		3,649			3,308			2,962		902		740		547				60				(13	)		4,551			4,048			3,556
Net interest revenue		826			816			773		81		43		37				–				–			907			859			810
Provision for loan losses		–			(18	)		–		–		–		–				–				–			–			(18	)		–
Net interest revenue after provision for loan losses		826			834			773		81		43		37				–				–			907			877			810
(Losses) gains on sales of available-for-sale investment securities, net		(1	)		26			23		–		–		–				–				–			(1	)		26			23
Gains on sales of divested businesses, net		–			–			–		–		–