STATE STREET CORP - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended March 31, 2003

¨ 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		04-2456637
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

225 Franklin Street		02110
Boston, Massachusetts		(Zip Code)
(Address of principal executive office)

617-786-3000

(Registrant’s telephone number, including area code)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x No ¨

The number of shares of the Registrant’s Common Stock outstanding on March 31, 2003 was 332,396,028.

STATE STREET CORPORATION

Table of Contents

		Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statement of Income		1
Consolidated Statement of Condition		2
Consolidated Statement of Changes in Stockholders’ Equity		3
Consolidated Statement of Cash Flows		4
Notes to Consolidated Financial Statements		5
Independent Accountants’ Review Report		16

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. Quantitative and Qualitative Disclosure About Market Risk		33

Item 4. Controls and Procedures		33

PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds		34

Item 4. Submission of Matter to a Vote of Security Holders		34

Item 6. Exhibits and Reports on Form 8-K		35

Signatures		36

Certifications		37

Exhibits

PART I. ITEM 1.

FINANCIAL STATEMENTS

Consolidated Statement of Income—State Street Corporation (Unaudited)


(Dollars in millions, except per share data) Three months ended March 31,		2003		2002

Fee Revenue:
Servicing fees	$	438	$	369
Management fees		125		124
Global securities lending		55		64
Foreign exchange trading		72		68
Brokerage fees		30		23
Processing fees and other		70		49

Total fee revenue		790		697
Net Interest Revenue:
Interest revenue		397		524
Interest expense		193		243

Net interest revenue		204		281
Provision for loan losses		—		1

Net interest revenue after provision for loan losses		204		280
Gains on the sales of available-for-sale investment securities		26		4

Total Revenue		1,020		981

Operating Expenses:
Salaries and employee benefits		443		421
Information systems and communications		130		96
Transaction processing services		72		59
Occupancy		71		60
Merger and integration costs		37		—
Other		81		79

Total operating expenses		834		715

Income before income taxes		186		266
Income taxes		90		88

Net Income	$	96	$	178

Earnings Per Share
Basic	$	.29	$	.55
Diluted		.29		.54

Average Shares Outstanding (in thousands)
Basic		329,569		323,689
Diluted		332,054		328,999
Cash Dividends Declared Per Share	$	.13	$	.11

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

PART I. ITEM 1.

FINANCIAL STATEMENTS (continued)

Consolidated Statement of Condition—State Street Corporation


(Dollars in millions, except per share data)		March 31, 2003			December 31, 2002

	(Unaudited)			(Note1)
Assets
Cash and due from banks	$	1,581		$	1,361
Interest-bearing deposits with banks		21,007			28,143
Securities purchased under resale agreements and securities borrowed		14,221			17,215
Federal funds sold		1,450			—
Trading account assets		1,316			984
Investment securities (including securities pledged of $15,582 and $10,335)		28,600			28,071
Loans (less allowance of $61 and $61)		4,639			4,113
Premises and equipment		948			887
Accrued income receivable		829			823
Goodwill		1,191			462
Other intangible assets		486			127
Other assets		2,841			3,608

Total Assets	$	79,109		$	85,794

Liabilities
Deposits:
Noninterest-bearing	$	7,026		$	7,279
Interest-bearing—U.S.		6,114			9,005
Interest-bearing—Non-U.S.		25,265			29,184

Total deposits		38,405			45,468
Securities sold under repurchase agreements		23,435			21,963
Federal funds purchased		4,690			3,895
Other short-term borrowings		2,004			3,440
Accrued taxes and other expenses		1,991			1,967
Other liabilities		1,917			3,004
Long-term debt		1,616			1,270

Total Liabilities		74,058			81,007

Stockholders’ Equity
Preferred stock, no par: authorized 3,500,000; issued none
Common stock, $1 par: authorized 500,000,000, issued 337,145,000 and 329,992,000		337			330
Surplus		305			104
Retained earnings		4,525			4,472
Accumulated other comprehensive income		94			106
Treasury stock, at cost (4,749,000 and 5,065,000 shares)		(210	)		(225	)

Total Stockholders’ Equity		5,051			4,787

Total Liabilities and Stockholders’ Equity	$	79,109		$	85,794

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

PART I. ITEM 1.

FINANCIAL STATEMENTS (continued)

Consolidated Statement of Changes in Stockholders’ Equity—State Street Corporation (Unaudited)


(Dollars in millions, shares in thousands)	Common Stock				Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock					Total
(Dollars in millions, shares in thousands)	Shares		Amount		Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Shares		Amount			Total

Balance at December 31, 2001	329,999		$	330	$	110		$	3,612		$	70		6,329		$	(277	)	$	3,845
Comprehensive income:
Net income									178											178
Change in net unrealized gains/losses on available-for-sale securities, net of related taxes of $43												(59	)							(59	)
Other, net of related tax expense of $2												2								2

Comprehensive income									178			(57	)							121
Cash dividends declared—$.11 per share									(35	)										(35	)
Stock awards and options exercised, including tax benefit of $14	(2	)				(8	)							(1,581	)		71			63
Common stock acquired														2

Balance at March 31, 2002	329,997		$	330	$	102		$	3,755		$	13		4,750		$	(206	)	$	3,994


Balance at December 31, 2002	329,992		$	330	$	104		$	4,472		$	106		5,065		$	(225	)	$	4,787
Comprehensive income:
Net income									96											96
Change in net unrealized gains/ losses on available-for-sale securities, net of related taxes of $16												(19	)							(19	)
Foreign currency translation, net of related taxes of $4												8								8
Change in unrealized gains/losses on cash flow hedges, net of related taxes of $1												(1	)							(1	)

Comprehensive income									96			(12	)							84
Cash dividends declared—$.13 per share									(43	)										(43	)
Common stock issued pursuant to:
January 14, 2003 Registration Statement	7,153					260														260
Impact of the present value of the estimated contract fees payable in respect of SPACES pursuant to January 14, 2003 Registration Statement						(57	)													(57	)
Stock awards and options exercised, including tax benefit of $2				7		(1	)							(373	)		16			22
Debt conversion						(1	)							(14	)		1
Common stock acquired														71			(2	)		(2	)

Balance at March 31, 2003	337,145		$	337	$	305		$	4,525		$	94		4,749		$	(210	)	$	5,051

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

PART I. ITEM 1.

FINANCIAL STATEMENTS (continued)

Consolidated Statement of Cash Flows—State Street Corporation (Unaudited)


(Dollars in millions) Three months ended March 31,		2003			2002

Operating Activities
Net Income	$	96		$	178
Non-cash charges for depreciation, amortization, provision for loan losses and deferred income taxes		190			236
Securities gains, net		(26	)		(4	)
Change in trading account assets, net		(332	)		(60	)
Other, net		(440	)		(147	)

Net Cash (Used by) Provided by Operating Activities		(512	)		203

Investing Activities
Payments for purchases of:
Available-for-sale securities		(13,774	)		(4,079	)
Held-to-maturity securities		(289	)		(293	)
Premises and equipment		(98	)		(73	)
Equity investments and other long-term assets		(10	)		(9	)
Business acquisitions, net of cash acquired		(1,078	)		—

Proceeds from:
Maturities of available-for-sale securities		9,323			3,142
Maturities of held-to-maturity securities		293			304
Sales of available-for-sale securities		3,862			952
Principal collected from lease financing		41			16

Net proceeds from (payments for):
Interest-bearing deposits with banks		7,136			(3,942	)
Federal funds sold, resale agreements and securities borrowed		1,544			(1,107	)
Loans		(489	)		507

Net Cash Provided by (Used by) Investing Activities		6,461			(4,582	)

Financing Activities
Proceeds from issuance of:
Treasury stock		10			49
Common Stock/SPACES, net of issuance costs		257			—
Long term debt, net of issuance costs		343			—

Payments for:
Non-recourse debt for lease financing		(64	)		(31	)
Cash dividends		(43	)		(36	)

Net (payments for) proceeds from:
Deposits		(7,063	)		4,308
Short-term borrowings		831			(765	)

Net Cash (Used by) Provided by Financing Activities		(5,729	)		3,525

Net Increase (Decrease)		220			(854	)
Cash and due from banks at beginning of period		1,361			1,651

Cash and Due From Banks at End of Period	$	1,581		$	797

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

PART I. ITEM 1.

FINANCIAL STATEMENTS (continued)

Notes to Consolidated Financial Statements—State Street Corporation (Unaudited)

Note 1—Basis of Presentation

State Street Corporation (“State Street” or the “Corporation”) is a financial holding company that provides custody, accounting, daily pricing and administration; master trust and master custody; investment management; trusteeship and recordkeeping; foreign exchange; securities lending; cash management; trading; and information services to clients worldwide. State Street reports two lines of business. Investment Servicing includes custody, accounting, daily pricing and administration; master trust and master custody; trusteeship and recordkeeping; foreign exchange and trading services; securities lending; deposit and short-term investment facilities; lease financing; investment 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 for both institutions and individual investors worldwide; these services include active and passive U.S. and non-U.S. equity and fixed income strategies, and other related services, such as securities lending.

The consolidated financial statements include the accounts of State Street and its subsidiaries, including its principal subsidiary, State Street Bank and Trust Company (“State Street Bank”).

All significant intercompany balances and transactions have been eliminated upon consolidation. The results of operations of businesses purchased are included from the date of acquisition. Investments in affiliates in which the Corporation has the ability to exercise significant influence, but not control, are accounted for using the equity method.

In the opinion of management, all adjustments, consisting of normal recurring accruals, which are necessary for a fair presentation of the financial position of State Street and subsidiaries at March 31, 2003 and December 31, 2002, its cash flows for the three months ended March 31, 2003 and 2002, and consolidated results of its operations for the three months ended March 31, 2003 and 2002, have been made. Operating results for the three-month period ended March 31, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. These statements should be read in conjunction with the financial statements and other information included in State Street’s latest annual report on Form 10-K.

The Statement of Condition at December 31, 2002, has been developed from the audited financial statements at that date, but does not include footnotes required by generally accepted accounting principles for complete financial statements.

The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

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

Revenue Recognition

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

PART I. ITEM 1.

FINANCIAL STATEMENTS (continued)

Notes to Consolidated Financial Statements—State Street Corporation (Unaudited)

Note 1—Basis of Presentation (continued)

Impact of Recent Accounting Announcements

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements of Guarantees, Including Guarantees of Indebtedness of Others.” Accounting requirements became effective January 1, 2003, and require all guarantees and indemnifications within its scope to be recorded at fair value as liabilities, and the maximum possible loss to the Corporation under these guarantees and indemnifications to be disclosed. State Street has indemnifications related to securities lending clients, certain investment guarantee products, credit enhancements and liquidity facilities, and parent company guarantees of subsidiary’s obligations that fall within the scope of this Interpretation. Each of these guarantees, except the parent company guarantees, are collateralized to some extent, which reduces loss exposure to the Corporation. The liabilities associated with these products are not material to the Corporation.

On January 1, 2003, State Street began expensing stock options using the fair value method in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation. State Street used the prospective transition method afforded under Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment to FASB Statement No. 123. The following table illustrates the effect on net income and earnings per share if the fair value method had been applied to all outstanding and unvested awards in each period.


	Three Months Ended March 31,
(Dollars in millions, except per share data)	2003			2002

Net income, as reported	$	96		$	178
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		—			—
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(15	)		(14	)
Pro forma net income	$	81		$	164
Earnings per share:
Basic—as reported	$	.29		$	.55
Basic—pro forma		.25			.51
Diluted—as reported		.29			.54
Diluted—pro forma		.24			.50

During the three months ended March 31, 2003, State Street granted 32,000 stock options at a weighted average option price of $37.41 resulting in $249,000 in expense; a total of 283,000 options were exercised during the same period with a weighted average option price of $13.45.

On January 17, 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” FIN 46 effects existing variable interest entities (“VIE”) on July 1, 2003. State Street sells and distributes securities for one type of VIE that is currently not included in the consolidated financial statements of State Street. Assuming no changes to the current structure of these VIEs, State Street will be required to consolidate them in its Consolidated Statement of Condition under this new accounting guidance. These VIEs, which State Street administers, issue asset-backed commercial paper (“ABCP”) that is rated P-1 by Moody’s Investors Service and/or A-1 or better by Standard & Poors. State Street provided these VIEs with administrative support, as well as with liquidity and credit enhancement facilities in the forms of liquidity asset purchase

PART I. ITEM 1.

FINANCIAL STATEMENTS (continued)

Notes to Consolidated Financial Statements—State Street Corporation (Unaudited)

Note 1—Basis of Presentation (continued)

agreements and lines of credit totaling $10.8 billion and standby letters of credit totaling $636 million at March 31, 2003. These ABCP programs have total commercial paper outstanding of $11.1 billion at March 31, 2003. An asset-specific credit enhancement, in the form of over-collateralization or otherwise, from non-State Street transferors, is subordinate to the Corporation’s liquidity and credit enhancement exposure. Potential losses from these VIEs are not expected to materially affect the results of operations of the Corporation; however, consolidation of these VIEs would cause the Corporation and State Street Bank to deleverage the size of their balance sheets to maintain their regulatory Tier 1 leverage ratio requirements.

On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 amends certain other existing pronouncements. SFAS No. 149 is effective on a prospective basis for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. State Street is assessing the impact of this standard on its financial position and results of operations.

Note 2—Acquisition

On January 31, 2003, State Street completed the primary closing of its acquisition of a substantial part of the global securities service business (“GSS business”) of Deutsche Bank AG for approximately $1.1 billion. In the period ending on the one-year anniversary of the closing, State Street will make additional payments of up to an estimated €360 million, based upon performance of the acquired businesses.

State Street financed $595 million of the initial purchase price through issuance of equity, equity-related and capital securities to the public under an existing shelf registration statement. In January 2003, State Street issued $284 million, or 7.2 million shares of common stock, $345 million, or 1.7 million units of SPACES (see Note 15), and $345 million of floating-rate, medium-term capital securities due 2008 (see Note 6), a portion of which was used to finance the acquisition. The remainder of the purchase price was financed using existing resources.

The acquisition was accounted for under the purchase method of accounting, in accordance with SFAS No. 141, Business Combinations. The purchase price of $1.1 billion was allocated as follows: goodwill $724 million, customer relationship intangible $363 million, capitalized software $28 million and other tangible assets $14 million. The customer relationship intangible asset is amortized on a straight-line basis over fifteen years. The software is amortized on a straight-line basis over five years. The results of the GSS acquisition are included in the accompanying statement of operations for the period from February 1, 2003 through March 31, 2003.

In connection with the acquisition, State Street expects to reduce its overall workforce primarily in the United States, over a 12-18 month period beginning in June 2003, by approximately 1,000 employees. Severance costs of $22 million and transaction costs of $22 million related to these activities were accrued as a liability in conjunction with recording the initial purchase of GSS, and were capitalized as part of the goodwill allocated with the GSS business. Additionally, State Street incurred $37 million of merger and integration costs in the first quarter of 2003. These one-time expenses consisted primarily of costs for employee retention, systems conversion costs and consulting services.

PART I. ITEM 1.

FINANCIAL STATEMENTS (continued)

Notes to Consolidated Financial Statements—State Street Corporation (Unaudited)

Note 3—Investment Securities

Available-for-sale securities and held-to-maturity securities consisted of the following as of the dates indicated:


(Dollars in millions)	March 31, 2003								December 31, 2002
	Amortized Cost		Unrealized				Fair Value		Amortized Cost		Unrealized				Fair Value
	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value

Available for sale:
U.S. Treasury and federal agencies	$	17,356	$	89	$	4	$	17,441	$	15,665	$	97	$	2	$	15,760
State and political subdivisions		1,917		36		6		1,947		1,992		35		9		2,018
Asset-backed securities		5,636		77		27		5,686		4,205		88		17		4,276
Collateralized mortgage obligations		1,131		2		7		1,126		546		3		1		548
Other debt investments		549		3		—		552		695		8		—		703
Money market mutual funds		147		—		—		147		3,057		—		—		3,057
Other equity securities		190		1		28		163		197		—		31		166

Total	$	26,926	$	208	$	72	$	27,062	$	26,357	$	231	$	60	$	26,528

Held to maturity:
U.S. Treasury and federal agencies	$	1,341	$	10			$	1,351	$	1,327	$	13			$	1,340
Other investments		197		—				197		216		—				216

Total	$	1,538	$	10			$	1,548	$	1,543	$	13			$	1,556

During the three months ended March 31, 2003, there were gross gains of $26 million and gross losses of less than a million realized in the sales of available-for-sale securities. During the three months ended March 31, 2002, there were gross gains of $7 million and gross losses of $3 million realized on the sales of available-for-sale securities.

Note 4—Allowance for Loan Losses

State Street establishes an allowance for loan losses to absorb probable credit losses. Changes in the allowance for loan losses were as follows:


(Dollars in millions)	Three Months Ended March 31,
(Dollars in millions)	2003		2002

Balance at beginning of period	$	61	$	58
Provision for loan losses		—		1
Recoveries		—		2

Balance at end of period	$	61	$	61

PART I. ITEM 1.

FINANCIAL STATEMENTS (continued)

Notes to Consolidated Financial Statements—State Street Corporation (Unaudited)

Note 5—Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2003, are as follows:


	For the Three Months Ended March 31,
(Dollars in millions)	Investment Servicing			Investment Management		Total

Balance at beginning of period	$	252		$	210	$	462
Additions to goodwill		730			—		730
Translation adjustments		(1	)		—		(1	)

Balance at end of period	$	981		$	210	$	1,191

The gross carrying amount and accumulated amortization of other intangible assets as of March 31, 2003, is as follows:


(Dollars in millions)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Other intangible assets:
Customer lists⁽¹⁾	$	496	$	(12	)	$	484
Other		2		—			2

Total	$	498	$	(12	)	$	486

(1)

Approximately $363 million of customer list intangibles with an amortization period of 15 years were recorded in January 2003 related to the acquisition of GSS. See Note 2 for further details.

Amortization expense related to other intangible assets was $6 million for the three months ended March 31, 2003. State Street expects to amortize approximately $33 million per year through the year 2007 related to intangible assets currently held.

Note 6—Long-term Debt

In January 2003, in connection with its acquisition of the GSS business (see Note 2), State Street issued $345 million of floating-rate, medium-term capital securities due 2008.

The floating rate capital securities were issued at LIBOR plus 50 basis points, and are subject to mandatory redemption on December 15, 2005, provided certain regulatory requirements are met, and otherwise are due on February 15, 2008. Issuance costs associated with the offering of approximately $2 million were deferred and are amortized over the term of the floating rate capital securities. Amortization expense for the period ended March 31, 2003 was less than $1 million. Upon closing of this transaction in January 2003, $469 million of State Street’s shelf registration was available for further issuance.

Note 7—Processing Fees and Other

Processing fees and other revenue includes fees received from Deutsche Bank representing amounts earned on client deposits of the GSS business that have not yet moved to State Street, fees from software licensing and maintenance, loans, investment banking, structured products, profits or losses from joint ventures, gains and losses on sales of leased equipment and other assets, other trading profits and losses, amortization of investments in tax-advantage financings, and the residual interest from a variable interest entity.

PART I. ITEM 1.

FINANCIAL STATEMENTS (continued)

Notes to Consolidated Financial Statements—State Street Corporation (Unaudited)

Note 8—Net Interest Revenue

Net interest revenue consisted of the following:


	Three Months Ended March 31,
(Dollars in millions)	2003		2002

Interest Revenue
Deposits with banks	$	125	$	161

Investment securities:
U.S. Treasury and federal agencies		96		112
State and political subdivisions (exempt from federal tax)		17		17
Other investments		66		78
Commercial and financial loans		14		24
Lease financing		23		28
Securities purchased under resale agreements, securities borrowed and federal funds sold		51		96
Trading account assets		5		8

Total interest revenue		397		524

Interest Expense
Deposits		100		111
Other borrowings		76		111
Long-term debt		17		21

Total interest expense		193		243

Net interest revenue	$	204	$	281


Note 9—Operating Expenses—Other The other category of operating expenses consisted of the following:

	Three Months Ended March 31,
(Dollars in millions)	2003		2002

Professional services	$	20	$	21
Advertising and sales promotion		11		13
Other		50		45

Total operating expenses—other	$	81	$	79

Note 10—Income Taxes

During the three months ended March 31, 2003, State Street recorded a one-time tax charge related to Massachusetts tax legislation. This legislation retroactively amended the corporate income tax law affecting the treatment of dividends received from Real Estate Investment Trusts (REITs) for the 1999-2002 tax years. This charge was $25 million net of federal benefit. State Street’s estimated full-year tax rate for 2003 is 37.6%, excluding the impact of the REITs.

PART I. ITEM 1.

FINANCIAL STATEMENTS (continued)

Notes to Consolidated Financial Statements—State Street Corporation (Unaudited)

Note 11—Regulatory Capital

The regulatory capital amounts and ratios were the following at March 31, 2003, and December 31, 2002:


	Regulatory Guidelines⁽¹⁾				State Street						State Street Bank
(Dollars in millions)	Minimum		Well Capitalized		2003			2002			2003			2002

Risk-based ratios:
Tier 1 capital	4	%	6	%		17.1	%		17.1	%		15.4	%		16.4	%
Total capital	8		10			18.1			18.0			15.5			16.5

Tier 1 leverage ratio	3		5			5.6			5.6			5.5			5.7

Tier 1 capital					$	4,268		$	4,727		$	3,748		$	4,449
Total capital						4,514			4,975			3,774			4,476

Adjusted risk-weighted assets and market-risk equivalents:
On-balance sheet					$	17,085		$	19,382		$	16,528		$	18,857
Off-balance sheet						7,538			7,925			7,543			7,930
Market-risk equivalents						306			342			266			317

Total					$	24,929		$	27,649		$	24,337		$	27,104

Quarterly average adjusted assets					$	75,753		$	84,031		$	68,714		$	77,563

(1)

State Street must meet the regulatory designation of “well capitalized” in order to maintain its status as a financial holding company. In addition, Regulation Y defines “well capitalized” for a bank holding company such as State Street for the purpose of determining eligibility for a streamlined review process for acquisition proposals. For such purposes, “well capitalized” requires State Street to maintain a minimum Tier 1 risk-based capital ratio of 6% and a minimum total risk-based capital ratio of 10%.

Note 12—Lines of Business

The following is a summary of the lines of business financial results for the three months ended March 31:


	Investment Servicing				Investment Management				Business Divestiture⁽¹⁾			Other/ One-Time⁽²⁾			Total
(Dollars in millions, except where otherwise noted; taxable equivalent)	2003		2002		2003		2002		2003	2002		2003		2002	2003		2002

Total Revenue	$	871	$	803	$	149	$	154		$	24				$	1,020	$	981
Income before income taxes		203		239		20		18			9	$	(37)			186		266
Average assets (billions)		75.8		74.0		1.9		1.9			0.6					77.7		76.5

(1)

Results of operations of the corporate trust operations divestiture.

(2)

Merger and integration expenses.

PART I. ITEM 1.

FINANCIAL STATEMENTS (continued)

Notes to Consolidated Financial Statements—State Street Corporation (Unaudited)

Note 13—Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:


	Three Months Ended March 31,
(Dollars in millions, except per share data; shares in thousands)	2003		2002

Net Income	$	96	$	178
Earnings per share:
Basic	$	.29	$	.55
Diluted		.29		.54
Basic average shares		329,569		323,689
Stock options and stock awards		2,336		4,908
7.75% convertible subordinated debentures		149		402

Dilutive average shares		332,054		328,999

Stock options to purchase approximately 19.3 million and 2.0 million shares were outstanding at March 31, 2003 and 2002, respectively, but not included in the computation of diluted earnings per share because the stock options’ exercise prices were greater than the average market price during the period.

Note 14—Contingent Liabilities

State Street provides custody, accounting, daily pricing and administration; master trust and master custody; investment management; trustee and recordkeeping; foreign exchange; securities lending; cash management; trading; and information services to clients worldwide. Assets under custody and assets under management are held by State Street in a fiduciary or custodial capacity and are not included in the Consolidated Statement of Condition because such items are not assets of State Street. Management conducts regular reviews of its responsibilities for these services and considers the results in preparing its financial statements. In the opinion of management, there are no contingent liabilities at March 31, 2003, that would have a material adverse effect on State Street’s financial position or results of operations.

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

PART I. ITEM 1.

FINANCIAL STATEMENTS (continued)

Notes to Consolidated Financial Statements—State Street Corporation (Unaudited)

Note 15—Off-Balance Sheet Financial Instruments, Including Derivatives

State Street uses various off-balance sheet financial instruments, including derivatives. The following table summarizes the contractual or notional amounts of derivative financial instruments held or issued by State Street for trading and balance sheet management:


(Dollars in millions)	March 31, 2003		December 31, 2002

Trading:
Interest rate contracts:
Swap agreements	$	4,897	$	3,847
Options and caps purchased		355		351
Options and caps written		491		483
Futures—short position		17,815		15,078
Options on futures purchased		20		—
Options on futures written		20		—

Foreign exchange contracts:
Forward, swap and spot		265,299		227,782
Options purchased		278		350
Options written		163		136
Futures		—		409

Balance Sheet Management:
Interest rate contracts:
Swap agreements		1,823		2,020

In connection with its interest rate risk management strategies, State Street has executed interest rate swap agreements with a notional value of $1.1 billion at March 31, 2003, designated as fair value hedges to hedge the changes in the fair value of certain securities. For the three months ended March 31, 2003, State Street recognized net pre-tax losses of approximately $1 million, which represented the ineffective portion of the hedge.

State Street has designated interest rate swaps with a notional value of $150 million as cash flow hedges to its floating rate debt. These interest rate swaps constitute a fully effective hedge. In addition, State Street entered into interest rate swaps with a notional value of $500 million effective February 20, 2002, a notional value of $50 million effective June 11, 2002, and a notional value of $50 million effective July 9, 2002, designated as fair value hedges to hedge certain of its fixed rate debt issuances. The fair value hedge swaps increased the value of long-term debt presented in the Statement of Condition by $57 million. For the three months ended March 31, 2003, the Corporation’s overall weighted average interest rate for long-term debt was 6.14% on a contractual basis and 4.45% including the effects of derivative contracts.

In January 2003, in connection with its acquisition of the GSS business (see Note 2), State Street issued $345 million, or 1.7 million units, of SPACES. SPACES are collateralized, forward purchase contract units for additional shares of common stock of State Street. Each SPACES has a stated amount of $200 and consists of PACES, a fixed-share purchase contract and treasury securities, and COVERS, a variable-share repurchase contract. The SPACES investors will receive total annual payments of 6.75% on the units, payable quarterly, consisting of an annual 4.00% contract payment on the COVERS, an annual 0.75% contract payment on the PACES and a 2.00% annual return on the underlying treasury securities. These payments, the present value of which totaled $45 million, were treated as a cost of capital and debited against surplus upon issuance. State Street will receive the proceeds of $345 million and issue common stock upon settlement on November 15, 2005, of the fixed share purchase contracts underlying the SPACES units.

PART I. ITEM 1.

FINANCIAL STATEMENTS (continued)

Notes to Consolidated Financial Statements—State Street Corporation (Unaudited)

Note 15—Off-Balance Sheet Financial Instruments, Including Derivatives (continued)

The following is a summary of the contractual amount of State Street’s credit-related, off-balance sheet financial instruments:


(Dollars in millions)	March 31, 2003		December 31, 2002

Indemnified securities on loan	$	149,078	$	131,991
Asset purchase agreements		14,635		14,044
Loan commitments		12,464		12,499
Standby letters of credit		3,276		3,252
Letters of credit		37		106

On behalf of its clients, State Street lends their securities to creditworthy brokers and other institutions. In certain circumstances, State Street may indemnify its clients for the fair market value of those securities against a failure of the borrower to return such securities. State Street requires the borrowers to provide collateral in an amount equal to or in excess of 102% of the fair market value of the securities borrowed. The borrowed securities are revalued daily to determine if additional collateral is necessary. State Street held, as collateral, cash and U.S. government securities totaling $155.3 billion and $134.6 billion for indemnified securities on loan at March 31, 2003, and December 31, 2002, respectively.

Loan commitments (unfunded loans and unused lines of credit), asset purchase agreements, standby letters of credit and letters of credit are issued to accommodate the financing needs of State Street’s clients and to provide credit enhancements to variable interest entities. Loan commitments are agreements by State Street to lend monies at a future date. Asset purchase agreements are commitments to purchase receivables or securities, subject to conditions established in the agreements.

Approximately 88% of the loan commitments and asset purchase agreements will expire in one year or less from the date of issue. Since many of the commitments are expected to expire or renew without being drawn, the total commitment amounts do not necessarily represent future cash requirements.

State Street provides liquidity and credit enhancement facilities in the forms of liquidity asset purchase agreements, lines of credit, and standby letters of credit to two types of variable interest entities (“VIEs”). One type, which State Street administers, issues asset-backed commercial paper (“ABCP”). At March 31, 2003 and 2002, State Street’s commitments under liquidity asset purchase agreements and lines of credit to these VIEs were $10.8 billion and $7.5 billion, respectively, and standby letters of credit were $636 million and $674 million, respectively, none of which were utilized. Amounts committed, but used, under the liquidity asset purchase agreements, lines of credit and standby letters of credit that State Street provides to these VIEs are included in the table above. Asset performance deterioration may cause the asset risk to shift from the ABCP investors to State Street as the liquidity provider for the asset as the VIE may need to repay maturing commercial paper by drawing the liquidity facilities (see Note 1).

For a second type of VIE, structured as a qualified special purpose entity in accordance with accounting principles generally accepted in the United States, State Street distributes and sells equity interests in tax-exempt investment-grade assets that are primarily sold to mutual fund clients. State Street provides liquidity asset purchase agreements to these entities. These liquidity asset purchase agreements obligate State Street to buy the equity interests in the underlying portfolio at par, which approximates market value, in the event that the

PART I. ITEM 1.

FINANCIAL STATEMENTS (continued)

Notes to Consolidated Financial Statements—State Street Corporation (Unaudited)

Note 15—Off-Balance Sheet Financial Instruments, Including Derivatives (continued)

re-marketing agent is unable to place the equity interests of the VIE with investors. The liquidity asset purchase agreements are subject to early termination by State Street in the event of payment default, bankruptcy of the issuer or credit enhancement provider, taxability, or downgrade of an asset below investment grade. State Street’s liquidity asset purchase agreements to these VIEs were $1.2 billion and $1.6 billion at March 31, 2003 and 2002, respectively, none of which were utilized.

Independent Accountants’ Review Report

The Stockholders and Board of Directors

State Street Corporation

We have reviewed the accompanying consolidated statement of condition of State Street Corporation as of March 31, 2003, and the related consolidated statements of income changes in stockholders’ equity and cash flows for the three-month periods ended March 31, 2003 and 2002. These financial statements are the responsibility of the Corporation’s management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.

We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated statement of condition of State Street Corporation as of December 31, 2002, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the year then ended (not presented herein) and in our report dated January 10, 2003, except for Note 25, as to which the date is January 31, 2003, we expressed an unqualified opinion on those consolidated financial statements.

ERNST & YOUNG LLP

Boston, Massachusetts

April 14, 2003

PART I. ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

State Street prepares and reports its financial information in accordance with accounting principles generally accepted in the United States (“Reported” results). The first quarter 2003 financial information includes two months of financial operating results of the newly acquired Global Securities Services business (“GSS business”), the financing costs attributable to the acquisition, merger and integration costs attributable to the acquisition, and the impact of certain Massachusetts tax legislation. The first quarter of 2002 financial information includes the operating results of the divested corporate trust business.

Condensed Income Statement


	Three Months Ended March 31,
(Dollars in millions, except per share data)	2003		2002			$ Change			% Change

Reported Results
Fee revenue:
Servicing fees	$	438	$	369		$	69		19
Management fees		125		124			1		1
Global securities lending		55		64			(9	)	(14	)
Foreign exchange trading		72		68			4		7
Brokerage fees		30		23			7		29
Processing fees and other		70		49			21		40

Total fee revenue		790		697			93		13
Net interest revenue		204		281			(77	)	(27	)
Provision for loan losses		—		(1	)

Net interest revenue after provision for loan losses		204		280			(76	)	(27	)
Gains on sales of available-for-sale investment securities		26		4			22

Total revenue		1,020		981			39		4

Operating expenses:
Salaries and employee benefits		443		421			22		5
Information systems and communications		130		96			34		36
Transaction processing services		72		59			13		22
Occupancy		71		60			11		19
Merger and integration costs		37		—			37
Other		81		79			2		3

Total operating expenses		834		715			119		17

Income before income taxes		186		266			(80	)
Income taxes		90		88			2

Net income	$	96	$	178		$	(82	)	(46	)

Earnings per share:
Basic	$	.29	$	.55		$	(.26	)	(47	)
Diluted		.29		.54			(.25	)	(46	)

PART I. ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (continued)

In order to provide information on a comparable basis from period to period and to assist stockholders, analysts, other external parties and management in analyzing the financial results and trends of its ongoing businesses and operations, supplemental financial results on a “Baseline” results basis is presented below. In the Management’s Discussion and Analysis of Financial Condition and Results of Operations section that follows, the discussion will reference “Baseline” results, “GSS Contribution” results, and “Operating” results. These terms are defined as follows:

•

“Baseline” results are “Operating” results excluding “GSS Contribution,” and are presented on a taxable-equivalent basis

•

“GSS contribution” results are the revenue and expenses, including financing costs, attributable to the GSS business acquired January 31, 2003.

•

“Operating” results are “Reported” results excluding significant charges, merger and integration costs, and results of divested businesses, and are presented on a taxable-equivalent basis.

Supplemental Financial Information


	Three Months Ended March 31, 2003
(Dollars in millions, except per share data)	Baseline Results		GSS Contribution			Operating Results		Other			Reported Results

Income Statement—Baseline Reconciliation—Q1 2003
Fee Revenue:
Servicing fees	$	380	$	58		$	438				$	438
Management fees		122		3			125					125
Global securities lending		45		10			55					55
Foreign exchange trading		67		5			72					72
Brokerage fees		30					30					30
Processing fees and other		50		20			70					70

Total fee revenue		694		96			790					790
Net interest revenue		221		(4	)		217	$	(13	)⁽¹⁾		204
Provision for loan losses

Net interest revenue after provision for loan losses		221		(4	)		217		(13	)		204
Gains on sales of available-for-sale investment securities		26					26					26

Total revenue		941		92			1,033		(13	)		1,020

Operating expenses:
Salaries and employee benefits		408		35			443					443
Information systems and communications		100		30			130					130
Transaction processing services		65		7			72					72
Occupancy		64		7			71					71
Merger and integration costs									37			37
Other		68		13			81					81

Total operating expenses		705		92			797		37			834

Income before income taxes		236					236		(50	)		186
Income taxes		78					78		12	⁽²⁾		90
Taxable-equivalent adjustment		13					13		(13	)⁽¹⁾

Net income	$	145	$	—		$	145	$	(49	)	$	96

Earnings Per Share—Diluted	$	.46	$	(.02	)⁽³⁾	$	.44	$	(.15	)	$	.29

(1)

Taxable-equivalent adjustment.

(2)

Reflects the previously announced effect of certain Massachusetts tax legislation which results in an expense of $25 million, and the tax benefit associated with the merger and integration costs ($13 million).

(3)

The ($.02) dilution is due to changes in shares outstanding attributable to the acquisition.

PART I. ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (continued)

Supplemental Financial Information


	Three Months Ended March 31, 2002
(Dollars in millions, except per share data)	Baseline Results			Corp Trust Results		Other⁽¹⁾			Reported Results

Income Statement—Baseline Reconciliation—Q1 2002
Fee revenue:
Servicing fees	$	349		$	20				$	369
Management fees		124								124
Global securities lending		64								64
Foreign exchange trading		68								68
Brokerage fees		23								23
Processing fees and other		48			1					49

Total fee revenue		676			21					697
Net interest revenue		293			3	$	(15	)		281
Provision for loan losses		(1	)							(1	)

Net interest revenue after provision for loan losses		292			3		(15	)		280
Gains on sales of available-for-sale investment securities		4								4

Total revenue		972			24		(15	)		981

Operating expenses:
Salaries and employee benefits		413			8					421
Information systems and communications		94			2					96
Transaction processing services		58			1					59
Occupancy		59			1					60
Other		76			3					79

Total operating expenses		700			15					715

Income before income taxes		272			9		(15	)		266
Income taxes		85			3					88
Taxable-equivalent adjustment		15					(15	)		—

Net income	$	172		$	6	$	—		$	178

Earnings Per Share—Diluted	$	.52		$	.02	$	—		$	.54

(1)

Taxable-equivalent adjustment.

PART I. ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (continued)

Supplemental Financial Information


	Three Months Ended March 31,
(Dollars in millions, except per share data)	2003		2002			$ Change			% Change

Income Statement—Baseline⁽¹⁾
Fee revenue:
Servicing fees	$	380	$	349		$	31		9
Management fees		122		124			(2	)	(1	)
Global securities lending		45		64			(19	)	(30	)
Foreign exchange trading		67		68			(1	)	(1	)
Brokerage fees		30		23			7		29
Processing fees and other		50		48			2		5

Total fee revenue		694		676			18		3
Net interest revenue		221		293			(72	)	(24	)
Provision for loan losses		—		(1	)

Net interest revenue after provision for loan losses		221		292			(71	)	(24	)
Gains on sales of available-for-sale investment securities		26		4			22

Total revenue		941		972			(31	)	(3	)

Operating expenses:
Salaries and employee benefits		408		413			(5	)	(1	)
Information systems and communications		100		94			6		6
Transaction processing services		65		58			7		12
Occupancy		64		59			5		11
Other		68		76			(8	)	(10	)

Total operating expenses		705		700			5		1

Income before income taxes		236		272			(36	)	(13	)
Income taxes		78		85
Taxable-equivalent adjustment		13		15

Net income	$	145	$	172		$	(27	)	(16	)

Earnings per share—Diluted	$	.46	$	.52		$	(.06	)	(12	)

(1)

As defined and reconciled to reported results on earlier schedules.

Summary

State Street’s reported earnings in the first quarter of 2003 were $96 million or $.29 per share, down from $178 million or $.54 per share for the first quarter of 2002. The results for the first quarter of 2003 include two months of financial operating results of the newly acquired GSS business, the financing costs attributable to the acquisition, merger and integration costs attributable to the acquisition, and the impact of certain Massachusetts tax legislation. These items reduced earnings by $49 million or $.17 per share. The results for the first quarter of 2002 include the operating results of the recently divested corporate trust business equal to $6 million or $.02 of earnings per share.

On a comparable Baseline basis, which excludes the financial operating results of the newly acquired GSS business, the financing costs attributable to the acquisition, merger and integration costs attributable to the acquisition, and the impact of certain Massachusetts tax legislation in the first quarter of 2003 and excludes the impact of the operating results of the recently divested corporate trust business in the first quarter of 2002, the

PART I. ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (continued)

Baseline earnings were $145 million or $.46 per share in the first quarter of 2003 and $172 million or $.52 per share in the first quarter of 2002. The decline in Baseline results in 2003 is primarily due to lower net interest revenue, reflecting the continuing decline in interest rates and narrower interest rate spreads.

Total Revenue

In the first quarter of 2003, total reported revenue was $1,020 million, up $39 million, or 4%, compared to $981 million a year ago and included revenue from the GSS business acquisition of $96 million. On a Baseline results basis, total revenue was $941 million compared to $972 million in 2002, a decrease of $31 million primarily reflecting lower net interest revenues of $71 million, reflecting the continuing decline in interest rates and narrower interest rate spreads.

Fee Revenue

Fee revenue, as reported for the first quarter of 2003, was $790 million, up $93 million, from 2002, which included $21 million of fee revenue attributable to the divested corporate trust business. The increase in revenue is due to $96 million of revenue from the acquired GSS business. Servicing and management fees are the largest components of fee revenue. Combined, they comprise 71% of State Street’s total fee revenue. 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 volume of portfolio transactions, as well as types of products and services used by clients. Servicing and management fees are affected by changes in worldwide equity and fixed income valuations. In general, servicing fees are affected by changes in daily average valuations of assets under custody, and management fees are affected by changes in month-end valuations of assets under management. Management fee revenue is significantly more sensitive to market valuations than servicing fee revenue. State Street estimates, that a 10% increase or decrease in worldwide equity values would cause a corresponding change in State Street’s total revenue of approximately 2%. Similarly, as bond values worldwide increase or decrease by 10%, State Street would anticipate a corresponding change of approximately 1% in its total revenue.


	Daily Averages of Indices				Average of Month-End Indices
Index	March 31, 2003	March 31, 2002	Change		March 31, 2003	March 31, 2002	Change

S&P 500^®	861.1	1,132.2	(24	)%	848.3	1,128.1	(25	)%
NASDAQ^®	1,351.4	1,882.8	(28	)	1,333.2	1,837.0	(27	)
MSCI^® EAFE	911.6	1,123.8	(19	)	890.3	1,116.0	(20	)

Servicing fees are derived from custody, accounting, daily pricing and administration; master trust and master custody; trustee and recordkeeping; performance, risk and compliance analytics, and investment manager operations outsourcing. Servicing fees for the first quarter of 2003 were $438 million, up $69 million from the reported $369 million in the first quarter of 2002. The increase was primarily attributable to the servicing fee revenue generated by the GSS business acquisition of $58 million. The remaining increase was attributable to business gained through an acquisition in July 2002 and new business from new and existing clients, which more than offset the constraint imposed by the decline in comparable daily average equity market valuations noted above.

At March 31, 2003, total assets under custody were $7.9 trillion, including $1.9 trillion attributable to the GSS business. The value of assets under custody is a broad measure of the relative size of various markets served. Changes to the value of assets under custody do not result in proportional changes in revenue. State Street uses relationship pricing for clients who take advantage of multiple services. Many services are priced on factors

PART I. ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (continued)

other than asset values, including the mix of assets under custody, securities positions held, portfolio transactions, and types of products and services. For the GSS business portfolio for the first two months following the acquisition, the pricing reflects terms and services at the date of acquisition.

Management fees from investment management services, primarily delivered through State Street Global Advisors^®, were $125 million, compared to $124 million a year ago. Fees from the acquired GSS business added $3 million to management fees. Management fees reflected continued new business success, which largely offset the effects of significantly lower month-end average equity market valuations from a year ago as noted in the table above. Total assets under management were $788 billion, compared to $808 billion a year previously. The following table shows the change in assets under management since year-end:


(Dollars in billions) Assets Under Management

December 31, 2002	$	763
Net inflows from clients		42
Market appreciation (depreciation)		(17	)

March 31, 2003	$	788

Commencing with the first quarter of 2003, securities lending revenue previously included in both servicing fees and management fees is presented as a separate revenue item. Prior period results have been adjusted to reflect this presentation. Securities lending revenue was $55 million in the quarter, compared to $64 million the previous year. Securities lending fees from the acquired GSS business added $10 million to securities lending revenue. Excluding this acquisition revenue, the decline in securities lending reflects narrower interest-rate spreads due to a less favorable interest-rate environment compared to a year ago, which more than offset growth in volume of securities on loan.

Foreign exchange trading revenue was $72 million for the quarter compared to $68 million a year ago. Foreign exchange fees from the acquired GSS business added $5 million to foreign exchange lending. Excluding this revenue, foreign exchange trading revenue reflected relatively low average currency volatility in the quarter.

Brokerage fee revenues were $30 million compared to $23 million a year ago, driven by significantly higher equity trading volumes.

Processing fees and other revenue, which includes certain fees from Deutsche Bank related to the GSS business, profits and losses from joint ventures and other items, was $70 million in the quarter compared to $49 million a year ago. This increase was due to $20 million of fee revenue from the acquired GSS business. Until customers and their related deposits are converted to State Street systems, Deutsche Bank is making payments in consideration of revenue earned from GSS client deposits. These deposits will transfer to State Street when the custody business is converted, over the next several quarters.

PART I. ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (continued)

Net Interest Revenue

Net interest revenue for the first quarter of 2003 was $204 million, down from $281 million in the first quarter of 2002. State Street provides repurchase agreements and deposit services for clients’ investment activities, which generate net interest revenue.


	Three Months Ended March 31,
	2003				2002
(Dollars in millions)	Average Balance		Rate⁽¹⁾		Average Balance		Rate⁽¹⁾

Interest-earning assets	$	69,705	2.39	%	$	71,145	3.07	%
Interest-bearing liabilities		61,456	1.27			62,779	1.58

Excess of rate earned over rate paid			1.12	%			1.49	%

Net Interest Margin			1.27	%			1.69	%

(1)

Rates are calculated on a taxable-equivalent basis where the tax savings generated by tax-exempt investments is recorded as net interest revenue with a corresponding charge to income tax expense. Tax savings are computed using a federal income tax rate of 35%, adjusted for applicable state income taxes, net of the related federal tax benefit.

Net interest revenue was $204 million, a decline of $77 million, or 27%, from a year ago. Lower yields on assets, reflecting the continuing decline in interest rates, drove the decrease in net interest revenue. Net interest margin for the three months ended March 31, 2003, was 1.27%, compared to 1.69% for the comparable period in 2002. Rates earned in excess of rates paid decreased by 37 basis points year-over-year. Lower yields on assets, as maturing assets were reinvested at the lower market rates, combined with a reduction in the size of the balance sheet were responsible for the change. The first quarter of 2003 was an unusually challenging interest-rate environment. Average spreads between overnight and two-year rates were 40 basis points during the quarter, compared to 145 basis points a year ago. This flattening in the short end of the yield significantly limited opportunities to leverage the balance sheet and served to reduce net interest revenue. Net interest revenue in the first quarter of 2002 was very strong, reflecting the residual effect of eleven reductions in the targeted federal funds rate in 2001.

Gains of Sales of Available-for-Sale Securities

State Street realized securities gains of $26 million in the first quarter of 2003, up $22 million from the first quarter of last year. This increase was due to State Street taking advantage of continuing low market yields on fixed-income securities as average yields on the two-year Treasury Note dropped from 3.21% in the first quarter of 2002 to 1.65% in this year’s first quarter.

Operating Expenses

Operating expenses for the first quarter of 2003 were $834 million, up $119 million, or 17%, from $715 million a year ago. This includes $92 million of expenses related to the GSS business acquisition. Excluding GSS expenses in the first quarter of 2003 and expenses related to the divested corporate trust business in the first quarter of 2002, expenses increased $5 million, or less than 1%.

Salaries and employee benefits expenses increased $22 million to $443 million, including $35 million of costs from the addition of approximately 2,800 employees due to the acquisition of the GSS business in January 2003. Excluding the impact of the GSS business in 2003 and the corporate trust business in 2002, salaries and employee benefits were down $5 million as a result of reduced contract services and lower incentive compensation expense, which more than offset prior-year merit increases and higher benefits costs in 2003.

PART I. ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (continued)

Information systems and communications expense increased $34 million to $130 million, including $30 million in GSS information systems costs. Excluding GSS business costs in 2003 and corporate trust expenses in 2002, information systems and communication expenses increased by $6 million due to continued investment in core processing capabilities including costs related to our acquisition of IFS in the third quarter of 2002.

Transaction processing services expense increased $13 million to $72 million, including $7 million in GSS transaction processing costs. The remainder of the increase in costs was driven by higher trading volumes in our brokerage business, resulting from growth in our transition management business.

Occupancy expense increased $11 million to $71 million, including $7 million in facilities costs from the GSS acquisition. The remaining expense increase was due to rent escalations and higher insurance costs.

Merger and integration costs totaled $37 million for the quarter. These expenses consisted primarily of retention costs for employees associated with the GSS acquisition who will stay until customers have converted to State Street systems. Also included are professional fees and systems integration costs incurred to date.

Other operating expenses in the first quarter of 2003 increased $2 million to $81 million. The increase included $13 million of costs from GSS operations, including $4 million of amortization costs related to intangible assets acquired. Excluding the GSS costs, other expenses decreased due to continued cost control measures.

State Street currently has two expense reduction programs in place. The first program relates to maximizing cost synergies related to the GSS acquisition. State Street expects to generate $125-$150 million pre-tax cost savings in 2003 through its integration plan, which is expected to be substantially complete over the next 12-18 months. State Street expects to reduce its overall workforce relating to the GSS business integration, primarily in the U.S., over a 12-18 month period beginning in June 2003, by approximately 1,000 employees. Under the integration plan, GSS operations will be transitioned to State Street’s U.S. servicing platforms in Quincy, Massachusetts and Kansas City, Missouri from facilities in Jersey City, New Jersey and Nashville, Tennessee.

The second expense reduction program announced on April 10, 2003, relates to actions that will reduce State Street’s operating expenses by approximately $125 million for the remainder of 2003 compared to its first-quarter baseline run rate. These expense reductions, which are in addition to the GSS expense reductions, will be phased in during the second quarter of 2003. The two components of this program include bringing down directly controllable expenses and additional staff reductions of up to 1,800 people.

Income Taxes

Income taxes for the first quarter of 2003 were $90 million, up from $88 million in the first quarter of last year. Taxes for the first quarter of 2003 include a one-time $25 million after-tax charge resulting from newly-enacted Massachusetts tax legislation that retroactively disallowed State Street’s dividends-received deduction for dividends received from its REIT subsidiary.

State Street’s estimated full-year tax rate for 2003 without the effect of the Massachusetts tax law change is 35%. Adding the effect of the one-time charge for the Massachusetts tax law change would increase the rate from 35% to 37.6%.

GSS Acquisition and Integration

On January 31, 2003, State Street completed the primary closing of its acquisition of a substantial part of the global securities services business (“GSS business”) from Deutsche Bank AG. Under the terms of the definitive agreements, first announced on November 5, 2002, State Street’s initial payment to Deutsche Bank for all

PART I. ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (continued)

business units to be acquired was approximately $1.1 billion. A separate closing of business units in Italy and Austria, will be held upon receipt of applicable regulatory approvals. In the period ending on the one-year anniversary of the closing, State Street will make additional payments of up to an estimated €360 million, based upon performance of the acquired business. The merger and integration costs associated with the acquisition are expected to be $90-$110 million on a pre-tax basis, with $37 million recorded in the first quarter of 2003 and the balance to be recorded over the next three quarters. The GSS business had approximately $1.9 trillion of assets under custody at March 31, 2003, and contributed $96 million of fee revenue in the first quarter, including $58 million of servicing fees, $3 million of management fees, $10 million of securities lending revenue, and $5 million of foreign exchange trading revenue. Deutsche Bank compensated State Street with $20 million, recorded in processing fees, for revenue earned on client deposits not yet transferred to State Street.

State Street recorded $5 million of interest costs associated with the acquisition financing in net interest revenue in the first quarter. Operating expenses attributable to the GSS business were $92 million, including $35 million of salaries and benefits expenses, $7 million of transaction processing services expenses, $30 million of information systems and communications expenses, $7 million of occupancy expenses, and $13 million of other expenses.

The acquired business had no impact on operating net income in the quarter. State Street recorded $0.02 in dilution to earnings per share associated with the GSS business, which was attributable to the issuance of common stock used to partially fund the acquisition.

State Street incurred $37 million of merger and integration costs in the first quarter of 2003. These one-time expenses consisted primarily of costs for employee retention, system conversion costs and consulting services.

When initially announced in November 2002, the acquired business represented approximately €700 million in annualized revenue. Based on the first two months of operations, the business as acquired is generating approximately $576 million of annualized revenue. The lower annualized revenue rate reflects the effects of the delayed closings in Italy and Austria, the decline in worldwide equity values between August 2002 and the end of the first quarter, client attrition that was anticipated, and the effect on the GSS business of the same factors affecting State Street as a whole. These factors include a low-interest rate environment and lower cross border investment flows. Based on the first two months, the business is generating approximately $552 million of annualized expenses, in part, reflecting implementation of planned expense reductions. State Street is ahead of schedule in reducing GSS expenses, and plans to meet or exceed its targets for cost savings.

Based on the first two months operating results, including lower-than-expected financing costs that reflect the decline in market interest rates, State Street confirms its previously-disclosed expectation that the acquisition will be dilutive to earnings per share by approximately $0.01 to $0.03 per share from operations and financing costs. The merger and integration costs associated with the acquisition in 2003 are expected to be $90-$110 million on a pretax basis, approximately one-third of which were recorded in the first quarter.

Credit Quality

At March 31, 2003, total gross loans were $4.7 billion. At quarter end, the allowance for loan losses was $61 million, no change from a year ago. For the quarter ended March 31, 2003, the provision for loan losses charged against income was less than $1 million; there were no charge-offs and no recoveries during the first quarter of 2003. Non-performing assets at March 31, 2003, were $11 million, all of which were non-performing investment securities.

PART I. ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (continued)

Lines of Business

Following is a summary of line of business financial results for the three months ended March 31:


	Investment Servicing						Investment Management						Business Divestiture⁽¹⁾				Other/ One-Time⁽²⁾				Total
(Dollars in millions, except where otherwise noted)	2003			2002			2003			2002			2003	2002			2003			2002	2003		2002

Fee Revenue:
Servicing fees	$	438		$	349									$	20						$	438	$	369
Management fees							$	125		$	124											125		124
Securities lending		47			53			8			11											55		64
Foreign exchange trading		72			68																	72		68
Brokerage		30			23																	30		23
Processing fees and other		64			44			6			4				1							70		49

Total fee revenue		651			537			139			139				21							790		697
Net interest revenue after provision for losses		194			262			10			15				3							204		280
Gains on sale of available-for-sale securities, net		26			4																	26		4

Total revenue		871			803			149			154				24							1,020		981
Operating Expenses		668			564			129			136				15		$	37				834		715

Income before income taxes	$	203		$	239		$	20		$	18			$	9		$	(37	)		$	186	$	266

Pre-tax margin		23	%		30	%		13	%		12	%			38	%
Average assets (billions)	$	75.8		$	74.0		$	1.9		$	1.9			$	0.6						$	77.7	$	76.5

(1)

Results of operations of the corporate trust operations divestiture.

(2)

Merger and integration expenses.

Investment Servicing. Investment Servicing includes custody, accounting, daily pricing and administration; master trust and master custody; trustee and recordkeeping; foreign exchange and trading services; securities lending; deposit and short-term investment facilities; lease financing; investment manager operations outsourcing; and performance, risk and compliance analytics to support institutional investors. State Street’s 50%-owned affiliates, Boston Financial Data Services, Inc. and the International Financial Data Services group of companies, provide shareholder services, including mutual fund and collective fund shareholder accounting. Revenue from Investment Servicing comprised 85% of State Street’s total operating revenue for the three months ended March 31, 2003.

Total operating revenue for the three months ended March 31, 2003, increased $68 million to $871 million, up 8% from the first three months of 2002.

Servicing fees were up 25% for the first three months of 2003 from a year ago, to $438 million. Servicing fees are derived from custody, accounting, daily pricing and administration; master trust and master custody; trustee and recordkeeping; securities lending; performance, risk and compliance analytics; and investment manager operations outsourcing. Revenues from the GSS acquisition, the IFS acquisition and existing and new clients, drove growth in servicing fees, more than offsetting the adverse effect from the decline in comparable average equity market valuations. Total assets under custody were $7.9 trillion, compared to $6.3 trillion a year ago.

PART I. ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (continued)

Securities lending revenue decreased from $53 million to $47 million reflecting narrower interest-rate spreads due to a less favorable interest rate environment in 2003, which more than offset growth in volume of securities on loan and the added $10 million from the GSS business.

Foreign exchange trading revenue was $72 million for the first three months of 2003, compared to $68 million a year ago. The GSS business added $5 million to foreign exchange trading. Excluding this revenue, foreign exchange trading revenue reflected relatively low average currency volatility in the quarter.

Brokerage fee revenue for the three months ended March 31, 2003, was $30 million compared to $23 million a year ago, primarily reflecting an increase in transition management services.

Processing fees and other revenue increased $20 million to $64 million from $44 million. The increase is due to fees from the GSS acquisition. Excluding this item, processing fees and other revenue were relatively flat from 2002 to 2003.

Net interest revenue, after provision for loan losses for the first three months of 2003, was $194 million, compared to $262 million in 2002. Net interest revenue for the first three months of 2003 reflected the challenging interest rate environment. Net interest revenue in 2002 benefited early in the year from the reductions in the federal funds rate that occurred in the latter part of 2001.

Taking advantage of recent record-low yields on fixed-income securities in the market, State Street realized securities gains of $26 million for the first three months of 2003, an increase of $22 million from the prior year, by selling higher-yielding securities held in the available-for-sale portfolio.

Operating expenses for the three months ended March 31, 2003, were $668 million, up $104 million from the prior year. Of this increase, $92 million were due to acquired GSS operations.

Investment Management. Investment Management offers a broad array of services for managing financial assets, including investment management and investment research services for both institutions and individual investors worldwide. These services included active and passive U.S. and non-U.S. equity and fixed income strategies, and other related services, such as securities lending. Retirement benefit services are provided through State Street’s 50%-owned affiliate, CitiStreet, LLC. Revenue from this line of business comprised 15% of State Street’s total operating revenue for the three months ended March 31, 2003.

Total revenue for the three months ended March 31, 2003, was $149 million, down $5 million, from $154 million reported for the first three months of 2002. The slight increase in processing fees and other revenue was offset by decreases in securities lending revenue and net interest revenue.

Management fees from investment management services, delivered through State Street Global Advisors, were $125 million in the first three months of 2003, compared to $124 million a year ago. Management fees principally reflected new business from new and existing clients, constrained by significantly lower average equity market valuations from a year ago. Total assets under management were $788 billion, compared to $808 billion the previous year.

Operating expenses for the three months ended March 31, 2003 were $129 million, down $7 million.

Business Divestiture. Included in this category are the revenues and expenses related to the corporate trust operations sold in December 2002.

Liquidity and Capital

Liquidity. The primary objective of State Street’s liquidity management is to ensure that the Corporation has sufficient funds to meet its commitments and business needs, including accommodating the transaction and

PART I. ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (continued)

cash management requirements of its clients. Liquidity is provided by State Street’s access to global debt markets, its ability to gather additional deposits from its clients, maturing short-term assets, sales of securities, and repayment of clients’ loans. Client deposits and other funds provide multi-currency, geographically diverse sources of liquidity. State Street maintains a large portfolio of liquid assets. As of March 31, 2003, the Corporation’s defined liquid assets were $68 billion or 86% of total assets, the vast majority of which can be sold on the open market to meet liquidity needs. At March 31, 2003, State Street had defined short-term liabilities of $58 billion. State Street has $136 million in unrealized gains on available-for-sale investment securities at March 31, 2003.

Capital. State Street’s objective is to maintain a strong capital base in order to provide financial flexibility for its business needs, including funding corporate growth and supporting clients’ cash management needs. As a state-chartered bank and member of the Federal Reserve System, State Street Bank, State Street’s principal subsidiary, is primarily regulated by the Federal Reserve Board, which has established guidelines for minimum capital ratios. State Street has developed internal capital adequacy policies to ensure that State Street Bank meets or exceeds the level required for the “well capitalized” category, the highest of the Federal Reserve Board’s five capital categories. State Street Bank must meet the regulatory designation of “well capitalized” in order for State Street to maintain its status as a financial holding company. State Street’s capital management emphasizes risk exposure rather than asset levels. At March 31, 2003, State Street Bank’s Tier 1 risk-based capital ratio was 15.4% and the Corporation’s Tier 1 risk-based capital ratio was 17.1%. Both significantly exceed the regulatory minimum of 4% and the well-capitalized threshold of 6%. See Note 11 to the Notes to Consolidated Financial Statements for further information.

State Street’s Board of Directors has authorized the purchase of State Street common stock for use in employee benefit programs and for general corporate purposes. As of March 31, 2003, 8.3 million shares may be purchased under the stock purchase program. State Street employs a third-party broker-dealer to acquire shares for the Corporation’s stock purchase program on the open market.

Trading Activities: Foreign Exchange and Interest Rate Sensitivity

As part of its trading activities, the Corporation assumes positions in both the foreign exchange and interest rate markets by buying and selling cash instruments and using financial derivatives, including foreign exchange forward contracts, foreign exchange and interest rate options, and interest rate swaps. As of March 31, 2003, the notional amount of these derivative instruments was $289.3 billion, of which $265.3 billion were foreign exchange forward contracts. Long and short foreign exchange forward positions are closely matched to minimize currency and interest rate risk. All foreign exchange contracts are valued daily at current market rates.

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

Value at Risk for the three months ended March 31,


(Dollars in millions)	Average		Maximum		Minimum

2003:
Foreign exchange products	$	.9	$	2.2	$	.4
Interest rate products		1.6		2.8		1.2
2002:
Foreign exchange products	$	.8	$	1.7	$	.4
Interest rate products		3.1		4.3		2.3

PART I. ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (continued)

State Street compares actual daily profits and losses from trading activities to estimate one-day value at risk. During the first three months of 2003, State Street did not experience any trading losses in excess of its end-of-day value at risk estimate.

Financial Goals and Factors That May Affect Them

State Street’s primary financial goal is sustainable real growth in earnings per share. The Corporation has two supporting goals, one for total revenue growth and one for return on common stockholders’ equity (ROE). The long-term revenue goal is for a 12.5% real, or inflation adjusted, compound annual growth rate of revenue from 2000 through 2010. At present, this equates to approximately a 15% nominal compound annual growth rate. The return on stockholders’ equity goal is 13%-15% for 2003 and 2004. The company will revisit this goal in 2004.

State Street considers these to be financial goals, not projections or forward-looking statements. However, the discussion included in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in other portions of this report on Form 10-Q, may contain statements that are considered “forward-looking statements” within the meaning of the federal securities laws. These statements may be identified by such forward-looking terminology as “expect,” “look,” “believe,” “anticipate,” “may,” “will,” or similar statements or variations of such terms. The Corporation’s financial goals and such forward-looking statements involve certain risks and uncertainties, including the issues and factors listed below and factors further described in conjunction with the forward-looking information, which could cause actual results to differ materially.

Factors that may cause such differences include, but are not limited to, the factors discussed in this section and elsewhere in this Form 10-Q. Each of these factors, and others, are also discussed from time to time in the Corporation’s other filings with the Securities and Exchange Commission, including in the Corporation’s Form 10-K. The forward-looking statements contained in this report on Form 10-Q speak only as of the time the statements were given, and the Corporation does not undertake to revise those forward-looking statements to reflect events after the date of this report.

Cross-border investing. Increased cross-border investing by clients worldwide benefits State Street’s revenue. Future revenue may increase or decrease depending upon the extent of increases or decreases in cross-border investments made by clients or future clients. Economic and political uncertainties resulting from terrorist attacks, subsequent military actions or other events could result in decreased cross-border investment activities.

Savings rate of individuals. State Street generally benefits when individuals invest their savings in mutual funds and other collective funds or in defined contribution plans. Changes in savings rates or investment styles may affect revenue. If there is a decline in the savings rates of individuals, or if there is a change in investment preferences that leads to fewer investments in mutual funds, other collective funds, and defined contribution plans, State Street’s revenue may be adversely affected.

Asset Values in worldwide financial markets. As asset values in worldwide financial markets increase or decrease, State Street’s opportunities to invest and service financial assets may change. Since a portion of the Corporation’s fees are based on the value of assets under custody and management, fluctuations in the valuation of worldwide securities markets will affect revenue. State Street estimates, based on a recent study, that a 10% increase or decrease in worldwide equity values would cause a corresponding change in State Street’s total revenue of approximately 2%. If fixed income security values worldwide were to increase or decrease by 10%, State Street would anticipate a corresponding change of approximately 1% in its total revenue.

Dynamics of markets served. Changes in markets served, including the growth rate of collective funds worldwide, outsourcing decisions, mergers, acquisitions and consolidations among clients and competitors and

PART I. ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (continued)

the pace of debt issuance, can affect revenue. In general, State Street benefits from increases in the volume of financial market transactions serviced.

State Street provides services worldwide. Global and regional economic factors and changes or potential changes in laws and regulations affecting the Corporation’s business—including volatile currencies, pace of inflation, changes in monetary policy, changes in domestic and international banking supervisory regulations including capital requirements, and social and political instability—could affect results of operations. For example, the significant slowing of economic growth globally is affecting worldwide equity values and business growth. The terrorist attacks that took place in the United States on September 11, 2001, and subsequent military and terrorist activities, have caused economic and political uncertainties. These activities 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, and may have other adverse effects on many companies, including State Street, in ways that are not predictable. In a similar manner, financial reporting irregularities involving large and well-known companies may have other adverse effects on State Street in ways which are not predictable. In addition, State Street cannot predict the final form of, or the effects of, the regulatory accord on international banking institutions to be reached by the Basel Committee on Banking Supervision.

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

Accounting policies. Changes in accounting principles generally accepted in the United States applicable to State Street could have a material impact on the Corporation’s reported results of operations. While such changes may not have an economic impact on the business of State Street, these changes could affect the attainment of the current measures of the Corporation’s financial goals.

Interest rates. The levels of market interest rates, the shape of the yield curve and the direction of interest rate changes relative to the currency mix of the Corporation’s interest-bearing assets and liabilities affect net interest revenue and securities lending revenue. In the short term, State Street’s net interest revenue and securities lending revenue benefit from falling interest rates and are negatively affected by rising rates because interest-bearing liabilities reprice sooner than interest-earning assets. In general, sustained lower interest rates and a flat yield curve may have a constraining effect on the net interest revenue and securities lending revenue growth.

Liquidity. Any occurrence that may limit the Corporation’s access to the funds markets, such as a decline in the confidence of debt purchasers, depositors or counterparties participating in the funds markets in general or with State Street in particular, or a downgrade of State Street’s debt rating, may adversely affect State Street’s ability to raise capital and, in turn, its liquidity.

Capital. Under regulatory capital adequacy guidelines, State Street and State Street Bank must meet guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items, subject to qualitative judgments by regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements could have a direct material effect on State Street’s financial condition; failure to maintain the status of “well capitalized” under the regulatory framework could affect State Street’s status as a financial holding company and eligibility for streamlined review process for acquisition proposals. In addition, failure to maintain the status of “well capitalized” could affect the confidence of State Street’s clients in the Corporation and could adversely affect its business.

PART I. ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (continued)

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

Volatility of currency markets. The degree of volatility in foreign exchange rates can affect the amount of foreign exchange trading revenue. In general, State Street benefits from currency volatility. Accordingly, foreign exchange revenue is likely to decrease during times of decreased currency volatility.

Pace of pension reform. State Street expects its business to benefit from worldwide pension reform that creates additional pools of assets that use custody and related services, and investment management services. The pace of pension reform and resulting programs, including public and private pension schemes, may affect the pace of revenue growth. If the pace of pension reform and resulting programs, including public and private pension schemes, slows down or if pension reform does not occur, then revenue growth may be adversely affected.

Pricing/competition. Future prices the Corporation is able to obtain for its products may increase or decrease from current levels depending upon demand for its products, its competitors’ activities and the introduction of new products into the marketplace.

Pace of new business; Business mix. A decline in the pace at which State Street attracts new clients, and the pace at which existing and new clients use additional services and assign additional assets to State Street for management or custody, will adversely affect future results of operations. A decline in the rate at which clients outsource functions such as their internal accounting activities, would also adversely affect results of operations. In addition, changes in business mix and in the source of revenue, including the mix of U.S. and non-U.S. business, may affect future results of operations, depending on the economic conditions of those geographic areas at the time.

Business continuity. State Street has business continuity and disaster recovery plans in place. However, events, including terrorist or military actions and resulting political and social turmoil, could arise that would cause unforeseen damage to State Street’s physical facilities or could cause delays or disruptions to operational functions, including information processing and financial market settlement functions. Additionally, State Street’s clients, vendors and counterparties could suffer from such events. Should these events affect State Street, or the clients, vendors or counterparties with which it conducts business, State Street’s results of operations could be adversely affected.

Rate of technological change. Technological change creates opportunities for product differentiation and reduced costs, as well as the possibility of increased expenses. Developments in the securities processing industry, including shortened settlement cycles and straight-through-processing, will result in changes to existing procedures. Alternative delivery systems have emerged, including the widespread use of the Internet. State Street’s financial performance depends in part on its ability to develop and market new and innovative services, and to adopt or develop new technologies that differentiate State Street’s products or provide cost efficiencies.

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

PART I. ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS (continued)

State Street uses trademark, trade secret, copyright and other proprietary rights procedures to protect its technology, and has applied for a limited number of patents in connection with certain software programs. Despite these efforts, State Street cannot be certain that the steps taken by it to prevent unauthorized use of proprietary rights are sufficient to prevent misappropriation of technology, particularly outside the United States where laws or law enforcement practices may not protect proprietary rights as fully as in the United States. In addition, no assurance can be given that the courts will adequately enforce contractual agreements that State Street has entered into to protect its proprietary technology. If any of its proprietary information was misappropriated by or otherwise disclosed to its competitors, State Street’s competitive position could be adversely affected. In the event a third party asserts a claim of infringement of its proprietary rights, obtained through patents or otherwise, against the Corporation, State Street may be required to spend significant resources to defend against such claims, develop a non-infringing program or process, or obtain a license to the infringed process.

Acquisitions and alliances. Acquisitions of complementary businesses and technologies and development of strategic alliances and divestitures of portions of its business are an active part of State Street’s overall business strategy. The Corporation has completed several acquisitions, alliances and divestitures in recent years. However, there can be no assurance that services, technologies, key personnel or businesses of acquired companies will be effectively assimilated into State Street’s business or service offerings or that alliances will be successful. In addition, State Street may not be able to successfully complete any divestiture on satisfactory terms, if at all, and divestitures may result in a reduction of total revenue and net income.

Critical Accounting Estimates

The Securities and Exchange Commission (“SEC”) issued disclosure guidance for “critical accounting estimates.” The SEC defines “critical accounting estimates” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

State Street’s significant accounting policies are described in detail in Note 1 in the Notes to the Consolidated Financial Statements as included in State Street’s annual report on Form 10-K for the year ended December 31, 2002, and have been updated in Note 1 to the consolidated financial statements included in this quarterly report on Form 10-Q. State Street’s critical accounting estimates are described in management’s discussion and analysis of results of operations and financial condition as included in State Street’s annual report on Form 10-K for the year ended December 31, 2002. There have not been any significant changes in the factors or methodology used by management in determining its critical accounting estimates since December 2002, that are material in relation to the Corporation’s financial condition, changes in financial condition and results of operations.

PART I. ITEM 3.

Quantitative and Qualitative Disclosure About Market Risk

See information under the caption “Trading Activities: Foreign Exchange and Interest Rate Sensitivity” on page 28.

State Street’s Risk Management function is described in detail in the Corporation’s annual report on Form 10-K for the year ended December 31, 2002.

PART I. ITEM 4.

Controls and Procedures

The Corporation has established and maintains disclosure controls and procedures that are designed to ensure that material information relating to the Corporation and its subsidiaries required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Within the 90 days prior to the date of this quarterly report, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of the date of such evaluation.

The Chief Executive Officer and Chief Financial Officer have also concluded that there were no significant changes in the Corporation’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date that the Corporation completed its evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II—Other Information

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(c) Directors of the Corporation who are not employees receive an annual retainer of $50,000 payable at their election in shares of Common Stock of the Corporation or in cash, and may further elect to defer either 50% or 100% until after termination of their services as a director. In April 2003, a total of 14,840 shares were issued and receipt of 4,452 shares was deferred as payment for the 2003 annual retainer. Exemption from registration of the shares is claimed by the Corporation under Section 4(2) of the Securities Act of 1933.

Also, directors of the Corporation who are not employees each received an award of 2,672 shares of deferred stock, payable after the director leaves the Board or reaches age 65, for the period April 2003 through March 2004. In April 2003, a total of 39,188 shares were awarded, and receipt deferred, under these awards. Exemption from registration of the shares is claimed by the Corporation under Section 4(2) of the Securities Act of 1933.

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

Registrant’s annual meeting of stockholders was held on April 16, 2003. At the meeting, the following nominees for Director were elected:

	Number of Shares
	For	Withheld
Truman S. Casner	280,642,901	8,572,615
Arthur L. Goldstein	281,790,731	7,424,785
Richard P. Sergel	275,861,229	13,354,287
Ronald L. Skates	282,721,979	6,493,537
David A. Spina	281,333,675	7,881,841

The following directors continue in office: Tenley E. Albright, M.D., Nader F. Darehshori, David P. Gruber, Linda A. Hill, Charles R. LaMantia, Ronald E. Logue, Alfred Poe, Gregory L. Summe, Diana Chapman Walsh, and Robert E. Weissman.

Also at the meeting, the following action was voted upon:

	Number of Shares
	For	Against	Abstain or Not Voting	Broker Nonvotes
Vote to exempt the Board of Directors from Massachusetts General Laws, Chapter 156B, Section 50A(a)	108,121,108	136,577,292	3,406,620	41,110,496

Vote to amend the By-laws applicable to the audit committee and independent auditors, self-dealing, and interlocking directorships	170	289,214,115	1,231	—

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibit Index

Exhibit Number		Page of this Report
12	Ratio of earnings to fixed charges	39

15	Letter regarding unaudited interim financial information	40

99.1	Certification—Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	41

(b) Current Reports on Form 8-K

A current report on Form 8-K dated March 5, 2003 was filed, by the Registrant, on March 6, 2003 with the Securities and Exchange Commission that announced that, as a result of Massachusetts legislation amending the corporate income tax law affecting the treatment of dividends received from Real Estate Investment Trusts (REITs), dividends received from the Company’s REIT subsidiary are no longer eligible for a dividends-received deduction.

A current report on Form 8-K dated March 20, 2003 was filed, by the Registrant, on March 24, 2003 with the Securities and Exchange Commission that announced expected reported earnings per share for the first quarter of 2003.

A current report on Form 8-K dated April 10, 2003 was filed, by the Registrant, on April 14, 2003 with the Securities and Exchange Commission that announced that it is initiating a number of actions that will reduce its operating expenses for the remainder of 2003, compared to its first quarter run rate.

A current report on Form 8-K dated April 15, 2003 was filed, by the Registrant, on April 15, 2003 with the Securities and Exchange Commission that announced first-quarter results, and furnishing selected financial information for the quarter.

A current report on Form 8-K dated May 6, 2003 was filed, by the Registrant, on May 6, 2003 with the Securities and Exchange Commission that announced webcast investor presentation by senior executives.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	STATE STREET CORPORATION

Date: May 9, 2003	By:	/s/ EDWARD J. RESCH
		Edward J. Resch, Executive Vice President and Chief Financial Officer



Date: May 9, 2003	By:	/s/ FREDERICK P. BAUGHMAN
		Frederick P. Baughman, Senior Vice President, Controller and Chief Accounting Officer

CERTIFICATION

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, David A. Spina, certify that:

1. I have reviewed this quarterly report on Form 10-Q of State Street Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003

By:

/s/ DAVID A. SPINA

David A. Spina,

Chairman and Chief Executive Officer

CERTIFICATION

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Edward J. Resch, certify that:

1. I have reviewed this quarterly report on Form 10-Q of State Street Corporation;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: May 9, 2003

By:

/s/ EDWARD J. RESCH

Edward J. Resch,

Executive Vice President and Chief Financial Officer