# UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

# THE	SECURITIES	EXCHANGE	ACT	OF	1934

For	the	fiscal	year	ended	December	31,	2006

# STATE	STREET	CORPORATION

(Exact	name	of	registrant	as	specified	in	its	charter)

Massachusetts

(State	or	other	jurisdiction	of	incorporation)

One	Lincoln	Street

Boston,	Massachusetts

(Address	of	principal	executive	office)

(I.R.S.	Employer	Identification	No.)

(Zip	Code)

(Registrant's	telephone	number,	including	area	code)

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

# (Title	of	Each	Class)

Common	Stock,	$1	par	value

(Name	of	each	exchange	on	which	registered)

Boston	Stock	Exchange

New	York	Stock	Exchange

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

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

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

Indicate	by	check	mark	whether	the	registrant	(1)	has	filed	all	reports	required	to	be	filed	by	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934	during	the	preceding	12 months	(or	for	such	shorter	period	that	the	registrant	was	required	to	file	such	reports)	and	(2)	has	been	subject	to	such	filing	requirements	for	the	past	90	days.	Yes	x		No	o Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of	registrant's knowledge,	in	definitive	proxy	or	information	statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment	to	this	Form	10-K.	o

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

Large	accelerated	filer	x											Accelerated	filer	o											Non-accelerated	filer	o

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

The	aggregate	market	value	of	the	voting	and	non-voting	common	equity	held	by	non-affiliates	computed	by	reference	to	the	price	at	which	the	common	equity	was	last	sold	as of	the	last	business	day	of	the	registrant's	most	recently	completed	second	fiscal	quarter	(June	30,	2006)	was	approximately	$19.18	billion.

The	number	of	shares	of	the	registrant's	Common	Stock	outstanding	as	of	January	31,	2007	was	333,845,013.

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

(1)	The	registrant's	definitive	Proxy	Statement	for	the	2007	Annual	Meeting	to	be	filed	pursuant	to	Regulation	14A	on	or	before	April	30,	2007	(Part	III).

# Table	of	Contents

| Item	1 | Business | 1 |
| :--- | :--- | :--- |
| Item\t1A | Risk\tFactors | 6 |
| Item\t1B | Unresolved\tStaff\tComments | 13 |
| Item\t2 | Properties | 14 |
| Item\t3 | Legal\tProceedings | 14 |
| Item\t4 | Submission\tof\tMatters\tto\ta\tVote\tof\tSecurity\tHolders | 14 |
| Item\t4A | Executive\tOfficers\tof\tthe\tRegistrant | 15 |
| PART\tII |  |  |
| Item\t5 | Market\tfor\tRegistrant's\tCommon\tEquity\tand\tRelated\tStockholder\tMatters | 17 |
| Item\t6 | Selected\tFinancial\tData | 19 |
| Item\t7 | Management's\tDiscussion\tand\tAnalysis\tof\tFinancial\tCondition\tand\tResults\tof |  |
|  | Operations | 20 |
| Item\t7A | Quantitative\tand\tQualitative\tDisclosures\tAbout\tMarket\tRisk | 66 |
| Item\t8 | Financial\tStatements\tand\tSupplementary\tData | 66 |
| Item\t9 | Changes\tin\tand\tDisagreements\twith\tAccountants\ton\tAccounting\tand\tFinancial |  |
|  | Disclosure | 117 |
| Item\t9A | Controls\tand\tProcedures | 117 |
| Item\t9B | Other\tInformation | 119 |
| PART\tIII |  |  |
| Item\t10 | Directors,\tExecutive\tOfficers\tand\tCorporate\tGovernance | 120 |
| Item\t11 | Executive\tCompensation | 120 |

| Item	12 | Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related |  |
| :--- | :--- | :--- |
|  | Stockholder\tMatters | 121 |
| Item\t13 | Certain\tRelationships\tand\tRelated\tTransactions,\tand\tDirector\tIndependence | 122 |
| Item\t14 | Principal\tAccountant\tFees\tand\tServices | 122 |
| PART\tIV |  |  |
| Item\t15 | Exhibits\tand\tFinancial\tStatement\tSchedules | 123 |
|  | Signatures | 127 |
|  | Exhibit\tIndex | 129 |

# PART	I

State	Street	Corporation	is	a	financial	holding	company	organized	under	the	laws	of	the	Commonwealth	of	Massachusetts,	and	through	its	subsidiaries,	provides	a full	range	of	products	and	services	for	institutional	investors	worldwide.	Unless	otherwise	indicated	or	unless	the	context	requires	otherwise,	all	references	in	this Form	10-K	to	"State	Street,"	"we,"	"us,"	"our"	or	similar	terms	mean	State	Street	Corporation	and	its	subsidiaries	on	a	consolidated	basis.	The	parent	company	is	a	legal entity	separate	and	distinct	from	its	subsidiaries,	assisting	those	subsidiaries	by	providing	financial	resources	and	management.	At	December	31,	2006,	we	had	total assets	of	$107.35	billion,	total	deposits	of	$65.65	billion,	total	shareholders'	equity	of	$7.25	billion	and	employed	21,700.	Our	executive	offices	are	located	at One	Lincoln	Street,	Boston,	Massachusetts	02111	(telephone	(617)	786-3000).

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

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

In	February	2007,	we	announced	a	definitive	agreement	to	acquire	Investors	Financial	Services	Corp.,	or	"Investors	Financial,"	a	$12	billion	bank	holding company	based	in	Boston.	Under	the	terms	of	the	agreement,	we	will	exchange	.906	shares	of	our	common	stock	for	each	share	of	Investors	Financial	common	stock. The	transaction	is	subject	to	customary	conditions,	including	the	approvals	of	Investors	Financial	shareholders	and	regulatory	agencies,	and	we	expect	to	close	the acquisition	in	the	third	quarter	of	2007.	The	acquisition	will	be	accounted	for	as	a	purchase.	Additional	information	about	this	acquisition	is	included	in	"Management's Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations"	included	in	this	Form	10-K	under	Item	7.

# GENERAL

We	were	organized	under	the	laws	of	the	Commonwealth	of	Massachusetts	in	1970	and	we	conduct	our	business	primarily	through	our	principal	bank	subsidiary, State	Street	Bank	and	Trust	Company,	which	we	refer	to	in	this	Form	10-K	as	"State	Street	Bank"	or	"the	Bank."	State	Street	Bank	traces	its	beginnings	to	the	founding of	the	Union	Bank	in	1792.	The	charter	under	which	State	Street	Bank	now	operates	was	authorized	by	a	special	act	of	the	Massachusetts	Legislature	in	1891,	and	its present	name	was	adopted	in	1960.

With	$11.85	trillion	of	assets	under	custody	and	$1.75	trillion	of	assets	under	management	at	year-end	2006,	we	are	a	leading	specialist	in	meeting	the	needs	of institutional	investors	worldwide.	Our	customers	include	mutual	funds	and	other	collective	investment	funds,	corporate	and	public	retirement	plans,	insurance companies,	foundations,	endowments	and	other	investment	pools,	and	investment	managers.

Including	the	United	States,	we	operate	in	26	countries	and	more	than	100	geographic	markets	worldwide.	For	a	discussion	of	our	business	activities,	refer	to	the	"Lines of	Business"	section	that	follows.	For	information	about	our	management	of	capital,	liquidity,	market	risk,	including	interest-rate	risk,	and	other	risks	inherent	in	our businesses,	refer	to	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations,"	included	under	Item	7	of	this	Form	10-K.	Financial information	with	respect	to	our	non-U.S.	activities	is	included	in	Note	23	of	the	"Notes	to	Consolidated	Financial	Statements"	included	in	this	Form	10-K	under	Item	8	.

# LINES	OF	BUSINESS

We	report	two	lines	of	business:	Investment	Servicing	and	Investment	Management.	These	two	lines	of	business	provide	services	to	support	institutional	investors, including	custody,	recordkeeping,	daily	pricing	and	administration,	shareholder	services,	foreign	exchange,	brokerage	and	other	trading	services,	securities	finance, deposit	and	short-term	investment	facilities,	loan	and	lease	financing,	investment	manager	and	hedge	fund	manager	operations	outsourcing,	performance,	risk	and compliance	analytics,	investment	research	and	investment	management,	including	passive	and	active	U.S.	and	non-U.S.	equity	and	fixed	income	strategies.	For additional	information	about	our	lines	of	business,	see	the	"Line	of	Business	Information"	section	of	Management's	Discussion	and	Analysis	included	under	Item	7,	and Note	22	of	the	"Notes	to	Consolidated	Financial	Statements"	included	under	Item	8,	of	this	Form	10-K.

# COMPETITION

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

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

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

# SUPERVISION	AND	REGULATION

We	are	registered	with	the	Board	of	Governors	of	the	Federal	Reserve	System,	or	"Federal	Reserve	Board,"	as	a	bank	holding	company	pursuant	to	the	Bank Holding	Company	Act	of	1956,	as	amended,	or	"the	Act."	The	Act,	with	certain	exceptions,	limits	the	activities	in	which	we	and	our	non-bank	subsidiaries	may	engage, including	non-bank	companies	for	which	we	own	or	control	more	than	5%	of	a	class	of	voting	shares,	to	those	that	the	Federal	Reserve	Board	considers	to	be	closely related	to	banking	or	managing	or	controlling	banks.	The	Federal	Reserve	Board	may	order	a	bank	holding	company	to	terminate	any	activity	or	its	ownership	or	control

of	a	non-bank	subsidiary	if	the	Federal	Reserve	Board	finds	that	such	activity,	ownership	or	control	constitutes	a	serious	risk	to	the	financial	safety,	soundness	or stability	of	a	bank	subsidiary	or	is	inconsistent	with	sound	banking	principles	or	statutory	purposes.	In	the	opinion	of	management,	all	of	our	present	subsidiaries	operate within	the	statutory	standard	or	are	otherwise	permissible.	The	Act	also	requires	a	bank	holding	company	to	obtain	prior	approval	of	the	Federal

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

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

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

# Capital	Adequacy

Like	other	bank	holding	companies,	we	are	subject	to	Federal	Reserve	Board	minimum	risk-based	capital	and	leverage	ratio	guidelines.	State	Street	Bank	is	subject to	similar	risk-based	capital	and	leverage	ratio	guidelines.	As	of	December	31,	2006,	our	capital	levels	on	a	consolidated	basis,	and	the	capital	levels	of	the	Bank, exceeded	the	applicable	minimum	capital	requirements.	Failure	to	meet	capital	requirements	could	subject	us	to	a	variety	of	enforcement	actions,	including	the termination	of	deposit	insurance	of	the	Bank	by	the	Federal	Deposit	Insurance	Corporation,	or	"FDIC,"	and	to	certain	restrictions	on	our	business	that	are	described further	in	this	"Supervision	and	Regulation"	section.

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

# Subsidiaries

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

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

countries	in	which	they	are	located.	As	of	December	31,	2006,	the	capital	of	each	of	these	banking	subsidiaries	exceeded	the	minimum	legal	capital	requirements	as	set by	those	authorities.

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

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

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

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

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

subsidiaries.	An	Agreement

corporation	subsidiary	is	a	subsidiary	organized	under	state	law	that	operates	as	if	it	was	organized	under	federal	law	and	is	subject	to	Regulation	K.	Agreement corporation	subsidiaries	are	generally	restricted	to	foreign	banking	operations.	The	Bank	has	applied	to	renew	its	approval	to	invest	18%	of	its	capital	and	surplus, which	is	less	than	the	maximum	20%	permitted	by	law.

Historically,	we	generally	have	invested	abroad	through	our	Edge	Act	corporation	subsidiaries.	However,	under	Federal	Reserve	Board	Regulation	Y,	we	may continue	to	make	new	investments	abroad	directly	(through	the	parent	company	or	through	direct,	non-bank	subsidiaries	of	the	parent	company)	or	through	international bank	branch	expansion	without	being	subject	to	the	20%	investment	limitation	for	Edge	Act	corporation	subsidiaries.	We	cannot	predict	with	certainty	the	impact	of	the Edge	Act	corporation	subsidiary	investment	limitation	on	the	pace	of	our	future	international	expansion.	Nonetheless,	in	light	of	available	alternatives,	we	do	not	believe that	the	Edge	Act	corporation	subsidiary	investment	limitation	will	materially	limit	our	ability	to	expand	internationally.

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

# Support	of	Subsidiary	Banks

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

# ECONOMIC	CONDITIONS	AND	GOVERNMENT	POLICIES

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

# STATISTICAL	DISCLOSURE	BY	BANK	HOLDING	COMPANIES

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

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

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

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

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

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

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

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

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

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

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

looking	statements	may	include	statements	about	State	Street's	confidence	in	its	strategies	and	its	expectations	about	revenue	and	market	growth,	acquisitions	and divestitures,	new	technologies,	services	and	opportunities,	and	earnings.

Forward-looking	statements	are	subject	to	various	risks	and	uncertainties,	which	change	over	time,	and	are	based	on	management's	expectations	and	assumptions	at

the	time	the	statements	are	made.	These	expectations	and	assumptions,	and	the	continued	validity	of	the	forward-looking	statements,	are	subject	to	change	due	to	a	broad range	of	factors	affecting	the	national	and	global	economies,	the	equity,	debt,	currency	and	other	financial	markets,	and	factors	specific	to	the	parent	company	and	to	the Bank.	Factors	that	could	cause	changes	in	the	expectations	or	assumptions	on	which	forward-looking	statements	are	based	include,	but	are	not	limited	to:

·							Economic	conditions	and	monetary	and	other	governmental	actions	designed	to	address	those	conditions;

·							The	performance	and	volatility	of	securities,	currency	and	other	markets	in	the	U.S.	and	internationally;

·							The	level	and	volatility	of	interest	rates,	particularly	in	the	U.S.	and	Europe;

·							Our	ability	to	attract	non-interest	bearing	deposits	and	other	low-cost	funds;

·							The	enactment	of	legislation,	including	tax	legislation,	and	changes	in	regulation	and	enforcement	that	impact	State	Street	and	its	customers;

·							The	competitive	environment	in	which	we	operate,	including	the	willingness	of	our	competitors	to	reduce	fees	or	add	to	their	products	and	services	to	seek	to attract	our	customers,	as	well	as	our	ability	to	cross-sell	services	to	our	customers	and	to	maintain	service	levels,	technology	and	product	offerings	that	are sufficient	to	attract	new	customers	and	retain	current	customers;

·							Our	ability	to	continue	to	grow	revenue,	control	expenses	and	attract	the	capital	necessary	to	achieve	our	business	goals	and	comply	with	regulatory requirements;

·							Our	ability	to	control	systemic	and	operating	risks;

·							Trends	in	the	globalization	of	investment	activity	and	the	growth	on	a	worldwide	basis	in	financial	assets;

·							Trends	in	governmental	and	corporate	pension	plans	and	savings	rates;

·							Changes	in	accounting	standards	and	practices,	including	changes	in	the	interpretation	of	existing	standards,	that	impact	our	consolidated	financial	statements;

·							Changes	in	tax	legislation	and	in	the	interpretation	of	existing	tax	laws	by	U.S.	and	non-U.S.	tax	authorities	that	impact	the	amount	of	taxes	due.

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

In	addition	to	factors	discussed	above	and	elsewhere	in	this	Form	10-K	or	previously	disclosed	in	our	other	SEC	filings,	the	factors	discussed	below	could	cause actual	future	results	to	differ	materially	from	those	contemplated	by	forward-looking	statements	and	from	our	historical	financial	results.	State	Street	undertakes	no obligation	to	revise	the	forward-looking	statements	contained	in	this	Form	10-K	to	reflect	events	after	the	date	it	is	filed	with	the	SEC.	These	factors	are	not	intended	to be	a	complete	summary	of

all	risks	and	uncertainties	that	may	affect	our	businesses.	Though	we	strive	to	monitor	and	mitigate	risk,	we	cannot	anticipate	all	potential	economic,	operational	and financial	developments	that	may	adversely	impact	our	operations	and	our	financial	results.

# Business	Conditions/Economic	Risk

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

A	significant	market	downturn	may	lead	to	a	decline	in	the	value	of	assets	under	management	and	custody,	which	would	reduce	our	asset-based	fee	revenue	and	the value	of	securities	we	hold	in	our	investment	portfolio,	and	may	adversely	impact	transaction	revenue	and	the	volume	of	transactions	that	we	execute	for	our	customers. In	addition,	lower	market	volatility,	even	in	a	generally	rising	market	environment,	may	reduce	trading	volumes	of	our	customers,	and	our	ability	to	achieve	attractive spreads,	which	could	lead	to	lower	trading	revenues.	Our	revenues,	particularly	our	trading	revenues,	may	increase	or	decrease	depending	upon	the	extent	of	increases	or decreases	in	cross-border	investments	made	by	our	customers.	The	level	of	cross-border	activity	can	be	influenced	by	a	number	of	factors,	including	geopolitical instabilities	and	customer	mix.	General	market	downturns	would	also	likely	lead	to	a	decline	in	the	volume	of	transactions	we	execute	on	behalf	of	our	customers, decreasing	our	fee	and	revenue	opportunities	and	reducing	the	level	of	assets	under	management	and	custody.

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

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

# Strategic/Competition	Risk

We	expect	the	markets	in	which	we	operate	to	remain	both	highly	competitive	and	global	across	all	facets	of	our	business,	resulting	in	increases	in	both	regional	and global	competitive	risks.	We	have	experienced,	and	anticipate	that	we	will	continue	to	experience,	pricing	pressure	in	many	of	our	core	businesses.	Many	of	our businesses	compete	with	other	domestic	and	international	banks	and	financial	services	companies,	such	as	custody	banks,	investment	advisors,	broker/dealers, outsourcing	companies	and	data	processing	companies.	Many	of	our	competitors,	including	our	competitors	in	core	services,	have	substantially	greater	capital	resources. In	some	of	our	businesses,	we	are	service	providers	to	significant	competitors.	The	ability	of	a	competitor	to	offer	comparable	or	improved	products	or	services	at	a lower	price	would	likely	negatively	affect	our	ability	to	maintain	or	increase	our	profitability.		In	addition,	pricing	pressures	as	a	result	of	the	activities	of	competitors, customer	pricing	reviews	and	rebids,	as	well	as	the	introduction	of	new	products,	may	result	in	a	reduction	in	the	prices	we	can	charge	for	our	products	and	services.

Acquisitions	of	complementary	businesses	and	technologies,	development	of	strategic	alliances	and	divestitures	of	portions	of	our	business,	in	addition	to	fostering organic	growth	opportunities,	are	an	active	part	of	our	overall	business	strategy	to	remain	competitive.	We	may	not	be	able	to	effectively	assimilate

services,	technologies,	key	personnel	or	businesses	of	acquired	companies	into	our	business	or	service	offerings,	alliances	may	not	be	successful,	and	related	revenue growth	or	cost	savings	may	not	be	achieved.	In	addition,	we	may	not	be	able	to	successfully	manage	the	divestiture	of	identified	businesses	on	satisfactory	terms,	if	at all,	which	would	reduce	anticipated	benefits	to	earnings.	Ongoing	consolidation	within	the	financial	services	industry	could	provide	opportunities	and	pose	challenges	in the	markets	we	serve.

Acquisitions	present	risks	that	differ	from	the	risks	associated	with	our	ongoing	operations.	In	January	2007,	we	announced	a	definitive	agreement	to	acquire Currenex,	Inc.,	an	independently	owned	electronic	foreign	exchange	trading	platform.	In	addition,	in	February	2007,	we	announced	a	definitive	agreement	to	acquire Investors	Financial.	Our	financial	results	for	2007	and	for	the	next	few	years	may	be	significantly	impacted	by	our	ability	to	achieve	the	cost	savings	and	other	benefits that	we	anticipate	as	a	result	of	the	acquisition	of	Investors	Financial,	as	well	as	our	ability	to	retain	its	customer	base	and	to	successfully	cross-sell	our	products	and services	to	its	customers.

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

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

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

Our	financial	results	may	be	adversely	affected	by	the	accounting	treatment	for	an	acquisition.		We	may	not	achieve	the	benefits	we	sought	in	an	acquisition,	or,	if achieved,	those	benefits	may	come	later	than	we	anticipated.	Failure	to	achieve	anticipated	benefits	from	an	acquisition,	such	as	our	acquisitions	of	Investors	Financial and	Currenex,	could	result	in	increased	costs	and	lower	revenues	than	expected	of	the	combined	company.

We	actively	strive	to	achieve	significant	cost	savings	by	shifting	certain	business	processes	to	lower-cost	geographic	locations,	while	continuing	to	maintain	service quality,	control	and	effective	management	of	risks	within	these	business	operations.	This	transition	to	a	true	"shared	services"	operational	model	focuses	on	certain	core service	offerings,	including	middle-	and	back-office	reconciliations,	securities	processing	and	transfer	agency	activities.	The	increased	elements	of	risk	that	arise	from conducting	certain	operating	processes	in	some	jurisdictions	could	lead	to	an	increase	in	reputation	risk.	Reputation	risk	is	inherent	in	our	current	operating	model; shifting	business	processes	merely	accentuates	these	risks	through	the	transition	process,	until	such	time	as	technology,	training	and	infrastructure	changes	are	in	place	to mitigate	the	risk.	The	extent	and	pace	at	which	we	are	able	to	move	functions	to	lower-cost	locations	may	also	be	impacted	by	regulatory	and	customer	acceptance issues.	Such	relocation	of	functions	also	entails	costs,	such	as	technology	and	real	estate	expenses,	that	partially	offset	the	financial	benefits	of	the	lower-cost	locations.

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

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

# Credit	Risk

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

# Financial	Markets	Risk

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

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

The	degree	of	volatility	in	foreign	exchange	rates	can	affect	our	foreign	exchange	trading	revenue.	In	general,	we	benefit	from	currency	volatility,	although	it	can increase	risk,	and	foreign	exchange	revenue,	all	other	things	being	equal,	is	likely	to	decrease	during	times	of	decreased	currency	volatility.	In	addition,	as	our	business grows	globally,	our	exposure	to	changes	in	foreign	currency	exchange	rates	could	affect	our	levels	of	revenue,	expense	and	earnings,	as	well	as	the	value	of	our

investment	in	our	non-U.S.	operations.	Our	other	financial	markets	trading	businesses,	as	well	as	our	asset	and	liability	management	activities,	are	also	subject	to	market risks.	Adverse	movements	in	levels	and	volatilities	of	financial	markets	could	cause	losses	that	may	affect	our	consolidated	results	of	operations	and	financial	condition.

# Liquidity	Risk

We	depend	on	access	to	global	capital	markets	to	provide	us	with	sufficient	capital	resources	and	liquidity	to	meet	our	commitments	and	business	needs,	and	to accommodate	the	transaction	and	cash	management	needs	of	our	customers.	Any	occurrence	that	may	limit	our	access	to	the	capital	markets,	such	as	a	decline	in	the confidence	of	debt	purchasers,	depositors	or	counterparties	participating	in	the	capital	markets	with	us	in	particular,	or	a	downgrade	of	our	debt	rating,	may	adversely affect	our	capital	costs	and	our	ability	to	raise	capital	and,	in	turn,	our	liquidity.	General	market	disruptions,	natural	disasters	or	operational	problems	may	affect	either third	parties	or	us,	and	can	also	have	an	adverse	affect	on	our	liquidity.

# Interest	Rate	Risk

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

# Operational	Risk

Operational	risk	is	inherent	in	all	of	State	Street's	activities.	Our	customers	have	a	broad	array	of	complex	and	specialized	servicing,	confidentiality	and	fiduciary requirements.	We	have	established	policies,	procedures	and	systems	designed	to	comply	with	these	regulatory	and	operational	risk	requirements.	We	also	face	the potential	for	loss	resulting	from	inadequate	or	failed	internal	processes,	employee	supervisory	or	monitoring	mechanisms,	or	other	systems	or	controls,	and	from	external events,	which	could	materially	affect	our	future	results	of	operations.	We	may	also	be	subject	to	disruptions	from	events	that	are	wholly	or	partially	beyond	our	control, which	could	cause	delays	or	disruptions	to	operational	functions,	including	functions	such	as	information	processing	and	financial	market	settlement.	In	addition,	our customers,	vendors	and	counterparties	could	suffer	from	such	events.	Should	these	events	affect	us,	or	the	customers,	vendors	or	counterparties	with	which	we	conduct business,	our	results	of	operations	could	be	negatively	affected.	We	use	various	strategies	and	processes	to	monitor	and	mitigate	operational	and	other	risks.	These	risk management	measures	entail	many	assumptions	regarding	events	that	are	not	possible	to	predict.	As	a	result,	our	risk	management	framework	may	not	always	be successful.

Our	success	depends,	in	large	part,	on	our	ability	to	attract	and	retain	key	people.	Competition	for	the	best	people	in	most	activities	in	which	we	engage	can	be intense,	and	we	may	not	be	able	to	hire	people	or	retain	them.	The	unexpected	loss	of	services	of	one	or	more	of	our	key	personnel	could	have	a	material	adverse	impact on	our	business	because	of	their	skills,	their	knowledge	of	our	markets,	their	years	of	industry	experience,	in	some	cases,	and	the	difficulty	of	promptly	finding	qualified replacement	personnel.		In	some	of	our	businesses,	we	have	experienced	significant	employee	turnover,	which	increases	costs,	requires	additional	training	and	increases the	potential	for	operational	risks.

We	enter	into	long-term	fixed	price	contracts	to	provide	middle	office	or	investment	manager	and	hedge	fund	manager	operations	outsourcing	services	to customers,	services	related	but	not	limited	to	certain	trading	activities,	cash	reporting,	settlement	and	reconciliation	activities,	collateral	management	and	information technology	development.	These	long-term	contracts	require	considerable	up-front	investment	by	us,	including	technology	and	conversion	costs,	and	carry	the	risk	that pricing	for	the	products	and	services	we	provide	might	not	prove	adequate	to	generate	expected	operating	margins	over	the	term	of	the	contracts.	Profitability	of	these contracts	is	largely	a	function	of	our	ability	to	accurately	calculate	pricing	for	our	services	and	our	ability	to	control	our	costs	and	maintain	the	relationship	with	the customer	for	an	adequate	period	of	time	to	recover	our	up-front	investment.	Performance	risk	exists	in	each	contract,	given	our	dependence	on	successful	conversion	and implementation	onto	our	own	operating	platforms	of	the	service	activities	provided.	In	addition,	our	failure	to	meet	specified	service	levels	may	adversely	affect	our revenue	from	such	arrangements,	or	permit	early	termination	of	the	contracts	by	the	customer.

Our	businesses	depend	on	an	information	technology	infrastructure	to	record	and	process	a	large	volume	of	increasingly	complex	transactions,	in	many	currencies, on	a	daily	basis,	across	numerous	and	diverse	markets.	Any	interruptions,	delays	and/or	breakdowns	of	this	infrastructure	can	result	in	significant	costs.	As	a	result,	we continue	to	invest	significantly	in	this	infrastructure.

# Regulatory/Legal/Accounting/Tax	Risk

Most	of	our	businesses	are	subject	to	extensive	regulation,	and	many	of	the	customers	to	which	we	provide	services	are	themselves	subject	to	a	broad	range	of regulatory	requirements.	These	regulations	may	affect	the	manner	and	terms	of	delivery	of	our	services.	As	a	financial	institution	with	substantial	international operations,	we	are	subject	to	extensive	regulatory	and	supervisory	oversight,	both	in	the	U.S.	and	overseas	in	connection	with	our	global	operations.	Our	businesses	are subject	to	stringent	regulation	and	examination	by	U.S.	federal	and	state	governmental	and	regulatory	agencies,	including	the	Federal	Reserve,	the	SEC	and	the Massachusetts	Commissioner	of	Banking,		and	self-regulatory	organizations	(including	securities	exchanges),	and	by	non-U.S.	governmental	and	regulatory	agencies and	self-

regulatory	organizations.	The	regulations	affect,	among	other	things,	the	scope	of	our	activities	and	customer	services,	our	capital	structure	and	our	ability	to	fund	the operations	of	our	subsidiaries,	our	lending	practices,	our	dividend	policy	and	the	manner	in	which	we	market	our	services.	Evolving	regulations,	such	as	the	new	Basel	II capital	framework	and	anti-money	laundering	regulations,	can	require	significant	effort	on	our	part	to	ensure	compliance.	New	or	modified	regulations	and	related regulatory	guidance	may	have	unforeseen	or	unintended	adverse	effects	on	the	financial	services	industry.

If	we	do	not	comply	with	governmental	regulations,	we	may	be	subject	to	fines,	penalties	or	material	restrictions	on	our	businesses	in	the	jurisdiction	where	the violation	occurred,	which	can	adversely	affect	our	business	operations	and,	in	turn,	our	financial	results.	Similarly,	many	of	our	customers	are	subject	to	significant regulatory	requirements,	and	retain	our	services	in	order	for	us	to	assist	them	in	complying	with	those	legal	requirements.	Changes	in	these	regulations	can	significantly affect	the	services	that	we	are	asked	to	provide,	as	well	as	our	costs.	If	we	cause	a	customer	to	fail	to	comply	with	these	regulatory	requirements,	we	may	be	liable	to them	for	losses	and	expenses	that	they	incur.	In	addition,	adverse	publicity	and	damage	to	our	reputation	arising	from	the	failure	or	perceived	failure	to	comply	with legal,	regulatory	or	contractual	requirements	could	affect	our	ability	to	attract	and	retain	customers	or	to	maintain	access	to	capital	markets,	or	could	result	in enforcement	actions,	fines,	penalties	and	lawsuits.	In	recent	years,	regulatory	oversight	and	enforcement	has	increased	substantially,	imposing	additional	costs	and increasing	the	potential	risks	associated	with	our	operations.	If	this	regulatory	trend	continues,	it	could	adversely	affect	our	operations	and,	in	turn,	our	financial	results.

From	time	to	time,	our	customers	may	make	claims	and	take	legal	action	pertaining	to	our	performance	of	fiduciary	or	contractual	responsibilities.	If	such	claims and	legal	actions	are	not	resolved	in	a	manner	favorable	to	us,	such	claims	may	result	in	financial	liability	to	us	and/or	adversely	affect	the	market	perception	of	State Street	and	its	products	and	services,	and	could	impact	customer	demand	for	our	products	and	services.		We	record	balance	sheet	reserves	for	such	known	and	unknown loss	contingencies,	including	litigation	and	operational	losses;	however,	we	cannot	always	estimate	the	ultimate	outcome,	and	as	a	result	the	adequacy	of	these	reserves to	cover	any	settlements	or	judgments	into	which	State	Street	ultimately	enters	or	to	which	we	are	subject.

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

Our	businesses	are	subject	to	changes	in	tax	legislation,	and	the	interpretation	of	existing	tax	laws	worldwide.	These	legislative	actions	may	impact	our	business directly	or	indirectly	through	their	impact	on	the	financial	markets.	In	the	normal	course	of	business,	we	are	subject	to	reviews	by	U.S.	and	non-U.S.	tax	authorities regarding	the	amount	of	taxes	due.	These	reviews	may	result	in	adjustments	to	the	timing	or	amount	of	taxes	due	and	the	allocation	of	taxable	income	among	tax jurisdictions.	While	such	changes	may	or	may	not	have	an	economic	impact	on	our	business,	these	changes	could	affect	the	attainment	of	our	current	financial	goals.

# ITEM	1B.							UNRESOLVED	STAFF	COMMENTS

None.

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

We	occupy	two	buildings	located	in	Quincy,	Massachusetts,	one	of	which	we	own	and	the	other	we	lease.	The	buildings,	containing	a	total	of	approximately 822,000	square	feet,	function	as	State	Street	Bank's	principal	operations	facilities.	Additionally,	we	own	a	92,000-square-foot	building	in	Westborough,	Massachusetts, and	a	138,000-square-foot	building	in	Grafton,	Massachusetts,	each	of	which	is	used	as	a	data	center.	Our	remaining	offices	and	facilities	around	the	world	are	leased. We	enter	into	operating	leases	to	meet	the	needs	of	our	operations	and	to	expand	our	geographic	reach.

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

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

# ITEM	4A.								EXECUTIVE	OFFICERS	OF	THE	REGISTRANT

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

All	executive	officers	are	elected	by	the	Board.	The	Chairman,	President,	Treasurer	and	Secretary	hold	office	until	the	first	meeting	of	the	Board	following	the	next annual	meeting	of	shareholders	and	until	their	successors	are	chosen	and	qualified.	All	executive	officers	hold	office	at	the	discretion	of	the	Board.	There	are	no	family relationships	among	any	of	our	directors	and	executive	officers.

Mr.	Logue	joined	State	Street	in	1990.	Since	prior	to	2002,	he	has	served	as	President	and	Chief	Operating	Officer.	In	June	2004,	he	was	appointed	Chairman	and Chief	Executive	Officer.

Mr.	Antonellis	joined	State	Street	in	1991.	As	of	2002,	he	served	as	Executive	Vice	President	and	head	of	Institutional	Investor	Services.	In	2003,	he	was	named head	of	Information	Technology	and	Global	Securities	Services.	In	2006,	he	was	appointed	Vice	Chairman	with	additional	responsibility	as	head	of	Investor	Services	in North	America	and	Global	Investment	Manager	Outsourcing	Services.

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

Mr.	Hunt	joined	State	Street	in	1994.		As	of	2002,	he	served	as	Executive	Vice	President	of	State	Street	and	head	of	State	Street	Global	Advisors'	international

business.	In	January	2005,	he	was	appointed	President	and	Chief	Executive	Officer	of	SSgA.	In	2006,	he	was	appointed	Vice	Chairman	of	State	Street.

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

Mr.	Chow	first	joined	State	Street	in	1990,	left	in	2003,	and	returned	in	2004.	When	he	left	in	2003,	he	was	Executive	Vice	President	and	head	of	Credit	and	Risk Policy.	Since	2004,	he	has	served	as	Executive	Vice	President,	Risk	and	Corporate	Administration.

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

Mr.	O'Leary	joined	State	Street	in	2005	as	Executive	Vice	President	and	head	of	Global	Human	Resources.	Prior	to	joining	State	Street,	he	served	as	a	senior advisor	to	Credit	Suisse	First	Boston	Corporation	after	serving	as	Managing	Director	and	Global	Head	of	Human	Resources	with	that	organization	for	more	than	18 years.

Mr.	James	Phalen	joined	State	Street	in	1992.	As	of	2002,	he	served	as	Executive	Vice	President	of	State	Street	and	Chairman	and	Chief	Executive	Officer	of CitiStreet,	a	joint	venture.	In	February	2005,	he	was	appointed	head	of	Investor	Services	in	North	America.	In	2006,	he	was	appointed	head	of	international	operations for	Investment	Servicing	and	Investment	Research	and	Trading,	based	in	Europe.

Mr.	David	Phelan	joined	State	Street	in	2006	as	Executive	Vice	President	and	General	Counsel.	From	1995	until	2006,	he	was	a	senior	partner	at	the	law	firm	of WilmerHale,	where	he	was	an	attorney	since	1993.

Mr.	Resch	joined	State	Street	in	2002	as	Executive	Vice	President	and	Chief	Financial	Officer.	In	2006,	he	was	also	appointed	Treasurer.	Prior	to	joining	State Street,	he	was	managing	director	and	chief	financial	officer	of	Pershing,	LLC,	a	subsidiary	of	Credit	Suisse	First	Boston	Corporation,	which	provides	brokerage processing	and	investment	services.	Prior	to	that,	he	served	as	managing	director	and	chief	accounting	officer	at	Donaldson,	Lufkin	&	Jenrette,	Inc.

Mr.	Shelton	joined	State	Street	in	1984.	Since	prior	to	2002,	he	has	served	as	Executive	Vice	President	and	head	of	State	Street	Global	Markets.

# PART	II

# STOCKHOLDER	MATTERS

# MARKET	FOR	REGISTRANT'S	COMMON	EQUITY

Our	Common	Stock	is	listed	on	the	New	York	and	Boston	Stock	Exchanges	under	the	ticker	symbol	STT.	There	were	4,586	shareholders	of	record	at December	31,	2006.	Information	concerning	the	market	prices	of,	and	dividends	on,	our	common	stock	during	the	past	two	years	is	included	in	this	Form	10-K	under Item	8,	under	the	caption	"Quarterly	Summarized	Financial	Information."

In	February	2005,	our	Board	authorized	the	purchase	of	up	to	15	million	shares	of	our	common	stock	for	general	corporate	purposes,	including	mitigation	of	the dilutive	impact	of	shares	issued	under	employee	benefit	programs,	and	canceled	a	program	authorized	in	1995.	In	March	2006,	the	Board	cancelled	the	remaining	2005 authorization	and	authorized	a	new	program	for	the	purchase	of	up	to	15	million	of	our	common	shares	for	the	same	purposes.

During	the	first	quarter	of	2006,	we	purchased	3	million	shares	of	our	common	stock	under	the	2005	program.	Under	the	2006	program,	we	purchased	2.8	million shares	of	our	common	stock	during	the	first	six	months	of	2006,	and	no	common	shares	were	purchased	by	us	during	the	third	and	fourth	quarters	of	2006.	As	of December	31,	2006,	12.2	million	shares	remained	available	for	purchase	under	the	2006	program.	We	employ	third-party	broker-dealers	to	acquire	shares	on	the	open market	for	our	publicly	announced	stock	purchase	program.

# RELATED	STOCKHOLDER	MATTERS

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

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

# SHAREHOLDER	RETURN	PERFORMANCE	PRESENTATION

The	graph	presented	below	compares	the	cumulative	total	shareholder	return	on	State	Street's	common	stock	to	the	cumulative	total	return	of	the	S&P	500	Index and	the	S&P	Financial	Index	for	the	five	fiscal	years,	which	commenced	January	1,	2002	and	ended	December	31,	2006.	The	cumulative	total	shareholder	return assumes	the	investment	of	$100	in	State	Street's	common	stock	and	in	each	index	on	December	31,	2001	and	assumes	reinvestment	of	dividends.	The	S&P	Financial Index	is	a	publicly	available	measure	of	88	of	the	Standard	&	Poor's	500	companies,	representing	25	banking	companies,	23	insurance	companies,	26	diversified financial	services	companies,	and	14	real	estate	companies.

	Comparison	of	Five-Year	Cumulative	Total	Shareholder	Return

# GRAPHIC

# ITEM	6.			SELECTED	FINANCIAL	DATA

| FOR	THE	YEAR	ENDED	DECEMBER	31:<br>(Dollars	in	millions,	except	per	share	amounts	or	where	otherwise<br>noted) | 2006 | 2005 | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Total\tfee\trevenue | $5,186 | $4,551 | $4,048 | $3,556 | $2,850 |
| Net\tinterest\trevenue | 1,110 | 907 | 859 | 810 | 979 |
| Provision\tfor\tloan\tlosses | — | — | (18) | — | 4 |
| Gains\t(Losses)\ton\tsales\tof\tavailable-for-sale\tinvestment\tsecurities,\tnet | 15 | (1) | 26 | 23 | 76 |
| Gain\ton\tsale\tof\tPrivate\tAsset\tManagement\tbusiness,\tnet\tof\texit\tand\tother |  |  |  |  |  |
| associated\tcosts | — | 16 | — | 285 | — |
| Gain\ton\tsale\tof\tCorporate\tTrust\tbusiness,\tnet\tof\texit\tand\tother\tassociated |  |  |  |  |  |
| costs | — | — | — | 60 | 495 |
| Total\trevenue | 6,311 | 5,473 | 4,951 | 4,734 | 4,396 |
| Total\toperating\texpenses | 4,540 | 4,041 | 3,759 | 3,622 | 2,841 |
| Income\tfrom\tcontinuing\toperations\tbefore\tincome\ttax\texpense | 1,771 | 1,432 | 1,192 | 1,112 | 1,555 |
| Income\ttax\texpense\tfrom\tcontinuing\toperations | 675 | 487 | 394 | 390 | 540 |
| Income\tfrom\tcontinuing\toperations | 1,096 | 945 | 798 | 722 | 1,015 |
| Net\tincome\t(loss)\tfrom\tdiscontinued\toperations | 10 | (107) | — | — | — |
| Net\tincome | $1,106 | $838 | $798 | $722 | $1,015 |
| PER\tCOMMON\tSHARE: |  |  |  |  |  |
| Basic\tearnings: |  |  |  |  |  |
| Continuing\toperations | $3.31 | $2.86 | $2.38 | $2.18 | $3.14 |
| Net\tincome | 3.34 | 2.53 | 2.38 | 2.18 | 3.14 |
| Diluted\tearnings: |  |  |  |  |  |
| Continuing\toperations | 3.26 | 2.82 | 2.35 | 2.15 | 3.10 |
| Net\tincome | 3.29 | 2.50 | 2.35 | 2.15 | 3.10 |
| Cash\tdividends\tdeclared | .80 | .72 | .64 | .56 | .48 |
| Closing\tprice\tof\tcommon\tstock\t(at\tyear\tend) | 67.44 | 55.44 | 49.12 | 52.08 | 39.00 |
| AT\tYEAR\tEND: |  |  |  |  |  |
| Investment\tsecurities | $64,992 | $ 59,870 | $ 37,571 | $ 38,215 | $ 28,071 |
| Total\tassets | 107,353 | 97,968 | 94,040 | 87,534 | 85,794 |
| Deposits | 65,646 | 59,646 | 55,129 | 47,516 | 45,468 |
| Long-term\tdebt | 2,616 | 2,659 | 2,458 | 2,222 | 1,270 |
| Shareholders'\tequity | 7,252 | 6,367 | 6,159 | 5,747 | 4,787 |
| Assets\tunder\tcustody\t(in\tbillions) | $11,854 | $ 10,121 | $9,497 | $9,370 | $6,171 |
| Assets\tunder\tmanagement\t(in\tbillions) | 1,749 | 1,441 | 1,354 | 1,106 | 763 |
| Number\tof\temployees | 21,700 | 20,965 | 19,668 | 19,850 | 19,501 |
| RATIOS: |  |  |  |  |  |
| Continuing\toperations: |  |  |  |  |  |
| Return\ton\tshareholders'\tequity | 16.2% | 15.3% | 13.3% | 13.9% | 24.1% |
| Return\ton\taverage\tassets | 1.03 | .95 | .84 | .87 | 1.28 |
| Dividend\tpayout | 24.2 | 25.3 | 26.9 | 25.9 | 15.4 |

| Return	on	shareholders'	equity | 16.4 | 13.6 | 13.3 | 13.9 | 24.1 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Return\ton\taverage\tassets | 1.04 | .84 | .84 | .87 | 1.28 |
| Dividend\tpayout | 24.0 | 28.5 | 26.9 | 25.9 | 15.4 |
| Average\tshareholders'\tequity\tto\taverage\ttotal\tassets | 6.3 | 6.2 | 6.3 | 6.3 | 5.3 |
| Tier\t1\trisk-based\tcapital | 13.7 | 11.7 | 13.3 | 14.0 | 17.1 |
| Total\trisk-based\tcapital | 15.9 | 14.0 | 14.7 | 15.8 | 18.0 |
| Tier\t1\tleverage\tratio | 5.8 | 5.6 | 5.5 | 5.6 | 5.6 |
| Tangible\tcommon\tequity\tto\tadjusted\ttotal\tassets | 5.1 | 4.8 | 4.5 | 4.5 | 4.9 |

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

State	Street	Corporation	is	a	financial	holding	company	organized	under	the	laws	of	the	Commonwealth	of	Massachusetts.	Unless	otherwise	indicated	or	unless	the context	requires	otherwise,	all	references	in	this	Management's	Discussion	to	"State	Street,"	"we,"	"us,"	"our"	or	similar	terms	mean	State	Street	Corporation	and	its subsidiaries	on	a	consolidated	basis.	At	December	31,	2006,	we	had	total	assets	of	$107.35	billion,	total	deposits	of	$65.65	billion,	total	shareholders'	equity	of	$7.25 billion	and	employed	21,700.	With	$11.85	trillion	of	assets	under	custody	and	$1.75	trillion	of	assets	under	management	at	year-end	2006,	we	are	a	leading	specialist	in meeting	the	needs	of	institutional	investors	worldwide.

In	February	2007,	we	announced	a	definitive	agreement	to	acquire	Investors	Financial	Services	Corp.,	or	"Investors	Financial,"	a	$12	billion	bank	holding company	based	in	Boston.	Under	the	terms	of	the	agreement,	we	will	exchange	.906	shares	of	our	common	stock	for	each	share	of	Investors	Financial	common	stock. The	transaction	is	subject	to	customary	conditions,	including	the	approvals	of	Investors	Financial	shareholders	and	regulatory	agencies,	and	we	expect	to	close	the acquisition	in	the	third	quarter	of	2007.	We	cannot	be	certain	that	approvals	of	Investors	Financial	shareholders	or	the	regulators	will	be	obtained.

The	acquisition	will	be	accounted	for	as	a	purchase.	The	acquisition	agreement	contains	certain	termination	rights	for	both	State	Street	and	Investors	Financial,	and further	provides	that,	if	the	agreement	is	terminated	under	specified	circumstances,	Investors	Financial	will	be	required	to	pay	State	Street	a	termination	fee	of	up to	$165	million.

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

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

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

# OVERVIEW	OF	FINANCIAL	RESULTS

| Years	ended	December	31,<br>(Dollars	in	millions,	except	per	share	amounts) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Total\tfee\trevenue | $5,186 | $4,551 | $4,048 |
| Net\tinterest\trevenue | 1,110 | 907 | 859 |
| Provision\tfor\tloan\tlosses | — | — | (18) |
| Gains\t(Losses)\ton\tsales\tof\tavailable-for-sale\tinvestment\tsecurities,\tnet | 15 | (1) | 26 |
| Gain\ton\tsale\tof\tdivested\tbusiness | — | 16 | — |
| Total\trevenue | 6,311 | 5,473 | 4,951 |
| Total\toperating\texpenses | 4,540 | 4,041 | 3,759 |
| Income\tfrom\tcontinuing\toperations\tbefore\tincome\ttax\texpense | 1,771 | 1,432 | 1,192 |
| Income\ttax\texpense\tfrom\tcontinuing\toperations | 675 | 487 | 394 |
| Income\tfrom\tcontinuing\toperations | 1,096 | 945 | 798 |
| Net\tincome\t(loss)\tfrom\tdiscontinued\toperations | 10 | (107) | — |
| Net\tincome | $1,106 | $838 | $798 |
| Earnings\tPer\tShare\tFrom\tContinuing\tOperations: |  |  |  |
| Basic | $3.31 | $2.86 | $2.38 |
| Diluted | 3.26 | 2.82 | 2.35 |
| Earnings\tPer\tShare: |  |  |  |
| Basic | $3.34 | $2.53 | $2.38 |
| Diluted | 3.29 | 2.50 | 2.35 |
| Return\ton\tshareholders'\tequity\tfrom\tcontinuing\toperations | 16.2% | 15.3% | 13.3% |
| Return\ton\tshareholders'\tequity | 16.4 | 13.6 | 13.3 |

Summary

Our	financial	results	for	2006	reflect	our	overall	objectives	of	consistent	revenue	growth,	balancing	expense	growth	with	growth	in	revenue	and	continuing	to expand	our	business	overseas.	The	highlights	are	as	follows:

·							Each	category	of	revenue,	as	reported	in	our	consolidated	statement	of	income,	increased	in	double	digits	compared	to	2005,	with	the	exception	of	processing fees	and	other	revenue.

·							Our	Investment	Management	business,	State	Street	Global	Advisors,	or	"SSgA,"	increased	its	contribution	to	our	consolidated	results	of	operations	to approximately	19%	of	consolidated	total	revenue	and	approximately	24%	of	consolidated	income	from	continuing	operations	before	income	taxes	for	2006, compared	to	18%	and	21%,	respectively,	for	2005.

·							We	grew	the	proportion	of	our	non-U.S.	revenue	to	approximately	43%	of	consolidated	total	revenue,	from	approximately	39%	for	2005.

·							We	ended	2006	with	record	levels	of	assets	under	custody	and	assets	under	management.

·							We	exceeded	our	operating-basis	financial	goals	for	2006	concerning	growth	in	total	revenue,	growth	in	earnings	per	share	from	continuing	operations	and	return on	shareholders'	equity	from	continuing	operations,	all	compared	to	2005.

Our	financial	results	for	2006	are	summarized	in	the	following	"Financial	Highlights"	section,	followed	by	a	more	detailed	discussion	in	the	"Consolidated	Results of	Operations"	section	of	this	Management's	Discussion	and	Analysis.

# Financial	Highlights

For	2006,	we	recorded	income	from	continuing	operations	of	$1.1	billion,	or	$3.26	per	diluted	share,	a	16%	increase	from	$945	million,	or	$2.82	per	diluted	share, for	2005.	Total	revenue	increased	15%	from	2005,	and	return	on	equity	from	continuing	operations	was	16.2%.

Overall	results	for	2006	included	net	income	from	discontinued	operations	of	$10	million	(pre-tax	income	of	$16	million	reduced	by	related	tax	expense	of	$6 million),	or	$.03	per	share,	the	result	of	the	finalization	of	certain	legal,	selling	and	other	costs	recorded	in	connection	with	our	divestiture	of	Bel	Air	Investment Advisors	LLC.	Our	results	for	2005	included	a	net	loss	from	discontinued	operations	of	$107	million	($165	million	charge	reduced	by	related	tax	benefit	of	$58	million), related	to	our	commitment	to	divest	Bel	Air.

Total	revenue	for	2006	grew	15%	from	2005,	with	about	three-quarters	of	the	growth	generated	from	existing	customers.	Total	fee	revenue	for	2006,	which	grew 14%,	reflected	consistent	growth	throughout	the	year	in	servicing	and	management	fees,	up	10%	and	26%,	respectively,	compared	to	2005.	Generally,	servicing	fees benefited	from	our	continued	expansion	overseas	and	our	cross-selling	of	services	to	our	broad	customer	base,	while	management	fees	benefited	from	the	strategic introduction	of	quantitative	active	products,	which	provide	higher-margin	revenue.	Trading	services	revenue,	which	benefited	from	strong	capital	markets	in	the	first half	of	2006,	grew	24%	year	over	year.	Securities	finance	revenue,	which	peaked	in	the	second	quarter	and	declined	in	the	third	quarter	as	a	result	of	seasonality, benefited	from	increases	in	volumes	of	securities	loaned,	and	for	the	full	year	increased	17%	from	2005.	We	continued	to	cross-sell	our	existing	customer	relationships and	to	introduce	new	products	and	services	to	existing	and	new	customers.

Net	interest	revenue	increased	22%	compared	to	2005,	and	net	interest	margin	increased	to	1.25%	from	1.08%.	This	growth	was	the	result	of	several	favorable trends—(1)	the	balance	sheet	repositioning	we	began	to	execute	in	late	2004;	(2)	higher	yields	on	the	re-investment	of	securities	as	they	matured;	(3)	growth	in	our average	balance	sheet	due	to	increased	customer	activity;	(4)	a	more	favorable	mix	of	customer	deposits,	particularly	non-U.S.	deposits;	and	(5)	the	absence	of	increases in	short-term	interest	rates	by	the	Federal	Reserve	during	the	second	half	of	the	year.	We	accomplished	the	repositioning	of	the	balance	sheet	without	adversely	affecting the	credit	profile	of	our	investment	portfolio,	and	at	year-end	2006	had	about	94%	of	the	portfolio	invested	in	"AAA"	or	"AA"	rated	securities,	with	88%	invested	in "AAA"	rated	securities,	compared	to	95%	and	90%,	respectively,	at	year-end	2005.

Total	operating	expenses	increased	12%	from	2005,	as	we	continued	to	carefully	balance	consistent	expense	management	with	revenue	growth.	Most	of	the	increase was	the	result	of	increased	incentive	compensation	due	to	our	improved	performance	and	increased	headcount	to	support	new	business,	particularly	internationally.	As	a result,	we	generated	positive	operating	leverage	of	almost	300	basis	points	on	an	annual	basis,	which	we	define	as	a	rate	of	total	revenue	growth	that	exceeds	the	rate	of growth	of	total	operating	expenses.

SSgA	is	increasingly	becoming	a	more	significant	contributor	to	our	overall	results,	as	that	business	comprised	about	19%	of	our	total	consolidated	revenue	and about	24%	of	our	total	income	from	continuing	operations	before	income	taxes	for	2006,	compared	to	18%	and	21%,	respectively,	for	2005,	and	achieved	a	pre-tax operating	margin	of	35%,	up	from	31%	for	2005.	Net	new	business	at	SSgA	was	about	$86	billion,	with	about	two-thirds	in	active	management	products,	such	as enhanced	indexing,	hedge	fund	strategies	and	active	quantitative	management.

We	continue	to	expand	our	business	outside	of	the	U.S.,	particularly	in	Europe	and	the	Asia-Pacific	region.	For	2006,	approximately	43%	of	our	consolidated	total revenue	was	generated	from	non-U.S.	activities,	up	from	approximately	39%	for	2005,	and	at	year-end	2006	we	employed	8,630	outside	the	U.S.	Our	goal	is	to eventually	generate	50%	of	our	consolidated	total	revenue	from	outside	the	United	States.

Assets	under	custody	and	assets	under	management	both	increased	to	record	levels	at	year-end	2006,	with	assets	under	custody	at	$11.85	trillion,	up	17%	from $10.12	trillion	a	year	ago,	and	assets	under	management	at	$1.75	trillion,	up	21%	from	$1.44	trillion	a	year	ago.	Assets	under	custody	have	grown	at	a	compound annual	rate	of	18%	since	year-end	2002,	with	U.S.	assets	growing	by	14%	and	non-U.S.	assets	growing	by	36%,	while	assets	under	management	have	grown	at	a compound	annual	rate	of	23%	over	the	same	period.

# Financial	Goals

In	early	2006,	we	reaffirmed	our	financial	goals	for	State	Street	for	2006.	These	financial	goals	were:

·							Growth	in	operating-basis	earnings	per	share	from	continuing	operations	of	between	10%	and	15%;	and

·							Operating-basis	return	on	shareholders'	equity	from	continuing	operations	of	between	14%	and	17%.

Operating-basis	results,	as	defined	by	management,	include	fully	taxable-equivalent	net	interest	revenue,	reflecting	tax-equivalent	adjustments	of	$45	million	and $42	million	for	2006	and	2005,	respectively,	and	a	corresponding	charge	to	income	tax	expense,	and	for	2006,	exclude	aggregate	tax-related	adjustments	of	$65	million, or	$.20	per	share.	The	tax	adjustments	related	to	additional	provisions	that	resulted	from	the	impact	of	the	Tax	Increase	Prevention	and	Reconciliation	Act	and	issues with	respect	to	certain	of	our	leveraged	leases.

Management	measures	our	financial	goals	and	related	results	on	an	operating	basis	to	provide	financial	information	that	is	comparable	from	period	to	period,	and	to present	comparable	financial	trends	with	respect	to	our	ongoing	business	operations.	The	use	of	fully	taxable-equivalent	net	interest	revenue	facilitates	the	comparison	of revenues	from	both	taxable	and	non-taxable	sources.	The	previously	described	tax-related	adjustments	are	not	part	of	our	normal	ongoing	business	operations,	and	as	a result	prevent	a	meaningful	comparison	of	earnings	per	share	and	return	on	shareholders'	equity	with	that	of	other	periods.	Management	believes	that	operating-basis financial	information	facilitates	an	investor's	understanding	and	analysis	of	State	Street's	underlying	performance	and	trends	in	addition	to	financial	information

# prepared	in	accordance	with	GAAP.

For	2006,	we	exceeded	our	financial	goals.	We	increased	our	operating-basis	earnings	per	share	from	continuing	operations	by	23%,	from	$2.82	to	$3.46	(up	16% from	$2.82	to	$3.26	on	a	GAAP	basis,	including	the	tax-related	adjustments).	Our	operating-basis	revenue	increased	15%	from	$5.52	billion	to	$6.36	billion	(including taxable-equivalent	adjustments	of	$45	million	for	2006	and	$42	million	for	2005);	and	we	recorded	operating	basis	return	on	shareholders'	equity	from	continuing operations	of	17.1%	(16.2%	on	a	GAAP	basis,	including	the	tax-related	adjustments).

# Outlook

Our	long	term	financial	goals	remain	the	same,	but	based	on	our	recently	announced	agreement	to	acquire	Investors	Financial,	we	have	adjusted	our	financial	goals for	2007	to	the	following,	assuming	the	acquisition	closes	in	July	2007:

·							Growth	in	operating-basis	earnings	per	share	from	continuing	operations	of	between	8%	and	10%;	and

Operating-basis	results	for	2007	will	exclude	merger,	integration	and	restructuring	charges	related	to	the	above-mentioned	acquisition,	and	for	2006	will	exclude the	previously	discussed	tax-related	adjustments.	Some	of	the	factors	and	assumptions	that	we	considered	in	determining	this	outlook	for	2007	were	as	follows:

·							Growth	in	revenue	generated	from	active	quantitative	asset	management	products;

·							Relatively	stable	domestic	interest	rates;

·							The	expected	flattening	of	the	U.S.	dollar	yield	curve;

·							The	continuation	of	beneficial	trends	in	non-U.S.	interest	rates;

·							Modest	growth	in	non-U.S.	deposits,	as	well	as	the	maintenance	of	a	favorable	mix	of	customer	deposits,	including	demand	deposits;

·							A	stable	income	tax	and	regulatory	environment;

·							Shareholder	and	regulatory	approvals	of	the	Investors	Financial	acquisition;

·							Achievement	of	expected	cost	savings	from	the	acquisition;	and

·							Retention	of,	and	success	in	cross-selling	to,	Investors	Financial's	customer	base.

Information	about	other	risks	and	uncertainties	which	could	cause	actual	results	to	differ	materially	from	those	expected	is	included	in	this	Form	10-K	under	Item

# CONSOLIDATED	RESULTS	OF	OPERATIONS

This	section	discusses	our	consolidated	results	of	operations	for	2006	compared	to	2005,	and	should	be	read	in	conjunction	with	the	consolidated	financial statements	and	related	notes	included	in	this	Form	10-K	under	Item	8.

# TOTAL	REVENUE

| Years	ended	December	31,<br>(Dollars	in	millions) | 2006 | 2005 | 2004 | 2005-2006 |
| :--- | :--- | :--- | :--- | :--- |
| Fee\tRevenue: |  |  |  |  |
| Servicing\tfees | $2,723 | $2,474 | $2,263 | 10% |
| Management\tfees | 943 | 751 | 623 | 26 |
| Trading\tservices | 862 | 694 | 595 | 24 |
| Securities\tfinance | 386 | 330 | 259 | 17 |
| Processing\tfees\tand\tother | 272 | 302 | 308 | (10) |
| Total\tfee\trevenue | 5,186 | 4,551 | 4,048 | 14 |
| Net\tInterest\tRevenue: |  |  |  |  |
| Interest\trevenue | 4,324 | 2,930 | 1,787 | 48 |
| Interest\texpense | 3,214 | 2,023 | 928 | 59 |
| Net\tinterest\trevenue | 1,110 | 907 | 859 | 22 |
| Provision\tfor\tloan\tlosses | — | — | (18) |  |
| Net\tinterest\trevenue\tafter\tprovision\tfor\tloan\tlosses | 1,110 | 907 | 877 | 22 |
| Gains\t(Losses)\ton\tsales\tof\tavailable-for-sale\tinvestment\tsecurities,\tnet | 15 | (1) | 26 |  |
| Gain\ton\tsale\tof\tPrivate\tAsset\tManagement\tbusiness | — | 16 | — |  |
| Total\trevenue | $6,311 | $5,473 | $4,951 | 15 |

We	are	one	of	the	world's	leading	specialists	in	servicing	mutual	funds,	other	collective	investment	funds	and	pension	plans.	We	are	consistently	gaining	business globally,	and	for	2006,	our	non-U.S.	revenue	was	approximately	43%	of	our	total	revenue,	compared	to	26%	for	2000.	We	provide	a	broad	range	of	reliable,	easy-to- integrate	investment	services	that	are	global	and	enable	our	customers	to	develop	and	launch	competitive	new	investment	products.	We	also	provide	active	management products,	including	enhanced	indexing,	hedge	fund	strategies	and	quantitative	management,	and	passive	investment	management	products	and	strategies.

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

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

Fee	Revenue

Servicing	and	management	fees	are	the	largest	components	of	fee	revenue,	and	collectively	comprised	approximately	71%	of	total	fee	revenue	for	2006	and	2005. These	fees	are	a	function	of	several	factors,	including	the	mix	and	volume	of	assets	under	custody	and	assets	under	management,	securities	positions	held	and	the volume	of	portfolio	transactions,	and	the	types	of	products	and	services	used	by	customers,	and	are	affected	by	changes	in	worldwide	equity	and	fixed	income valuations.

Generally,	servicing	fees	are	impacted,	in	part,	by	changes	in	daily	average	valuations	of	assets	under	custody,	while	management	fees	are	impacted	by	changes	in month-end	valuations	of	assets	under	management.	Additional	factors,	such	as	transaction	volumes,	balance	credits,	customer	minimum	balances	and	other	factors	may have	a	significant	impact	on	servicing	fee	revenue.	Generally,	management	fee	revenue	is	more	sensitive	to	market	valuations	than	servicing	fee	revenue.	In	addition, performance	fees	have	become	a	larger	component	of	management	fee	revenue	over	the	past	two	years,	and	amounted	to	about	9%	of	management	fees	for	2006. Performance	fees	are	generated	when	the	performance	of	managed	funds	exceeds	benchmarks	specified	in	the	management	agreements.

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

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

# INDEX

| December	31,<br>(Dollars	in	millions) | 2006 | 2005 | 2004 | 2005-2006 |
| :--- | :--- | :--- | :--- | :--- |
| Servicing\tfees | $ 2,723 | $ 2,474 | $ 2,263 | 10% |
| Management\tfees(1) | 943 | 751 | 623 | 26 |
| Trading\tservices | 862 | 694 | 595 | 24 |
| Securities\tfinance | 386 | 330 | 259 | 17 |
| Processing\tfees\tand\tother | 272 | 302 | 308 | (10) |
| Total\tfee\trevenue | $ 5,186 | $ 4,551 | $ 4,048 | 14 |

Almost	70%	of	the	$635	million	increase	in	total	fee	revenue	over	2005	came	from	servicing	and	management	fees.

# Servicing	Fees:

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

The	increase	in	servicing	fees	of	$249	million	from	2005	primarily	resulted	from	net	new	business	from	existing	and	new	customers,	higher	average	equity	market valuations,	and	higher	customer	transaction	volumes.	Net	new	business	is	defined	as	new	business	net	of	lost	business.	For	2006,	servicing	fees	generated	from customers	outside	the	U.S.	were	approximately	44%	of	total	servicing	fees,	up	from	40%	in		2005.

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

We	have	a	leading	position	for	servicing	U.S.	tax-exempt	assets	for	corporate	and	public	pension	funds.	We	provide	trust	and	valuation	services	for	more	than 4,300	daily-priced	portfolios,	making	us	a	leader	for	both	monthly	and	daily	valuation	services.

We	are	a	leading	service	provider	outside	of	the	U.S.	as	well.	In	Germany,	we	provide	Depotbank	services	for	approximately	17%	of	retail	and	institutional	fund assets.	In	the	United	Kingdom,	we	provide	custody	services	for	19%	of	pension	fund	assets	and	provide	administration	services	to	more	than	23%	of	mutual	fund	assets. We	service	approximately	13%	of	the	hedge	fund	market	and	more	than	$500	billion	of	offshore	assets,	primarily	domiciled	in	the	Cayman	Islands,	Ireland, Luxembourg,	and	the	Channel	Islands.	We	have	more	than	$800	billion	in	assets	under	administration	in	the	Asia-Pacific	region,	and	are	a	leader	in	Japan	with	more than	36%	of	the	trust	assets	held	by	non-domestic	trust	banks.

At	year-end	2006,	our	total	assets	under	custody	were	$11.85	trillion,	compared	to	$10.12	trillion	a	year	earlier.	The	value	of	assets	under	custody	is	a	broad measure	of	the	relative	size	of	various	markets	served.	Changes	in	the	value	of	assets	under	custody	do	not	necessarily	result	in	proportional	changes	in	revenue.	Assets under	custody	consisted	of	the	following	at	December	31:

# ASSETS	UNDER	CUSTODY

| As	of	December	31,<br>(Dollars	in	billions) | 2006 | 2005 | 2004 | 2003 | 2002 | 2005-2006<br>AGR | 2002-2006<br>CAGR |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Mutual\tfunds | $3,738 | $3,442 | $ 3,088 | $ 3,094 | $ 2,548 | 9% | 10% |
| Collective\tfunds | 1,665 | 1,001 | 911 | 1,153 | 260 | 66 | 59 |
| Pension\tproducts | 3,713 | 3,358 | 3,254 | 3,026 | 1,993 | 11 | 17 |
| Insurance\tand\tother\tproducts | 2,738 | 2,320 | 2,244 | 2,097 | 1,370 | 18 | 19 |
| Total | $ 11,854 | $ 10,121 | $ 9,497 | $ 9,370 | $ 6,171 | 17 | 18 |

# MIX	OF	ASSETS	UNDER	CUSTODY

| As	of	December	31,<br>(In	billions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Financial\tInstrument\tMix: |  |  |  |
| Equities | $5,821 | $4,814 | $ 4,688 |
| Fixed\tincome | 4,035 | 3,797 | 3,286 |
| Short-term\tand\tother\tinvestments | 1,998 | 1,510 | 1,523 |
| Total | $11,854 | $10,121 | $ 9,497 |

# GEOGRAPHIC	MIX	OF	ASSETS	UNDER	CUSTODY

| December	31,<br>(In	billions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| United\tStates | $8,962 | $7,773 | $ 7,268 |
| Other\tAmericas | 607 | 508 | 466 |
| Europe/Middle\tEast/Africa | 1,815 | 1,454 | 1,403 |
| Asia/Pacific | 470 | 386 | 360 |
| Total | $11,854 | $10,121 | $ 9,497 |

# Management	Fees:

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

The	$192	million	increase	in	management	fees	from	2005	primarily	resulted	from	higher	equity	market	valuations	and	net	new	business.	In	addition,	performance fees	increased	from	$41	million	in	2005	to	$84	million	in	2006.	Management	fees	generated	from	customers	outside	the	United	States	were	approximately	32%	of	total management	fees,	up	from	30%	for	2005.

At	year-end	2006,	assets	under	management	were	$1.75	trillion,	compared	to	$1.44	trillion	at	year-end	2005.	While	certain	management	fees	are	directly determined	by	the	value	of	assets	under	management	and	the	investment	strategy	employed,	management	fees	reflect	other	factors	as	well,	including	our	relationship pricing	for	customers	who	use	multiple	services,	and	the	benchmarks	specified	in	the	respective	management	agreements	related	to	performance	fees.	Accordingly,	there is	not	necessarily	a	direct	correlation	between	the	value	of	assets	under	management,	market	indices	and	management	fee	revenue.	Assets	under	management	consisted of	the	following	at	December	31.

# ASSETS	UNDER	MANAGEMENT

| As	of	December	31,<br>(In	billions) | 2006 | 2005 | 2004 | 2003 | 2002 | 2005-<br>2006	AGR | 2002-2006<br>CAGR |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Equities: |  |  |  |  |  |  |  |
| Passive | $691 | $625 | $600 | $519 | $357 | 11% | 18% |
| Active\tand\tother | 181 | 147 | 122 | 81 | 48 | 23 | 39 |
| Company\tstock/ESOP | 85 | 76 | 77 | 76 | 56 | 12 | 11 |
| Total\tequities | 957 | 848 | 799 | 676 | 461 | 13 | 20 |
| Fixed\tincome | 201 | 144 | 141 | 91 | 73 | 40 | 29 |
| Cash\tand\tmoney\tmarket | 591 | 449 | 414 | 339 | 229 | 32 | 27 |
| Total\tfixed\tincome\tand\tcash | 792 | 593 | 555 | 430 | 302 | 34 | 27 |
| Total | $ 1,749 | $ 1,441 | $ 1,354 | $ 1,106 | $763 | 21 | 23 |

# GEOGRAPHIC	MIX	OF	ASSETS	UNDER	MANAGEMENT

| As	of	December	31,<br>(In	billions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| United\tStates | $ 1,202 | $ 1,023 | $ 1,009 |
| Other\tAmericas | 30 | 24 | 23 |
| Europe/Middle\tEast/Africa | 384 | 275 | 221 |
| Asia/Pacific | 133 | 119 | 101 |
| Total | $ 1,749 | $ 1,441 | $ 1,354 |

The	following	table	presents	a	roll-forward	of	assets	under	management	for	the	three	years	ended	December	31,	2006:

| Years	Ended	December	31,<br>(In	billions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Balance\tat\tbeginning\tof\tyear | $ 1,441 | $ 1,354 | $ 1,106 |
| Net\tnew\tbusiness | 86 | 36 | 145 |
| Market\tappreciation | 222 | 51 | 103 |
| Balance\tat\tend\tof\tyear | $ 1,749 | $ 1,441 | $ 1,354 |

# Trading	Services:

Trading	services	revenue	includes	revenue	from	foreign	exchange	trading	and	brokerage	and	other	trading	services.	We	offer	a	complete	range	of	foreign	exchange services	under	an	account	model	that	focuses	on	the	global	requirements	of	our	customers	to	execute	trades	and	receive	market	insights	in	any	time	zone.	We	have behavior,	as	well	as	consultative	services	that	use	quantitative	tools	designed	to	optimize	our	customers'	returns.	Foreign	exchange	trading	revenue	is	influenced	by three	principal	factors:	the	volume	and	type	of	customer	foreign	exchange	transactions;	currency	volatility	and	trend;	and	the	management	of	currency	market	risks. exclusive	ownership	of	FX	Connect ®,	the	world's	first	and	leading	foreign	exchange	trading	platform,	and	we	provide	quantitatively-based	research	into	investor

For	2006,	foreign	exchange	trading	revenue	increased	31%,	to	$611	million	from	$468	million	in	2005,	and	benefited	from	a	strong	first	half	of	the	year.	The increase	from	2005	resulted	from	increased	transaction	volumes,	a	favorable	transaction	mix	related	to	custody	FX	services,	and	an	increase	in	FX	trading	profits, partially	offset	by	a	decline	in	customer	volume-weighted	currency	volatility.

We	also	offer	a	range	of	brokerage	and	other	trading	products	tailored	specifically	to	meet	the	needs	of	the	global	pension	community,	including	transition management,	commission	recapture	and	self-directed	brokerage.	These	products	are	differentiated	by	our	position	as	an	agent	of	the	institutional	investor.	Brokerage	and other	trading	fees	were	$251	million	in	2006,	up	11%	compared	to	2005.	Growth	was	attributable	to	a	significant	increase	in	other	trading	services	and	trading	profits, offset	by	a	slight	decrease	in	brokerage	revenue,	the	result	of	a	decline	in	commission	recapture	revenue.

# Securities	Finance:

Securities	finance	provides	liquidity	to	the	financial	markets	and	an	effective	means	for	customers	to	earn	revenue	on	their	existing	portfolios.	By	acting	as	a	lending agent	and	coordinating	loans	between	lenders	and	borrowers,	we	lend	securities	and	provide	liquidity	in	more	than	35	markets	around	the	world.	Borrowers	provide collateral	in	the	form	of	cash	or	securities	to	State	Street	in	return	for	loaned	securities.	For	cash	collateral,	we	pay	a	usage	fee	to	the	provider	of	the	cash	collateral,	and invest	the	cash	collateral	in	certain	investment	vehicles.	The	spread	between	the	yield	on	the	investment	vehicle	and	the	usage	fee

paid	to	the	provider	of	the	collateral	is	split	between	the	lender	of	the	securities	and	State	Street	as	agent.	For	non-cash	collateral,	the	borrower	pays	a	fee	for	the	loaned securities,	and	the	fee	is	split	between	the	lender	of	the	securities	and	State	Street.

Securities	finance	revenue	has	historically	been	affected	by	seasonality	during	the	year,	and	is	principally	a	function	of	the	volume	of	securities	loaned	and	the interest-rate	spreads	earned	on	the	collateral.	During	2006,	securities	finance	revenue	peaked	in	the	second	quarter,	as	a	result	of	heavy	borrowing	demand	from customers,	declined	in	the	third	quarter,	and	rebounded	slightly	in	the	fourth	quarter.	Overall,	securities	finance	revenue	increased	17%	from	a	year	earlier.	Growth	in this	revenue	over	2005	resulted	from	a	22%	increase	in	securities	lending	volumes.	Consolidated	spread	was	essentially	unchanged	from	the	prior	year.

# Processing	Fees	and	Other:

Processing	fees	and	other	revenue	includes	diverse	types	of	fees	and	other	revenue,	including	fees	from	our	structured	products	business,	fees	from	software licensing	and	maintenance,	profits	and	losses	from	unconsolidated	subsidiaries,	gains	and	losses	on	sales	of	leased	equipment	and	other	assets,	and	amortization	of investments	in	tax-advantaged	financings.	Processing	fees	and	other	revenue	decreased	10%	from	2005,	with	the	decline	partially	due	to	the	absence	of	fees	from Deutsche	Bank	AG	related	to	customer	deposits	of	the	acquired	Global	Securities	Services,	or	"GSS,"	business,	which	were	converted	to	our	systems	in	prior	years.

# Net	Interest	Revenue

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

| Years	ended	December	31,<br>(Dollars	in	millions) | 2006 | 2005 | 2004 | Change<br>2005—2006 |
| :--- | :--- | :--- | :--- | :--- |
| Interest\trevenue | $ 4,324 | $ 2,930 | $ 1,787 | 48% |
| Interest\texpense | 3,214 | 2,023 | 928 | 59 |
| Net\tinterest\trevenue | 1,110 | 907 | 859 | 22 |
| Provision\tfor\tloan\tlosses | — | — | (18) |  |
| Net\tinterest\trevenue\tafter\tprovision\tfor\tloan\tlosses | $ 1,110 | $907 | $877 |  |
| Net\tinterest\trevenue\t(fully\ttaxable-equivalent\tbasis) | $ 1,155 | $949 | $904 | 22% |
| Excess\tof\trates\tearned\tover\trates\tpaid\t(fully\ttaxable-equivalent |  |  |  |  |
| basis) | .89% | .82% | .95% |  |
| Net\tinterest\tmargin\t(fully\ttaxable-equivalent\tbasis) | 1.25 | 1.08 | 1.08 |  |

Additional	detail	about	the	components	of	interest	revenue	and	interest	expense	is	in	Note	16	of	the	"Notes	to	Consolidated	Financial	Statements"	included	in	this Form	10-K	under	Item	8.

The	increase	in	net	interest	revenue	for	2006	compared	to	2005	was	due	to	several	factors.	On	the	asset	side,	there	was	an	increase	in	average	interest-earning	assets as	well	as	higher	yields	on	our	investment	securities	portfolio.	The	higher	yields	were	the	result	of	a	higher	interest	rate	environment	as	well	as	a	repositioning	program begun	in	late	2004	and	substantially	completed	in	the	second	half	of	2006.	On	the	liability	side,	a	higher	level	of	customer	deposits,	primarily	resulting	from	the	growth of	our	non-U.S.	operations,	as	well	as	a	more	favorable	mix	of	deposits,	also	contributed	to	the	growth	in	net	interest	revenue.	These	benefits	were	partially	offset	by	the impact	of	higher	funding	costs,	as	the	Federal	Reserve	raised	short-term	interest	rates	during	the	first	half	of	the	year.

For	the	year	ended	December	31,	2006,	our	average	investment	securities	portfolio	increased	from	approximately	$51.2	billion	to	approximately	$61.6	billion.	The portfolio	included	a	higher	percentage	of	collateralized	mortgage	obligations	and	floating-rate,	asset-backed	securities	compared	to	a	year	earlier,	and	a	lower	percentage of	U.S.	Treasuries	and	direct	obligations	of	federal	agencies.	The	shift	in	the	portfolio	was	designed	to	better	position	us	in	a	rising	short-term	interest-rate	environment, without	adversely	affecting	overall	risk,	as	we	continued	to	invest	conservatively	in	"AA"	and	"AAA"	rated	securities.	"AA"	and	"AAA"	rated	securities	comprised approximately	94%	of	the	investment	securities	portfolio,	with	approximately	88%	"AAA"	rated,	at	December	31,	2006.

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

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

Our	management	of	the	investment	securities	portfolio	has	many	objectives,	the	foremost	of	which	is	to	generate	maximum	return	with	modest	duration	and	credit

risk.	In	addition,	we	structure	the	portfolio	to	provide	liquidity	and	to	serve	as	a	source	of	collateral	for	customer	activities.	These	objectives	may	entail	strategic	sales	of specific	securities	as	market	conditions	warrant.	We	recorded	net	gains	of	$15	million	on	sales	of	available-for-sale	securities	for	2006,	compared	to	net	losses	of $1	million	for	2005.	At	December	31,	2006,	approximately	93%	of	the	investment	securities	portfolio,	or	$60.45	billion,	was	classified	as	available	for	sale.	Additional information	about	available-for-sale	securities,	and	the	gross	gains	and	losses	that	comprise	the	net	gains,	is	in	Note	3	of	the	"Notes	to	Consolidated	Financial Statements"	included	in	this	Form	10-K	under	Item	8.

# OPERATING	EXPENSES

| Years	Ended	December	31,<br>(Dollars	in	millions) | 2006 | 2005 | 2004 | 2005—2006 |
| :--- | :--- | :--- | :--- | :--- |
| Salaries\tand\temployee\tbenefits | $2,652 | $2,231 | $1,957 | 19% |
| Information\tsystems\tand\tcommunications | 501 | 486 | 527 | 3 |
| Transaction\tprocessing\tservices | 496 | 449 | 398 | 10 |
| Occupancy | 373 | 391 | 363 | (5) |
| Other | 518 | 484 | 514 | 7 |
| Total\toperating\texpenses | $4,540 | $4,041 | $3,759 | 12 |
| Number\tof\temployees\tat\tyear-end | 21,700 | 20,965 | 19,668 |  |

The	19%	increase	in	salaries	and	employee	benefits	from	2005	was	driven	primarily	by	higher	incentive	compensation	costs	due	to	improved	performance,	the impact	of	higher	staffing	levels	and	annual	merit	increases,	and	planned	benefit	increases.	Staffing	levels	increased	to	support	growth	in	our	Investment	Servicing business,	particularly	in	Europe,	and	in	our	Investment	Management	business,	as	well	as	in	information	technology	and	risk	management.

The	slight	increase	in	information	systems	and	communications	expense	primarily	resulted	from	higher	telecommunications	costs	and	third	party	software expenditures	to	support	overseas	growth.

Transaction	processing	services	expenses	are	volume-related,	and	include	equity	trading	services	and	fees	related	to	securities	settlement,	sub-custodian	fees	and external	contract	services.	The	10%	increase	primarily	resulted	from	higher	transaction	volumes,	as	well	as	expansion	of	our	operations	in	Europe.

Occupancy	expense	was	down	5%	from	2005,	primarily	due	to	the	absence	of	the	$26	million	charge	recorded	in	2005	related	to	a	long-term	sub-lease	agreement for	space	in	our	headquarters	building,	offset	by	a	slight	increase	in	energy	and	other	utility	costs.

The	7%	increase	in	other	expenses	from	2005	primarily	resulted	from	increased	costs	to	support	growth	initiatives,	offset	by	a	decline	in	professional	services	fees related	to	information	technology	and	the	restructuring	of	our	Global	Treasury	function,	which	occurred	in	2005.

# Income	Taxes

The	increase	in	income	tax	expense	from	continuing	operations	to	$675	million	for	2006,	from	$487	million	a	year	ago,	resulted	from	increased	pre-tax	earnings,	as well	as	$81	million	of	aggregate	adjustments	recorded	during	2006	primarily	related	to	the	Tax	Increase	Prevention	and	Reconciliation	Act	and	the	potential	resolution of	issues	with	the	IRS	with	respect	to	certain	of	our	leveraged	leases.	Additional	information	about	these	adjustments	is	in	Notes	10	and	20	of	the	"Notes	to	Consolidated Financial	Statements"	included	in	this	Form	10-K	under	Item	8.	The	effective	tax	rate	for	continuing	operations	for	2006	was	38.1%,	compared	to	34%	for	2005.

The	2006	income	tax	expense	from	discontinued	operations	of	$6	million	was	related	to	$16	million	of	income	associated	with	the	finalization	of	certain	costs recorded	in	connection	with	our	divestiture	of	Bel	Air,	which	was	completed	during	2006.	The	2005	income	tax	benefit	from	discontinued	operations	of	$58	million	was related	to	the	loss	of	$165	million	recorded	in	connection	with	our	agreement	to	divest	Bel	Air	in	2005.

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

# LINE	OF	BUSINESS	INFORMATION

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

The	following	is	a	summary	of	line	of	business	results.	These	results	exclude	the	income	(loss)	from	discontinued	operations	related	to	our	previously	discussed divestiture	of	Bel	Air.	The	"Other/One-Time"	column	for	2005	includes	the	additional	gain	from	our	sale	of	the	Private	Asset	Management	business,	and	for	2004, includes	merger	and	integration	costs	related	to	the	GSS	acquisition.

| Years	ended	December	31,<br>(Dollars	in	millions,	except<br>where	otherwise	noted) | 2006 | Investment<br>Servicing<br>2005 | 2004 | 2006 | Investment<br>Management<br>2005 | 2004 | 2006 | Other/One-<br>Time<br>2005 | 2004 | 2006 | Total<br>2005 | 2004 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Fee\trevenue: |  |  |  |  |  |  |  |  |  |  |  |  |
| Servicing\tfees | $2,723 | $2,474 | $2,263 |  |  |  |  |  |  | $2,723 | $2,474 | $2,263 |
| Management\tfees | — | — | — | $943 | $751 | $623 |  |  |  | 943 | 751 | 623 |
| Trading\tservices | 862 | 694 | 595 | — | — | — |  |  |  | 862 | 694 | 595 |
| Securities\tfinance | 292 | 260 | 211 | 94 | 70 | 48 |  |  |  | 386 | 330 | 259 |
| Processing\tfees\tand\tother | 208 | 221 | 239 | 64 | 81 | 69 |  |  |  | 272 | 302 | 308 |
| Total\tfee\trevenue | 4,085 | 3,649 | 3,308 | 1,101 | 902 | 740 |  |  |  | 5,186 | 4,551 | 4,048 |
| Net\tinterest\trevenue | 986 | 826 | 816 | 124 | 81 | 43 |  |  |  | 1,110 | 907 | 859 |
| Provision\tfor\tloan\tlosses | — | — | (18) | — | — | — |  |  |  | — | — | (18) |
| Net\tinterest\trevenue\tafter |  |  |  |  |  |  |  |  |  |  |  |  |
| provision\tfor\tloan\tlosses | 986 | 826 | 834 | 124 | 81 | 43 |  |  |  | 1,110 | 907 | 877 |
| Gains\t(Losses)\ton\tsales\tof |  |  |  |  |  |  |  |  |  |  |  |  |
| available-for-sale\tinvestment |  |  |  |  |  |  |  |  |  |  |  |  |
| securities,\tnet | 15 | (1) | 26 | — | — | — |  |  |  | 15 | (1) | 26 |
| Gain\ton\tsale\tof\tdivested\tbusiness | — | — | — | — | — | — |  | $16 |  | — | 16 | — |
| Total\trevenue | 5,086 | 4,474 | 4,168 | 1,225 | 983 | 783 |  | 16 |  | 6,311 | 5,473 | 4,951 |
| Operating\texpenses | 3,742 | 3,363 | 3,115 | 798 | 678 | 582 |  | — | $62 | 4,540 | 4,041 | 3,759 |

|  | $1,344 | $1,111 | $1,053 | $427 | $305 | $201 | $16 | $(62) | $1,771 | $1,432 | $1,192 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Pre-tax\tmargin | 26% | 25% | 25% | 35% | 31% | 26% |  |  |  |  |  |
| Average\tassets\t(in\tbillions) | $103.4 | $96.9 | $92.5 | $3.0 | $2.9 | $2.6 |  |  | $106.4 | $99.8 | $95.1 |

# Investment	Servicing

The	14%	increase	in	total	revenue	from	2005	was	primarily	driven	by	increases	in	servicing	and	trading	services	fees	and	securities	finance	revenue,	as	well	as	a 19%	increase	in	net	interest	revenue,	slightly	offset	by	a	decline	in	processing	fees	and	other	revenue.

Servicing	fees	were	up	from	2005	due	to	net	new	business	from	existing	and	new	customers,	higher	equity	valuations	and	higher	customer	transaction	volumes.	The increase	in	trading	services	revenue	reflected	a	higher	dollar	volume	of	foreign	exchange	trades	for	customers	and	a	higher	volume	of	fixed	income	transition management	business.	Processing	fees	and	other	revenue	declined	from	2005,	partly	as	a	result	of	a	decline	in	fees	from	Deutsche	Bank	AG	as	GSS	customer	deposits were	converted	to	our	systems.

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

Net	interest	revenue	for	2006	increased	19%	from	2005	due	to	an	increase	in	average	interest-earning	assets,	as	well	as	higher	yields	on	our	investment	securities portfolio.	The	higher	yields	were	the	result	of	a	repositioning	program	begun	in	late	2004	and	substantially	completed	in	the	second	half	of	2006,	which	is	further discussed	under	the	caption	"Net	Interest	Revenue"	in	the	"Total	Revenue"	section	of	this

Management's	Discussion	and	Analysis.	In	2004,	we	reduced	the	allowance	for	loan	losses	through	a	reduction	of	the	loan	loss	provision	as	a	result	of	reduced	credit exposures	and	overall	improved	credit	quality.	A	portion	of	net	interest	revenue	is	recorded	in	the	Investment	Management	business	line	based	on	the	volume	of customer	liabilities	attributable	to	that	business.

Operating	expenses	increased	from	2005,	driven	primarily	by	higher	incentive	compensation	costs	due	to	improved	performance,	the	impact	of	higher	staffing levels	and	annual	merit	increases,	and	planned	benefit	increases.	Staffing	levels	increased	to	support	growth	in	business,	particularly	in	Europe.	Transaction	processing costs	increased	due	to	a	higher	volume	of	securities	settlements	and	higher	sub-custodian	fees.	Other	expenses	increased	as	a	result	of	an	increase	in	costs	to	support growth	initiatives,	offset	by	lower	professional	services	fees	partly	related	to	the	restructuring	of	Global	Treasury.

# Investment	Management

Total	revenue	for	2006	increased	25%	from	2005.	Management	fees	for	the	Investment	Management	business	line,	which	were	up	26%,	are	identical	to	the respective	consolidated	results.	Refer	to	the	"Management	Fees"	caption	in	the	"Total	Revenue"	section	of	this	Management's	Discussion	and	Analysis	for	a	more	in- depth	discussion.	Performance	fees	increased	from	$41	million	for	2005	to	$84	million	for	2006,	and	accounted	for	almost	one-quarter	of	the	increase	in	management fees.	Securities	finance	revenue	for	2006	was	up	34%	from	2005,	reflecting	higher	securities	lending	volumes.	Net	interest	revenue	improved	due	to	higher	volumes	of customer	liabilities,	primarily	resulting	from	the	growth	of	our	non-U.S.	operations,	as	well	as	a	more	favorable	mix	of	deposits.

Operating	expenses	increased	18%	from	2005,	primarily	attributable	to	higher	incentive	compensation	costs	due	to	improved	performance.

# OVERVIEW	OF	CONSOLIDATED	RESULTS	OF	OPERATIONS

| Years	ended	December	31,<br>(Dollars	in	millions,	except	per	share	amounts) | 2005 | 2004 | $	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- |
| Total\tfee\trevenue | $ 4,551 | $ 4,048 | $503 | 12% |
| Net\tinterest\trevenue | 907 | 859 | 48 | 6 |
| Provision\tfor\tloan\tlosses | — | (18) | 18 | 100 |
| Gains\t(Losses)\ton\tsales\tof\tavailable-for-sale\tinvestment\tsecurities, |  |  |  |  |
| net | (1) | 26 | (27) | (104) |
| Gain\ton\tsale\tof\tdivested\tbusiness | 16 | — | 16 | — |
| Total\trevenue | 5,473 | 4,951 | 522 | 11 |
| Total\toperating\texpenses | 4,041 | 3,759 | 282 | 8 |
| Income\tfrom\tcontinuing\toperations\tbefore\tincome\ttax\texpense | 1,432 | 1,192 | 240 | 20 |
| Income\ttax\texpense\tfrom\tcontinuing\toperations | 487 | 394 | 93 | 24 |
| Income\tfrom\tcontinuing\toperations | 945 | 798 | 147 | 18 |
| Net\tloss\tfrom\tdiscontinued\toperations | (107) | — | (107) | — |
| Net\tincome | $838 | $798 | 40 | 5 |
| Earnings\tPer\tShare\tFrom\tContinuing\tOperations: |  |  |  |  |
| Basic | $2.86 | $2.38 | $.48 | 20 |
| Diluted | 2.82 | 2.35 | .47 | 20 |
| Earnings\tPer\tShare: |  |  |  |  |
| Basic | $2.53 | $2.38 |  |  |
| Diluted | 2.50 | 2.35 |  |  |
| Return\ton\tshareholders'\tequity | 15.3% | 13.3% |  |  |

The	net	loss	from	discontinued	operations	in	2005	of	$107	million,	or	$.32	per	share,	resulted	from	our	divestiture	of	Bel	Air.	The	2004	results	included	$62	million of	merger	and	integration	costs,	$41	million	after-tax	or	$.12	per	share,	related	to	the	GSS	acquisition.

Years	ended	December	31,

(Dollars	in	millions)

| Servicing	fees | $ 2,474 | $ 2,263 | $211 | 9% |
| :--- | :--- | :--- | :--- | :--- |
| Management\tfees | 751 | 623 | 128 | 21 |
| Trading\tservices | 694 | 595 | 99 | 17 |
| Securities\tfinance | 330 | 259 | 71 | 27 |
| Processing\tfees\tand\tother | 302 | 308 | (6) | (2) |
| Total\tfee\trevenue | 4,551 | 4,048 | 503 | 12 |
| Net\tInterest\tRevenue: |  |  |  |  |
| Interest\trevenue | 2,930 | 1,787 | 1,143 | 64 |
| Interest\texpense | 2,023 | 928 | 1,095 | 118 |
| Net\tinterest\trevenue | 907 | 859 | 48 | 6 |
| Provision\tfor\tloan\tlosses | — | (18) | (18) |  |
| Net\tinterest\trevenue\tafter\tprovision\tfor\tloan\tlosses | 907 | 877 | 30 | 3 |
| Gains\t(Losses)\ton\tsales\tof\tavailable-for-sale\tinvestment\tsecurities, |  |  |  |  |
| net | (1) | 26 | (27) | (104) |
| Gain\ton\tsale\tof\tPrivate\tAsset\tManagement\tbusiness | 16 | — | 16 |  |
| Total\trevenue | $ 5,473 | $ 4,951 | $522 | 11 |

The	increase	in	total	revenue	for	2005	compared	to	2004	primarily	reflected	growth	in	fee	revenue,	but	also	reflected	higher	net	interest	revenue	and	a	$16	million gain	from	final	settlement	of	the	sale	of	our	Private	Asset	Management	business.	Fee	revenue	in	2005	primarily	reflected	growth	in	servicing,	management,	trading services	and	securities	finance	fees.

The	increase	in	servicing	fees	was	the	result	of	new	business	from	existing	and	new	customers,	and	higher	equity	market	valuations.	Our	business	continued	to	grow outside	the	U.S.,	with	approximately	40%	of	our	servicing	fees	derived	from	non-U.S.	customers,	up	from	34%	in	2004.	Assets	under	custody	increased	to	$10.12 trillion	at	December	31,	2005,	up	$624	billion	from	$9.50	trillion	a	year	earlier.

The	increase	in	management	fees	reflected	continued	new	business	and	higher	average	month-end	equity	market	valuations.	Approximately	30%	of	management fees	were	from	customers	outside	the	U.S.	in	2005	and	2004.	Assets	under	management	increased	to	$1.44	trillion	at	December	31,	2005,	up	$87	billion	from	$1.35 trillion	a	year	earlier.

The	growth	in	trading	services	revenue,	which	includes	foreign	exchange	trading,	brokerage	and	other	trading	revenue,	reflected	an	increase	in	brokerage	and	other trading	fees	of	$51	million,	primarily	due	to	increased	global	transition	management	business,	as	well	as	an	increase	in	equity	trading	revenue	in	the	U.S.	Trading services	revenue	also	benefited	from	a	$48	million	increase	in	foreign	exchange	trading	revenue.	Customer	spot	and	forward	trading	volumes	were	strong	in	2005,	both in	the	volume	and	value	of	transactions,	up	32%	from	2004.	The	impact	of	volume	increases	was	somewhat	offset	by	lower	currency	volatility,	as	measured	by	our	index of	26	currencies,	down	12%	from	2004.

Securities	finance	revenue	reflected	the	effect	of	improved	interest	rate	spreads	and	a	9%	increase	in	securities	lending	volumes.

The	decline	in	processing	fees	and	other	revenue	reflected	a	decrease	of	$30	million	in	payments	made	by	Deutsche	Bank	AG	in	consideration	of	net	interest revenue	earned	from	GSS	customer	deposits,	largely	offset	by	an	increase	in	revenue	from	our	structured	products	business.	The	deposits	were	held	by	Deutsche	Bank until	customers	and	their	related	deposits	were	converted	to	our	systems.	The	net	loss	on	sales	of	available-for-sale	securities	of	$1	million	in	2005	compared	to	a	gain	of $26	million	in	2004.

The	increase	in	net	interest	revenue	reflected	an	increase	in	the	size	of	our	average	balance	sheet	and	the	impact	of	repositioning	and	increasing	the	average	size	of our	investment	securities	portfolio.	Net	interest	revenue	for	2004	reflected	a	$19	million	cumulative	reduction	in	interest	revenue,	which	resulted	from	a	change	in	the applicable	state	tax	rate	for	leveraged	lease	transactions.

We	reduced	the	allowance	for	loan	losses	in	2004	by	recording	an	$18	million	benefit	in	the	related	income	statement	provision	in	response	to	reduced	credit exposure	and	improved	credit	quality.

| Years	ended	December	31,<br>(Dollars	in	millions) | 2005 | 2004 | $	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- |
| Operating\tExpenses: |  |  |  |  |
| Salaries\tand\temployee\tbenefits | $ 2,231 | $ 1,957 | $274 | 14% |
| Information\tsystems\tand\tcommunications | 486 | 527 | (41) | (8) |
| Transaction\tprocessing\tservices | 449 | 398 | 51 | 13 |
| Occupancy | 391 | 363 | 28 | 8 |
| Other | 484 | 514 | (30) | (6) |
| Total\toperating\texpenses | $ 4,041 | $ 3,759 | $282 | 8 |

The	increase	in	operating	expenses	from	2004	reflected	higher	expenses	for	salaries	and	employee	benefits,	transaction	processing,	occupancy	and	other	expenses, somewhat	offset	by	a	decline	in	information	systems	and	communications	expense	and	the	absence	of	merger,	integration,	divestiture	and	restructuring	costs.

The	increase	in	salaries	and	employee	benefits	was	driven	by	higher	staffing	levels	and	higher	compensation	costs	related	to	improved	earnings,	higher	averages salaries	due	to	merit	increases	and	higher	costs	of	employee	benefits.

Information	systems	and	communications	expense	decreased	because	of	efficiencies	gained	as	GSS	customers	were	converted	to	our	operation	platforms,	somewhat offset	by	costs	for	new	outsourcing	customers	and	costs	of	the	new	data	center.

Transaction	processing	services	expenses,	which	in	large	part	are	volume-related,	include	equity	trading	services	and	fees	related	to	securities	settlement,	sub- custodian	fees	and	external	contract	services.	The	increase	resulted	from	a	higher	volume	of	investment	activity	combined	with	higher	net	asset	values	that	impact	sub- custodian	fees.

Occupancy	expense	for	2005	reflected	a	$26	million	pre-tax	charge	related	to	a	long-term	sub-lease	agreement	with	an	unrelated	third	party	for	space	in	our headquarters	building.	Occupancy	expense	for	2004	reflected	a	loss	of	$16	million	from	a	sub-lease	agreement	at	our	former	headquarters	building.	Aside	from	these charges,	the	increases	year	over	year	reflected	increased	occupancy	costs	in	Europe	to	accommodate	new	investment	manager	operations	outsourcing	customers.

The	decline	in	other	operating	expenses	was	primarily	due	to	the	absence	of	merger	and	integration	costs	of	$62	million	recorded	in	2004	related	to	the	conversion of	customers	gained	in	the	GSS	acquisition	to	our	systems,	and	the	absence	of	2004	restructuring	costs	of	$21	million	related	to	severance	and	benefit	costs	associated with	a	425-position	workforce	reduction.

The	increase	in	income	tax	expense	from	continuing	operations	resulted	from	increased	pre-tax	earnings.	The	effective	tax	rate	for	continuing	operations	for	2005 was	34%.	Our	effective	rate	for	2004	was	33.1%,	including	the	impact	of	a	cumulative	benefit	of	$18	million	resulting	from	a	change	in	the	effective	state	tax	rate applied	to	leveraged	lease	transactions.	Excluding	this	item,	the	effective	rate	for	2004	was	34%.

# SIGNIFICANT	ACCOUNTING	ESTIMATES

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

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

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

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

# Lease	Financing

We	have	a	leveraged	lease	portfolio	consisting	of	U.S.	and	cross-border	financings,	primarily	for	transportation	equipment,	including	trains,	aircraft	and	ships. Lease	financing	investments	are	reported	at	the	aggregate	of	lease	payments	receivable	and	estimated	residual	values,	net	of	non-recourse	debt	and	unearned	income. Unearned	income	is	recognized	in	interest	revenue	to	yield	a	level	rate	of	return	on	the	net	investment	in	the	leases.

Measuring	the	net	investment	and	interest	revenue	related	to	lease	financing	requires	the	use	of	several	assumptions	regarding	estimates	of	residual	values,	the amount	and	timing	of	cash	flows,	and	the	impact	of	income	tax	regulations	and	income	tax	rates	relating	to	the	leases.	Due	to	the	complexity	and	long-term	nature	of many	of	these	leases,	these	assumptions	are	reviewed	regularly	for	adjustments	that	may	be	required,	including	the	recognition	of	other-than-temporary	impairment	of residual	values.

Changes	in	these	assumptions	in	future	periods	could	affect	asset	balances	and	related	interest	revenue,	as	well	as	the	amount	of	income	tax	expense.	Certain	of	these assumptions	could	be	affected	by	changes	in	tax	positions	established	with	respect	to	the	amount	and	timing	of	tax	deductions	taken	with	respect	to	certain	lease transactions,	which	could	be	impacted	by	the	enactment	of	tax	legislation	or	changes	in	the	interpretation	of	existing	tax	laws	by	U.S.	and	non-U.S.	tax	authorities.	As	we discussed	in	the	"Income	Taxes"	section	of	this	Management's	Discussion	and	Analysis,	we	recorded	additional	income	tax	expense	of	$81	million	during	2006,	as	a result	of	the	impact	of	the	Tax	Increase	Prevention	and	Reconciliation	Act	and	changes	in	tax	positions	that	we	established	with	respect	to	certain	of	our	leveraged	lease transactions.

Additional	information	about	lease	financing	balances	is	in	Note	4	of	the	"Notes	to	Consolidated	Financial	Statements"	included	in	this	Form	10-K	under	Item	8.

# Goodwill

Goodwill	arises	when	the	purchase	price	exceeds	the	assigned	value	of	net	assets	of	acquired	businesses,	and	represents	the	value	attributable	to	unidentifiable intangible	elements	being	acquired.	Almost	all	of	our	goodwill	resulted	from	business	acquisitions	of	our	Investment	Servicing	line	of	business.	Approximately	99%	of the	total	goodwill	recorded	in	our	consolidated	statement	of	condition	was	recorded	by	this	business	line,	and	the	remaining	1%	was	recorded	by	Investment Management.

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

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

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

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

Events	that	may	indicate	goodwill	impairment	include	significant	or	adverse	changes	in	the	business,	economic	or	political	climate;	an	adverse	action	or	assessment by	a	regulator;	unanticipated	competition;	and	a	more-likely-than-not	expectation	that	we	will	sell	or	otherwise	dispose	of	a	business	to	which	the	goodwill	relates.	Our goodwill	impairment	testing	for	2006	indicated	that	none	of	our	goodwill	was	impaired.	Goodwill	recorded	in	our	consolidated	statement	of	condition	at	December	31, 2006	totaled	approximately	$1.4	billion.

Additional	information	about	goodwill	is	in	Note	5	of	the	"Notes	to	Consolidated	Financial	Statements."

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

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

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

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

# Pension	Costs

We	maintain	a	tax-qualified	non-contributory	defined	benefit	pension	plan	covering	substantially	all	domestic	employees,	as	well	as	certain	non-U.S.	defined benefit	plans.	Measuring	cost	and	reporting	liabilities	resulting	from	defined	benefit	pension	plans	requires	the	use	of	many	assumptions,	including	estimates	of	future interest	rates,	asset	returns,	compensation	increases	and	other	actuarial-based	projections	relating	to	the	plans.	Pension-related	estimates	have	a	significant	impact	on	the determination	of	pension	obligations	and	related	expense.

We	use	December	31	as	a	measurement	date	for	our	pension	asset	and	projected	benefit	obligation	balances.	Each	year,	we	review	actual	demographic	and investment	experience	with	the	plans'	actuaries.	In	addition	to	actual	experience,	adjustments	to	assumptions	consider	published	interest-rate	indices,	known compensation	trends	and	policies	and	economic	conditions	that	may	affect	the	estimated	long-term	rate	of	return	on	plan	assets.

The	significant	assumptions	used	to	measure	periodic	benefit	cost	and	pension	obligations	are	described	below.

# Size	and	Characteristics	of	the	Employee	Population

Periodic	benefit	cost	is	directly	related	to	the	number	of	employees	covered	by	the	plans	and	other	factors,	including	salary,	age	and	years	of	employment.

# Actuarial	Assumptions

Actuarial	assumptions	used	to	estimate	benefit	obligations	consider	factors	such	as	mortality	rate,	turnover	rate,	retirement	rate,	disability	rate	and	the	rate	of compensation	increases.	These	factors	tend	to

change	gradually	over	time.	The	aggregate	impact	of	assumptions	is	reviewed	each	year	and	specific	assumptions	are	reviewed	periodically.

# Expected	Long-Term	Rate	of	Return	on	Plan	Assets

We	calculate	the	expected	return	on	plan	assets	each	year	based	on	the	composition	of	assets	at	the	beginning	of	the	plan	year	and	the	expected	long-term	rate	of return	on	that	portfolio.	The	expected	long-term	rate	of	return	is	designed	to	approximate	the	actual	long-term	rate	of	return	on	plan	assets	over	time	and	is	not	expected to	change	significantly.

To	determine	if	the	expected	rate	of	return	is	reasonable,	we	consider	such	factors	as	(1)	the	actual	return	earned	on	plan	assets,	(2)	historical	rates	of	return	on	the various	asset	classes	in	the	plan	portfolio,	(3)	projections	of	returns	on	various	asset	classes,	and	(4)	current/prospective	capital	market	conditions	and	economic forecasts.

If	we	were	to	assume	a	25	basis	point	increase	or	decrease	in	the	expected	long-term	rate	of	return	on	plan	assets	for	all	defined	benefit	pension	plans	and	keep	all other	assumptions	constant,	benefit	cost	would	increase	or	decrease	by	approximately	$2	million.

# Discount	Rate

We	use	the	discount	rate	to	determine	the	present	value	of	our	future	benefit	obligations.	It	reflects	the	rates	available	on	long-term,	high-quality	fixed-income	debt instruments,	reset	annually	on	the	measurement	date.	If	we	were	to	assume	a	25	basis	point	increase	or	decrease	in	the	discount	rate	for	all	defined	benefit	pension	plans and	keep	all	other	assumptions	constant,	benefit	cost	would	increase	or	decrease	by	approximately	$5	million,	and	the	projected	benefit	obligation	would	increase	or decrease	by	approximately	$37	million.

Additional	information	about	our	pension	plans	and	related	benefit	costs	is	in	Note	17	of	the	"Notes	to	Consolidated	Financial	Statements"	included	in	this Form	10-K	under	Item	8.

# FINANCIAL	CONDITION

| Years	ended<br>December	31,<br>(In	millions) | 2006<br>Average<br>Balance | 2005<br>Average<br>Balance |
| :--- | :--- | :--- |
| Assets: |  |  |
| Interest-bearing\tdeposits\twith\tbanks | $9,621 | $17,260 |
| Securities\tpurchased\tunder\tresale\tagreements | 12,543 | 12,579 |
| Federal\tfunds\tsold | 277 | 311 |
| Trading\taccount\tassets | 975 | 470 |
| Investment\tsecurities | 61,579 | 51,153 |
| Loans | 7,670 | 6,013 |

| Total	interest-earning	assets | 92,665 | 87,786 |
| :--- | :--- | :--- |
| Cash\tand\tdue\tfrom\tbanks | 2,977 | 2,598 |
| Other\tassets | 10,802 | 9,385 |
| Total\tassets | $ 106,444 | $99,769 |
| Liabilities\tand\tShareholders'\tEquity: |  |  |
| Interest-bearing\tdeposits: |  |  |
| U.S. | $2,453 | $2,992 |
| Non-U.S. | 53,182 | 46,711 |
| Total\tinterest-bearing\tdeposits | 55,635 | 49,703 |
| Securities\tsold\tunder\trepurchase\tagreements | 20,883 | 22,432 |
| Federal\tfunds\tpurchased | 2,777 | 2,306 |
| Other\tshort-term\tborrowings | 2,039 | 1,970 |
| Long-term\tdebt | 2,621 | 2,461 |
| Total\tinterest-bearing\tliabilities | 83,955 | 78,872 |
| Noninterest-bearing\tdeposits | 8,274 | 8,293 |
| Other\tliabilities | 7,471 | 6,426 |
| Shareholders'\tequity | 6,744 | 6,178 |
| Total\tliabilities\tand\tshareholders'\tequity | $ 106,444 | $99,769 |

# Overview	of	Consolidated	Statement	of	Condition

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

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

For	2006,	the	growth	in	average	interest-bearing	liabilities	of	$5.1	billion	was	composed	of	a	$6.5	billion	increase	in	foreign	deposits	offset	by	a	decline	in repurchase	agreements	of	$1.5	billion.	These	changes	are	representative	of	the	higher	levels	of	customer	activity	outside	the	U.S.	Average	interest-earning	assets	in	2006 increased	$4.9	billion	from	2005,	consistent	with	the	increased	level	of	customer	liabilities.

During	2006,	we	substantially	completed	the	investment	portfolio	restructuring	begun	in	late	2004.	The	average	investment	portfolio	increased	$10.4	billion,	offset in	part	by	a	decline	in	average	interest-bearing	deposits	with	banks	of	$7.6	billion.	The	composition	of	the	investment	portfolio	continued	to	favor	mortgage-	and	asset- backed	securities	because	of	their	high	credit	quality,	higher	yields	and	highly	liquid	nature.	The	credit	quality	of	the	investment	portfolio	remained	very	strong	at	year- end	2006,	with	88%	of	the	securities	rated	"AAA"	and	6%	rated	"AA."

# Investment	Securities

We	consider	a	well-diversified,	high-credit	quality	investment	securities	portfolio	to	be	an	important	element	in	the	management	of	our	consolidated	balance	sheet. The	portfolio	continues	to	be	concentrated	in	marketable	securities	with	high	credit	quality,	with	approximately	94%	of	the	carrying	value	of	the	portfolio	"AAA"	or "AA"	rated.	The	percentages	of	the	carrying	value	of	the	investment	securities	portfolio	by	credit	rating	were	as	follows	as	of	December	31:

|  | 2006 | 2005 |
| :--- | :--- | :--- |
| AAA(1) | 88% | 90% |
| AA | 6 | 5 |
| A | 4 | 3 |
| BBB | 1 | 1 |
| Non-rated | 1 | 1 |
|  | 100% | 100% |

# (1)			Includes	U.S.	Treasury	securities

The	investment	securities	portfolio	is	also	diversified	with	respect	to	asset	class.	The	bulk	of	the	portfolio	is	in	high-grade	mortgage-backed	and	asset-backed securities.	The	largely	floating-rate	asset-backed	portfolio	consists	of	home-equity	loan,	credit	card,	auto-	and	student-loan	securities.	Mortgage-backed	securities	are split	between	securities	of	Federal	National	Mortgage	Association,	Federal	Home	Loan	Mortgage	Corporation	and	large-issuer	collateralized	mortgage	obligations.

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

| (In	millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Available\tfor\tSale: |  |  |  |
| U.S.\tTreasury\tand\tfederal\tagencies: |  |  |  |
| Direct\tobligations | $7,612 | $10,214 | $12,119 |
| Mortgage-backed\tsecurities | 11,454 | 11,138 | 9,147 |
| Asset-backed\tsecurities |  |  |  |
|  | 25,634 | 23,842 | 10,056 |
| State\tand\tpolitical\tsubdivisions | 3,749 | 1,868 | 1,785 |
| Collateralized\tmortgage\tobligations | 8,476 | 5,527 | 1,719 |
| Other\tdebt\tinvestments | 3,027 | 1,695 | 922 |
| Money-market\tmutual\tfunds | 201 | 232 | 97 |
| Other\tequity\tsecurities | 292 | 463 | 326 |

| Total | $60,445 | $54,979 | $36,171 |
| :--- | :--- | :--- | :--- |
| Held\tto\tMaturity: |  |  |  |
| U.S.\tTreasury\tand\tfederal\tagencies: |  |  |  |
| Direct\tobligations | $846 | $1,657 | $1,294 |
| Mortgage-backed\tsecurities | 1,084 | 925 | — |
| Collateralized\tmortgage\tobligations | 2,357 | 2,086 | — |
| Other\tinvestments | 260 | 223 | 106 |
| Total | $4,547 | $4,891 | $1,400 |

We	had	$378	million	of	net	pre-tax	unrealized	losses	on	available-for-sale	investment	securities	at	December	31,	2006,	or	$227	million	after-tax.	Net	pre-tax unrealized	losses	on	available-for-sale	securities	at	December	31,	2005	were	$475	million,	or	$285	million	after	tax.	Management	considers	the	aggregate	decline	in	fair value	and	the	resulting	net	unrealized	losses	to	be	temporary	and	primarily	the	result	of	increases	in	interest	rates,	not	the	result	of	any	material	changes	in	the	credit characteristics	of	the	investment	securities	portfolio.	Management	has	the	ability	and	the	intent	to	hold	the	securities	until	recovery	in	market	value.	We	generally configure	our	investment	securities	portfolio	so	that	any	change	in	its	fair	value	is	largely,	but	not	totally,	offset	by	changes	in	the	economic	value	of	our	customer liabilities;	however,	existing	accounting	standards	do	not	allow	for	the	change	in	economic	value	of	our	customer	liabilities	to	offset	unrealized	losses	on	available-for- sale	securities.

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

The	increase	in	state	and	political	subdivisions	in	the	available-for-sale	category	compared	to	2005	resulted	from	the	consolidation	onto	our	balance	sheet	of	certain trusts	utilized	in	connection	with	our	tax-exempt	investment	programs.	This	consolidation	is	more	fully	discussed	in	Note	11	of	the	"Notes	to	Consolidated	Financial Statements"	included	in	this	Form	10-K	under	Item	8.	The	increase	in	collateralized	mortgage	obligations	resulted	from	our	previously	discussed	investment	securities repositioning	program.

The	carrying	amounts,	by	contractual	maturity,	of	debt	securities	available	for	sale	and	held	to	maturity,	and	the	related	weighted-average	contractual	yields,	were as	follows	as	of	December	31,	2006:

| (Dollars	in	millions) | Amount | Under	1	Year<br>Yield | 1	to	5	Years<br>Amount | Yield | 6	to	10	Years<br>Amount | Yield | Amount | Over	10	Years<br>Yield |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Available\tfor\tSale: |  |  |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tfederal |  |  |  |  |  |  |  |  |
| agencies: |  |  |  |  |  |  |  |  |
| Direct\tobligations | $ 4,684 | 3.78% | $2,440 | 4.15% | $488 | 4.31% |  |  |
| Mortgage-backed\tsecurities | 160 | 3.61 | 951 | 4.21 | 4,982 | 4.70 | $5,361 | 5.12% |
| Asset-backed\tsecurities | 1,324 | 4.83 | 10,239 | 5.39 | 8,967 | 5.55 | 5,104 | 5.42 |
| State\tand\tpolitical\tsubdivisions(1) | 500 | 6.85 | 1,828 | 7.43 | 1,077 | 6.78 | 344 | 7.78 |
| Collateralized\tmortgage |  |  |  |  |  |  |  |  |
| obligations | 142 | 5.05 | 1,892 | 4.89 | 3,231 | 5.48 | 3,211 | 5.55 |
| Other\tinvestments | 996 | 6.41 | 1,285 | 5.41 | 731 | 5.44 | 15 | 5.25 |
| Total | $ 7,806 |  | $18,635 |  | $19,476 |  | $14,035 |  |
| Held\tto\tMaturity: |  |  |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tfederal |  |  |  |  |  |  |  |  |
| agencies: |  |  |  |  |  |  |  |  |
| Direct\tobligations | $95 | 3.61% | $751 | 4.23% |  |  |  |  |
| Mortgage-backed\tsecurities | — | — | 22 | 3.75 | $320 | 4.85% | $742 | 5.29% |
| Collateralized\tmortgage |  |  |  |  |  |  |  |  |
| obligations | — | — | 712 | 4.96 | 1,052 | 5.02 | 593 | 5.01 |
| Other\tinvestments | 76 | 2.70 | 96 | 6.11 | 85 | 6.50 | 3 | 8.24 |
| Total | $171 |  | $1,581 |  | $1,457 |  | $1,338 |  |

(1)			Yields	have	been	calculated	on	a	fully	taxable-equivalent	basis,	using	applicable	federal	and	state	income	tax	rates.	The	maturities	of	mortgage-backed	securities, asset-backed	securities	and	collateralized	mortgage	obligations	are	based	upon	expected	principal	payments.

# Loans	and	Lease	Financing

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

| (In	millions) | 2006 | 2005 | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| U.S.: |  |  |  |  |  |
| Commercial\tand\tfinancial | $ 3,480 | $ 2,298 | $ 1,826 | $ 2,344 | $ 1,578 |
| Lease\tfinancing | 415 | 404 | 373 | 395 | 403 |
| Total\tU.S. | 3,895 | 2,702 | 2,199 | 2,739 | 1,981 |
| Non-U.S.: |  |  |  |  |  |
| Commercial\tand\tindustrial | 3,137 | 1,854 | 526 | 424 | 289 |
| Lease\tfinancing | 1,914 | 1,926 | 1,904 | 1,858 | 1,719 |
| Banks\tand\tother\tfinancial\tinstitutions |  |  |  |  |  |
|  | — | — | — | — | 177 |
| Other | — | — | — | — | 8 |
| Total\tnon-U.S. | 5,051 | 3,780 | 2,430 | 2,282 | 2,193 |
| Total\tloans | $ 8,946 | $ 6,482 | $ 4,629 | $ 5,021 | $ 4,174 |
| Average\tloans\tand\tlease\tfinancing\toutstanding | $ 7,670 | $ 6,013 | $ 5,689 | $ 5,568 | $ 5,105 |

At	December	31,	2006,	approximately	8%	of	our	assets	consisted	of	loans	and	lease	financing.	The	aggregate	increase	in	loans	from	2005	reflected	an	increase	in daily	overdrafts,	which	result	primarily	from	securities	settlement	advances	related	to	customer	investment	activities.	Overdrafts	included	in	loans	were	$5.69	billion	and $3.41	billion	at	December	31,	2006	and	December	31,	2005,	respectively.	Average	overdrafts	were	approximately	$5.21	billion	and	$3.24	billion	for	the	years	ended December	31,	2006	and	2005,	respectively.	These	balances	do	not	represent	significant	credit	risk	because	of	their	short-term	nature,	which	is	generally	overnight,	the lack	of	significant	concentration	and	their	occurrence	in	the	normal	course	of	the	securities	settlement	process.

As	of	December	31,	2006	and	2005,	unearned	income	included	in	lease	financing	was	$1.01	billion	and	$1.07	billion	for	non-U.S.	leases,	respectively,	and	$129 million	and	$125	million	for	U.S.	leases,	respectively.	Information	about	our	allowance	for	loan	losses	is	included	in	the	"Risk	Management—Credit	Risk"	section	of this	Management's	Discussion	and	Analysis.

Maturities	for	selected	loan	and	lease	financing	categories	were	as	follows	as	of	December	31,	2006:

| (In	millions) | Total | Under	1 | 1	to	5 | Over	5 |
| :--- | :--- | :--- | :--- | :--- |
| U.S.: |  |  |  |  |
| Commercial\tand\tfinancial | $ 3,480 | $ 3,453 | $24 | $3 |
| Lease\tfinancing | 415 | — | 17 | 398 |
| Total\tU.S. | 3,895 | 3,453 | 41 | 401 |
| Non-U.S.: |  |  |  |  |
| Commercial\tand\tindustrial | 3,137 | 3,136 | 1 | — |
| Lease\tfinancing | 1,914 | — | 17 | 1,897 |
| Total\tnon-U.S. | 5,051 | 3,136 | 18 | 1,897 |
| Total | $ 8,946 | $ 6,589 | $59 | $ 2,298 |

The	following	table	presents	the	classification	of	loans	and	leases	due	after	one	year	according	to	sensitivity	to	changes	in	interest	rates	as	of	December	31,	2006:

| (In	millions) |  |
| :--- | :--- |
| Loans\tand\tleases\twith\tpredetermined\tinterest\trates | $ 2,330 |
| Loans\tand\tleases\twith\tfloating\tor\tadjustable\tinterest\trates | 27 |
| Total | $ 2,357 |

# Cross-Border	Outstandings

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

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

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

| (In	millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| United\tKingdom | $ 5,531 | $2,696 | $2,355 |
| Germany | 2,696 | 4,217 | 3,971 |
| Canada | — | 1,463 | 1,383 |
| Australia | 1,519 | 1,441 | 1,760 |
| Netherlands | — | 992 | — |
| Japan | — | — | 941 |
| Total\toutstanding | $ 9,746 | $10,809 | $10,410 |

The	total	cross-border	outstandings	presented	in	the	table	represented	9%,	11%	and	11%	of	our	consolidated	total	assets	as	of	December	31,	2006,	2005	and	2004, respectively.	Aggregate	cross-border	outstandings	to	countries	which	totaled	between	.75%	and	1%	of	our	consolidated	total	assets	at	December	31,	2006	was	$1.05 billion	(Canada);	at	December	31,	2005,	$1.86	billion	(Belgium	and	Japan);	and	at	December	31,	2004,	$2.47	billion	(Netherlands,	France	and	Sweden).

# Capital

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

# Regulatory	Capital

Our	objective	with	respect	to	regulatory	capital	management	is	to	maintain	a	strong	capital	base	in	order	to	provide	financial	flexibility	for	our	business	needs, including	funding	corporate	growth	and	supporting	customers'	cash	management	needs,	and	to	provide	protection	against	loss	to	depositors	and	creditors.	We	strive	to maintain	an	optimal	level	of	capital,	commensurate	with	our	risk	profile,	on	which

an	attractive	return	to	shareholders	will	be	realized	over	both	the	short	and	long	term,	while	protecting	our	obligations	to	depositors	and	creditors	and	satisfying regulatory	requirements.	The	Capital	Committee,	working	in	conjunction	with	the	Asset	and	Liability	Committee,	or	"ALCO,"	oversees	the	management	of	regulatory capital,	and	is	responsible	for	ensuring	capital	adequacy	with	respect	to	regulatory	requirements,	internal	targets	and	the	expectations	of	credit	rating	agencies.	Our capital	management	process	focuses	on	our	risk	exposures,	our	capital	position	relative	to	our	peers,	regulatory	capital	requirements	and	the	evaluations	of	the	major independent	credit	rating	agencies	that	assign	ratings	to	our	public	debt.

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

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

| Regulatory	Capital	Ratios: | REGULATORY<br>GUIDELINES<br>Minimum | Well<br>Capitalized | STATE<br>STREET<br>2006 | 2005 | STATE<br>STREET<br>BANK<br>2006 | 2005 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Tier\t1\tcapital | 4% | 6% | 13.7% | 11.7% | 12.0% | 10.3% |
| Total\tcapital | 8 | 10 | 15.9 | 14.0 | 14.1 | 12.5 |
| Tier\t1\tleverage\tratio(1) | 4 | 5 | 5.8 | 5.6 | 5.6 | 5.4 |

(1)										Regulatory	guideline	for	well	capitalized	applies	only	to	State	Street	Bank.

At	December	31,	2006,	State	Street's	and	State	Street	Bank's	tier	1	and	total	risk-based	capital	ratios	increased	compared	to	year-end	2005,	the	result	of	growth	in capital,	primarily	from	earnings.	Total	risk-weighted	assets	were	flat	year	over	year,	as	growth	in	balance	sheet	risk-weighted	assets,	primarily	investment	securities available	for	sale	and	loans,	was	offset	by	a	decrease	in	off-balance	sheet	equivalent	risk-weighted	assets.	The	decrease	resulted	primarily	from	allowable	changes	in	the calculation	of	exposure	related	to	our	securities	finance	activities.	Both	ratios	for	State	Street	and	State	Street	Bank	exceeded	the	regulatory	minimum	and	well- capitalized	thresholds.

To	manage	fluctuations	in	the	tier	1	and	total	risk-based	capital	of	State	Street	and	State	Street	Bank	resulting	from	foreign	currency	translation,	we	have	entered into	foreign	exchange	forward	contracts	to	hedge	a	portion	of	our	net	foreign	investment	in	non-U.S.	subsidiaries.	The	notional	value	of	these	contracts	was		€100 million,	or	approximately	$132	million,	at	December	31,	2006.

In	June	2004,	the	Basel	Committee	on	Banking	Supervision	released	the	final	version	of	its	capital	adequacy	framework,	known	as	Basel	II.	In	2006,	the	four	U.S. banking	regulatory	agencies	jointly	issued	their	second	draft	of	implementation	rules,	and	are	seeking	industry	comment	by	the	end	of	March	2007.	Additional supervisory	guidance	is	expected	to	be	available	by	the	end	of	March	2007,	and	the	release	of	the	final	implementation	rules	is	expected	prior	to	the	end	of	2007.	Under the	current	implementation	plan,	State	Street,	along	with	other	large	internationally-active	U.S.	institutions,	will	be	required	to	be	fully	implemented	under	the	U.S. rules	during	2010.	State	Street	previously	established	a	comprehensive	implementation	program	to	ensure	these	regulatory	requirements	are	met	within	prescribed timeframes.	At	this	time,	we	cannot	predict	the	final	form	of	the	rules	in	the	U.S.,	nor	their	impact	on	State	Street's	or	State	Street	Bank's	risk-based	capital.

We	have	increased	our	quarterly	dividend	twice	each	year	since	1978.	Over	the	last	ten	years,	dividends	per	share	have	grown	at	a	15%	compound	annual	growth rate.	Funds	for	cash	distributions	to	our	shareholders	by	the	parent	company	are	derived	from	a	variety	of	sources.	The	level	of	dividends	to	shareholders	on	our	common stock,	which	totaled	$265	million	in	2006,	is	reviewed	regularly	and	determined	by	the	Board	considering	our	liquidity,	capital	adequacy	and	recent	earnings	history	and prospects,	as	well	as	economic	conditions	and	other	factors	deemed	relevant.	Federal	and	state	banking	regulations	place	certain	restrictions	on	dividends	paid	by subsidiary	banks	to	the	parent	holding	company.	In	addition,	bank	regulators	have	the	authority	to	prohibit	bank	holding	companies	from	paying	dividends	if	they	deem such	payment	to	be	an	unsafe	or	unsound	practice.	At	December	31,	2006,	the	parent	company	had	$10.13	billion	of	liquid	assets	with	which	to	meet	dividend declaration	and	other	payment	obligations.	Information	concerning	dividends	from	our	subsidiary	banks	is	in	Note	14	of	the	"Notes	to	Consolidated	Financial Statements"	included	in	this	Form	10-K	under	Item	8.

During	the	first	quarter	of	2006,	we	purchased	3	million	shares	of	our	common	stock	under	a	program	authorized	by	our	Board	in	2005.	On	March	16,	2006,	the Board	authorized	a	new	program	for	the	purchase	of	up	to	15	million	shares	of	our	common	stock	for	general	corporate	purposes,	including	mitigating	the	dilutive impact	of	shares	issued	under	employee	benefit	programs,	and	terminated	the	2005	program.	Under	this	new	program,	we	purchased	2.8	million	shares	of	our	common stock	during	2006,	and	as	of	December	31,	2006,	12.2	million	shares	were	available	for	purchase.	We	utilize	third-party	broker-dealers	to	acquire	common	shares	on	the open	market	in	our	execution	of	the	stock	purchase	program.	Additional	information	about	share	purchases	is	in	Note	12	of	the	"Notes	to	Consolidated	Financial Statements"	included	in	this	Form	10-K	under	Item	8.

# Economic	Capital

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

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

·							Market	risk:	the	risk	of	adverse	financial	impact	due	to	fluctuations	in	market	prices,	primarily	as	they	relate	to	our	trading	activities

·							Interest-rate	risk:	the	risk	of	loss	in	non-trading	asset	and	liability	management	positions,	primarily	the	impact	of	adverse	movements	in	interest	rates	on	the repricing	mismatches	that	exist	between	balance	sheet	assets	and	liabilities

·							Credit	risk:	the	risk	of	loss	that	may	result	from	the	default	or	downgrade	of	a	borrower	or	counterparty

·							Operational	risk:	the	risk	of	loss	from	inadequate	or	failed	internal	processes,	people	and	systems,	or	from	external	events

·							Business	risk:	the	risk	of	adverse	changes	in	our	earnings	from	business	factors,	including	changes	in	the	competitive	environment,	changes	in	the	operational economics	of	business	activities,	and	the	effect	of	strategic	and	reputation	risks

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

# Liquidity

The	objective	of	liquidity	management	is	to	ensure	that	we	have	the	ability	to	meet	our	financial	obligations	in	a	timely	and	cost-effective	manner,	and	that	we maintain	sufficient	flexibility	to	fund	strategic	corporate	initiatives	as	they	arise.	Effective	management	of	liquidity	involves	assessing	the	potential	mismatch	between the	future	cash	needs	of	our	customers	and	our	available	sources	of	cash	under	normal	and	adverse	economic	and	business	conditions.	Uses	of	liquidity	consist	primarily of	meeting	deposit	withdrawals	and	funding	outstanding	commitments	to	extend	credit	as	they	are	drawn	upon.	Liquidity	is	provided	by	the	maintenance	of	broad	access to	the	global	capital	markets	and	our	balance	sheet	asset	structure,	as	described	below.

Global	Treasury	is	responsible	for	the	day-to-day	management	of	our	global	liquidity	position,	which	is	conducted	within	risk	guidelines	established	and	monitored by	ALCO.	Management	maintains	a	liquidity	measurement	framework,	including	a	contingency	funding	plan	designed	to	manage	through	a	potential	liquidity	crisis.

The	plan	defines	roles,	responsibilities,	and	management	actions	to	be	undertaken	in	the	event	of	deterioration	in	our	liquidity	profile	caused	by	either	a	State	Street- specific	event	or	a	broader	disruption	in	the	capital	markets.	The	plan	outlines	several	levels	of	potential	risk	to	our	liquidity	and	identifies	several	"triggers"	that	we	use as	early	warning	signals	of	a	possible	difficulty.	These	triggers	are	a	combination	of	internal	and	external	measures	of	increases	in	potential	cash	needs	or	decreases	in available	cash	sources	and	possible	impairment	of	our	ability	to	access	the	global	capital	markets.

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

Material	risks	to	the	sources	of	short-term	liquidity	would	include,	among	other	things,	rating	agency	downgrades	of	our	deposits	and	debt	securities	below investment-grade	level,	which	would	restrict	our	ability	to	access	the	funding	markets	and	may	lead	to	withdrawals	of	unsecured	deposits	by	our	customers.	In	addition, a	large	volume	of	unanticipated	funding	requirements,	such	as	fundings	under	liquidity	asset	purchase	agreements	that	have	met	draw	conditions,	or	large	draw-downs	of existing	lines	of	credit,	could	require	additional	liquidity.	As	of	December	31,	2006,	there	were	no	circumstances	that	management	considered	reasonably	likely	to	occur that	would	adversely	impact	our	sources	of	short-term	liquidity.

While	maintenance	of	our	high	investment-grade	credit	rating	is	of	primary	importance	to	our	liquidity	management	program,	on-balance	sheet	liquid	assets represent	significant	liquidity	that	we	can	directly	control	and	provide	a	source	of	cash	in	the	form	of	principal	maturities	and	the	ability	to	borrow	from	the	capital markets	using	our	securities	as	collateral.	Our	liquid	assets	consist	primarily	of	short-term	money-market	assets,	such	as	federal	funds	sold	and	interest-bearing	deposits with	banks,	the	latter	of	which	are	multicurrency	instruments	invested	with	major	multinational	banks;	and	high-quality,

marketable	investment	securities	not	already	pledged,	which	generally	are	more	liquid	than	other	types	of	assets	and	can	be	sold	or	borrowed	against	to	quickly	generate cash.	As	of	December	31,	2006,	our	liquid	assets,	as	defined,	totaled	$42	billion.	Securities	carried	at	$23.28	billion	as	of	December	31,	2006	were	designated	as	pledged for	public	and	trust	deposits,	borrowed	funds	and	for	other	purposes	as	provided	by	law,	and	are	excluded	from	the	liquid	assets	calculation.

Based	upon	our	level	of	liquid	assets	and	our	ability	to	access	the	capital	markets	for	additional	funding	when	necessary,	management	considers	overall	liquidity	at December	31,	2006	more	than	sufficient	to	meet	State	Street's	current	commitments	and	business	needs,	including	accommodating	the	transaction	and	cash	management needs	of	its	customers.

Our	ability	to	maintain	consistent	access	to	liquidity	is	fostered	by	the	maintenance	of	high	investment-grade	ratings	on	our	debt,	as	measured	by	the	major independent	credit	rating	agencies.	Factors	essential	to	retaining	high	credit	ratings	include	diverse	and	stable	core	earnings;	strong	risk	management;	strong	capital ratios;	diverse	liquidity	sources,	including	the	global	funds	markets	and	customer	deposits;	and	strong	liquidity	monitoring	procedures.	High	ratings	on	debt	minimize borrowing	costs	and	enhance	our	liquidity	by	ensuring	the	largest	possible	market	for	our	debt.	A	downgrade	or	reduction	in	credit	ratings	could	have	an	adverse	impact to	our	ability	to	access	funding	at	favorable	interest	rates.	There	were	no	changes	to	our	ratings	in	2006.

(1)										Long-term	debt	above	excludes	capital	leases	(reported	as	a	separate	line	item)	and	the	effect	of	interest-rate	swaps.	Interest	payments	were	calculated	at	the	stated rate	with	the	exception	of	floating-rate	debt,	for	which	payments	were	calculated	using	the	indexed	rate	in	effect	on	December	31,	2006.

The	obligations	presented	in	the	table	are	recorded	in	our	consolidated	statement	of	condition	at	December	31,	2006.	The	table	does	not	include	obligations	which will	be	settled	in	cash,	primarily	in	less	than	one	year,	such	as	deposits,	federal	funds	purchased,	securities	sold	under	repurchase	agreements	and

other	short-term	borrowings.	Additional	information	about	deposits,	federal	funds	purchased,	securities	sold	under	repurchase	agreements	and	other	short-term borrowings	is	in	Notes	7	and	8	of	the	"Notes	to	Consolidated	Financial	Statements,"	included	in	this	Form	10-K	under	Item	8.

The	table	does	not	include	obligations	related	to	derivative	contracts,	because	the	amounts	included	in	our	consolidated	statement	of	condition	at	December	31, 2006	related	to	derivative	contracts	do	not	represent	the	amounts	that	may	ultimately	be	paid	under	the	contracts.	Additional	information	about	derivative	contracts	is	in Note	15	of	the	"Notes	to	Consolidated	Financial	Statements"	included	in	this	Form	10-K	under	Item	8.	We	have	obligations	under	pension	and	other	postretirement benefit	plans,	which	are	more	fully	described	in	Note	17	of	the	"Notes	to	Consolidated	Financial	Statements,"	which	are	not	included	in	the	above	table.

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

OTHER	COMMERCIAL	COMMITMENTS

TENURE	OF	COMMITMENT

|  | amounts | Less	than | 1–3 | 4–5 | Over	5 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| (In\tmillions) | committed(1) | 1\tyear | years | years | years |
| As\tof\tDecember\t31,\t2006 |  |  |  |  |  |
| Indemnified\tsecurities\tfinancing | $506,032 | $506,032 |  |  |  |
| Liquidity\tasset\tpurchase\tagreements | 30,017 | 24,669 | $2,638 | $1,309 | $1,401 |
| Unfunded\tcommitments\tto\textend\tcredit | 16,354 | 12,845 | 1,092 | 2,256 | 161 |
| Standby\tletters\tof\tcredit | 4,437 | 793 | 2,926 | 640 | 78 |
| Total\tcommercial\tcommitments | $556,840 | $544,339 | $6,656 | $4,205 | $1,640 |

(1)										Amounts	committed	are	reported	net	of	participations.

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

# Risk	Management

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

We	have	a	disciplined	approach	to	risk	management	that	involves	all	levels	of	management.	The	Board	provides	extensive	review	and	oversight	of	State	Street's overall	risk	management	programs,	including	the	approval	of	key	risk	management	policies	and	the	periodic	review	of	State	Street's	key	risk	indicators.	These indicators	are	designed	to	identify	major	business	activities	of	State	Street	with	significant	risk	content,	and	to	establish	quantifiable	thresholds	for	risk	measurement. Key	risk	indicators	are	reported	regularly	to	the	Executive	Committee	of	the	Board,	and	are	reviewed	periodically	for	appropriateness.	Modifications	to	the	indicators	are made	to	reflect	changes	in	our	business	activities	or	refinements	to	existing	measurements.	Enterprise	Risk	Management,	or	"ERM,"	a	dedicated	corporate	group, provides	oversight,	support	and	coordination	across	business	units	and	is	responsible	for	the

formulation	and	maintenance	of	enterprise-wide	risk	management	policies	and	guidelines.	In	addition,	ERM	establishes	and	reviews	approved	limits,	and	with	the support	of	business	line	management,	monitors	key	risks.	The	head	of	ERM	meets	regularly	with	the	Board	or	a	Board	committee,	as	appropriate,	and	has	the	authority to	escalate	issues	as	necessary.

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

Responsibility	for	risk	management	is	overseen	by	a	series	of	management	committees.	The	Major	Risk	Committee,	or	"MRC,"	is	responsible	for	the	formulation, recommendation	and	approval	of	policies,	guidelines	and	programs	governing	the	identification,	analysis,	measurement	and	control	of	material	risks	across	State	Street. Chaired	by	the	head	of	ERM,	the	MRC	focuses	on	the	review	of	business	activities	with	significant	risk	content	and	the	assessment	of	risk	management	programs	and initiatives,	and	also	serves	as	the	credit	policy	committee	for	State	Street.	The	Capital	Committee,	chaired	by	the	Chief	Financial	Officer,	oversees	the	management	of our	regulatory	and	economic	capital,	the	determination	of	the	framework	for	capital	allocation	and	strategies	for	capital	structure	and	debt	and	equity	issuances.	ALCO, chaired	by	the	Treasurer,	oversees	the	management	of	our	consolidated	balance	sheet,	including	management	of	our	global	liquidity	and	interest-rate	risk	positions.	The Fiduciary	Review	Committee	reviews	the	criteria	for	the	acceptance	of	fiduciary	duties,	and	assists	our	business	lines	with	their	fiduciary	responsibilities	executed	on behalf	of	customers.	Several	other	committees	with	specialized	risk	management	functions	report	to	the	MRC.

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

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

# Market	Risk

Market	risk	is	defined	as	the	risk	of	adverse	financial	impact	due	to	fluctuations	in	interest	rates,	foreign	exchange	rates	and	other	market-driven	rates	or	prices. State	Street	is	exposed	to	market	risk	both	in	its	trading	and	non-trading,	or	asset	and	liability	management,	activities.	State	Street	manages	its	overall	market	risk through	a	comprehensive	risk	management	framework.	This	framework	includes	risk	management	groups	that	report	independently	to	senior	management	through ERM.	The	process	of

managing	market	risk	for	these	activities,	discussed	in	further	detail	below,	applies	to	both	on-balance	sheet	and	off-balance	sheet	exposures.

# Trading	Activities

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

Market	risk	associated	with	foreign	exchange	and	trading	activities	is	controlled	through	established	limits	on	aggregate	and	net	open	positions,	sensitivity	to changes	in	interest	rates,	and	concentrations,	which	are	supplemented	by	stop-loss	limits.	We	use	an	array	of	risk	management	tools	and	methodologies,	including	value- at-risk,	to	measure,	monitor	and	control	market	risk.	All	limits	and	measurement	techniques	are	reviewed	and	adjusted	as	necessary	on	a	regular	basis	by	business managers,	the	market	risk	management	group	and	the	Trading	and	Market	Risk	Committee.

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

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

As	part	of	our	trading	activities,	we	assume	positions	in	the	foreign	exchange	and	interest-rate	markets	by	buying	and	selling	cash	instruments	and	using	derivative financial	instruments,	including	foreign	exchange	forward	contracts,	foreign	exchange	and	interest-rate	options	and	interest-rate	swaps.	As	of	December	31,	2006,	the notional	amounts	of	all	of	these	derivative	financial	instruments	were	$514.04	billion,	of	which	$492.06	billion	were	foreign	exchange	forward	contracts.	In	the aggregate,	long	and	short	foreign	exchange	forward	positions	are	closely	matched	to	minimize	currency	and	interest-rate	risk.	All	foreign	exchange	contracts	are	valued daily	at	current	market	rates.

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

Like	all	quantitative	risk	measures,	value-at-risk	is	subject	to	certain	limitations	and	assumptions	inherent	in	the	methodology.	Our	methodology	gives	equal	weight to	all	market-rate	observations	regardless	of	how	recently	the	market	rates	were	observed.	The	estimate	is	calculated	using	static

portfolios	consisting	of	positions	held	at	the	end	of	the	trading	day.	Implicit	in	the	estimate	is	the	assumption	that	no	intraday	action	is	taken	by	management	during adverse	market	movements.	As	a	result,	the	methodology	does	not	represent	risk	associated	with	intraday	changes	in	positions	or	intraday	price	volatility.

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

# VALUE-AT-RISK

| (In	millions) | Annual<br>Average | 2006<br>Maximum | Minimum | Annual<br>Average | 2005<br>Maximum | Minimum |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Years\tended\tDecember\t31, |  |  |  |  |  |  |
| Foreign\texchange\tproducts | $ 1.7 | $ 4.3 | $.7 | $ 1.3 | $ 3.3 | $.5 |
| Interest-rate\tproducts | .8 | 1.8 | .2 | 1.1 | 3.0 | .3 |

We	compare	daily	profits	and	losses	from	trading	activities	to	estimated	one-day	value-at-risk.	For	the	years	ended	December	31,	2006,	2005	and	2004,	we	did	not experience	any	trading	losses	in	excess	of	our	end-of-day	value-at-risk	estimate.

# Asset	and	Liability	Management	Activities:

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

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

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

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

Because	no	one	individual	measure	can	accurately	assess	all	of	our	risks	to	changes	in	rates,	we	use	several	quantitative	measures	in	our	assessment	of	current	and potential	future	exposures	to	changes	in	interest	rates	and	their	impact	on	net	interest	revenue	and	balance	sheet	values.	Net	interest	revenue	simulation	is	the	primary	tool used	in	our	evaluation	of	the	potential	range	of	possible	net	interest	revenue	results	that	could	occur	under	a	variety	of	interest-rate	environments.	We	also	use	market valuation	and	duration	analysis	to	assess	changes	in	the	economic	value	of	balance	sheet	assets	and	liabilities	caused	by	assumed	changes	in	interest	rates.	Finally,	gap analysis—the	difference	between	the	amount	of	balance	sheet	assets	and	liabilities	re-pricing	within	a	specified	time	period—is	used	as	a	measurement	of	our	interest- rate	risk	position.

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

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

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

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

The	following	table	presents	the	estimated	exposure	of	NIR	for	the	next	twelve	months,	calculated	as	of	December	31,	2006	and	2005,	due	to	an	immediate	±	100 basis	point	shift	in	then-current	interest	rates.	Estimated	incremental	exposures	presented	below	are	dependent	on	management's	assumptions	about	asset	and	liability sensitivities	under	various	interest-rate	scenarios,	such	as	those	previously	discussed,	and

do	not	reflect	any	actions	management	may	undertake	in	order	to	mitigate	some	of	the	adverse	effects	of	interest-rate	changes	on	State	Street's	financial	performance.

# NIR-AT-RISK

|  | Estimated	Exposure	to | Estimated	Exposure	to |
| :--- | :--- | :--- |
| (In\tmillions) | Net\tInterest\tRevenue\n2006 | 2005 |
| Rate\tChange |  |  |
| +\t100\tbps\tshock | $ (90) | $ (58) |
| \t–\t100\tbps\tshock | 52 | (5) |
| +\t100\tbps\tramp | (57) | (35) |
| \t–\t100\tbps\tramp | 46 | 9 |

The	following	table	presents	estimated	EVE	exposures,	calculated	as	of	December	31,	2006	and	2005,	assuming	an	immediate	and	prolonged	shift	in	interest	rates, the	impact	of	which	would	be	spread	over	a	number	of	years.

# ECONOMIC	VALUE	OF	EQUITY

|  | Estimated	Exposure	to<br>Economic	Value	of	Equity | Estimated	Exposure	to<br>Economic	Value	of	Equity |
| :--- | :--- | :--- |
| (In\tmillions) | 2006 | 2005 |
| Rate\tChange |  |  |
| +\t200\tbps\tshock | $ (1,023) | $ (714) |
| \t-\t200\tbps\tshock | 371 | 138 |

While	the	measures	presented	in	the	tables	above	are	not	a	prediction	of	future	NIR	or	valuations,	they	do	suggest	that	if	all	other	variables	remained	constant,	in the	short	term,	falling	interest	rates	would	lead	to	NIR	that	is	higher	than	it	would	otherwise	have	been,	and	rising	rates	would	lead	to	lower	NIR.	Other	important factors	that	impact	the	levels	of	NIR	are	balance	sheet	size	and	mix;	interest-rate	spreads;	the	slope	and	interest-rate	level	of	U.S.	dollar	and	non-U.S.	dollar	yield	curves and	the	relationship	between	them;	the	pace	of	change	in	market	interest	rates;	and	management	actions	taken	in	response	to	the	preceding	conditions.	Incremental increases	in	the	levels	of	NIR-at-risk	and	EVE	exposures	for	upward	shifts	in	interest	rates	presented	in	the	tables	above	are	largely	the	result	of	the	increased	purchases of	fixed-rate	securities,	primarily	securities	available	for	sale,	in	response	to	management's	expectations	concerning	the	future	direction	of	U.S.	interest	rates.	These purchases	resulted	in	an	overall	interest-rate	risk	position	that	was	well	within	internally	approved	guidelines.	The	securities	were	purchased	in	accordance	with management's	intention	to	maintain	the	high	credit	quality	of	our	investment	portfolio.

One	of	the	most	significant	assumptions	underlying	our	modeling	methodologies	and	the	level	of	our	NIR	is	the	reaction	of	our	balance	sheet	liabilities,	such	as deposits,	to	movements	in	market	interest	rates.	Generally,	we	invest	customer	deposits	in	money-market	assets	and	high-quality	investment	securities,	the	mix	of	which is	determined	by	the	interest-rate	and	balance	sensitivities	of	customer	deposits	under	a	variety	of	economic	environments.	We	regularly	assess	the	characteristics	of customer	liabilities	by	product,	geography,	currency	and	customer	type	to	ensure	that	the	characteristics	have	not	materially	changed	in	a	way	that	would	create	material risk	to	our	NIR	and	net	interest	margin.

Credit	and	counterparty	risk	is	defined	as	the	risk	of	financial	loss	if	a	borrower	or	counterparty	is	either	unable	or	unwilling	to	repay	borrowings	or	settle	in accordance	with	contractual	terms.	The	extension	of	credit	and	acceptance	of	counterparty	risk	by	State	Street	are	governed	by	corporate	guidelines	based	on	the prospective	customer's	risk	profile,	the	markets	served,	counterparty	and	country	concentrations,	and	regulatory	compliance.	Our	focus	on	large	institutional	investors and	their	businesses	requires	that	we	assume	concentrated	credit	risk	in	a	variety	of	forms	to	certain	highly-rated	entities.	This	concentration	risk	is	mitigated	by comprehensive	guidelines	and	procedures	to	monitor	and	manage	all	aspects	of	credit	and	counterparty	risk	that	we	undertake.	Exposures	are	evaluated	on	an	individual basis	at	least	annually.

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

An	allowance	for	loan	losses	is	maintained	to	absorb	probable	credit	losses	in	the	loan	portfolio	and	is	reviewed	regularly	by	management	for	adequacy.	An	internal rating	system	is	used	to	assess	potential	risk	of	loss	based	on	customer	investment	profile,	current	economic	and/or	customer	financial	indicators.	The	provision	for	loan losses	is	a	charge	to	earnings	to	maintain	the	overall	allowance	for	loan	losses	at	a	level	considered	adequate	relative	to	the	level	of	credit	risk	in	the	loan	and	lease

financing	portfolio.	No	provision	was	recorded	in	either	2006	or	2005.	In	2004,	we	reversed	$18	million	through	the	provision	as	a	result	of	reduced	credit	risk exposures	and	improved	credit	quality.

At	December	31,	2006	and	2005,	the	allowance	for	loan	losses	was	$18	million,	less	than	1%	of	total	loans	as	of	each	year-end.	Changes	in	the	allowance	for	loan losses	were	as	follows	for	the	years	ended	December	31:

| (In	millions) | 2006 | 2005 | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| U.S.: |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $14 | $14 | $43 | $43 | $40 |
| Provision\tfor\tloan\tlosses | — | — | (15) | — | 4 |
| Loan\tcharge-offs—commercial\tand\tfinancial | — | — | — | — | (3) |
| Recoveries—commercial\tand\tfinancial | — | — | — | — | 3 |
| Transferred\tupon\tsale(1) | — | — | — | — | (1) |
| Reclassification(2) | — | — | (14) | — | — |
| Balance\tat\tend\tof\tyear—U.S. | 14 | 14 | 14 | 43 | 43 |
| Non-U.S.: |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | 4 | 4 | 18 | 18 | 18 |
| Provision\tfor\tloan\tlosses | — | — | (3) | — | — |
| Reclassification(2) | — | — | (11) | — | — |
| Balance\tat\tend\tof\tyear—Non-U.S. | 4 | 4 | 4 | 18 | 18 |
| Total\tbalance\tat\tend\tof\tyear | $18 | $18 | $18 | $61 | $61 |

(1)										In	2002,	we	completed	the	sale	of	our	Global	Trade	Banking	business,	which	included	the	transfer	of	$1	million	of	the	allowance	for	loan	losses.

(2)										In	2004,	we	reclassified	$25	million	of	the	allowance	for	loan	losses	to	other	liabilities	as	a	reserve	for	off-balance	sheet	commitments.	Subsequent	to	the reclassification,	the	reserve	for	off-balance	sheet	commitments	was	reduced	by	$10	million,	and	recorded	as	an	offset	to	other	operating	expenses.

Past-due	loans	are	loans	on	which	principal	or	interest	payments	are	over	90	days	delinquent,	but	where	interest	continues	to	be	accrued.	There	were	no	past-due loans	as	of	December	31,	2006,	2005,	2004,	2003	and	2002.

We	generally	place	loans	on	non-accrual	status	once	payments	are	60	days	past	due,	or	earlier	if	management	determines	that	full	collection	is	not	probable.	Loans 60	days	past	due,	but	considered	both	well-secured	and	in	the	process	of	collection,	may	be	excluded	from	non-accrual	status.	For	loans	placed	on	non-accrual	status, revenue	recognition	is	suspended.	There	were	no	non-accrual	loans	at	year-end	2006,	2005,	2004,	2003	and	2002.

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

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

On	behalf	of	our	customers,	we	lend	their	securities	to	creditworthy	banks,	broker/dealers	and	other	institutions.	In	most	circumstances,	we	indemnify	our customers	for	the	fair	market	value	of	those

securities	against	a	failure	of	the	borrower	to	return	such	securities.	Though	these	transactions	are	well-collateralized,	the	substantial	volume	of	these	activities necessitates	thorough	credit-based	underwriting	and	monitoring	processes.	State	Street	requires	the	borrowers	to	provide	collateral	in	an	amount	equal	to	or	in	excess	of 100%	of	the	fair	market	value	of	the	securities	borrowed.	Collateral	funds	received	in	connection	with	our	securities	lending	services	are	held	by	us	as	agent	and	are	not recorded	in	our	consolidated	statement	of	condition.	The	borrowed	securities	and	collateral	are	revalued	daily	to	determine	if	additional	collateral	is	necessary.	State Street	held,	as	agent,	cash	and	securities	totaling	$527.37	billion	and	$387.22	billion	as	collateral	for	indemnified	securities	financing	at	December	31,	2006	and	2005, respectively.

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

Investments	in	debt	and	equity	securities,	including	investments	in	affiliates,	are	monitored	regularly	by	Corporate	Finance	and	ERM.	To	the	extent	necessary, procedures	are	in	place	for	evaluating	potentially	impaired	securities.	Total	non-performing	investment	securities	were	$4	million	at	both	December	31,	2006	and	2005.

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

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

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

# Business	Risk

We	define	business	risk	as	the	risk	of	adverse	changes	in	our	earnings	related	to	business	factors,	including	changes	in	the	competitive	environment,	changes	in	the operational	economics	of	business	activities	and	the	potential	effect	of	strategic	and	reputation	risks,	not	already	captured	as	market,	credit	or	operational	risks.	We incorporate	business	risk	into	our	assessment	of	our	economic	capital	needs.	Active

management	of	business	risk	is	an	integral	component	of	all	aspects	of	our	business,	and	responsibility	for	the	management	of	business	risk	lies	with	every	individual	at State	Street.

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

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

# OFF-BALANCE	SHEET	ARRANGEMENTS

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

In	the	normal	course	of	business,	we	sell	and	distribute	securities	for	three	types	of	off-balance	sheet	entities,	two	of	which	are	not	recorded	in	our	consolidated financial	statements.	Additional	information	about	these	special	purpose	entities	is	in	Notes	10	and	11	of	the	"Notes	to	Consolidated	Financial	Statements"	included	in this	Form	10-K	under	Item	8.

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

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

# RECENT	ACCOUNTING	DEVELOPMENTS

In	September	2006,	the	Financial	Accounting	Standards	Board,	or	"FASB,"	issued	Statement	of	Financial	Accounting	Standards	No.	158,	Employers'	Accounting for	Defined	Benefit	Pension	and	Other	Postretirement	Plans—an	amendment	of	FASB	Statements	No.	87,	88,	106	and	132(R).	This	new	standard	is	intended	to	make	it easier	for	financial	statement	users	to	understand	an	employer's	financial	position	and	ability	to	meet	the	obligations	of	its	benefit	plans.	The	standard	requires recognition	in	our	consolidated	statement	of	condition	of	the	overfunded	or	underfunded	status	of	our	tax-qualified	defined	benefit	pension	plan,	nonqualified	retirement plans	and	postretirement	benefit	plans,	which	is	the	difference	between	the	fair	value	of	plan	assets	and	the	related	benefit	obligations.	The	standard	also	requires	the

reclassification	of	the	after-tax	amount	of	any	unrecognized	actuarial	gains	and	losses	and	unrecognized	prior	service	costs	to	accumulated	other	comprehensive	income, a	component	of	shareholders'	equity.	In	subsequent	years,	the	after-tax	amount	of	changes	in	unrecognized	actuarial	gains	and	losses,	as	well	as	unrecognized	prior service	costs,	will	be	recorded	in	other	comprehensive	income.

The	standard	was	effective	on	December	31,	2006	with	respect	to	the	recognition	of	our	plans'	funded	status,	and	the	standard's	remaining	provisions	must	be applied	prospectively.	Upon	adoption	of	the	standard,	to	recognize	the	after-tax	difference	between	our	plans'	net	funded	status	and	the	amounts	currently	recorded	in the	consolidated	statement	of	condition,	we	recorded	an	after-tax	reduction	of	accumulated	other	comprehensive	income	of	approximately	$164	million.	Disclosures required	by	the	new	standard	are	included	in	Note	17	of	the	"Notes	to	Consolidated	Financial	Statements"	included	in	this	Form	10-K	under	Item	8.

In	July	2006,	the	FASB	issued	FASB	Staff	Position,	or	"FSP,"	No.	FAS	13-2,	Accounting	for	a	Change	or	Projected	Change	in	the	Timing	of	Cash	Flows	Relating to	Income	Taxes	Generated	by	a	Leveraged	Lease	Transaction.	The	FSP,	which	must	be	applied	as	of	January	1,	2007,	requires	that	the	recognition	of	lease	income over	the	term	of	a	lease	be	recalculated	if	there	is	a	change	in	the	expected	timing	of	tax-related	cash	flows.	The	cumulative	effect	of	applying	the	provisions	of	the	FSP must	be	recorded	as	an	adjustment	to	the	beginning	balance	of	retained	earnings	as	of	January	1,	2007.

Our	application	of	the	FSP's	provisions	to	certain	of	our	leveraged	leases	resulted	in	an	after-tax	reduction	of	the	beginning	balance	of	retained	earnings	on January	1,	2007	of	approximately	$226	million.	Future	revenue	from	the	affected	leases	is	expected	to	increase	over	the	remaining	terms	of	the	affected	leases	by	an amount	approximately	equal	to	the	after-tax	reduction.	Future	developments	concerning	our	resolution	of	issues	with	the	IRS	with	respect	to	the	affected	leases	could affect	management's	estimate	of	the	timing	of	tax-related	cash	flows	used	to	record	the	cumulative	effect	adjustment.	Changes	in	estimates	of	the	timing	of	these	tax- related	cash	flows	could	result	in	income	tax	expense	in	our	consolidated	statement	of	income	during	2007	or	later	years.

Information	related	to	other	recent	accounting	developments	is	in	Note	1	of	the	"Notes	to	Consolidated	Financial	Statements"	included	in	this	Form	10-K	under Item	8.

# To	Our	Shareholders

# 2006	was	a	very	good	year	for	State	Street.

We	exceeded	all	of	our	financial	goals	(excluding	tax	adjustments),	grew	our	business	globally,	expanded	relationships	with	our	customers,	launched	new	products, acquired	new	capabilities	and	continued	to	be	a	strong	corporate	citizen	in	the	communities	in	which	we	live	and	work.

Our	performance	in	2006	was	driven	by	a	number	of	themes	that	I	define	as	setting	the	standard	for	our	industry.

# Consistency

The	first	theme	is	consistency,	which	is	best	illustrated	by	our	financial	performance.	2006	was	our	twenty-ninth	consecutive	year	of	operating	earnings	per	share growth	and	our	twenty-eighth	consecutive	year	of	dividend	increases,	with	an	11	percent	increase	from	2005.	We	outperformed	our	peer	group	in	revenue	and	EPS growth	while	generating	lower	expense	growth.	Earnings	per	share	from	continuing	operations,	excluding	the	tax	adjustments	recorded	in	the	second	and	fourth	quarters, rose	23	percent	from	2005	(exceeding	our	goal	of	between	10	and	15	percent);	our	top-line	operating	revenue	on	a	fully	taxable-equivalent	basis	was	up	15	percent	from 2005	(exceeding	our	goal	of	between	8	and	12	percent);	and	our	return	on	equity	from	continuing	operations,	excluding	the	above-mentioned	tax	adjustments,	improved from	15.3	percent	in	2005	to	17.1	percent	(exceeding	our	range	of	between	14	and	17	percent).

We	also	achieved	290	basis	points	of	positive	operating	leverage	in	2006	compared	to	2005,	and	generated	four	more	quarters	of	year-over-year	operating	leverage, bringing	State	Street's	number	of	consecutive	quarters	of	year-over-year	positive	operating	leverage	to	nine.	This	consistent	performance	was	rewarded	with	a	22	percent increase	in	our	stock	price	in	2006.

We	increased	net	interest	revenue	on	a	fully	taxable-equivalent	basis	by	22	percent	over	2005	and	improved	net	interest	margin	to	1.25	percent,	up	from	1.08	percent in	2005.	We	also	repurchased	5.8	million	shares	of	our	common	stock.

State	Street	Global	Advisors	(SSgA),	our	investment	management	arm	and	the	largest	institutional	asset	manager	in	the	world*,	contributed	to	our	strong	financial performance	with	another	outstanding	year	in	2006,	accounting	for	24	percent	of	the	company's	total	pretax	profit	in	2006,	up	from	21	percent	in	2005.	Pretax	profit	at SSgA	increased	40	percent	compared	to	2005,	with	its	pretax	margin	up	to	35	percent	from	31	percent	in	2005.		Assets	under	management	grew	21.4	percent	in	2006	to $1.7	trillion.

Consistency	is	also	reflected	in	our	approach	to	community	support,	sustainable	development	and	the	environment.	Since	1977,	we	have	contributed	a	portion	of pretax	profits	to	the	State	Street	Foundation,	which	in	turn	provided	more	than	$11.4	million	in	grants	in	2006	to	support	affordable	housing,	education	and	health.

Additionally,	our	employees	worldwide	devoted	40,000	hours	to	volunteer	activities.	In	our	home	state	of	Massachusetts,	we	were	the	largest	corporate	contributor to	the	United	Way	of	Massachusetts	Bay	for	the	sixteenth	consecutive	year.	This	consistent	performance	on	behalf	of	our	communities	was	a	key	factor	in	State	Street being	named	to	Business	Ethics	magazine's	"100	Best	Corporate	Citizens"	list	for	2006.	State	Street	was	also	selected	for	both	the	World	and	North	America	Dow	Jones Sustainability	Indexes,	based	on	our	enhanced	environmental	management	and	corporate	governance	policies,	in	addition	to	our	strong	citizenship	and	philanthropy programs.

# *	Based	on	assets	under	management

# Global	Growth

The	second	theme	underpinning	our	strong	performance	in	2006	is	global	growth.		We	made	considerable	progress	in	2006	against	our	long-term	goal	of	growing non-US	revenue	to	50	percent,	achieving	a	total	of	43	percent	in	2006,	up	from	39	percent	in	2005.	This	increase	in	non-US	revenue	highlights	our	ability	to	capitalize	on key	growth	areas,	such	as	hedge	and	offshore	fund	servicing,	enhanced	and	active	strategies,	investment	manager	operations	outsourcing	and	electronic	foreign	exchange trading.	At	SSgA,	32	percent	of	revenue	now	comes	from	non-US	sources,	up	from	30	percent	in	2005.

"Global"	not	only	applies	to	our	business	but	also	to	our	people.	Today,	approximately	40	percent	of	our	employees	are	located	outside	of	the	US,	which	provides us	with	a	strong	foundation	for	future	growth	as	we	seek	to	outpace	our	competitors	in	markets	that	are	growing	faster	than	the	US.

This	diversity	starts	at	the	top	of	our	company,	highlighted	by	the	election	in	December	of	three	European	nationals	to	our	board	of	directors—Peter	Coym,	Amelia Fawcett	and	Maureen	Miskovic,	all	of	whom	bring	a	wealth	of	global	and	financial	industry	experience	to	our	board.

"Global"	also	describes	our	customer	base	in	2006,	with	key	asset	servicing	and	asset	management	business	wins	being	awarded	to	us	in	Beijing,	Boston, Edinburgh,	Hong	Kong,	London,	Luxembourg,	Munich,	New	York,	Paris,	Singapore,	Sydney,	Tokyo	and	Toronto.	These	wins	represent	a	total	of	779	new	investment servicing	wins	and	1,345	new	asset	management	business	wins	from	companies	that	include	Virgin	Money,	Bayerische	Versorgungskammer,	CIMB	Group,	IKANO Fund	Management	S.A.,	TOWER	Australia	Limited	and	John	Hancock	Funds.

# Innovation

The	third	theme,	innovation,	remains	a	key	driver	in	fueling	our	growth	and	deepening	our	relationships	with	customers.	This	focus	on	innovation	is	supported	by our	commitment	to	investing	in	technology—22	percent	of	our	operating	expenses	in	2006—and	pioneering	new	products	and	solutions.

In	2006,	we	launched	a	number	of	industry	firsts.	This	innovation	ranges	from	the	launch	of	our	Sovereign	Bond	Flow	Indicator	that	measures	investor	flows	into sovereign	bonds	covering	13	countries,	to	the	expansion	of	our	alternative	investment	strategies	capabilities	with	a	new	line-up	of	cutting-edge	absolute	return	strategies, to	12	new	exchange-traded	funds	providing	investors	with	precise	exposure	to	targeted	sectors	such	as	the	oil	and	gas	sector	and	the	metals	and	mining	sector.

Our	leading	position	in	investment	manager	operations	outsourcing,	a	capability	that	we	pioneered	in	the	industry	in	2000,	continued	to	expand	in	2006	with	the completion	of	the	first	European	customer	migration	onto	our	Enterprise	technology	and	the	addition	of	two	new	North	American	customers—Evergreen	Investments and	Putnam	Investments.

# Customer	Focus

The	fourth	and	final	theme	is	customer	focus.	Our	commitment	to	delivering	a	value	to	our	customers	that	they	cannot	find	anywhere	else	proved	to	be	a	strong differentiator	for	State	Street	in	2006,	with	more	than	75	percent	of	our	new	revenue	coming	from	deepening	relationships	with	existing	customers.	For	example,	AXA Investment	Managers	expanded	its	relationship	with	us	to	include	servicing	for	its	Luxembourg-	and	Dublin-based	fund	groups	for	more	than	€20	billion	in	assets. Calamos	Investments,	a	customer	since	2004,	chose	State	Street	to	provide	fund	accounting	services	for	an	additional	nine	open-ended	mutual	funds	and	one	variable insurance	fund	representing	$29.8	billion	in	assets.

The	California	Public	Employees'	Retirement	System	(CalPERS)	reappointed	State	Street	to	provide	investment	services	for	its	$200	billion	pension	fund,	a testament	to	the	high-quality	customer	service	that

State	Street	has	provided	to	CalPERS	for	more	than	13	years.	CalPERS	also	selected	SSgA	as	one	of	its	first	managers	to	implement	a	domestic	long-short	equity strategy,	underscoring	the	success	SSgA	continues	to	achieve	in	offering	the	most	innovative	investment	strategies	available	in	the	industry	today.

Our	ability	to	deliver	for	our	customers	continued	to	yield	business	from	new	customers	as	well.	For	example,	SSgA	was	selected	by	China's	National	Council	for

Social	Security	Fund	(NCSSF)	as	external	manager	for	the	National	Social	Security	Fund's	global	equity	mandate—the	first	time	the	NCSSF	chose	a	global	manager.

Customer	focus	is	part	of	our	corporate	culture	at	State	Street	and	a	value	that	is	reflected	across	our	leadership	team.	Three	members	of	this	team	were	promoted to	vice	chairman	in	2006,	in	recognition	of	the	considerable	contributions	they	have	made	to	the	evolution	of	our	company	and	the	impact	of	their	responsibilities	on	our current	and	future	growth.	Joseph	L.	(Jay)	Hooley,	a	20-year	veteran	of	State	Street,	is	head	of	global	investment	servicing	and	investment	research	and	trading.	Under his	leadership,	State	Street	has	achieved	consistently	high	growth	and	has	expanded	its	global	presence.	Today,	the	company	is	the	No.	1	provider	of	investment manager	operations	outsourcing	services,	a	leading	provider	of	hedge	fund	servicing	and	a	world	leader	in	multi-asset	class	trading	and	transition	management.

William	W.	Hunt	is	president	and	chief	executive	officer	of	SSgA	and	a	12-year	State	Street	veteran.	With	more	than	a	decade	of	experience	working	outside	of	the US,	Hunt	plays	a	key	role	in	driving	State	Street's	global	expansion	as	well	as	accelerating	SSgA's	push	into	active	and	enhanced	strategies.

Joseph	C.	Antonellis,	a	16-year	veteran	of	State	Street,	is	chief	information	officer	and	heads	the	company's	global	securities	services,	operations	and	technology.

Antonellis,	named	"Best	CIO"	by	the	American	Financial	Technology	Awards,	is	also	responsible	for	the	company's	investment	servicing	business	in	North	America.

# What's	Next?

Looking	ahead	to	2007,	the	question	that	I	am	most	often	asked	is:	"What's	next?"		This	is	a	question	that	we	continually	ask	ourselves	to	ensure	that	we	don't become	complacent	and	falsely	assume	that	by	simply	doing	more	of	the	same	we	will	deliver	similar	results.	While	we	have	confidence	in	our	strategic	focus,	we	will continue	to	evolve	our	business	to	ensure	that	we	retain	our	leadership	position	in	the	industry	and	set	the	standard	for	others	to	follow.

We	will	also	continue	to	balance	revenue	growth	with	expense	discipline	to	generate	positive	operating	leverage,	and	aggressively	pursue	capabilities	that	will augment	our	market	share	in	high-growth	markets	and	will	increase	our	revenue.	Our	proposed	acquisitions	of	Investors	Financial	Services	Corporation	and	Currenex, which	we	announced	at	the	beginning	of	2007,	are	examples	of	actions	we	are	taking	to	enhance	our	leadership	position.

With	the	acquisition	of	Boston-based	Investors	Financial	Services,	State	Street	strengthens	its	position	as	a	worldwide	service	provider	of	fund	accounting	to	the mutual	fund	industry,	enhances	its	capabilities	in	servicing	the	offshore	fund	market,	and	further	extends	its	leadership	in	the	fastest	growing	segment	of	the	asset servicing	business—hedge	fund	administration.

Key	to	this	transaction	is	the	tremendous	cross-sell	opportunities	that	it	provides	State	Street.	Investors	Financial	Services	serves	12	of	the	top	25	global	investment managers.	These	institutions	will	now	have	access	to	State	Street's	global	capabilities,	from	foreign	exchange	to	securities	lending	to	servicing	cross-border	assets.

The	Investors	Financial	Services	acquisition	also	expands	State	Street's	product	line,	bringing	private	equity	fund	servicing	capabilities	along	with	approximately $30	billion	in	private	equity	fund	assets	under	administration	and	strengthens	State	Street's	leadership	position	in	key	areas.	With	the	addition	of

Investors	Financial	Services'	$2.2	trillion	in	assets	under	custody,	State	Street	will	have	more	than	$14	trillion	in	assets	under	custody.	State	Street	will	also	be	the	No.	1 administrator	of	hedge	funds,	with	assets	under	administration	of	more	than	$340	billion.	In	addition,	the	acquisition	helps	extend	State	Street's	lead	in	investment manager	operations	outsourcing.

The	combination	of	expanded	market	share	in	key	growth	markets,	cross-sell	opportunities	with	new	customers	and	the	addition	of	new	products	will	help	us generate	significant	new	revenue.

The	Investors	Financial	Services	acquisition	also	complements	our	acquisition	of	the	Currenex	foreign	exchange	trading	platform,	which	accelerates	our participation	in	the	electronic	foreign	exchange	trading	market	and	its	fastest	growing	segment:	hedge	funds.	Foreign	exchange	is	the	largest	and	most-liquid	market	in the	world,	with	trading	volumes	of	approximately	$2.3	trillion	per	day.	With	the	Currenex	acquisition,	State	Street	can	offer	its	customers	more	efficient	access	to markets	as	well	as	the	industry's	most	flexible,	comprehensive	trading	solutions.

# Setting	the	Industry	Standard

When	we	talk	about	"setting	the	industry	standard,"	we	define	this	standard	as	delivering	financial	results	that	are	better	than	the	market	and	our	peer	group.	Our long-term	financial	goals	remain	the	same	as	I	previously	described.	Due	to	the	Investors	Financial	Services	Corp.	acquisition,	however,	we	have	set	financial	goals	for 2007	of	achieving	growth	in	operating	earnings	per	share	of	8	to	10	percent,	growth	in	operating	revenue	of	16	to	18	percent	and	return	on	equity	of	between	12	and	15 percent.	We	expect	to	achieve	near	the	middle	of	these	ranges	in	2007.	Our	operating	results	for	2007	will	exclude	merger,	integration	and	restructuring	charges	related to	the	Investors	Financial	Services	acquisition,	and	for	2006	will	exclude	the	previously	mentioned	tax	adjustments.

We	expect	that	further	improvements	in	net	interest	revenue	and	net	interest	margin	resulting	from	the	actions	we	have	taken	over	the	past	two	years	will	improve the	yields	from	our	balance	sheet,	without	adding	any	significant	new	credit	risk.

By	setting	the	standard	for	our	industry,	we	will	continue	to	deliver	superior	results	for	shareholders,	customers,	employees	and	the	community.	We	are	committed to	ensuring	that	we	consistently	achieve	this	level	of	performance	across	the	globe,	while	continually	innovating	to	create	products	and	services	that	deepen	our relationships	with	our	customers.		We	delivered	on	our	commitment	in	2006,	and	I	will	ensure	that	we	remain	equally	committed	to	superior	results	for	all	of	our stakeholders	in	2007.

# Sincerely,

/s/	RONALD	E.	LOGUE

Ronald	E.	Logue

Chairman	and	Chief	Executive	Officer

# ITEM	7A.		QUANTITATIVE	AND	QUALITATIVE	DISCLOSURES	ABOUT	MARKET	RISK

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

# ITEM	8.		FINANCIAL	STATEMENTS	AND	SUPPLEMENTARY	DATA

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

# REPORT	OF	INDEPENDENT	REGISTERED	PUBLIC	ACCOUNTING	FIRM

# THE	SHAREHOLDERS	AND	BOARD	OF	DIRECTORS	OF

We	have	audited	the	accompanying	consolidated	statement	of	condition	of	State	Street	Corporation	as	of	December	31,	2006	and	2005,	and	the	related	consolidated statements	of	income,	changes	in	shareholders'	equity,	and	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2006.	These	financial	statements	are the	responsibility	of	the	Corporation's	management.	Our	responsibility	is	to	express	an	opinion	on	these	financial	statements	based	on	our	audits.

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

In	our	opinion,	the	financial	statements	referred	to	above	present	fairly,	in	all	material	respects,	the	consolidated	financial	position	of	State	Street	Corporation	at December	31,	2006	and	2005,	and	the	consolidated	results	of	its	operations	and	its	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2006,	in conformity	with	U.S.	generally	accepted	accounting	principles.

We	also	have	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	effectiveness	of	State	Street Corporation's	internal	control	over	financial	reporting	as	of	December	31,	2006,	based	on	criteria	established	in	Internal	Control—Integrated	Framework	issued	by	the Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	and	our	report	dated	February	15,	2007	expressed	an	unqualified	opinion	thereon.

As	discussed	in	Note	1	to	the	financial	statements,	in	2006,	the	Corporation	changed	its	method	of	accounting	for	its	defined	benefit	pension	and	other postretirement	plans.

/S/	ERNST	&	YOUNG	LLP

# CONSOLIDATED	FINANCIAL	STATEMENTS

# Consolidated	Statement	of	Income

| Years	ended	December	31,<br>(Dollars	in	millions,	except	per	share	amounts) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Fee\tRevenue: |  |  |  |
| Servicing\tfees | $2,723 | $2,474 | $2,263 |
| Management\tfees | 943 | 751 | 623 |
| Trading\tservices | 862 | 694 | 595 |
| Securities\tfinance | 386 | 330 | 259 |
| Processing\tfees\tand\tother | 272 | 302 | 308 |
| Total\tfee\trevenue | 5,186 | 4,551 | 4,048 |
| Net\tInterest\tRevenue: |  |  |  |
| Interest\trevenue | 4,324 | 2,930 | 1,787 |
| Interest\texpense | 3,214 | 2,023 | 928 |
| Net\tinterest\trevenue | 1,110 | 907 | 859 |
| Provision\tfor\tloan\tlosses | — | — | (18) |
| Net\tinterest\trevenue\tafter\tprovision\tfor\tloan\tlosses | 1,110 | 907 | 877 |
| Gains\ton\tsales\tof\tavailable-for-sale\tinvestment\tsecurities,\tnet | 15 | (1) | 26 |
| Gain\ton\tsale\tof\tPrivate\tAsset\tManagement\tbusiness | — | 16 | — |
| Total\trevenue | 6,311 | 5,473 | 4,951 |
| Operating\tExpenses: |  |  |  |
| Salaries\tand\temployee\tbenefits | 2,652 | 2,231 | 1,957 |
| Information\tsystems\tand\tcommunications | 501 | 486 | 527 |
| Transaction\tprocessing\tservices | 496 | 449 | 398 |

| Occupancy | 373 | 391 | 363 |
| :--- | :--- | :--- | :--- |
| Other | 518 | 484 | 514 |
| Total\toperating\texpenses | 4,540 | 4,041 | 3,759 |
| Income\tfrom\tcontinuing\toperations\tbefore\tincome\ttax\texpense | 1,771 | 1,432 | 1,192 |
| Income\ttax\texpense\tfrom\tcontinuing\toperations | 675 | 487 | 394 |
| Income\tfrom\tcontinuing\toperations | 1,096 | 945 | 798 |
| Income\t(Loss)\tfrom\tdiscontinued\toperations | 16 | (165) | — |
| Income\ttax\texpense\t(benefit)\tfrom\tdiscontinued\toperations | 6 | (58) | — |
| Net\tincome\t(loss)\tfrom\tdiscontinued\toperations | 10 | (107) | — |
| Net\tincome | $1,106 | $838 | $798 |
| Earnings\tPer\tShare\tFrom\tContinuing\tOperations: |  |  |  |
| Basic | $3.31 | $2.86 | $2.38 |
| Diluted | 3.26 | 2.82 | 2.35 |
| Income\t(Loss)\tPer\tShare\tFrom\tDiscontinued\tOperations: |  |  |  |
| Basic | $.03 | $(.33) | $— |
| Diluted | .03 | (.32) | — |
| Earnings\tPer\tShare: |  |  |  |
| Basic | $3.34 | $2.53 | $2.38 |
| Diluted | 3.29 | 2.50 | 2.35 |
| Average\tShares\tOutstanding\t(in\tthousands): |  |  |  |
| Basic | 331,350 | 330,361 | 334,606 |
| Diluted | 335,732 | 334,636 | 339,605 |

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

# Consolidated	Statement	of	Condition

| As	of	December	31,<br>(Dollars	in	millions,	except	per	share	amounts) | 2006 | 2005 |
| :--- | :--- | :--- |
| Assets |  |  |
| Cash\tand\tdue\tfrom\tbanks | $2,368 | $2,684 |
| Interest-bearing\tdeposits\twith\tbanks | 5,236 | 11,275 |
| Securities\tpurchased\tunder\tresale\tagreements | 14,678 | 8,679 |
| Trading\taccount\tassets | 785 | 764 |
| Investment\tsecurities\tavailable\tfor\tsale | 60,445 | 54,979 |
| Investment\tsecurities\theld\tto\tmaturity\t(fair\tvalue\tof\t$4,484\tand\t$4,815) | 4,547 | 4,891 |
| Loans\tand\tleases\t(less\tallowance\tof\t$18\tand\t$18) | 8,928 | 6,464 |
| Premises\tand\tequipment\t(net\tof\taccumulated\tdepreciation\tof\t$2,415\tand\t$2,149) | 1,560 | 1,453 |
| Accrued\tincome\treceivable | 1,617 | 1,364 |
| Goodwill | 1,384 | 1,337 |
| Other\tintangible\tassets | 434 | 459 |
| Other\tassets | 5,371 | 3,619 |
| Total\tassets | $107,353 | $97,968 |
| Liabilities |  |  |
| Deposits: |  |  |
| Noninterest-bearing | $10,194 | $9,402 |
| Interest-bearing—U.S. | 1,272 | 2,379 |
| Interest-bearing—Non-U.S. | 54,180 | 47,865 |
| Total\tdeposits | 65,646 | 59,646 |
| Securities\tsold\tunder\trepurchase\tagreements |  |  |
|  | 19,147 | 20,895 |
| Federal\tfunds\tpurchased | 2,147 | 1,204 |
| Other\tshort-term\tborrowings | 2,835 | 1,219 |
| Accrued\ttaxes\tand\tother\texpenses | 3,143 | 2,632 |
| Other\tliabilities | 4,567 | 3,346 |
| Long-term\tdebt | 2,616 | 2,659 |
| Total\tliabilities | 100,101 | 91,601 |
| Commitments\tand\tcontingencies\t(Note\t10) |  |  |
| Shareholders'\tEquity |  |  |
| Preferred\tstock,\tno\tpar:\tauthorized\t3,500,000\tshares;\tissued\tnone |  |  |
| Common\tstock,\t$1\tpar:\tauthorized\t500,000,000\tshares;\tissued\t337,126,000\tand\t337,126,000\tshares | 337 | 337 |
| Surplus | 399 | 266 |
| Retained\tearnings | 7,030 | 6,189 |
| Accumulated\tother\tcomprehensive\tloss | (224) | (231) |
| Treasury\tstock,\tat\tcost\t(4,688,000\tand\t3,501,000\tshares) | (290) | (194) |
| Total\tshareholders'\tequity | 7,252 | 6,367 |
| Total\tliabilities\tand\tshareholders'\tequity | $107,353 | $97,968 |

# Consolidated	Statement	of	Changes	in	Shareholders'	Equity

| Balance	at	December	31,	2003 | 337,132 | $337 | $329 | $5,007 | $192 | 2,658 | $(118) | $5,747 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Comprehensive\tIncome: |  |  |  |  |  |  |  |  |
| Net\tincome |  |  |  | 798 |  |  |  | 798 |
| Change\tin\tnet\tunrealized\tgains/losses\ton\tavailable-for-sale\tsecurities,\tnet\tof\trelated\ttaxes\tof |  |  |  |  |  |  |  |  |
| $(91)\tand\treclassification\tadjustment |  |  |  |  | (130) |  |  | (130) |
| Change\tin\tminimum\tpension\tliability,\tnet\tof\trelated\ttaxes\tof\t$(19) |  |  |  |  | (26) |  |  | (26) |
| Foreign\tcurrency\ttranslation,\tnet\tof\trelated\ttaxes\tof\t$17 |  |  |  |  | 85 |  |  | 85 |
| Change\tin\tunrealized\tgains/losses\ton\tcash\tflow\thedges,\tnet\tof\trelated\ttaxes\tof\t$(1) |  |  |  |  | (3) |  |  | (3) |
| related\ttaxes\tof\t$(14) |  |  |  |  | (26) |  |  | (26) |
| Total\tcomprehensive\tincome |  |  |  | 798 | (100) |  |  | 698 |
| Cash\tdividends\tdeclared—$.64\tper\tshare |  |  |  | (215) |  |  |  | (215) |
| Common\tstock\tacquired |  |  |  |  |  | 4,098 | (178) | (178) |
| Impact\tof\tfixing\tthe\tvariable-share\tsettlement\trate\tof\tSPACES |  |  | (26) |  |  |  |  | (26) |
| Common\tStock\tIssued\tPursuant\tto: |  |  |  |  |  |  |  |  |
| Stock\tawards\tand\toptions\texercised,\tincluding\ttax\tbenefit\tof\t$20 | (6) |  | (10) |  |  | (3,128) | 141 | 131 |
| Debt\tconversion |  |  | (4) |  |  | (104) | 4 | — |
| Other |  |  |  |  |  | (43) | 2 | 2 |
| Balance\tat\tDecember\t31,\t2004 | 337,126 | 337 | 289 | 5,590 | 92 | 3,481 | (149) | 6,159 |
| Comprehensive\tIncome: |  |  |  |  |  |  |  |  |
| Net\tincome |  |  |  | 838 |  |  |  | 838 |
| Change\tin\tnet\tunrealized\tgains/losses\ton\tavailable-for-sale\tsecurities,\tnet\tof\trelated\ttaxes\tof |  |  |  |  |  |  |  |  |
| $(150)\tand\treclassification\tadjustment |  |  |  |  | (229) |  |  | (229) |
| Foreign\tcurrency\ttranslation,\tnet\tof\trelated\ttaxes\tof\t$(54) |  |  |  |  | (140) |  |  | (140) |
| related\ttaxes\tof\t$20 |  |  |  |  | 37 |  |  | 37 |
| Change\tin\tunrealized\tgains/losses\ton\tcash\tflow\thedges,\tnet\tof\trelated\ttaxes\tof\t$6 |  |  |  |  | 9 |  |  | 9 |
| Total\tcomprehensive\tincome |  |  |  | 838 | (323) |  |  | 515 |
| Cash\tdividends\tdeclared—$.72\tper\tshare |  |  |  | (239) |  |  |  | (239) |
| Common\tstock\tacquired |  |  |  |  |  | 13,130 | (664) | (664) |
| Common\tStock\tIssued\tPursuant\tto: |  |  |  |  |  |  |  |  |
| SPACES |  |  | (73) |  |  | (8,712) | 418 | 345 |
| Stock\tawards\tand\toptions\texercised,\tincluding\ttax\tbenefit\tof\t$20 |  |  | 50 |  |  | (4,319) | 197 | 247 |
| Other |  |  |  |  |  | (79) | 4 | 4 |
| Balance\tat\tDecember\t31,\t2005 | 337,126 | 337 | 266 | 6,189 | (231) | 3,501 | (194) | 6,367 |
| Comprehensive\tIncome: |  |  |  |  |  |  |  |  |
| Net\tincome |  |  |  | 1,106 |  |  |  | 1,106 |
| Change\tin\tnet\tunrealized\tgains/losses\ton\tavailable-for-sale\tsecurities,\tnet\tof\trelated\ttaxes\tof |  |  |  |  |  |  |  |  |
| $40\tand\treclassification\tadjustment |  |  |  |  | 58 |  |  | 58 |
| Foreign\tcurrency\ttranslation,\tnet\tof\trelated\ttaxes\tof\t$56 |  |  |  |  | 124 |  |  | 124 |
| related\ttaxes\tof\t$(10) |  |  |  |  | (18) |  |  | (18) |
| Change\tin\tminimum\tpension\tliability,\tnet\tof\trelated\ttaxes\tof\t$(107) |  |  |  |  | (160) |  |  | (160) |
| Change\tin\tunrealized\tgains/losses\ton\tcash\tflow\thedges,\tnet\tof\trelated\ttaxes\tof\t$2 |  |  |  |  | 3 |  |  | 3 |
| Total\tcomprehensive\tincome |  |  |  | 1,106 | 7 |  |  | 1,113 |
| Cash\tdividends\tdeclared—$.80\tper\tshare |  |  |  | (265) |  |  |  | (265) |
| Common\tstock\tacquired |  |  |  |  |  | 5,782 | (368) | (368) |
| Common\tstock\treceived\tunder\tCOVERS\tcontracts |  |  | 30 |  |  | 1,199 | (26) | 4 |
| Common\tStock\tIssued\tPursuant\tto: |  |  |  |  |  |  |  |  |
| Stock\tawards\tand\toptions\texercised,\tincluding\ttax\tbenefit\tof\t$43 |  |  | 103 |  |  | (5,782) | 300 | 403 |
| Other |  |  |  |  |  | (12) | (2) | (2) |
| Balance\tat\tDecember\t31,\t2006 | 337,126 | $337 | $399 | $7,030 | $(224\t) | 4,688 | $(290\t) | $7,252 |

# Consolidated	Statement	of	Cash	Flows

| Years	ended	December	31,<br>(In	millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Operating\tActivities: |  |  |  |
| Net\tincome | $1,106 | $838 | $798 |
| Adjustments\tto\treconcile\tnet\tincome\tto\tnet\tcash\tprovided\tby\toperating\tactivities: |  |  |  |
| Non-cash\tadjustments\tfor\tdepreciation,\tamortization,\taccretion,\tprovision\tfor\tloan\tlosses\tand\tdeferred\tincome\ttax\texpense | 385 | 499 | 639 |
| Income\t(Loss)\tfrom\tdiscontinued\toperations | (16) | 165 | — |
| Gain\ton\tsale\tof\tdivested\tbusiness | — | (16) | — |
| Securities\tlosses\t(gains),\tnet | (15) | 1 | (26) |
| Change\tin\ttrading\taccount\tassets,\tnet | (179) | (19) | (340) |
| Other,\tnet | (300) | 1,015 | (655) |
| Net\tCash\tProvided\tby\tOperating\tActivities | 981 | 2,483 | 416 |
| Investing\tActivities: |  |  |  |
| Net\tdecrease\tin\tinterest-bearing\tdeposits\twith\tbanks | 6,039 | 9,359 | 1,104 |
| Net\tdecrease\t(increase)\tin\tfederal\tfunds\tsold\tand\tsecurities\tpurchased\tunder\tresale\tagreements | (5,999) | 9,649 | (8,777) |
| Proceeds\tfrom\tsales\tof\tavailable-for-sale\tsecurities | 3,571 | 3,299 | 8,035 |
| Proceeds\tfrom\tmaturities\tof\tavailable-for-sale\tsecurities | 16,602 | 22,129 | 15,387 |
| Purchases\tof\tavailable-for-sale\tsecurities | (23,920) | (44,758) | (23,408) |
| Proceeds\tfrom\tmaturities\tof\theld-to-maturity\tsecurities | 1,590 | 1,132 | 1,107 |
| Purchases\tof\theld-to-maturity\tsecurities |  |  |  |
|  | (1,246) | (4,623) | (892) |
| Net\t(increase)\tdecrease\tin\tloans | (2,464) | (1,801) | 451 |
| Proceeds\tfrom\tsale\tof\tdivested\tbusiness, | — | 16 | — |
| Business\tacquisitions,\tnet\tof\tcash\tacquired | — | (43) | (100) |
| Purchases\tof\tequity\tinvestments\tand\tother\tlong-term\tassets | (168) | (55) | (86) |
| Purchases\tof\tpremises\tand\tequipment | (310) | (314) | (336) |
| Other | 114 | 58 | 60 |
| Net\tCash\tUsed\tin\tInvesting\tActivities | (6,191) | (5,952) | (7,455) |
| Financing\tActivities: |  |  |  |
| Net\t(decrease)\tincrease\tin\ttime\tdeposits | (1,261) | (5,341) | 3,569 |
| Net\tincrease\tin\tall\tother\tdeposits | 7,258 | 9,895 | 4,015 |
| Net\tdecrease\tin\tshort-term\tborrowings | (653) | (341) | (1,603) |
| Proceeds\tfrom\tissuance\tof\tlong-term\tdebt,\tnet\tof\tissuance\tcosts | — | 595 | — |
| Payments\tfor\tlong-term\tdebt\tand\tobligations\tunder\tcapital\tleases | (16) | (370) | (9) |
| Proceeds\tfrom\tSPACES,\tnet\tof\tissuance\tcosts | — | 345 | — |
| Purchases\tof\tcommon\tstock | (368) | (664) | (178) |
| Proceeds\tfrom\tissuance\tof\ttreasury\tstock\tfor\tstock\tawards\tand\toptions\texercised | 193 | 231 | 113 |
| Payments\tfor\tcash\tdividends | (259) | (232) | (209) |
| Net\tCash\tProvided\tby\tFinancing\tActivities | 4,894 | 4,118 | 5,698 |
| Net\tIncrease\t(Decrease) | (316) | 649 | (1,341) |
| Cash\tand\tDue\tfrom\tBanks\tat\tBeginning\tof\tYear | 2,684 | 2,035 | 3,376 |
| Cash\tand\tDue\tfrom\tBanks\tat\tEnd\tof\tYear | $2,368 | $2,684 | $2,035 |
| Supplemental\tDisclosure:\nInterest\tpaid | $3,177 | $1,965 | $911 |

| Income	taxes	paid | 533 | 331 | 211 |
| :--- | :--- | :--- | :--- |
| Non-cash\tinvestments\tin\tcapital\tleases\tand\tother\tpremises\tand\tequipment | 109 | 9 | 235 |
| Non-cash\tacquisitions\tof\tinvestment\tsecurities\tavailable\tfor\tsale | 1,464 | — | — |

# Notes	to	Consolidated	Financial	Statements

# Note	1.	Summary	of	Significant	Accounting	Policies

The	accounting	and	financial	reporting	policies	of	State	Street	Corporation	conform	to	accounting	principles	generally	accepted	in	the	United	States	of	America,	or "GAAP."	Unless	otherwise	indicated	or	unless	the	context	requires	otherwise,	all	references	in	these	notes	to	consolidated	financial	statements	to	"State	Street,"	"we," "us,"	"our"	or	similar	references	mean	State	Street	Corporation	and	its	subsidiaries	on	a	consolidated	basis.	The	parent	company	is	a	financial	holding	company headquartered	in	Boston,	Massachusetts.	We	report	two	lines	of	business:

·							Investment	Servicing	provides	services	for	U.S.	mutual	funds	and	collective	investment	funds,	corporate	and	public	retirement	plans,	insurance	companies,

foundations,	endowments	and	other	investment	pools	worldwide.	Products	include	custody,	product-	and	participant-level	accounting,	daily	pricing	and administration;	master	trust	and	master	custody;	recordkeeping;	foreign	exchange,	brokerage	and	other	trading	services;	securities	finance;	deposit	and	short- term	investment	facilities;	loans	and	lease	financing;	investment	manager	and	hedge	fund	manager	operations	outsourcing;	and	performance,	risk	and	compliance analytics	to	support	institutional	investors.

·							Investment	Management	offers	a	broad	array	of	services	for	managing	financial	assets,	including	investment	management	and	investment	research	services,

primarily	for	institutional	investors	worldwide.	These	services	include	passive	and	active	U.S.	and	non-U.S.	equity	and	fixed	income	strategies,	and	other	related services,	such	as	securities	finance.

The	preparation	of	consolidated	financial	statements	requires	management	to	make	estimates	and	assumptions	in	the	application	of	certain	of	our	accounting policies	that	materially	affect	the	reported	amounts	of	assets,	liabilities,	revenue	and	expenses.	As	a	result	of	unanticipated	events	or	circumstances,	actual	results	could differ	from	those	estimates.	The	following	is	a	summary	of	our	significant	accounting	policies.

# Basis	of	Presentation:

Our	consolidated	financial	statements	include	the	accounts	of	the	parent	company	and	its	majority-owned	subsidiaries,	including	its	principal	banking	subsidiary, State	Street	Bank	and	Trust	Company,	or	"State	Street	Bank,"	as	well	as	special	purpose	entities	considered	to	be	variable	interest	entities	for	which	State	Street	is	the primary	beneficiary	under	existing	accounting	standards.	All	material	inter-company	transactions	and	balances	have	been	eliminated.	Certain	previously	reported amounts	have	been	reclassified	to	conform	to	current	year	presentation.

We	consolidate	subsidiaries	in	which	we	hold	a	majority	of	the	voting	rights	or	exercise	control.	Investments	in	unconsolidated	subsidiaries,	recorded	in	other assets,	are	generally	accounted	for	using	the	equity	method	of	accounting	if	we	have	the	ability	to	exercise	significant	influence	over	the	operations	of	the	investee.	For investments	accounted	for	under	the	equity	method,	our	share	of	income	or	loss	is	recorded	in	processing	fees	and	other	revenue.	Investments	not	meeting	the	criteria	for equity	method	treatment	are	accounted	for	using	the	cost	method	of	accounting.

# Foreign	Currency	Translation:

The	assets	and	liabilities	of	our	operations	with	functional	currencies	other	than	the	U.S.	dollar	are	translated	at	month-end	exchange	rates,	and	revenue	and expenses	are	translated	at	rates	that	approximate	average	monthly	exchange	rates.	Gains	or	losses	from	the	translation	of	the	net	assets	of	subsidiaries	with	functional currencies	other	than	the	U.S.	dollar,	net	of	related	taxes,	are	recorded	in	accumulated	other	comprehensive	income.

# Cash	and	Cash	Equivalents:

For	purposes	of	the	consolidated	statement	of	cash	flows,	cash	equivalents	have	been	defined	as	cash	and	due	from	banks.

Securities	Purchased	Under	Resale	Agreements	and	Securities	Sold	Under	Repurchase	Agreements:

U.S.	Treasury	and	federal	agency	securities,	or	"U.S.	government	securities,"	purchased	under	resale	agreements	or	sold	under	repurchase	agreements	are	treated	as collateralized	financing	transactions,	and	are	recorded	in	the	consolidated	statement	of	condition	at	the	amounts	at	which	the	securities	will	be	subsequently	resold	or repurchased,	plus	accrued	interest.	Our	policy	is	to	take	possession	or	control	of	securities	underlying	resale	agreements,	allowing	borrowers	the	right	of	collateral substitution	and/or	short-notice	termination.	We	revalue	these	securities	daily	to	determine	if	additional	collateral	is	necessary	from	the	borrower	to	protect	us	against credit	exposure.	We	can	use	these	securities	as	collateral	for	repurchase	agreements.	For	securities	sold	under	repurchase	agreements	collateralized	by	our	U.S. government	securities	portfolio,	the	dollar	value	of	the	U.S.	government	securities	remains	in	investment	securities	in	our	consolidated	statement	of	condition.	Where	a master	netting	agreement	exists	or	both	parties	are	members	of	a	common	clearing	organization,	resale	and	repurchase	agreements	with	the	same	counterparty	or clearing	house	and	maturity	date	are	reported	on	a	net	basis.

# Investment	Securities	Available	for	Sale	and	Held	to	Maturity:

Our	investment	securities	portfolio	principally	includes	debt	securities	purchased	in	connection	with	our	asset	and	liability	management	activities.	These	securities are	classified	at	the	time	of	purchase,	based	on	management's	intentions,	as	available	for	sale	or	held	to	maturity.	Securities	available	for	sale	are	those	that	management intends	to	hold	for	an	indefinite	period	of	time,	including	securities	used	as	part	of	our	asset	and	liability	management	strategy	that	may	be	sold	in	response	to	changes	in interest	rates,	pre-payment	risk,	liquidity	needs	or	other	similar	factors.	Debt	and	marketable	equity	securities	classified	as	available	for	sale	are	reported	at	fair	value, and	after-tax	net	unrealized	gains	and	losses	are	reported	in	accumulated	other	comprehensive	income,	a	component	of	shareholders'	equity.	Gains	or	losses	on	sales	of available-for-sale	securities	are	computed	using	the	specific	identification	method.	Securities	held	to	maturity	are	debt	securities	that	management	has	the	positive	intent and	ability	to	hold	to	maturity.	Securities	classified	as	held	to	maturity	are	reported	at	cost,	adjusted	for	amortization	of	premiums	and	accretion	of	discounts.

Management	reviews	the	fair	value	of	the	portfolio	at	least	quarterly,	and	evaluates	individual	securities	for	declines	in	fair	value	that	may	be	other	than	temporary, considering	factors	such	as	current	and	expected	future	interest	rates,	credit	ratings,	dividend	payments,	the	financial	health	of	the	issuer	and	other	pertinent	information, including	current	developments	with	respect	to	the	issuer,	as	well	as	the	duration	of	the	decline	and	management's	intent	and	ability	to	hold	the	security.	If	declines	are deemed	other	than	temporary,	an	impairment	loss	is	recognized	and	the	amortized	cost	basis	of	the	investment	security	is	written	down	to	its	current	fair	value,	which becomes	the	new	cost	basis.	Other-than-temporary	unrealized	losses	on	available-for-sale	and	held-to-maturity	securities,	if	any,	are	recorded	as	a	reduction	of	processing fees	and	other	revenue.

Loans	are	generally	reported	at	the	principal	amount	outstanding,	net	of	the	allowance	for	loan	losses,	unearned	income,	and	any	net	unamortized	deferred	loan origination	fees.	Interest	revenue	is	recognized	using	the	interest	method	or	on	a	basis	approximating	a	level	rate	of	return	over	the	term	of	the	loan.	Fees	received	for providing	loan	commitments	and	letters	of	credit	that	we	anticipate	will	result	in	loans	typically	are	deferred	and	amortized	to	interest	revenue	over	the	life	of	the	related loan,	beginning	with	the

initial	borrowing.	Fees	on	commitments	and	letters	of	credit	are	amortized	to	processing	fees	and	other	revenue	over	the	commitment	period	when	funding	is	not	known or	expected.

Loans	are	placed	on	non-accrual	status	when	they	become	60	days	past	due	as	to	either	principal	or	interest,	or	earlier	when,	in	the	opinion	of	management,	full collection	of	principal	or	interest	is	not	probable.	Loans	60	days	past	due,	but	considered	both	well	secured	and	in	the	process	of	collection,	are	treated	as	exceptions	and may	be	exempted	from	non-accrual	status.	When	we	place	a	loan	on	non-accrual	status,	the	accrual	of	interest	is	discontinued	and	previously	recorded	but	unpaid interest	is	reversed	and	generally	charged	against	net	interest	revenue.	For	loans	on	non-accrual	status,	revenue	is	recognized	on	a	cash	basis	after	recovery	of	principal, if	and	when	interest	payments	are	received.

Leveraged	lease	investments	are	reported	at	the	aggregate	of	lease	payments	receivable	and	estimated	residual	values,	net	of	non-recourse	debt	and	unearned income.	Lease	residual	values	are	reviewed	regularly	for	other-than-temporary	impairment,	with	valuation	adjustments	recorded	currently	against	processing	fees	and other	revenue.	Unearned	income	is	recognized	to	yield	a	level	rate	of	return	on	the	net	investment	in	the	leases.	Gains	and	losses	on	residual	values	of	leased	equipment sold	are	recorded	in	processing	fees	and	other	revenue.

# Allowance	for	Loan	Losses:

The	adequacy	of	the	allowance	for	loan	losses	is	evaluated	on	a	regular	basis	by	management.	Factors	considered	in	evaluating	the	adequacy	of	the	allowance include	previous	loss	experience,	current	economic	conditions	and	adverse	situations	that	may	affect	the	borrower's	ability	to	repay,	the	estimated	value	of	the underlying	collateral	and	the	performance	of	individual	credits	in	relation	to	contract	terms,	and	other	relevant	factors.	The	provision	for	loan	losses	charged	to	earnings is	based	upon	management's	judgment	of	the	amount	necessary	to	maintain	the	allowance	at	a	level	adequate	to	absorb	estimated	probable	credit	losses.

Loans	are	charged	off	to	the	allowance	for	loan	losses	in	the	reporting	period	in	which	either	an	event	occurs	that	confirms	the	existence	of	a	loss	or	it	is	determined that	a	loan	or	a	portion	of	a	loan	is	not	collectible.	Recoveries	are	recorded	on	a	cash	basis.

In	addition,	we	maintain	a	reserve	for	off-balance	sheet	credit	exposures	that	is	recorded	in	other	liabilities.	The	adequacy	of	this	reserve	is	subject	to	the	same considerations	and	review	as	the	allowance	for	loan	losses.	Provisions	to	change	the	level	of	this	reserve	are	recorded	in	other	operating	expenses.

# Premises	and	Equipment:

Buildings,	leasehold	improvements,	computers,	software	and	other	equipment	are	carried	at	cost	less	accumulated	depreciation	and	amortization.	Depreciation	and amortization	recorded	in	operating	expenses	are	computed	using	the	straight-line	method	over	the	estimated	useful	lives	of	the	related	assets	or	the	remaining	terms	of the	leases,	generally	3	to	40	years.	Maintenance	and	repairs	are	charged	to	expense	as	incurred,	while	major	leasehold	improvements	are	capitalized	and	expensed	over their	estimated	useful	lives	or	terms	of	the	lease.	For	premises	held	under	leases	where	we	have	an	obligation	to	restore	the	facilities	to	their	original	condition	upon expiration	of	the	lease,	we	expense	the	anticipated	related	costs	over	the	term	of	the	lease.

Costs	related	to	internal-use	software	development	projects	that	provide	significant	new	functionality	are	capitalized.	We	consider	projects	for	capitalization	that	are expected	to	yield	long-term	operational	benefits,	such	as	applications	that	result	in	operational	efficiencies	and/or	incremental	revenue	streams.	Software	customization costs	relating	to	specific	customer	enhancements	are	expensed	as	incurred.

# Goodwill	and	Other	Intangible	Assets:

Goodwill	represents	the	excess	of	the	cost	of	an	acquisition	over	the	fair	value	of	the	net	tangible	and	other	intangible	assets	acquired.	Other	intangible	assets represent	purchased	assets	that	can	be	distinguished	from	goodwill	because	of	contractual	rights	or	because	the	asset	can	be	exchanged	on	its	own	or	in	combination with	a	related	contract,	asset	or	liability.	Goodwill	is	not	amortized,	but	is	subject	to	annual	impairment	tests.	Customer-list	intangible	assets	generally	are	amortized	on	a straight-line	basis	over	fifteen	years,	and	the	amortization	is	recorded	in	other	operating	expenses.	Impairment	of	goodwill	is	deemed	to	exist	if	the	carrying	value	of	a reporting	unit,	including	its	allocation	of	goodwill	and	other	intangible	assets,	exceeds	its	estimated	fair	value.	Impairment	of	other	intangibles	is	deemed	to	exist	if	the balance	of	the	other	intangible	asset	exceeds	the	cumulative	net	cash	inflows	related	to	the	asset	over	its	remaining	estimated	useful	life.	If	it	is	determined,	based	on these	reviews,	that	goodwill	or	other	intangible	assets	are	impaired,	the	value	of	the	goodwill	or	the	other	intangible	asset	is	written	down	through	a	charge	to	other operating	expenses.

# Fee	and	Net	Interest	Revenue:

Fees	from	investment	servicing,	investment	management,	securities	finance,	trading	services	and	certain	types	of	processing	fees	and	other	revenue	are	recorded based	on	estimates	or	specific	contractual	terms	as	transactions	occur	or	services	are	rendered,	provided	that	persuasive	evidence	exists,	the	price	to	the	customer	is	fixed or	determinable	and	collectibility	is	reasonably	assured.	Amounts	accrued	at	period-end	are	recorded	in	accrued	income	receivable	in	our	consolidated	statement	of condition.	Investment	management	performance	fees	are	recorded	in	arrears	after	the	performance	period	ends,	based	on	predetermined	benchmarks	associated	with	the applicable	fund's	performance.	Interest	revenue	on	interest-earning	assets	and	interest	expense	on	interest-bearing	liabilities	is	recorded	based	on	the	effective	yield	of the	related	financial	instrument.

# Employee	Benefits	Expense:

Employee	benefits	expense	includes	prior	and	current	service	costs	of	pension	and	other	postretirement	benefit	plans,	which	are	accrued	on	a	current	basis,	as	well as	contributions	under	defined	contribution	savings	plans,	unrestricted	awards	under	other	employee	compensation	plans,	and	the	amortization	of	restricted	stock awards.

# Equity-Based	Compensation:

We	record	compensation	expense,	equal	to	the	estimated	fair	value	of	employee	stock	options	on	the	grant	date,	on	a	straight-line	basis	over	the	options'	vesting period.	We	use	a	Black-Scholes	option-pricing	model	to	determine	the	fair	value	of	the	options	granted.

On	January	1,	2006,	we	adopted	Statement	of	Financial	Accounting	Standards,	or	"SFAS,"	No.	123	(revised	2004),	Share-Based	Payment.	This	new	standard requires	the	fair	value	of	all	share-based	payments	to	employees,	including	awards	made	prior	to	January	1,	2003,	to	be	recognized	in	the	consolidated	statement	of income.	We	elected	to	use	the	modified	prospective	method,	under	which	compensation	expense	is	recorded	over	the	remaining	vesting	period	for	only	the	portion	of stock	awards	not	fully	vested	as	of	January	1,	2006.	The	impact	of	adoption	of	the	new	standard	was	not	material	to	our	consolidated	financial	condition	or	results	of operations,	because	the	number	of	options	granted	prior	to	January	1,	2003,	that	were	not	fully	vested	as	of	January	1,	2006,	was	not	significant.	In	addition,	we	elected

to	adopt	the	alternative	transition	method	prescribed	by	Financial	Accounting	Standards	Board,	or	"FASB,"	Staff	Position	FAS	123(R)-3,	and	reclassified	$86	million	of tax	benefits	related	to	equity-based	compensation	from	a	general	surplus	account	to	a	specifically	designated	surplus	account	within	shareholders'	equity.

The	following	table	illustrates	the	pro	forma	effect	on	net	income	and	earnings	per	share	as	if	all	outstanding	and	unvested	stock	options	in	each	period	were accounted	for	using	estimated	fair	value,	for	the	years	indicated.

| 31, | 2005 | 2004 |
| :--- | :--- | :--- |
| (In\tmillions,\texcept\tper\tshare\tamounts) |  |  |
| Net\tincome,\tas\treported | $838 | $798 |
| Add:\tStock\toption\tcompensation\texpense\tincluded\tin\treported\tnet\tincome,\tnet\tof\trelated\ttaxes | $20 | $15 |
| Deduct:\tTotal\tstock\toption\tcompensation\texpense\tdetermined\tunder\tfair\tvalue\tmethod\tfor\tall |  |  |
| awards,\tnet\tof\trelated\ttaxes | (27) | (42) |
| Pro\tforma\tnet\tincome | $831 | $771 |
| Earnings\tper\tshare: |  |  |
| Basic—as\treported | $2.53 | $2.38 |
| Basic—pro\tforma | 2.51 | 2.30 |
| Diluted—as\treported | $2.50 | $2.35 |
| Diluted—pro\tforma | 2.48 | 2.27 |

We	use	an	asset	and	liability	approach	to	account	for	income	taxes.	Our	objective	is	to	recognize	the	amount	of	taxes	payable	or	refundable	for	the	current	year through	charges	or	credits	to	the	current	tax	provision,	and	to	recognize	deferred	tax	assets	and	liabilities	for	the	future	tax	consequences	resulting	from	temporary differences	between	the	amounts	reported	in	the	consolidated	financial	statements	and	their	respective	tax	bases.	The	measurement	of	tax	assets	and	liabilities	is	based on	enacted	tax	laws	and	applicable	tax	rates.	A	deferred	tax	valuation	allowance	is	established	if	it	is	considered	more	likely	than	not	that	all	or	a	portion	of	the	deferred tax	assets	will	not	be	realized.

# Earnings	Per	Share:

Basic	earnings	per	share	is	calculated	by	dividing	net	income	available	to	common	shareholders	by	the	weighted-average	number	of	common	shares	outstanding	for the	period,	which	excludes	unvested	shares	of	restricted	stock.	Diluted	earnings	per	share	is	calculated	by	dividing	net	income	available	to	common	shareholders	by	the weighted-average	number	of	common	shares	outstanding	for	the	period	and	the	shares	representing	the	dilutive	effect	of	stock	options	and	awards	and	other	equity- related	financial	instruments.	The	effect	of	stock	options	and	restricted	stock	outstanding	is	excluded	from	the	calculation	of	diluted	earnings	per	share	in	periods	in which	their	effect	would	be	antidilutive.

# Derivative	Financial	Instruments:

A	derivative	financial	instrument	is	a	financial	instrument	or	other	contract	which	has	one	or	more	underlying	and	one	or	more	notional	amounts,	no	initial	net investment,	or	a	smaller	initial	net	investment	than	would	be	expected	for	similar	types	of	contracts,	and	which	requires	or	permits	net	settlement.	Derivatives	that	we enter	into	include	forwards,	futures,	swaps,	options	and	other	instruments	with	similar	characteristics.

We	record	derivatives	in	our	consolidated	statement	of	condition	at	their	fair	value.	On	the	date	a	derivative	contract	is	entered	into,	we	designate	the	derivative	as: (1)	a	hedge	of	the	fair	value	of	a	recognized	fixed-rate	asset	or	liability	or	of	an	unrecognized	firm	commitment	(a	"fair	value"	hedge);	(2)	a	hedge	of	a	forecasted transaction	or	of	the	variability	of	cash	flows	to	be	received	or	paid	related	to	a	recognized	variable-rate	asset	or	liability	(a	"cash	flow"	hedge);	(3)	a	foreign	currency fair	value	or	cash

flow	hedge	(a	"foreign	currency"	hedge);	(4)	a	hedge	of	a	net	investment	in	a	non-U.S.	operation;	or	(5)	held	for	trading	purposes	("trading"	instruments).

Changes	in	the	fair	value	of	a	derivative	that	is	highly	effective—and	that	is	designated	and	qualifies	as	a	fair	value	hedge—are	recorded	currently	in	processing fees	and	other	revenue,	along	with	the	changes	in	fair	value	of	the	hedged	asset	or	liability	attributable	to	the	hedged	risk.	Changes	in	the	fair	value	of	a	derivative	that	is highly	effective—and	that	is	designated	and	qualifies	as	a	cash	flow	hedge—are	recorded,	net	of	tax,	in	other	comprehensive	income,	until	earnings	are	affected	by	the hedged	cash	flows	(e.g.,	when	periodic	settlements	on	a	variable-rate	asset	or	liability	are	recorded	in	earnings).	Cash	flow	hedge	ineffectiveness,	defined	as	the	extent	to which	the	changes	in	fair	value	of	the	derivative	exceed	the	variability	of	cash	flows	of	the	forecasted	transaction,	is	recorded	in	processing	fees	and	other	revenue.

Changes	in	the	fair	value	of	a	derivative	that	is	highly	effective—and	that	is	designated	and	qualifies	as	a	foreign	currency	hedge—are	recorded	currently	either	in processing	fees	and	other	revenue	or	in	other	comprehensive	income,	net	of	tax,	depending	on	whether	the	hedge	transaction	meets	the	criteria	for	a	fair	value	or	a	cash flow	hedge.	If,	however,	a	derivative	is	used	as	a	hedge	of	a	net	investment	in	a	non-U.S.	operation,	its	changes	in	fair	value,	to	the	extent	effective	as	a	hedge,	are recorded,	net	of	tax,	in	the	foreign	currency	translation	component	of	other	comprehensive	income.	Lastly,	entire	changes	in	the	fair	value	of	derivatives	classified	as trading	instruments	are	recorded	in	trading	services	revenue.

At	both	the	inception	of	the	hedge	and	on	an	ongoing	basis,	we	formally	assess	and	document	the	effectiveness	of	a	derivative	designated	as	a	hedge	in	offsetting changes	in	the	fair	value	of	hedged	items	and	the	likelihood	that	the	derivative	will	be	an	effective	hedge	in	future	periods.	We	discontinue	hedge	accounting prospectively	when	we	determine	that	the	derivative	will	not	remain	effective	in	offsetting	changes	in	fair	value	or	cash	flows	of	the	underlying	risk	being	hedged,	the derivative	expires,	terminates	or	is	sold,	or	management	discontinues	the	hedge	designation.

Unrealized	gains	and	losses	on	foreign	exchange	and	interest-rate	contracts	are	reported	at	fair	value	in	the	consolidated	statement	of	condition	as	a	component	of other	assets	and	other	liabilities,	respectively,	on	a	gross	basis,	except	where	such	gains	and	losses	arise	from	contracts	covered	by	qualifying	master	netting	agreements.

In	September	2006,	the	FASB	issued	SFAS	No.	158,	Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans—an	amendment	of	FASB Statements	No.	87,	88,	106	and	132(R).	This	new	standard	is	intended	to	make	it	easier	for	financial	statement	users	to	understand	an	employer's	financial	position	and ability	to	meet	the	obligations	of	its	benefit	plans.	The	standard	requires	recognition	in	our	consolidated	statement	of	condition	of	the	overfunded	or	underfunded	status of	our	tax-qualified	defined	benefit	pension	plan,	nonqualified	retirement	plans	and	postretirement	benefit	plans,	which	is	the	difference	between	the	fair	value	of	plan assets	and	the	related	benefit	obligations.	The	standard	also	requires	the	reclassification	of	the	after-tax	amount	of	any	unrecognized	actuarial	gains	and	losses	and unrecognized	prior	service	costs	to	accumulated	other	comprehensive	income,	a	component	of	shareholders'	equity.	In	subsequent	years,	the	after-tax	amount	of	changes in	unrecognized	actuarial	gains	and	losses,	as	well	as	unrecognized	prior	service	costs,	will	be	recorded	in	other	comprehensive	income.

The	standard	was	effective	as	of	December	31,	2006	for	the	recognition	of	our	plans'	funded	status,	and	applies	prospectively	for	the	remaining	provisions.	Upon

adoption	of	the	standard,	to	recognize	the	after-tax	difference	between	our	plans'	net	funded	status	and	the	amounts	currently	recorded	in	the	consolidated	statement	of condition,	we	recorded	an	after-tax	reduction	of	accumulated	other	comprehensive	income	of	approximately	$164	million.	Disclosures	required	by	the	new	standard	are included	in	Note	17.

In	September	2006,	the	FASB	issued	SFAS	No.	157,	Fair	Value	Measurements.	This	new	standard	defines	fair	value,	establishes	a	framework	for	measuring	fair value	in	conformity	with	GAAP,	and	expands	disclosures	about	fair	value	measurements.	Prior	to	this	standard,	there	were	varying	definitions	of	fair	value	and	limited guidance	for	applying	those	definitions	under	GAAP.	In	addition,	the	guidance	was	dispersed	among	the	many	accounting	pronouncements	that	require	fair	value measurements.	This	standard	is	intended	to	increase	consistency	and	comparability	in	fair	value	measurements	and	disclosures	about	fair	value	measurements.	The provisions	of	this	standard	are	effective	beginning	January	1,	2008.	We	are	currently	evaluating	the	potential	impact	of	adoption	of	this	standard	on	our	consolidated financial	position	and	results	of	operations.

In	September	2006,	the	Securities	and	Exchange	Commission	issued	Staff	Accounting	Bulletin,	or	"SAB,"	No.	108,	Considering	the	Effects	of	Prior	Year Misstatements	When	Quantifying	Misstatements	in	Current	Year	Financial	Statements.	SAB	No.	108	provides	interpretive	guidance	on	how	the	effects	of	the	carryover or	reversal	of	prior	year	financial	statement	misstatements	should	be	considered	in	quantifying	a	current	year	misstatement.	The	guidance	provided	by	SAB	No.	108 must	be	initially	applied	to	financial	statements	for	the	year	ended	December	31,	2006.	This	guidance	has	not	had	any	material	impact	on	our	consolidated	financial condition	or	results	of	operations.

In	July	2006,	the	FASB	issued	FASB	Staff	Position,	or	"FSP,"	No.	FAS	13-2,	Accounting	for	a	Change	or	Projected	Change	in	the	Timing	of	Cash	Flows	Relating to	Income	Taxes	Generated	by	a	Leveraged	Lease	Transaction.	The	FSP,	which	must	be	applied	as	of	January	1,	2007,	requires	that	the	recognition	of	lease	income over	the	term	of	a	lease	be	recalculated	if	there	is	a	change	in	the	expected	timing	of	tax-related	cash	flows.	The	cumulative	effect	of	applying	the	provisions	of	the	FSP must	be	recorded	as	an	adjustment	to	the	beginning	balance	of	retained	earnings	as	of	January	1,	2007.	Our	application	of	the	FSP's	provisions	to	certain	of	our leveraged	leases	resulted	in	an	after-tax	reduction	of	the	beginning	balance	of	retained	earnings	on	January	1,	2007	of	approximately	$226	million.	Future	revenue	from the	affected	leases	is	expected	to	increase	over	the	remaining	terms	of	the	affected	leases	by	an	amount	approximately	equal	to	the	after-tax	reduction.

In	July	2006,	to	improve	comparability	in	the	reporting	of	income	tax	assets	and	liabilities	in	the	absence	of	guidance	in	existing	income	tax	accounting	standards, the	FASB	issued	Interpretation	No.	48,	Accounting	for	Uncertainty	in	Income	Taxes—an	interpretation	of	FASB	Statement	No.	109.	Generally,	this	Interpretation clarifies	the	accounting	for	uncertainty	in	income	taxes	recognized	in	a	company's	financial	statements	in	accordance	with	existing	income	tax	accounting	standards,	and prescribes	certain	thresholds	and	attributes	for	the	financial	statement	recognition	and	measurement	of	tax	positions	taken	or	expected	to	be	taken	in	a	tax	return.	The Interpretation	must	be	applied	as	of	January	1,	2007,	and	the	cumulative	effect	of	applying	the	Interpretation's	provisions	must	be	recorded	as	an	adjustment	of	the beginning	balance	of	retained	earnings	as	of	that	date.	Our	application	of	the	Interpretation's	provisions	to	our	tax	positions	as	of	January	1,	2007	did	not	have	a	material impact	on	our	consolidated	financial	position	or	results	of	operations.

In	April	2006,	the	FASB	issued	FSP	No.	FIN	46(R)-6,	Determining	the	Variability	to	Be	Considered	in	Applying	FASB	Interpretation	No.	46(R).	This	FSP addresses	how	a	reporting	enterprise	should	determine	the	variability	to	be	considered	in	applying	FASB	Interpretation	No.	46	(revised	December	2003),	Consolidation of	Variable	Interest	Entities,	or	"FIN	46(R)."	The	variability	that	is	considered	in	applying	FIN	46(R)	affects	the	determination	of	(a)	whether	an	entity	is	a	variable interest	entity,	or	"VIE;"	(b)	which	interests	are	variable	interests	in	a	VIE;	and	(c)	which	party,	if	any,	is	the	primary	beneficiary	of	a	VIE.	This	variability	will	affect any	calculation	of	expected	losses	and	expected	residual	returns,	if	such	a	calculation	is	necessary	to	determine	the	primary	beneficiary	of	a	VIE.	The	FSP	was	effective prospectively	for	all	VIEs	(including	newly	created	VIEs)	beginning	July	1,	2006.	Upon	adoption,	the	FSP	did	not	have	a	material	impact	on	our	consolidated	financial position	or	results	of	operations.

In	February	2006,	the	FASB	issued	SFAS	No.	155,	Accounting	for	Certain	Hybrid	Financial	Instruments—an	amendment	of	FASB	Statements	No.	133	and	140. This	standard	amends	SFAS	No.	133,	Accounting	for	Derivative	Instruments	and	Hedging	Activities,	and	SFAS	No.	140,	Accounting	for	Transfers	and	Servicing	of Financial	Assets	and	Extinguishment	of	Liabilities.	The	standard	resolves	certain	previous	implementation	issues	with	respect	to	beneficial	interests	in	securitized financial	assets,	and	requires	that	these	interests	be	evaluated	to	determine	if	they	are	free-standing	derivatives,	or	if	they	are	hybrid	financial	instruments	that	contain embedded	derivatives	requiring	separate	accounting.	The	standard	also	permits	fair	value	re-measurement	for	any	hybrid	financial	instrument	that	contains	an	embedded derivative	that	otherwise	would	require	separation,	and	eliminates	the	prohibition	concerning	passive	derivatives	that	a	qualifying	special	purpose	entity	may	hold.	The standard	is	effective	for	all	financial	instruments	acquired,	issued	or	subject	to	re-measurement	occurring	on	or	after	January	1,	2007.	We	do	not	anticipate	that	this standard	will	have	a	material	impact	on	our	consolidated	financial	position	and	results	of	operations.

# Note	2.	Acquisitions	and	Divestitures

In	February	2007,	we	announced	a	definitive	agreement	to	acquire	Investors	Financial	Services	Corp.,	or	"Investors	Financial,"	a	$12	billion	bank	holding company	based	in	Boston.	Under	the	terms	of	the	agreement,	we	will	exchange	.906	shares	of	our	common	stock	for	each	share	of	Investors	Financial	common	stock. The	transaction,	which	is	subject	to	customary	conditions,	including	the	approvals	of	Investors	Financial	shareholders	and	regulatory	agencies,	is	expected	to	close	in	the third	quarter	of	2007,	and	will	be	accounted	for	as	a	purchase.

In	January	2007,	we	announced	a	definitive	agreement	to	acquire	Currenex,	Inc.,	an	independently	owned	electronic	foreign	exchange	trading	platform.	Under	the terms	of	the	agreement,	we	will	acquire	Currenex	for	approximately	$564	million	in	cash.	The	transaction,	which	is	subject	to	customary	conditions,	including	regulatory approvals,	is	expected	to	close	in	the	first	half	of	2007,	and	will	be	accounted	for	as	a	purchase.

In	2005,	we	committed	to	a	plan	to	divest	our	ownership	interest	in	Bel	Air	Investment	Advisors	LLC,	or	"Bel	Air,"	and	at	that	time	recorded	a	$165	million discontinued	operations	charge	and	corresponding	tax	benefit	of	$58	million.	During	2006,	we	completed	the	divestiture	and	recorded	income	of	approximately $16	million,	or	$10	million	after-tax,	related	to	the	finalization	of	certain	legal,	selling	and	other	costs	recorded	in	connection	with	the	divestiture.	We	have	not reclassified	Bel	Air's	results	of	operations	for	2006,	2005	and	2004	to	discontinued	operations	because	these	results	were	not	material	to	State	Street's	consolidated results.

In	2003,	we	completed	the	sale	of	our	Private	Asset	Management,	or	"PAM,"	business,	and	recorded	a	pre-tax	gain	of	$285	million	at	the	time	of	the	transaction. During	2005,	as	a	result	of	the	achievement	of	certain	target	levels	of	customer	conversions	to	the	buyer,	we	recognized	an	additional	pre-tax	gain	of	$16	million	from final	settlement	of	the	sale.

Note	3.	Investment	Securities

|  |  | Gross<br>Unrealized |  |  |  | Gross<br>Unrealized | Gross<br>Unrealized |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (In\tmillions) | Amortized\nCost | Gains | Losses | Fair\nValue | Amortized\nCost | Gains | Losses | Fair\nValue |
| Available\tfor\tSale: |  |  |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tfederal\tagencies: |  |  |  |  |  |  |  |  |
| Direct\tobligations | $7,701 |  | $89 | $7,612 | $10,340 |  | $126 | $10,214 |
| Mortgage-backed\tsecurities | 11,685 | $15 | 246 | 11,454 | 11,387 | $5 | 254 | 11,138 |
| Asset-backed\tsecurities | 25,646 | 28 | 40 | 25,634 | 23,892 | 13 | 63 | 23,842 |
| Collateralized\tmortgage\tobligations | 8,538 | 17 | 79 | 8,476 | 5,598 | 1 | 72 | 5,527 |
| State\tand\tpolitical\tsubdivisions | 3,740 | 20 | 11 | 3,749 | 1,864 | 12 | 8 | 1,868 |
| Other\tdebt\tinvestments | 3,043 | 7 | 23 | 3,027 | 1,703 | 1 | 9 | 1,695 |
| Money-market\tmutual\tfunds | 201 | — | — | 201 | 232 | — | — | 232 |
| Other\tequity\tsecurities | 269 | 24 | 1 | 292 | 438 | 27 | 2 | 463 |
| Total | $60,823 | $111 | $489 | $60,445 | $55,454 | $59 | $534 | $54,979 |
| Held\tto\tMaturity: |  |  |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tfederal\tagencies: |  |  |  |  |  |  |  |  |
| Direct\tobligations | $846 |  | $15 | $831 | $1,657 | — | $21 | $1,636 |
| Mortgage-backed\tsecurities | 1,084 | $5 | 17 | 1,072 | 925 | — | 14 | 911 |
| Collateralized\tmortgage\tobligations | 2,357 | 5 | 41 | 2,321 | 2,086 | — | 40 | 2,046 |
| Other\tinvestments | 260 | 1 | 1 | 260 | 223 | — | 1 | 222 |
| Total | $4,547 | $11 | $74 | $4,484 | $4,891 | — | $76 | $4,815 |

Aggregate	investment	securities	carried	at	$23.28	billion	and	$26.57	billion	at	December	31,	2006	and	2005,	respectively,	were	designated	as	pledged	for	public and	trust	deposits,	short-term	borrowings	and	for	other	purposes	as	provided	by	law.

Gross	unrealized	losses	on	investment	securities	on	a	pre-tax	basis	consisted	of	the	following	as	of	December	31,	2006:

| (In	millions) | Less	than	12<br>continuous	months<br>Fair	Value | Gross<br>Unrealized<br>Losses | 12	continuous<br>months	or	longer<br>Fair	Value | Gross<br>Unrealized<br>Losses | Fair	Value | Total<br>Gross<br>Unrealized<br>Losses |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| U.S.\tTreasury\tand\tfederal |  |  |  |  |  |  |
| agencies: |  |  |  |  |  |  |
| Direct\tobligations | $524 | $10 | $7,524 | $94 | $8,048 | $104 |
| Mortgage-backed\tsecurities | 3,048 | 66 | 7,102 | 197 | 10,150 | 263 |
| Asset-backed\tsecurities | 5,038 | 7 | 4,264 | 33 | 9,302 | 40 |
| Collateralized\tmortgage |  |  |  |  |  |  |
| obligations | 1,703 | 9 | 5,400 | 111 | 7,103 | 120 |
| State\tand\tpolitical\tsubdivisions | 1,272 | 6 | 703 | 5 | 1,975 | 11 |
| Other\tdebt\tinvestments | 1,382 | 9 | 665 | 14 | 2,047 | 23 |
| Other\tequity\tsecurities | 30 | — | 8 | 2 | 38 | 2 |
| Total | $12,997 | $107 | $25,666 | $456 | $38,663 | $563 |

As	more	fully	described	in	Note	1,	management	periodically	reviews	the	investment	securities	portfolio	to	determine	if	other-than-temporary	impairment	has occurred.	This	review	encompasses	all	investment	securities	and	includes	such	quantitative	factors	as	current	and	expected	future	interest	rates,	the	length	of	time	the cost	basis	has	exceeded	the	fair	value	and	the	severity	of	the	impairment	measured	as	the	ratio	of	fair	value	to	amortized	cost,	and	includes	all	investment	securities	for which	we	have	issuer-specific	concerns	regardless	of	quantitative	factors.	After	a	full	review	of	all	investment	securities,	taking

into	consideration	current	economic	conditions,	adverse	situations	that	might	affect	our	ability	to	fully	collect	interest	and	principal,	the	timing	of	future	payments,	the value	of	underlying	collateral	of	asset-backed	securities,	and	other	relevant	factors,	management	considers	the	aggregate	decline	in	fair	value	and	the	resulting	gross unrealized	losses	of	$563	million	on	3,897	securities	at	December	31,	2006	to	be	temporary.	The	losses	are	primarily	the	result	of	rising	interest	rates	over	the	course	of 2005	and	part	of	2006,	not	the	result	of	any	material	changes	in	the	credit	characteristics	of	the	investment	securities	portfolio.	Management	has	the	ability	and	the	intent to	hold	the	securities	until	recovery	in	market	value.

Gross	gains	and	losses	realized	from	sales	of	available-for-sale	securities	were	as	follows	for	the	years	indicated:

| (In	millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Gross\tgains | $33 | $9 | $49 |
| Gross\tlosses | 18 | 10 | 23 |
| Net\tgains\t(losses) | $15 | $(1) | $26 |

Maturities	of	debt	investment	securities	were	as	follows	as	of	December	31,	2006:

| (In	millions) | Under	1<br>Year | 1	to	5<br>Years | 6	to	10<br>Years | Over	10<br>Years |
| :--- | :--- | :--- | :--- | :--- |
| Available\tfor\tSale: |  |  |  |  |
| U.S.\tTreasury\tand\tfederal\tagencies: |  |  |  |  |
| Direct\tobligations | $ 4,684 | $2,440 | $488 |  |
| Mortgage-backed\tsecurities | 160 | 951 | 4,982 | $5,361 |
| Asset-backed\tsecurities | 1,324 | 10,239 | 8,967 | 5,104 |
| Collateralized\tmortgage\tobligations | 142 | 1,892 | 3,231 | 3,211 |
| State\tand\tpolitical\tsubdivisions | 500 | 1,828 | 1,077 | 344 |
| Other\tinvestments | 996 | 1,285 | 731 | 15 |
| Total | $ 7,806 | $18,635 | $19,476 | $14,035 |
| Held\tto\tMaturity: |  |  |  |  |
| U.S.\tTreasury\tand\tfederal\tagencies: |  |  |  |  |
| Direct\tobligations | $95 | $751 |  |  |
| Mortgage-backed\tsecurities | — | 22 | $320 | $742 |
| Collateralized\tmortgage\tobligations | — | 712 | 1,052 | 593 |
| Other\tinvestments | 76 | 96 | 85 | 3 |
| Total | $171 | $1,581 | $1,457 | $1,338 |

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

# Note	4.	Loans	and	Lease	Financing

| (In	millions) | 2006 | 2005 |
| :--- | :--- | :--- |
| Commercial\tand\tFinancial: |  |  |
| U.S. | $ 3,480 | $ 2,298 |
| Non-U.S. | 3,137 | 1,854 |
| Lease\tFinancing: |  |  |
| U.S. | 415 | 404 |
| Non-U.S. | 1,914 | 1,926 |
| Total\tloans | 8,946 | 6,482 |
| Less\tallowance\tfor\tloan\tlosses | (18) | (18) |
| Net\tloans | $ 8,928 | $ 6,464 |

Aggregate	securities	settlement	advances	and	overdrafts	included	in	commercial	and	financial	loans	in	the	table	above	were	$5.69	billion	and	$3.41	billion	at December	31,	2006	and	2005,	respectively.

The	components	of	the	net	investment	in	leveraged	leases	were	as	follows	as	of	December	31:

| (In	millions) | 2006 | 2005 |
| :--- | :--- | :--- |
| Net\trental\tincome\treceivable | $3,272 | $3,314 |
| Estimated\tresidual\tvalues | 196 | 215 |
| Unearned\tincome | (1,139) | (1,199) |
| Investment\tin\tleveraged\tleases | 2,329 | 2,330 |
| Less\trelated\tdeferred\tincome\ttaxes | (1,779) | (1,735) |
| Net\tinvestment\tin\tleveraged\tleases | $550 | $595 |

Changes	in	the	allowance	for	loan	losses	were	as	follows	for	the	years	ended	December	31:

| (In	millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Balance\tat\tbeginning\tof\tyear | $18 | $18 | $61 |
| Provision\tfor\tloan\tlosses | — | — | (18) |
| Reclassification | — | — | (25) |
| Balance\tat\tend\tof\tyear | $18 | $18 | $18 |

During	2004,	we	reclassified	$25	million	of	the	allowance	for	loan	losses	to	other	liabilities	as	a	reserve	for	off-balance	sheet	commitments.	Subsequent	to	the reclassification,	the	reserve	for	off-balance	sheet	commitments	was	reduced	by	$10	million,	which	was	recorded	as	a	reduction	of	other	operating	expenses.	Additionally, we	reduced	the	allowance	for	loan	losses	by	$18	million	through	the	provision	for	loan	losses	as	a	result	of	reduced	credit	exposures	and	improved	credit	quality.

# Note	5.	Goodwill	and	Other	Intangible	Assets

Changes	in	the	carrying	amount	of	goodwill	were	as	follows	for	the	years	ended	December	31:

| (In	millions) | Investment<br>Servicing | Investment<br>Management | Total |
| :--- | :--- | :--- | :--- |
| Balance\tat\tDecember\t31,\t2004 | $ 1,284 | $213 | $ 1,497 |
| Purchase\tprice\tadjustments\tfrom\tprior\tperiod\tacquisitions | 42 | 1 | 43 |
| Write-off\tof\tBel\tAir\tgoodwill | — | (144) | (144) |
| Reclassification\tof\tBel\tAir\tgoodwill | 62 | (62) | — |
| Translation\tadjustments | (58) | (1) | (59) |
| Balance\tat\tDecember\t31,\t2005 | 1,330 | 7 | 1,337 |
| Translation\tadjustments | 46 | 1 | 47 |
| Balance\tat\tDecember\t31,\t2006 | $ 1,376 | $8 | $ 1,384 |

During	2005,	we	recorded	$42	million	of	goodwill	related	to	the	final	settlement	of	our	2002	purchase	of	International	Fund	Services.	In	addition,	we	wrote	off $144	million	of	goodwill	as	a	result	of	the	divestiture	of	our	ownership	interest	in	Bel	Air,	and	reclassified	$62	million	of	goodwill	related	to	Bel	Air's	broker/dealer business	from	Investment	Management	to	Investment	Servicing,	which	is	the	line	of	business	that	records	all	other	broker/dealer	goodwill.

The	gross	carrying	amount	and	accumulated	amortization	of	other	intangible	assets	were	as	follows	as	of	December	31:

| (In	millions) | Gross<br>Carrying<br>Amount | 2006<br>Accumulated<br>Amortization | Net<br>Carrying<br>Amount | Gross<br>Carrying<br>Amount | 2005<br>Accumulated<br>Amortization | Net<br>Carrying<br>Amount |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Customer\tlists | $564 | $ (170) | $394 | $529 | $ (118) | $411 |
| Pension-related\tunrecognized\tprior |  |  |  |  |  |  |
| service\tcosts | — | — | — | 20 | — | 20 |
| Other | 50 | (10) | 40 | 33 | (5) | 28 |
| Total | $614 | $(180) | $434 | $582 | $ (123) | $459 |

Amortization	expense	related	to	other	intangible	assets	was	$43	million,	$43	million	and	$35	million	for	the	years	ended	December	31,	2006,	2005	and	2004, respectively.	Expected	amortization	expense	for	intangibles	held	at	December	31,	2006	is	$42	million	for	2007	through	2009,	$41	million	for	2010,	and	$39	million	for 2011.

Note	6.	Other	Assets

Other	assets	consisted	of	the	following	as	of	December	31:

| (In	millions) | 2006 | 2005 |
| :--- | :--- | :--- |
| Unrealized\tgains\ton\tderivative\tfinancial\tinstruments | $ 3,060 | $2,114 |
| Equity\tinvestments\tin\tunconsolidated\tsubsidiaries | 336 | 315 |
| Prepaid\tpension\texpense | 53 | 187 |
| Other | 1,922 | 1,003 |
| Total | $ 5,371 | $ 3,619 |

# Note	7.	Deposits

At	December	31,	2006	and	2005,	we	had	$16.74	billion	and	$17.84	billion,	respectively,	of	time	deposits	outstanding.	Non-U.S.	time	deposits	were	$6.80	billion and	$8.30	billion	at	December	31,	2006	and	2005,	respectively.	Substantially	all	U.S.	and	non-U.S.	time	deposits	were	in	amounts	of	$100,000	or	more.	The	scheduled maturities	of	time	deposits	were	as	follows	at	December	31,	2006:

# Note	8.	Short-Term	Borrowings

Our	short-term	borrowings	include	securities	sold	under	repurchase	agreements,	federal	funds	purchased	and	other	short-term	borrowings,	including	commercial paper.	Collectively,	short-term	borrowings	had	weighted-average	interest	rates	of	4.46%	and	2.82%	for	the	years	ended	December	31,	2006	and	2005,	respectively.

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

|  | Federal	Funds	Purchased | Federal	Funds	Purchased |  | Repurchase	Agreements | Securities	Sold	Under |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (Dollars\tin\tmillions) | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 |
| Balance\tat\tDecember\t31, | $ 2,147 | $ 1,204 | $435 | $ 19,147 | $ 20,895 | $ 21,881 |
| Maximum\toutstanding\tat\tany\tmonth\tend | 8,040 | 3,982 | 5,500 | 23,024 | 24,690 | 26,773 |
| Average\toutstanding\tduring\tthe\tyear | 2,777 | 2,306 | 2,891 | 20,883 | 22,432 | 22,989 |
| Weighted\taverage\tinterest\trate\tat\tend\tof\tyear | 5.18% | 4.08% | 1.75% | 4.43% | 3.79% | 1.64% |
| Weighted\taverage\tinterest\trate\tduring\tthe\tyear | 5.04 | 3.23 | 1.40 | 4.38 | 2.73 | 1.02 |

Securities	sold	under	repurchase	agreements	included	the	following	at	December	31,	2006:

| (In	millions) |  |
| :--- | :--- |
| Collateralized\twith\tsecurities\tpurchased\tunder\tresale\tagreements | $10,517 |
| Collateralized\twith\tinvestment\tsecurities | 8,630 |
| Total | $19,147 |

The	obligations	to	repurchase	securities	sold	are	recorded	as	a	liability	in	our	consolidated	statement	of	condition.	U.S.	government	securities	with	a	fair	value	of $8.79	billion	underlying	the	repurchase	agreements	remained	in	investment	securities.	Information	about	these	U.S.	government	securities	and	the	related	repurchase agreements,	including	accrued	interest,	as	of	December	31,	2006,	is	presented	in	the	following	table.	The	table	excludes	repurchase	agreements	collateralized	with securities	purchased	under	resale	agreements.

| (Dollars	in	millions) | U.S.	Government<br>Securities	Sold<br>Amortized<br>Cost | Fair	Value | Repurchase<br>Agreements<br>Amortized<br>Cost | Rate |
| :--- | :--- | :--- | :--- | :--- |
| Overnight\tmaturity | $ 8,917 | $ 8,794 | $ 8,632 | 4.43% |

During	2005,	we	entered	into	an	agreement	with	a	clearing	organization	that	enables	us	to	net	all	securities	purchased	under	resale	agreements	and	sold	under repurchase	agreements	with	counterparties	that	are	also	members	of	this	organization.	As	a	result	of	netting,	the	average	balances	of	securities	purchased	under	resale agreements	and	securities	sold	under	repurchase	agreements	were	each	reduced	by	$6.41	billion	for	2006	and	$1.70	billion	for	2005.

Other	short-term	borrowings	at	December	31,	2006	included	$1.5	billion	related	to	our	tax-exempt	investment	programs,	which	were	consolidated	onto	our statement	of	condition	during	2006.	These	trusts,	and	the	consolidation,	are	more	fully	discussed	in	Note	11.

We	maintain	a	commercial	paper	program	under	which	we	can	issue	up	to	$3	billion	with	original	maturities	of	up	to	270	days	from	the	date	of	issue.	At December	31,	2006	and	2005,	$998	million	and	$864	million,	respectively,	of	commercial	paper	were	outstanding.	In	addition,	State	Street	Bank	currently	has	authority to	issue	bank	notes	up	to	an	aggregate	of	$750	million	with	original	maturities	ranging	from	14	days	to	five	years.	At	December	31,	2006	and	2005,	no	notes	payable

were	outstanding,	and	at	December	31,	2006,	all	$750	million	was	available	for	issuance.

State	Street	Bank	currently	maintains	a	line	of	credit	of	CAD	$800	million,	or	approximately	$688	million,	to	support	its	Canadian	securities	processing	operations.

The	line	of	credit	has	no	stated	termination	date	and	is	cancelable	by	either	party	with	prior	notice.	At	December	31,	2006,	no	balance	was	due	on	this	line	of	credit.

# Note	9.	Long-Term	Debt

| (Dollars	in	millions) | 2006 | 2005 |
| :--- | :--- | :--- |
| Statutory\tbusiness\ttrusts: |  |  |
| 8.035%\tsubordinated\tnotes\tdue\tto\tState\tStreet\tCapital\tTrust\tB\tin\t2027 | $309 | $322 |
|  | 206 | 210 |
| Floating\trate\tsubordinated\tnotes\tdue\tto\tState\tStreet\tCapital\tTrust\tI\tin\t2028(2) | 155 | 154 |
| Parent\tcompany\tand\tnon-bank\tsubsidiary\tissuances: |  |  |
| Long-term\tcapital\tlease | 501 | 515 |
| 7.65%\tsubordinated\tnotes\tdue\t2010(1) | 294 | 295 |
| 7.35%\tnotes\tdue\t2026 | 150 | 150 |
| 9.50%\tmortgage\tnote\tdue\t2009 | 6 | 9 |
| State\tStreet\tBank\tissuances: |  |  |
| 5.25%\tsubordinated\tnotes\tdue\t2018(1) | 396 | 405 |
| 5.30%\tsubordinated\tnotes\tdue\t2016 | 399 | 399 |
| Floating\trate\tsubordinated\tnotes\tdue\t2015(2) | 200 | 200 |
| Total\tlong-term\tdebt | $ 2,616 | $ 2,659 |

(1)			We	have	entered	into	various	interest-rate	swap	contracts	to	modify	our	interest	expense	on	certain	subordinated	notes	from	a	fixed	rate	to	a	floating	rate.	These swaps	are	recorded	as	fair	value	hedges,	and	at	December	31,	2006	and	2005,	we	recorded	a	decrease	of	$9	million	and	an	increase	of	$18	million,	respectively,	in the	carrying	value	of	long-term	debt.

(2)			We	have	entered	into	interest-rate	swaps,	which	are	recorded	as	cash	flow	hedges,	to	modify	our	floating-rate	interest	expense	on	the	subordinated	notes	due	2028 and	2015	to	a	fixed	rate.

See	Note	15	for	additional	information	about	derivatives.

We	maintain	an	effective	universal	shelf	registration	that	allows	for	the	offering	and	sale	of	debt	securities,	capital	securities,	common	stock,	depositary	shares	and preferred	stock,	and	warrants	to	purchase	such	securities,	including	any	shares	into	which	the	preferred	stock	and	depositary	shares	may	be	convertible,	or	any combination	thereof.

# Statutory	Business	Trusts:

We	have	three	statutory	business	trusts,	State	Street	Capital	Trusts	A	and	B	and	State	Street	Capital	Trust	I,	and	as	of	both	December	31,	2006	and	2005,	these trusts	collectively	have	issued	$650	million	of	cumulative	semi-annual	and	quarterly	income	trust	preferred	capital	securities.

Proceeds	received	by	the	trusts	from	their	capitalization	and	from	their	capital	securities	issuances	were	invested	in	junior	subordinated	debentures	issued	by	the parent	company.	The	junior	subordinated	debentures	are	the	sole	assets	of	the	trusts.	The	trusts	are	wholly-owned	by	us;	however,	we	do	not	consolidate	the	trusts	under existing	accounting	standards.

Payments	made	by	the	trusts	on	the	capital	securities	are	dependent	on	our	payments	made	to	the	trusts	on	the	junior	subordinated	debentures.	Our	fulfillment	of these	commitments	has	the	effect	of	providing	a	full,	irrevocable	and	unconditional	guarantee	of	the	trusts'	obligations	under	the	capital	securities.	While	the	capital securities	are	not	recorded	in	our	consolidated	statement	of	condition,	they	continue	to	qualify	as	Tier	1	capital	under	federal	regulatory	capital	guidelines.	Information about	restrictions	on	our	ability	to	obtain	funds	from	our	subsidiary	banks	is	in	Note	14.

Interest	paid	on	the	debentures	is	recorded	in	interest	expense.	Distributions	on	the	capital	securities	are	payable	from	interest	payments	received	on	the	debentures and	are	due	semi-annually	by	State	Street	Capital	Trusts	A	and	B,	and	quarterly	by	State	Street	Capital	Trust	I,	subject	to	deferral	for	up	to	five	years	under	certain conditions.	The	capital	securities	are	subject	to	mandatory	redemption	in	whole	at	the	stated	maturity	upon	repayment	of	the	debentures,	with	an	option	by	us	to	redeem the	debentures	at	any	time	upon	the	occurrence	of	certain	tax	events	or	changes	to	tax	treatment,	investment	company	regulation	or	capital	treatment;	or	at	any	time	after March	15,	2007,	for	the	Capital	Securities	B,	after	December	30,	2006,	for	the	Capital	Securities	A,	and	after	May	15,	2008,	for	the	Capital	Trust	I	securities.	For	State Street	Capital	Trusts	A	and	B,	redemption	premiums	are	payable	on	a	declining	basis	according	to	the	terms	of	the	trust	agreements.	All	redemptions	are	subject	to federal	regulatory	approval.

Parent	Company	and	Non-Bank	Subsidiary	Issuances:

At	December	31,	2006	and	2005,	$501	million	and	$515	million,	respectively,	were	included	in	long-term	debt	related	to	the	capital	leases	for	One	Lincoln	Street and	the	One	Lincoln	Street	parking	garage.	See	Note	18	for	additional	information.

The	7.65%	subordinated	notes	due	2010	qualify	as	Tier	2	capital	under	federal	regulatory	capital	guidelines.	The	7.35%	notes	are	unsecured.

The	9.50%	mortgage	note	was	fully	collateralized	by	property	at	December	31,	2005.	The	scheduled	principal	payments	for	the	next	three	years	are	$3	million	for 2007	and	2008	and	less	than	$1	million	for	2009,	at	which	time	the	debt	will	be	entirely	paid	off.

# State	Street	Bank	Issuances:

State	Street	Bank	currently	has	authority	to	issue	up	to	an	aggregate	of	$1	billion	of	subordinated	fixed-rate,	floating-rate	or	zero-coupon	bank	notes	with	a	maturity of	five	to	fifteen	years.	With	respect	to	the	5.25%	subordinated	bank	notes	due	2018,	State	Street	Bank	is	required	to	make	semi-annual	interest	payments	on	the outstanding	principal	balance	of	the	notes	on	April	15	and	October	15	of	each	year,	and	the	notes	qualify	as	Tier	2	capital	under	regulatory	capital	guidelines.

With	respect	to	the	5.30%	subordinated	notes	due	2016	and	the	floating-rate	subordinated	notes	due	2015,	State	Street	Bank	is	required	to	make	semi-annual interest	payments	on	the	outstanding	principal	balance	of	the	5.30%	notes	on	January	15	and	July	15	of	each	year	beginning	in	July	2006,	and	quarterly	interest	payments on	the	outstanding	principal	balance	of	the	floating-rate	notes	on	March	8,	June	8,	September	8	and	December	8	of	each	year	beginning	in	March	2006.	The	notes qualify	as	Tier	2	capital	under	regulatory	capital	guidelines.

# Note	10.	Commitments	and	Contingencies

Off-Balance	Sheet	Commitments	and	Contingencies:

Credit-related	financial	instruments	include	indemnified	securities	financing,	unfunded	commitments	to	extend	credit	or	purchase	assets	and	standby	letters	of credit.	The	total	potential	loss	on	unfunded	commitments,	standby	and	commercial	letters	of	credit	and	securities	finance	indemnifications	is	equal	to	the	total	contractual amount,	which	does	not	consider	the	value	of	any	collateral.

The	following	is	a	summary	of	the	contractual	amount	of	credit-related,	off-balance	sheet	financial	instruments	at	December	31.	Amounts	reported	do	not	reflect participations	to	unrelated	third	parties.

| (In	millions) | 2006 | 2005 |
| :--- | :--- | :--- |
| Indemnified\tsecurities\tfinancing | $ 506,032 | $ 372,863 |
| Liquidity\tasset\tpurchase\tagreements | 30,251 | 24,412 |
| Unfunded\tcommitments\tto\textend\tcredit | 16,354 | 14,403 |
| Standby\tletters\tof\tcredit | 4,926 | 5,027 |

On	behalf	of	our	customers,	we	lend	their	securities	to	creditworthy	brokers	and	other	institutions.	In	certain	circumstances,	we	may	indemnify	our	customers	for the	fair	market	value	of	those	securities	against	a	failure	of	the	borrower	to	return	such	securities.	Collateral	funds	received	in	connection	with	our	securities	finance services	are	held	by	us	as	agent	and	are	not	recorded	in	our	consolidated	statement	of	condition.	We	require	the	borrowers	to	provide	collateral	in	an	amount	equal	to	or in	excess	of	100%	of	the	fair	market	value	of	the	securities	borrowed.	The	borrowed	securities	are	revalued	daily	to	determine	if	additional	collateral	is	necessary.	We held,	as	agent,	cash	and	U.S.	government	securities	totaling	$527.37	billion	and	$387.22	billion	as	collateral	for	indemnified	securities	on	loan	at	December	31,	2006 and	2005,	respectively.

Approximately	81%	of	the	unfunded	commitments	to	extend	credit	and	liquidity	asset	purchase	agreements	expire	within	one	year	from	the	date	of	issue.	Since many	of	the	commitments	are	expected	to	expire	or	renew	without	being	drawn	upon,	the	total	commitment	amounts	do	not	necessarily	represent	future	cash requirements.

In	the	normal	course	of	business,	we	provide	liquidity	and	credit	enhancements	to	asset-backed	commercial	paper	programs,	or	"conduits."	These	conduits	are	more fully	described	in	Note	11.	The	commercial	paper	issuances	and	commitments	of	the	conduits	to	provide	funding	are	supported	by	liquidity	asset	purchase	agreements and	backup	liquidity	lines	of	credit,	the	majority	of	which	are	provided	by	us.	In	addition,	we	provide	direct	credit	support	to	the	conduits	in	the	form	of	standby	letters of	credit.	Our	commitments	under	liquidity	asset	purchase	agreements	and	backup	lines	of	credit	totaled	$23.99	billion	at	December	31,	2006,	and	are	included	in	the preceding	table.	Our	commitments	under

standby	letters	of	credit	totaled	$1.01	billion	at	December	31,	2006,	and	are	also	included	in	the	preceding	table.

Deterioration	in	asset	performance	or	certain	other	factors	may	shift	the	asset	risk	from	the	commercial	paper	investors	to	us	as	the	liquidity	or	credit	enhancement provider.	In	addition,	the	conduits	may	need	to	draw	upon	the	backup	facilities	to	repay	maturing	commercial	paper.	In	these	instances,	we	would	either	acquire	the assets	of	the	conduits	or	make	loans	to	the	conduits	secured	by	the	conduits'	assets.	Potential	losses,	if	any,	from	these	conduits	are	not	expected	to	materially	affect	our consolidated	financial	condition	or	results	of	operations.

In	the	normal	course	of	business,	we	hold	assets	under	custody	and	management	in	a	custodial	or	fiduciary	capacity.	Management	conducts	regular	reviews	of	its responsibilities	in	this	regard	and	considers	the	results	in	preparing	the	consolidated	financial	statements.	In	the	opinion	of	management,	no	contingent	liabilities	existed at	December	31,	2006,	that	would	have	had	a	material	adverse	effect	on	State	Street's	consolidated	financial	position	or	results	of	operations.

# Legal	Proceedings:

We	are	involved	in	various	industry-related	regulatory,	governmental	and	law	enforcement	inquiries	and	subpoenas,	as	well	as	legal	proceedings	that	arise	in	the normal	course	of	business.	In	the	opinion	of	management,	after	discussion	with	counsel,	these	regulatory,	governmental	and	law	enforcement	inquiries	and	subpoenas, and	legal	proceedings	can	be	successfully	defended	or	resolved	without	a	material	adverse	effect	on	our	consolidated	financial	condition	or	results	of	operations.

# Tax	Contingencies:

In	the	normal	course	of	business,	we	are	subject	to	challenges	from	U.S.	and	non-U.S.	tax	authorities	regarding	the	amount	of	taxes	due.	These	challenges	may result	in	adjustments	to	the	timing	or	amount	of	taxable	income	or	deductions	or	the	allocation	of	income	among	tax	jurisdictions.	During	2004,	the	U.S.	Internal Revenue	Service,	or	"IRS,"	completed	its	review	of	our	federal	income	tax	returns	for	tax	years	1997,	1998	and	1999	and	proposed	to	disallow	tax	deductions	related	to lease-in-lease-out,	or	"LILO,"	transactions.	We	believe	that	we	reported	the	tax	effects	of	these	transactions	properly,	based	on	applicable	statutes,	regulations	and	case law	in	effect	at	the	time	they	were	entered	into.	During	the	second	quarter	of	2005,	we	filed	an	appeal	with	the	IRS,	which	continues,	with	respect	to	their	proposed disallowance	of	these	tax	deductions.	In	January	2007,	a	U.S.	District	Court	found	for	the	government	in	a	LILO	case	involving	another	financial	institution.	The financial	institution	is	appealing	the	decision.	The	IRS	has	indicated	that	it	is	reviewing	its	LILO	settlement	position	in	light	of	the	outcome	of	this	case.

During	2005,	the	IRS	announced	that	it	had	classified	sale-in-lease-out,	or	"SILO,"	transactions	as	tax	shelters,	or	"listed	transactions."	The	IRS	began	its	review	of our	tax	returns	for	the	years	2000–2003	during	the	second	quarter	of	2005,	and	is	reviewing	these	SILO	transactions.	During	the	fourth	quarter	of	2006,	the	IRS proposed	to	disallow	tax	deductions	related	to	certain	SILO	transactions.	We	believe	that	we	reported	the	tax	effects	of	these	transactions	properly,	based	on	applicable statutes,	regulations	and	case	law	in	effect	at	the	time	they	were	entered	into.

During	2006,	we	recorded	an	additional	tax	provision	of	approximately	$46	million	to	accrue	for	the	potential	resolution	of	the	above-described	issues	with	the	IRS. While	it	is	unclear	whether	we	will	be	able	to	reach	an	acceptable	settlement	with	the	IRS	with	respect	to	LILO	transactions,	management	believes	we	are	sufficiently accrued	as	of	December	30,	2006	for	tax	exposures,	including	exposures	related	to	LILO	and	SILO	transactions,	and	related	interest	expense.	In	future	periods,	if management	revises	its	evaluation	of	this	tax	position,	the	effect	of	the	revision	will	be	recorded	in	income	tax	expense	in	that	period.

# Note	11.	Securitizations	and	Variable	Interest	Entities

# Tax-Exempt	Investment	Programs:

In	the	normal	course	of	business,	we	structure	and	sell	certificated	interests	in	pools	of	tax-exempt	investment-grade	assets	principally	to	mutual	fund	customers. We	utilize	trusts	which	are	structured	as	qualifying	special	purpose	entities,	or	"QSPEs,"	which,	while	not	subject	to	the	requirements	of	FIN	46(R),	are	governed	by	the accounting	and	reporting	provisions	of	SFAS	No.	140,	Accounting	for	the	Transfers	and	Servicing	of	Financial	Assets	and	Extinguishments	of	Liabilities.	We	may	also provide	liquidity	and	remarketing	services	to	the	QSPEs.	Historically,	we	transferred	assets	to	these	unaffiliated	QSPEs	from	our	investment	securities	portfolio	at	fair market	value	and	treated	such	transfers	as	sales.	The	QSPEs	financed	the	acquisition	of	these	assets	by	selling	certificated	interests	issued	by	the	QSPE	to	third-party investors	and	we	typically	purchased	a	minority	residual	interest	in	these	QSPEs.

During	the	third	quarter	of	2006,	we	determined	that	off-balance	sheet	accounting	treatment	for	these	trusts	was	not	appropriate.	As	a	result,	we	consolidated	the trusts	onto	our	consolidated	statement	of	condition	as	of	September	30,	2006,	resulting	in	an	increase	in	assets,	composed	of	municipal	securities	available	for	sale,	and liabilities,	composed	of	other	short-term	borrowings,	of	approximately	$1.5	billion.	In	addition,	we	recorded	a	cumulative	gain	of	$15	million	in	trading	services	revenue for	the	quarter	ended	September	30,	2006.	The	consolidation	of	these	trusts	did	not	change	the	economic	substance	of	the	programs,	and	its	impact	was	not	material	to consolidated	financial	statements	of	prior	periods.	The	consolidation	of	the	trusts	is	reported	as	a	non-cash	acquisition	of	investment	securities	available	for	sale	in	our consolidated	statement	of	cash	flows.

The	trusts	had	a	weighted-average	life	of	approximately	4.9	years	at	December	31,	2006,	compared	to	approximately	6.2	years	at	December	31,	2005.	Under separate	agreements,	we	provide	standby	bond	purchase	agreements	to	most	of	these	trusts,	which	obligate	State	Street	to	acquire	the	bonds	at	par	value	in	the	event	that the	re-marketing	agent	is	unable	to	place	the	certificated	interests	of	the	trusts	with	investors.	The	standby	bond	purchase	agreements	are	subject	to	early	termination	by State	Street	in	the	event	of	a	shortfall	in	the	required	over-collateralization	in	the	trust.	As	the	primary	standby	bond	purchase	agreement	provider,	we	are	not	obligated to	acquire	bonds	in	the	event	of	the	following	credit	events:	payment	default,	bankruptcy	of	issuer	or	credit	enhancement	provider,	imposition	of	taxability,	or downgrade	of	an	asset	held	by	the	trust	below	investment	grade.	Our	commitments	to	the	trusts	under	these	standby	bond	purchase	agreements	totaled	$1.68	billion	at December	31,	2006,	none	of	which	were	utilized	at	period-end.	In	the	event	that	our	obligations	under	these	agreements	are	triggered,	no	material	impact	to	our consolidated	financial	condition	or	results	of	operations	would	occur,	because	the	bonds	are	recorded	in	our	consolidated	statement	of	condition.

# Asset-Backed	Commercial	Paper	Programs:

We	established	an	asset-backed	commercial	paper	program	in	1992.	Currently,	we	administer	four	third-party	owned,	special	purpose,	multi-seller	asset-backed commercial	paper	programs,	or	"conduits,"	that	purchase	financial	assets	with	various	asset	classifications	from	a	variety	of	third-parties.	These	conduits,	which	are structured	as	bankruptcy-remote	limited	liability	companies,	provide	access	to	the	efficiencies	of	the	global	commercial	paper	markets,	which	have	historically	offered an	attractive	cost	of	financing	relative	to	bank-based	borrowing.	Asset	purchases	by	the	conduits	are	funded	by	issuing	commercial	paper,	which	is	supported	by	liquidity asset	purchase	agreements	and	backup	liquidity	lines	of	credit,	the	majority	of	which	are	provided	by	us.	In	addition,	we	provide	direct	credit	support	to	the	conduits	in the	form	of	standby	letters	of	credit.	All	fees	are	charged	based	on	market	price.	The	sellers	continue	to	service	the	transferred	assets	and	absorb	the	first	losses	of	the conduits	by	providing	collateral	in	the	form	of	excess	assets	also	known	as	over-collaterization.

We	hold	no	equity	ownership	in	these	conduits.	These	entities	typically	meet	the	definition	of	a	variable	interest	entity	as	defined	by	FIN	46(R).	We	are	not	the primary	beneficiary	of	these	conduits,	as

defined	by	FIN	46(R),	as	a	result	of	the	issuance	of	subordinated	notes	by	the	conduits	to	third-party	investors,	and	we	do	not	record	these	conduits	in	our	consolidated financial	statements.	At	December	31,	2006	and	2005,	total	assets	in	unconsolidated	conduits	were	$25.25	billion	and	$17.90	billion,	respectively.	Our	off-balance	sheet commitments	to	these	conduits	are	disclosed	in	Note	10.

# Collateralized	Debt	Obligations:

We	manage	a	series	of	collateralized	debt	obligations,	or	"CDOs."	A	CDO	is	a	managed	investment	vehicle	which	purchases	a	portfolio	of	diversified	highly-rated assets.	A	CDO	funds	purchases	through	the	issuance	of	several	tranches	of	debt	and	equity,	the	repayment	and	return	of	which	are	linked	to	the	performance	of	the assets	in	the	CDO.	Typically,	our	involvement	is	as	collateral	manager.	We	may	also	invest	in	a	small	percentage	of	the	debt	issued.	These	entities	typically	meet	the definition	of	a	variable	interest	entity	as	defined	by	FIN	46(R).	We	are	not	the	primary	beneficiary	of	these	CDOs,	as	defined	by	FIN	46(R),	and	do	not	record	these CDOs	in	our	consolidated	financial	statements.	At	December	31,	2006	and	2005,	total	assets	in	these	CDOs	were	$3.48	billion	and	$2.73	billion,	respectively.

During	2005,	we	acquired	and	transferred	$60	million	of	investment	securities	from	our	available-for-sale	portfolio	into	a	CDO.	This	transfer,	which	was	executed at	fair	market	value	in	exchange	for	cash,	was	treated	as	a	sale.	We	did	not	acquire	or	transfer	any	investment	securities	to	a	CDO	during	2006.

# Note	12.	Shareholders'	Equity

# Treasury	Stock:

During	the	first	quarter	of	2006,	we	purchased	3	million	shares	of	our	common	stock	under	a	program	authorized	by	our	Board	of	Directors,	or	"Board,"	in	2005. On	March	16,	2006,	the	Board	authorized	a	new	program	for	the	purchase	of	up	to	15	million	shares	of	our	common	stock	for	general	corporate	purposes,	including mitigating	the	dilutive	impact	of	shares	issued	under	employee	benefit	programs,	and	terminated	the	2005	program.	Under	this	new	program,	we	purchased	2.8	million shares	of	our	common	stock	during	2006,	and	as	of	December	31,	2006,	12.2	million	shares	were	available	for	purchase.	We	utilize	third-party	broker-dealers	to	acquire common	shares	on	the	open	market	in	the	execution	of	our	stock	purchase	program.

In	addition,	shares	may	be	acquired	for	other	deferred	compensation	plans,	held	by	an	external	trustee,	that	are	not	part	of	the	common	stock	purchase	program.	As of	December	31,	2006,	on	a	cumulative	basis,	approximately	395,000	shares	have	been	purchased	and	are	held	in	trust.	These	shares	are	recorded	as	treasury	stock	in our	consolidated	statement	of	condition.

During	2006,	2005	and	2004,	we	purchased	and	recorded	as	treasury	stock	a	total	of	5.8	million	shares,	13.1	million	shares	and	4.1	million	shares,	respectively,	at an	average	historical	cost	per	share	of		$63,	$51	and	$43,	respectively.

Accumulated	Other	Comprehensive	(Loss)	Income:

| (In	millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Foreign\tcurrency\ttranslation | $197 | $73 | $213 |
|  | (7) | 11 | (26) |
| Unrealized\tloss\ton\tavailable-for-sale\tsecurities | (227) | (285) | (56) |
| Minimum\tpension\tliability | (186) | (26) | (26) |
| Unrealized\tloss\ton\tcash\tflow\thedges | (1) | (4) | (13) |
| Total | $ (224) | $ (231) | $92 |

For	the	year	ended	December	31,	2006,	we	realized	net	gains	of	$15	million	on	sales	of	available-for-sale	securities.	Unrealized	losses	of	$7	million	were	included in	other	comprehensive	income	at	December	31,	2005,	net	of	deferred	taxes	of	$4	million,	related	to	these	sales.

For	the	year	ended	December	31,	2005,	we	realized	net	losses	of	$1	million	on	sales	of	available-for-sale	securities.	Unrealized	gains	of	$1	million	were	included	in other	comprehensive	income	at	December	31,	2004,	net	of	deferred	taxes	of	less	than	$1	million,	related	to	these	sales.

For	the	year	ended	December	31,	2004,	we	realized	net	gains	of	$26	million	on	sales	of	available-for-sale	securities.	Unrealized	gains	of	$11	million	were	included in	other	comprehensive	income	at	December	31,	2003,	net	of	deferred	taxes	of	$7	million,	related	to	these	sales.

# Note	13.	Equity-Based	Compensation

The	2006	Equity	Incentive	Plan	was	approved	by	shareholders	in	April	2006,	and	20,000,000	shares	of	common	stock	were	approved	for	issuance	for	stock	and stock-based	awards,	including	stock	options,	stock	appreciation	rights,	restricted	stock,	deferred	stock	and	performance	awards.	In	addition,	up	to	8,000,000	shares	from our	1997	Equity	Incentive	Plan,	that	were	available	to	issue	or	become	available	due	to	cancellations	and	forfeitures,	may	be	awarded	under	the	2006	Plan.	The	1997 Plan	expired	on	December	18,	2006.	As	of	December	31,	2006,	1,305,420	shares	from	the	1997	Plan	have	been	added	to	and	may	be	awarded	from	the	2006	Plan.	As	of December	31,	2006,	106,045	awards	have	been	made	under	the	2006	Plan.	We	have	stock	options	outstanding	from	previous	plans,	including	the	1997	Plan,	under which	no	further	grants	can	be	made.

The	exercise	price	of	non-qualified	and	incentive	stock	options	and	stock	appreciation	rights	may	not	be	less	than	the	fair	value	of	such	shares	at	the	date	of	grant.

Stock	options	and	stock	appreciation	rights	issued	under	the	2006	Plan	and	the	prior	1997	Plan	generally	vest	over	four	years	and	expire	no	later	than	ten	years	from	the date	of	grant.	For	restricted	stock	awards	issued	under	the	2006	Plan	and	the	prior	1997	Plan,	stock	certificates	are	issued	at	the	time	of	grant	and	recipients	have dividend	and	voting	rights.	In	general,	these	grants	vest	over	three	years.	For	deferred	stock	awards	issued	under	the	2006	Plan	and	the	prior	1997	Plan,	no	stock	is issued	at	the	time	of	grant.	Generally,	these	grants	vest	over	two-,	three-	or	four-year	periods.	Performance	awards	granted	under	the	2006	Equity	Incentive	Plan	and	the prior	1997	Plan	are	earned	over	a	performance	period	based	on	achievement	of	goals,	generally	over	two-	to	three-year	periods.	Payment	for	performance	awards	is made	in	shares	of	our	common	stock	or	in	cash	equal	to	the	fair	market	value	of	our	common	stock,	based	on	certain	financial	ratios	after	the	conclusion	of	each performance	period.

We	record	compensation	expense,	equal	to	the	estimated	fair	value	of	the	options	on	the	grant	date,	on	a	straight-line	basis	over	the	options'	vesting	period.	We	use a	Black-Scholes	option-pricing	model	to	estimate	the	fair	value	of	the	options	granted.

The	weighted-average	assumptions	used	in	connection	with	the	option-pricing	model	were	as	follows	for	the	years	indicated.

|  | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Dividend\tyield | 1.41% | 1.85% | 1.35% |
| Expected\tvolatility | 26.50 | 28.70 | 27.10 |
| Risk-free\tinterest\trate | 4.60 | 4.19 | 3.02 |
| Expected\toption\tlives\t(in\tyears) | 7.8 | 7.8 | 5.0 |

Compensation	expense	related	to	stock	options,	stock	appreciation	rights,	restricted	stock	awards,	deferred	stock	awards	and	performance	awards,	which	we	record as	a	component	of	salaries	and	employee	benefits	expense	in	our	consolidated	statement	of	income,	was	$208	million,	$110	million	and	$74	million	for	the	years	ended December	31,	2006,	2005	and	2004,	respectively.	The	related	total	income	tax	benefit	recorded	in	our	consolidated	statement	of	income	was	$83	million,	$44	million and	$30	million	for	2006,	2005	and	2004,	respectively.

Information	about	the	2006	Plan	and	1997	Plan	as	of	December	31,	2006,	and	activity	during	the	year	then	ended	is	presented	below:

| Stock	Options	and	Stock	Appreciation	Rights: | Shares<br>(in	thousands) | Weighted<br>Average<br>Exercise<br>Price | Weighted<br>Average<br>Remaining<br>Contractual<br>Term<br>(in	years) | Aggregate<br>Intrinsic<br>Value<br>(in	millions) |
| :--- | :--- | :--- | :--- | :--- |
| Outstanding: |  |  |  |  |
| December\t31,\t2005 | 23,956 | $ 44.60 |  |  |
| Granted | 972 | 62.63 |  |  |
| Exercised | (4,823) | 40.81 |  |  |
| Forfeited\tor\texpired | (316) | 51.32 |  |  |
| Outstanding\tat\tDecember\t31,\t2006 | 19,789 | $ 46.28 | 5.6 | $419 |
| Exercisable\tat\tDecember\t31,\t2006 | 15,132 | $ 44.84 | 4.8 | $342 |

As	of	December	31,	2006,	total	unrecognized	compensation	cost	related	to	stock	options	and	stock	appreciation	rights	was	$39	million,	which	is	expected	to	be recognized	over	a	weighted-average	period	of	11	months.

Other	stock	awards	and	related	activity	consisted	of	the	following	for	the	year	ended	December	31,	2006:

| Restricted	Stock	Awards | Shares | Grant	Date<br>Fair	Value |
| :--- | :--- | :--- |
| (Shares\tin\tthousands) |  |  |
| Outstanding\tDecember\t31,\t2005 | 378 | $ 46.82 |
| Granted | 184 | 62.62 |
| Vested | (168) | 46.49 |
| Forfeited | (21) | 51.12 |
| Outstanding\tDecember\t31,\t2006 | 373 | $ 54.42 |

The	weighted-average	grant	date	fair	value	of	restricted	stock	awards	granted	in	2005	and	2004	was	$45.26	and	$51.39	per	share,	respectively.	The	total	fair	value of	restricted	stock	awards	vested	was	$8	million,	$8	million	and	$10	million	for	2006,	2005	and	2004,	respectively.	As	of	December	31,	2006,	total	unrecognized compensation	cost	related	to	restricted	stock	was	$13	million,	which	is	expected	to	be	recognized	over	a	weighted-average	period	of	11	months.

| Deferred	Stock	Awards | Shares | Grant	Date<br>Fair	Value |
| :--- | :--- | :--- |
| (Shares\tin\tthousands) |  |  |
| Outstanding\tDecember\t31,\t2005 | 3,203 | $ 43.60 |
| Granted | 3,083 | 60.94 |
| Vested | (1,270) | 43.80 |
| Forfeited | (162) | 53.33 |
| Outstanding\tDecember\t31,\t2006 | 4,854 | $ 54.21 |

The	weighted-average	grant	date	fair	value	of	deferred	stock	awards	granted	in	2005	and	2004	was	$43.40	and	$50.28	per	share,	respectively.	The	total	fair	value	of deferred	stock	awards	vested	was	$56	million,	$14	million	and	$51	million	for	2006,	2005	and	2004,	respectively.	As	of	December	31,	2006,	total	unrecognized compensation	cost	related	to	deferred	stock	awards	was	$149	million,	which	is	expected	to	be	recognized	over	a	weighted-average	period	of	14	months.

| Performance	Awards | Shares | Weighted-<br>Average<br>Grant	Date<br>Fair	Value |
| :--- | :--- | :--- |
| (Shares\tin\tthousands) |  |  |
| Outstanding\tDecember\t31,\t2005 | 1,283 | $ 48.52 |
| Granted | 959 | 59.87 |
| Forfeited | (193) | 52.71 |
| Paid\tOut | (160) | 52.78 |
| Outstanding\tDecember\t31,\t2006 | 1,889 | $ 53.49 |

The	weighted-average	grant	date	fair	value	of	performance	awards	granted	in	2005	and	2004	was	$47.91	and	$50.35	per	share,	respectively.	The	total	fair	value	of performance	awards	paid	out	was	$9	million	and	$12	million	for	2006	and	2005,	respectively.	There	were	no	payments	made	for	performance	awards	in	2004,	as	the only	program	in	place	at	that	time	paid	out	every	other	year	and	2004	was	not	a	payout	year.	As	of	December	31,	2006,	total	unrecognized	compensation	cost	related	to performance	awards	was	$38	million,	which	is	expected	to	be	recognized	over	a	weighted-average	period	of	23	months.

We	generally	utilize	treasury	shares	to	satisfy	the	issuance	of	stock	under	our	equity	incentive	plans.	We	do	not	have	a	specific	policy	concerning	purchases	of	our common	stock	to	satisfy	stock	issuances,	including	exercises	of	options.	We	have	a	general	policy	concerning	purchases	of	stock	to	meet	common	stock	issuances	under our	employee	benefit	plans,	including	option	exercises	and	other	corporate	purposes.	Various	factors	determine	the	amount	and	timing	of	our	purchases	of	our	common stock,	including	our	capital	requirements,	the	number	of	shares	we	expect	to	issue	under	employee	benefit	plans,	market	conditions	(including	the	trading	price	of	our common	stock),	and	legal	considerations.	These	factors	can	change	at	any	time,	and	there	can	be	no	assurance	as	to	the	number	of	shares	of	common	stock	we	will purchase	or	when	we	will	purchase	them.

# Note	14.	Regulatory	Matters

We	are	subject	to	various	regulatory	capital	requirements	administered	by	federal	banking	agencies.	Failure	to	meet	minimum	capital	requirements	can	initiate certain	mandatory	and	discretionary	actions	by	regulators	that,	if	undertaken,	could	have	a	direct	material	effect	on	our	consolidated	financial	condition.	Under regulatory	capital	adequacy	guidelines,	we	must	meet	specific	capital	requirements	that	involve	quantitative	measures	of	our	consolidated	assets,	liabilities	and	off- balance	sheet	exposures	as	calculated	under	regulatory	accounting	practices.	Our	capital	amounts	and	classification	are	subject	to	qualitative	judgments	by	the	regulators about	components,	risk	weightings	and	other	factors.

Quantitative	measures	established	by	regulation	to	ensure	capital	adequacy	require	State	Street	and	State	Street	Bank	to	maintain	minimum	risk-based	capital	and leverage	ratios	as	set	forth	in	the	following	table.	The	risk-based	capital	ratios	are	Tier	1	capital	and	total	capital	divided	by	adjusted	total	risk-weighted	assets	and market-risk	equivalents,	and	the	Tier	1	leverage	ratio	is	Tier	1	capital	divided	by	adjusted	quarterly	average	assets.	As	of	December	31,	2006	and	2005,	State	Street	and State	Street	Bank	met	all	capital	adequacy	requirements	to	which	they	were	subject.

As	of	December	31,	2006,	State	Street	Bank	was	categorized	as	"well	capitalized"	under	the	regulatory	framework.	To	be	categorized	as	"well	capitalized,"	State Street	Bank	must	exceed	the	"well	capitalized"	guideline	ratios,	as	set	forth	in	the	table,	and	meet	certain	other	requirements.	State	Street	Bank	exceeded	all	"well capitalized"	requirements	as	of	December	31,	2006	and	2005.	There	are	no	conditions	or	events	since	December	31,	2006	that	management	believes	have	changed	the capital	category	of	State	Street	Bank.

The	regulatory	capital	ratios	and	related	amounts	were	as	follows	as	of	December	31:

| (Dollars	in	millions) | Minimum | Capitalized | 2006 | 2005 | 2006 | 2005 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Risk-Based\tRatios: |  |  |  |  |  |  |
| Tier\t1\tcapital | 4% | 6% | 13.7% | 11.7% | 12.0% | 10.3% |
| Total\tcapital | 8 | 10 | 15.9 | 14.0 | 14.1 | 12.5 |
| Tier\t1\tleverage\tratio | 4 | 5 | 5.8 | 5.6 | 5.6 | 5.4 |
| Shareholders'\tequity |  |  | $7,252 | $6,367 | $6,769 | $6,139 |
| Capital\ttrust\tsecurities |  |  | 650 | 650 | — | — |
| Unrealized\tlosses\ton\tavailable-for-sale |  |  |  |  |  |  |
| securities |  |  | 227 | 285 | 239 | 292 |
| Unrealized\t(gains)\tlosses\ton\tcash\tflow |  |  |  |  |  |  |
| hedges |  |  | — | 4 | 163 | (10) |
| Recognition\tof\tpension\tplan |  |  |  |  |  |  |
| funded\tstatus |  |  | 164 | — | — | — |
| Qualifying\tminority\tinterest\tin |  |  |  |  |  |  |
| consolidated\tsubsidiaries |  |  | — | 2 | — | 2 |
| Less: |  |  |  |  |  |  |
| Goodwill |  |  | 1,384 | 1,337 | 1,297 | 1,247 |
| Other\tintangible\tassets |  |  | 434 | 459 | 401 | 438 |
| Other\tdeductions |  |  | 2 | 1 | — | — |
| Tier\t1\tcapital |  |  | 6,473 | 5,511 | 5,473 | 4,738 |
| Qualifying\tsubordinated\tdebt |  |  | 1,178 | 1,238 | 998 | 998 |
| Allowances\tfor\ton-\tand\toff-balance |  |  |  |  |  |  |
| sheet\tcredit\texposures |  |  | 30 | 30 | 30 | 30 |
| Unrealized\tgains\ton\tavailable-for-sale |  |  |  |  |  |  |
| equity\tsecurities |  |  | 10 | 12 | 1 | 6 |
| Tier\t2\tcapital |  |  | 1,218 | 1,280 | 1,029 | 1,034 |
| Deduction\tfor\tinvestments\tin\tfinance |  |  |  |  |  |  |
| subsidiaries |  |  | (184) | (174) | (62) | (52) |
| Total\tcapital |  |  | $7,507 | $6,617 | $6,440 | $5,720 |

| market-risk	equivalents: |  |  |  |  |
| :--- | :--- | :--- | :--- | :--- |
| On-balance\tsheet | $31,447 | $27,288 | $30,000 | $25,965 |
| Off-balance\tsheet | 15,371 | 19,586 | 15,375 | 19,602 |
| Market-risk\tequivalents | 395 | 361 | 394 | 351 |
| Total | $47,213 | $47,235 | $45,769 | $45,918 |
| Adjusted\tquarterly\taverage\tassets | $ 110,794 | $98,970 | $97,132 | $87,667 |

(1)										State	Street	Bank	must	meet	the	regulatory	designation	of	"well	capitalized"	in	order	for	us	to	maintain	our	status	as	a	financial	holding	company,	including maintaining	a	minimum	Tier	1	risk-based	capital	ratio	(Tier	1	capital	divided	by	adjusted	total	risk-weighted	assets	and	market-risk	equivalents)	of	6%,	a	minimum total	risk-based	capital	ratio	(total	capital	divided	by	adjusted	total	risk-weighted	assets	and	market-risk	equivalents)	of	10%,	and	a	Tier	1	leverage	ratio	(Tier	1 capital	divided	by	adjusted	quarterly	average	assets)	of	5%.	In	addition,	Federal	Reserve	Regulation	Y	defines	"well	capitalized"	for	a	bank	holding	company	such as	us	for	purposes	of	determining

eligibility	for	a	streamlined	review	process	for	acquisition	proposals.	For	such	Regulation	Y	purposes,	"well	capitalized"	requires	us	to	maintain	a	minimum	Tier	1 risk-based	capital	ratio	of	6%	and	a	minimum	total	risk-based	capital	ratio	of	10%.

# Cash,	Dividend,	Loan	and	Other	Restrictions:

During	2006,	our	bank	subsidiaries	were	required	by	the	Federal	Reserve	to	maintain	average	cash	reserve	balances	of	$103	million.	In	addition,	federal	and	state banking	regulations	place	certain	restrictions	on	dividends	paid	by	bank	subsidiaries	to	a	parent	holding	company.	For	2007,	aggregate	dividends	by	State	Street	Bank without	prior	regulatory	approval	are	limited	to	approximately	$766	million	of	its	undistributed	earnings	at	December	31,	2006,	plus	an	additional	amount	equal	to	its net	profits,	as	defined,	for	2007	up	to	the	date	of	any	dividend.

The	Federal	Reserve	Act	requires	that	extensions	of	credit	by	State	Street	Bank	to	certain	affiliates,	including	the	parent	company,	be	secured	by	specific	collateral, that	the	extension	of	credit	to	any	one	affiliate	be	limited	to	10%	of	its	capital	and	surplus	(as	defined),	and	that	extensions	of	credit	to	all	such	affiliates	be	limited	to 20%	of	its	capital	and	surplus.

At	December	31,	2006,	consolidated	retained	earnings	included	$230	million	representing	undistributed	earnings	of	affiliates	that	are	accounted	for	using	the	equity method.

# Note	15.	Derivative	Financial	Instruments

We	use	derivatives	to	support	customers'	needs,	conduct	trading	activities,	and	manage	our	interest-rate	and	currency	risk.

As	part	of	our	trading	activities,	we	assume	positions	in	both	the	foreign	exchange	and	interest-rate	markets	by	buying	and	selling	cash	instruments	and	using derivative	financial	instruments,	including	foreign	exchange	forward	contracts,	foreign	exchange	and	interest-rate	options,	and	interest-rate	swaps.	In	the	aggregate,	long and	short	foreign	exchange	forward	positions	are	matched	closely	to	minimize	currency	and	interest-rate	risk.	All	foreign	exchange	contracts	are	valued	daily	at	current market	rates.

Interest-rate	contracts	involve	an	agreement	with	a	counterparty	to	exchange	cash	flows	based	on	the	movement	of	an	underlying	interest-rate	index.	An	interest-rate swap	agreement	involves	the	exchange	of	a	series	of	interest	payments,	either	at	a	fixed	or	variable	rate,	based	upon	the	notional	amount	without	the	exchange	of	the underlying	principal	amount.	An	interest-rate	option	contract	provides	the	purchaser,	for	a	premium,	the	right,	but	not	the	obligation,	to	receive	an	interest	rate	based upon	a	predetermined	notional	value	during	a	specified	period.	An	interest-rate	futures	contract	is	a	commitment	to	buy	or	sell,	at	a	future	date,	a	financial	instrument	at a	contracted	price;	it	may	be	settled	in	cash	or	through	the	delivery	of	the	contracted	instrument.

Foreign	exchange	contracts	involve	an	agreement	to	exchange	one	currency	for	another	currency	at	an	agreed-upon	rate	and	settlement	date.	Foreign	exchange contracts	consist	of	cross-currency	swap	agreements	and	foreign	exchange	forward	and	spot	contracts.

The	following	table	summarizes	the	contractual	or	notional	amounts	of	derivative	financial	instruments	held	or	issued	for	trading	and	asset	and	liability management	as	of	December	31:

| (In	millions) | 2006 | 2005 |
| :--- | :--- | :--- |
| Trading: |  |  |
| Interest-rate\tcontracts: |  |  |
| Swap\tagreements | $1,011 | $4,508 |
| Options\tand\tcaps\tpurchased | 1,216 | 912 |
| Options\tand\tcaps\twritten | 3,224 | 2,564 |
| Futures | 154 | 534 |
| Foreign\texchange\tcontracts: |  |  |
| Forward,\tswap\tand\tspot | 492,063 | 414,376 |
| Options\tpurchased | 8,313 | 6,624 |
| Options\twritten | 8,063 | 6,763 |
| Asset\tand\tLiability\tManagement: |  |  |
| Interest-rate\tcontracts: |  |  |
| Swap\tagreements | 2,770 | 5,369 |
| Foreign\texchange\tcontracts: |  |  |
| Swap\tagreements | 132 | 355 |

In	connection	with	our	asset	and	liability	management	activities,	we	have	executed	interest-rate	swap	agreements	designated	as	fair	value	and	cash	flow	hedges	to manage	interest-rate	risk.	The	notional	values	of	these	interest-rate	swap	agreements	and	the	related	assets	or	liabilities	being	hedged	were	as	follows	at	December	31:

| (In	millions) | Fair<br>Value<br>Hedges | 2006<br>Cash<br>Flow<br>Hedges | Total | Fair<br>Value<br>Hedges | 2005<br>Cash<br>Flow<br>Hedges | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Available-for-sale\tinvestment\tsecurities | $ 1,452 |  | $ 1,452 | $ 2,211 |  | $ 2,211 |
| Interest-bearing\ttime\tdeposits(1) | 118 | $300 | 418 | 118 | $ 1,490 | 1,608 |

| Long-term	debt(2)(3) | 700 | 200 | 900 | 1,200 | 350 | 1,550 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Total | $ 2,270 | $500 | $ 2,770 | $ 3,529 | $ 1,840 | $ 5,369 |

(1)										For	the	years	ended	December	31,	2006	and	2005,	the	overall	weighted-average	interest	rate	for	interest-bearing	time	deposits	was	5.02%	and	3.23%,	respectively, on	a	contractual	basis,	and	3.52%	and	3.19%,	respectively,	including	the	effects	of	hedges.

(2)										For	the	year	ended	December	31,	2006,	the	fair	value	hedges	of	long-term	debt	decreased	the	carrying	value	of	long-term	debt	presented	in	our	consolidated statement	of	condition	by	$9	million	and	in	the	year	ended	December	31,	2005	it	increased	the	value	by	$18	million.

For	cash	flow	hedges,	any	changes	in	the	fair	value	of	the	derivative	financial	instruments	remain	in	accumulated	other	comprehensive	income	and	are	generally recorded	in	our	consolidated	statement	of	income	in	future	periods	when	earnings	are	affected	by	the	variability	of	the	hedged	cash	flow.	Hedge	ineffectiveness	recorded in	processing	fees	and	other	revenue	was	not	material	in	2006,	2005	or	2004.

We	have	entered	into	foreign	exchange	forward	contracts	with	an	aggregate	notional	amount	of	€100	million,	or	approximately	$132	million,	to	hedge	a	portion	of our	net	foreign	investment	in	non-U.S.

subsidiaries.	As	a	result,	approximately	$18	million	of	after-tax	translation	losses	and	$37	million	of	after-tax	translation	gains	for	the	years	ended	December	31,	2006 and	2005,	respectively,	on	the	hedge	contracts	were	recorded	in	accumulated	other	comprehensive	income.

Foreign	exchange	trading	revenue	related	to	foreign	exchange	contracts	was	$611	million,	$468	million	and	$420	million	for	the	years	ended	December	31,	2006, 2005	and	2004,	respectively.	For	other	financial	instrument	contracts,	recorded	in	trading	services	revenue	were	gains	of	$18	million	in	2006,	gains	of	$4	million	in	2005 and	losses	of	$25	million	in	2004.	Future	cash	requirements,	if	any,	related	to	foreign	exchange	contracts	are	represented	by	the	gross	amount	of	currencies	to	be exchanged	under	each	contract	unless	we	and	the	counterparty	have	agreed	to	pay	or	receive	the	net	contractual	settlement	amount	on	the	settlement	date.	Future	cash requirements	on	other	financial	instruments	are	limited	to	the	net	amounts	payable	under	the	agreements.

# Note	16.	Net	Interest	Revenue

| (In	millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Interest\tRevenue: |  |  |  |
| Deposits\twith\tbanks | $414 | $529 | $591 |
| Investment\tsecurities: |  |  |  |
| U.S.\tTreasury\tand\tfederal\tagencies | 1,011 | 866 | 536 |
| State\tand\tpolitical\tsubdivisions\t(exempt\tfrom\tfederal\ttax) | 88 | 58 | 57 |
| Other\tinvestments | 1,830 | 873 | 277 |
| Securities\tpurchased\tunder\tresale\tagreements\tand\tfederal\tfunds\tsold | 663 | 412 | 196 |
| Commercial\tand\tfinancial\tloans | 205 | 106 | 59 |
| Lease\tfinancing | 65 | 65 | 57 |
| Trading\taccount\tassets | 48 | 21 | 14 |
| Total\tinterest\trevenue | 4,324 | 2,930 | 1,787 |
| Interest\tExpense: |  |  |  |
| Deposits | 1,891 | 1,132 | 512 |
| Other\tshort-term\tborrowings | 1,145 | 753 | 315 |
| Long-term\tdebt | 178 | 138 | 101 |
| Total\tinterest\texpense | 3,214 | 2,023 | 928 |
| Net\tinterest\trevenue | $ 1,110 | $907 | $859 |

# Note	17.	Employee	Benefits

State	Street	Bank	and	certain	of	its	U.S.	subsidiaries	participate	in	a	non-contributory,	tax-qualified	defined	benefit	pension	plan.	In	addition	to	this	primary	plan, we	have	non-qualified	unfunded	supplemental	retirement	plans,	or	"SERPs,"	that	provide	certain	officers	with	defined	pension	benefits	in	excess	of	allowable	qualified plan	limits.	Non-U.S.	employees	participate	in	local	defined	benefit	plans.

State	Street	Bank	and	certain	of	its	U.S.	subsidiaries	participate	in	a	post-retirement	plan	that	provides	health	care	and	insurance	benefits	for	retired	employees.

Combined	information	for	the	U.S.	and	non-U.S.	defined	benefit	plans,	and	information	for	the	post-retirement	plan,	is	as	follows	as	of	the	December	31 measurement	date:

|  | Primary	U.S. |  |  |  |
| :--- | :--- | :--- | :--- | :--- |
|  | and\tNon-U.S. |  |  |  |
|  | Defined |  | Post-Retirement |  |
|  | Benefit\tPlans |  | Plan |  |
| (In\tmillions) | 2006 | 2005 | 2006 | 2005 |
| Benefit\tObligations: |  |  |  |  |
| Beginning\tof\tyear | $759 | $650 | $79 | $72 |
| Service\tcost | 59 | 50 | 4 | 4 |
| Interest\tcost | 39 | 35 | 5 | 4 |
| Employee\tContributions | 1 | — | — | — |
| Transfers\tin | — | 27 | — | — |
| Actuarial\tlosses/(gains) | (4) | 62 | 9 | 4 |
| Benefits\tpaid | (47) | (45) | (7) | (5) |
| Expenses\tpaid | (1) | (2) | — | — |
| Special\ttermination\tbenefits | — | 1 | — | — |
| Foreign\tcurrency\ttranslation | 27 | (19) | — | — |
| End\tof\tyear | $833 | $759 | $90 | $79 |
| Plan\tAssets\tat\tFair\tValue:\nBeginning\tof\tyear | $706 | $592 |  |  |

N/A—Disclosure	not	applicable	for	period	indicated	as	a	result	of	the	adoption	of	SFAS	No.	158.

Expected	benefit	payments	for	the	next	ten	years	are	as	follows:

| (In	millions) | Primary	U.S.	and<br>Non-U.S.	Defined<br>Benefit	Plans | Non-Qualified<br>SERPs | Post-<br>Retirement<br>Plan |
| :--- | :--- | :--- | :--- |
| 2007 | $43 | $7 | $8 |
| 2008 | 32 | 6 | 8 |
| 2009 | 29 | 5 | 7 |
| 2010 | 29 | 6 | 7 |
| 2011 | 28 | 10 | 7 |

The	accumulated	benefit	obligation	for	all	of	our	U.S.	defined	benefit	pension	plans	was	$613	million	and	$581	million	at	December	31,	2006,	and	2005, respectively.

To	develop	the	assumption	of	the	expected	long-term	rate	of	return	on	plan	assets,	we	considered	the	historical	returns	and	the	future	expectations	for	returns	for each	asset	class,	as	well	as	the	target	asset	allocation	of	the	pension	portfolio.	This	analysis	resulted	in	the	determination	of	the	assumed	long-term	rate	of	return	on	plan assets	of	8.00%	for	the	year	ended	December	31,	2006.

For	the	tax-qualified	U.S.	defined	benefit	pension	plan,	the	asset	allocation	as	of	December	31,	2006	and	2005,	and	the	strategic	target	allocation	for	2007,	by	asset category,	were	as	follows:

# ASSET	CATEGORY

|  | Strategic	Target<br>Allocation | Percentage	of	Plan<br>Assets	at	December	31, | Percentage	of	Plan<br>Assets	at	December	31, |
| :--- | :--- | :--- | :--- |
|  | 2007 | 2006 | 2005 |
| Equity\tsecurities | 45% | 46% | 59% |
| Fixed\tincome\tsecurities | 45 | 45 | 29 |
| Other | 10 | 9 | 12 |
| Total | 100% | 100% | 100% |

The	preceding	strategic	target	asset	allocation	was	last	amended	effective	July	31,	2006.	Consistent	with	that	target	allocation,	the	plan	should	generate	a	real	return above	inflation,	and	superior	to	that	of	a	benchmark	index	consisting	of	a	combination	of	appropriate	capital	markets	indices	weighted	in	the	same	proportions	as	the plan's	strategic	target	asset	allocation.	Equities	included	domestic	and	international	publicly-traded	common,	preferred	and	convertible	securities.	Fixed	income securities	included	domestic	and	international	corporate	and	government	debt	securities,	as	well	as	asset-backed	securities	and	private	debt.	The	"other"	category included	real	estate,	alternative	investments	and	cash	and	cash	equivalents.	Derivative	financial	instruments	are	an	acceptable	alternative	to	investing	in	these	types	of securities,	but	may	not	be	used	to	leverage	the	plan's	portfolio.

Expected	employer	contributions	to	the	tax-qualified	U.S.	defined	benefit	pension	plan,	SERPs	and	post-retirement	plan	for	the	year	ending	December	31,	2007	are $14	million,	$7	million	and	$8	million,	respectively.

State	Street	has	unfunded	SERPs	that	provide	certain	officers	with	defined	pension	benefits	in	excess	of	qualified	plan	limits	imposed	by	U.S.	federal	tax	law. Information	for	the	SERPs	was	as	follows	for	the	years	ended	December	31:

|  | Qualified	SERPs |  |
| :--- | :--- | :--- |
| (In\tmillions) | 2006 | 2005 |
| Benefit\tObligations: |  |  |
| Beginning\tof\tyear | $107 | $99 |
| Service\tcost | 6 | 4 |
| Interest\tcost | 7 | 5 |
| Actuarial\tloss | 24 | 11 |
| Benefits\tpaid | (6) | (8) |
| Settlements | — | (8) |
| Plan\tamendments | 4 | 4 |
| End\tof\tyear | $142 | $107 |
| Accrued\tBenefit\tExpense: |  |  |
| Funded\tstatus\t(plan\tassets\tless\tbenefit\tobligations) | $(142) | $(107) |
| Net\tactuarial\tloss | N/A | 39 |
| Prior\tservice\tcost | N/A | 17 |
| Net\taccrued\tbenefit\texpense | $(142) | $(51) |
| Amounts\tRecognized\tin\tthe\tConsolidated\tStatement\tof\tCondition: |  |  |
| Accrued\tbenefit\tliability | N/A | $(78) |
| Intangible\tassets | N/A | 20 |
| Accumulated\tother\tcomprehensive\tloss | N/A | 7 |
| Non-current\tassets | — | N/A |
| Current\tliabilities | $(7) | N/A |
| Non-current\tliabilities | (135) | N/A |
| Net\taccrued\tamount\trecognized\tin\tstatement\tof\tcondition | $(142) | $(51) |
| Amounts\tRecognized\tin\tAccumulated\tOther\tComprehensive\tIncome: |  |  |
| Initial\tnet\tobligation | — | N/A |
| Prior\tservice\tcost | $(19) | N/A |
| Net\tloss | (59) | N/A |
| Accumulated\tother\tcomprehensive\tloss | $(78) | N/A |
| Cumulative\temployer\tcontributions\tin\texcess\tof\tnet\tperiodic\tbenefit\tcost | (64) | N/A |
| Net\tobligation\trecognized\tin\tstatement\tof\tcondition | $(142) | N/A |
| Determination\tof\tAdjustment\trelated\tto\tadoption\tof\tSFAS\tNo.\t158: |  |  |
|  | $32 | $27 |
| Actual\tintangible\tasset | 18 | 20 |
|  | 14 | 7 |
|  | — | N/A |
| Prior\tservice\tcost | 19 | N/A |
| Net\tloss | 59 | N/A |
|  | $78 | N/A |
|  | $64 | N/A |
| Accumulated\tbenefit\tobligation | $96 | $78 |
| Actuarial\tassumptions: |  |  |
| Assumptions\tused\tto\tdetermine\tbenefit\tobligations\tand\tperiodic\tbenefit\tcosts\tare\tconsistent\twith\tthose\tnoted\tfor\tthe\tpost-retirement\tplan,\twith\tthe\nfollowing\texception: |  |  |
| Rate\tof\tincrease\tfor\tfuture\tcompensation | 4.75% | 4.75% |

For	those	defined	benefit	plans	that	had	accumulated	benefit	obligations	in	excess	of	plan	assets	as	of	December	31,	2006	and	2005,	the	accumulated	benefit obligations	were	$326	million	and	$262	million,	respectively,	and	the	plan	assets	were	$200	million	and	$163	million,	respectively.

For	those	defined	benefit	plans	that	had	projected	benefit	obligations	in	excess	of	plan	assets	as	of	December	31,	2006	and	2005,	the	projected	benefit	obligations were	$411	million	and	$866	million,	respectively,	and	the	plan	assets	were	$204	million	and	$706	million,	respectively.

If	trend	rates	in	health	care	costs	were	increased	by	1%,	the	post-retirement	benefit	obligation	as	of	December	31,	2006,	would	have	increased	7%,	and	the aggregate	expense	for	service	and	interest	costs	for	2006	would	have	increased	13%.	Conversely,	if	trend	rates	in	health	care	costs	were	reduced	by	1%,	the	post- retirement	benefit	obligation	as	of	December	31,	2006,	would	have	decreased	6%,	and	the	aggregate	expense	for	service	and	interest	costs	for	2006	would	have decreased	11%.

The	following	table	presents	the	actuarially	determined	expense	(income)	for	our	U.S.	and	non-U.S.	defined	benefit	plans,	SERPs	and	post-retirement	plan	for	the years	ended	December	31:

|  | Defined	Benefit	Plans | Defined	Benefit	Plans |  | Post-Retirement	Plan | Post-Retirement	Plan | Post-Retirement	Plan |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (In\tmillions) | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 |
| Components\tof\tNet\tPeriodic\tBenefit\tCost: |  |  |  |  |  |  |
| Service\tcost | $59 | $50 | $41 | $4 | $3 | $3 |
| Interest\tcost | 39 | 35 | 32 | 5 | 4 | 4 |
| Assumed\treturn\ton\tplan\tassets | (53) | (45) | (40) | — | — | — |
| Amortization\tof\ttransition\tobligation\t(asset) | — | — | (1) | 1 | 1 | 1 |
| Amortization\tof\tprior\tservice\tcost | (2) | (2) | (2) | — | — | — |
| Amortization\tof\tnet\tloss | 17 | 15 | 16 | 2 | 1 | 1 |
| Net\tperiodic\tbenefit\tcost | 60 | 53 | 46 | 12 | 9 | 9 |
| Special\tEvents\tAccounting\tExpense: |  |  |  |  |  |  |
| Special\ttermination\tbenefits | — | 1 | — | — | — | — |
| Special\tevents\taccounting\texpense | — | 1 | — | — | — | — |
| Total\texpense | $60 | $54 | $46 | $12 | $9 | $9 |
| Estimated\tamounts\tthat\twill\tbe\tamortized\tfrom\taccumulated |  |  |  |  |  |  |
| other\tcomprehensive\tincome\tover\tthe\tnext\tfiscal\tyear: |  |  |  |  |  |  |
| Initial\tnet\tasset | — |  |  | $(1) |  |  |
| Prior\tservice\tcredit | $2 |  |  | — |  |  |
| Net\tloss | (14) |  |  | (1) |  |  |
| Estimated\tamortization | $ (12) |  |  | $(2) |  |  |

|  | Non-Qualified	SERPs | Non-Qualified	SERPs | Non-Qualified	SERPs |
| :--- | :--- | :--- | :--- |
| (In\tmillions) | 2006 | 2005 | 2004 |
| Components\tof\tNet\tPeriodic\tBenefit\tCost: |  |  |  |
| Service\tcost | $6 | $4 | $5 |
| Interest\tcost | 7 | 5 | 6 |
| Amortization\tof\tprior\tservice\tcost | 2 | 2 | 1 |
| Amortization\tof\tnet\tloss | 4 | 2 | 2 |
| Net\tperiodic\tbenefit\tcost | $19 | $13 | $14 |
| Special\tEvents\tAccounting\tExpense: |  |  |  |
| Settlements | — | 2 | 1 |
| Special\tevents\taccounting\texpense | — | 2 | 1 |
| Total\texpense | $19 | $15 | $15 |
| Estimated\tamounts\tthat\twill\tbe\tamortized\tfrom\taccumulated\tother\tcomprehensive\tincome\tover |  |  |  |
| the\tnext\tfiscal\tyear: |  |  |  |
| Initial\tnet\tobligation | — |  |  |
| Prior\tservice\tcost | $(2) |  |  |
| Net\tloss | (4) |  |  |
| Estimated\tamortization | $(6) |  |  |

Certain	of	our	U.S.	employees	are	eligible	to	contribute	a	portion	of	their	pre-tax	salary	to	a	401(k)	savings	plan	and	an	Employee	Stock	Ownership	Plan,	or "ESOP."	Our	matching	portion	of	these	contributions	is	paid	in	cash,	and	the	related	expense	was	$20	million	for	2006,	$21	million	for	2005	and	$16	million	for	2004. In	addition,	employees	in	certain	non-U.S.	offices	participate	in	other	local	plans.	Expenses	related	to	these	plans	were	$32	million,	$39	million	and	$31	million	for 2006,	2005	and	2004,	respectively.

The	ESOP	is	a	non-leveraged	plan.	Compensation	cost	is	equal	to	the	contribution	called	for	by	the	plan	formula	and	is	equal	to	the	cash	contributed	for	the purchase	of	shares	on	the	open	market	or	the	fair	value	of	the	shares	contributed	from	treasury	stock.	Dividends	on	shares	held	by	the	ESOP	are	charged	to	retained earnings,	and	shares	are	treated	as	outstanding	for	purposes	of	calculating	earnings	per	share.

# Note	18.Occupancy	Expense	and	Information	Systems	and	Communications	Expense

Occupancy	expense	and	information	systems	and	communications	expense	included	expense	for	depreciation	of	buildings,	leasehold	improvements,	computers, equipment	and	furniture	and	fixtures.	Total	depreciation	expense	for	the	years	ended	December	31,	2006,	2005	and	2004	was	$309	million,	$315	million	and	$301 million,	respectively.

As	of	December	31,	2006,	accumulated	amortization	of	assets	under	capital	leases	was	$83	million.	Amortization	of	assets	recorded	under	capital	leases	and	the costs	of	operating	leases	for	office	space	are	recorded	in	occupancy	expense.	The	costs	of	operating	leases	related	to	computers	and	equipment	are	recorded	in information	systems	and	communications	expense.

The	following	is	a	summary	of	future	minimum	lease	payments	under	non-cancelable	capital	and	operating	leases	as	of	December	31,	2006:

| (In	millions) | Capital<br>Leases | Operating<br>Leases | Total |
| :--- | :--- | :--- | :--- |
| 2007 | $51 | $148 | $199 |
| 2008 | 52 | 137 | 189 |
| 2009 | 52 | 110 | 162 |
| 2010 | 52 | 98 | 150 |
| 2011 | 52 | 58 | 110 |

| Thereafter | 615 | 451 | 1,066 |
| :--- | :--- | :--- | :--- |
| Total\tminimum\tlease\tpayments | 874 | $ 1,002 | $ 1,876 |
| Less\tamount\trepresenting\tinterest\tpayments | (373) |  |  |
| Present\tvalue\tof\tminimum\tlease\tpayments | $501 |  |  |

We	lease	approximately	865,000	square	feet	at	One	Lincoln	Street,	an	office	building	located	in	Boston,	Massachusetts,	and	a	related	366,000	square-foot underground	parking	garage,	under	20-year,	non-cancelable	capital	leases	expiring	in	September	2023.	As	of	December	31,	2006	and	2005,	an	aggregate	net	book	value of	$447	million	and	$474	million,	respectively,	for	the	capital	leases	was	recorded	in	premises	and	equipment	in	our	consolidated	statement	of	condition,	and	the	related liability	was	recorded	in	long-term	debt.	Capital	lease	asset	amortization	is	recorded	in	occupancy	expense	over	the	lease	terms.	Lease	payments	are	recorded	as	a reduction	of	the	liability,	with	a	portion	recorded	as	imputed	interest	expense.	For	the	years	ended	December	31,	2006	and	2005,	interest	expense	related	to	these	capital lease	obligations,	recorded	in	net	interest	revenue,	was	$37	million	and	$38	million,	respectively.

We	have	entered	into	non-cancelable	operating	leases	for	premises	and	equipment.	Future	minimum	rental	commitments	in	the	preceding	table	have	been	reduced by	aggregate	sublease	rental	commitments

of	$151	million	for	operating	leases	and	$64	million	for	capital	leases.	Nearly	all	leases	include	renewal	options.

Total	rental	expense	amounted	to	$179	million,	$181	million	and	$190	million	in	2006,	2005	and	2004,	respectively.	Rental	expense	has	been	reduced	by	sublease revenue	of	$13	million,	$10	million	and	$20	million	for	the	years	ended	December	31,	2006,	2005	and	2004,	respectively.	During	2005	and	2004,	we	entered	into	sub- lease	agreements	for	our	headquarters	building	and	other	office	space	in	Boston.	These	sub-lease	agreements	resulted	in	the	recognition	of	charges	to	occupancy	expense of	$26	million	and	$16	million	for	the	years	ended	December	31,	2005	and	2004,	respectively.

# Note	19.	Other	Operating	Expenses

The	components	of	other	operating	expenses	were	as	follows	for	the	years	ended	December	31:

| (In	millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Professional\tservices | $157 | $184 | $165 |
| Merger,\tintegration\tand\tdivestiture\tcosts(1) | — | — | 62 |
| Other(2) | 361 | 300 | 287 |
| Total\tother\toperating\texpenses | $518 | $484 | $514 |

(1)										Amount	represented	merger	and	integration	costs	related	to	our	acquisition	of	a	substantial	portion	of	the	Global	Securities	Services,	or	"GSS,"	business	of Deutsche	Bank	AG.

(2)										Amount	for	2004	included	$21	million	of	restructuring	costs	incurred	in	connection	with	a	workforce	reduction.

# Note	20.	Income	Taxes

The	components	of	income	tax	expense	from	continuing	operations	consisted	of	the	following	for	the	years	ended	December	31:

| (In	millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Current: |  |  |  |
| Federal | $328 | $185 | $31 |
| State | 82 | 46 | 27 |
| Non-U.S. | 265 | 139 | 157 |
| Total\tcurrent | 675 | 370 | 215 |
| Deferred: |  |  |  |
| Federal | 27 | 83 | 160 |
| State | (9) | 14 | 23 |
| Non-U.S. | (18) | 20 | (4) |
| Total\tdeferred | — | 117 | 179 |
| Total\tincome\ttax\texpense\tfrom\tcontinuing\toperations | $675 | $487 | $394 |

Current	and	deferred	income	taxes	from	continuing	operations	for	2005	and	2004	have	been	reclassified	to	reflect	tax	returns	as	actually	filed.	The	income	tax expense	(benefit)	related	to	net	realized	securities	gains	or	losses	was	$6	million,	$(1)	million	and	$10	million	for	2006,	2005	and	2004,	respectively.	Pre-tax	income from	continuing	operations	attributable	to	operations	located	outside	the	U.	S.	was	$759	million,	$494	million	and	$424	million	for	2006,	2005	and	2004,	respectively.

For	those	foreign	subsidiaries	for	which	accumulated	earnings	of	the	subsidiary	are	considered	to	be	permanently	invested,	no	provision	for	deferred	U.S.	income taxes	is	recorded.	The	total	undistributed

retained	earnings	of	these	subsidiaries	was	$324	million	at	December	31,	2006.	If	the	accumulated	earnings	in	these	subsidiaries	had	been	temporarily	invested,	a deferred	U.S.	tax	liability	of	$56	million	would	have	been	recorded.

Income	tax	expense	from	continuing	operations	for	2006	included	an	additional	provision	of	$35	million	primarily	related	to	the	impact	of	the	Tax	Increase Prevention	and	Reconciliation	Act,	or	"TIPRA,"	on	income	generated	from	certain	of	our	leveraged	leases,	more	fully	described	below,	and	$46	million	related	to	the potential	resolution	of	issues	with	the	IRS	concerning	our	LILO	and	SILO	transactions.	Additional	information	about	issues	related	to	LILO	and	SILO	transactions	is	in Note	10.	Income	tax	expense	from	continuing	operations	for	2004	included	a	cumulative	benefit	of	$18	million	resulting	from	a	change	in	the	effective	state	tax	rate applied	to	leveraged	lease	transactions.

During	2006,	TIPRA	repealed	the	federal	income	tax	exclusion,	effective	on	January	1,	2007,	which	was	previously	allowed	for	a	portion	of	the	income	generated from	certain	leveraged	leases	of	aircraft.	As	a	result	of	this	legislation,	and	in	accordance	with	existing	lease	accounting	standards,	we	recalculated	the	allocation	of	the components	of	leasing-related	income	over	the	terms	of	the	affected	leases	and	recorded	a	non-cash	charge	to	income	tax	expense	of	approximately	$35	million primarily	related	to	the	impact	of	this	legislation.

Significant	components	of	deferred	tax	liabilities	and	assets	were	as	follows	at	December	31:

| (In	millions) | 2006 | 2005 |
| :--- | :--- | :--- |
| Deferred\tTax\tLiabilities: |  |  |
| Lease\tfinancing\ttransactions | $ 1,779 | $ 1,735 |
| Foreign\tcurrency\ttranslation | 90 | 34 |
| Pension | — | 29 |
| Other | 12 | — |
| Operating\texpenses | 62 | 50 |
| Total\tdeferred\ttax\tliabilities | 1,943 | 1,848 |
| Deferred\tTax\tAssets: |  |  |
| Unrealized\tlosses\ton\tavailable-for-sale\tsecurities,\tnet | 153 | 190 |
| Deferred\tcompensation | 108 | 54 |
| Pension | 81 | — |
| Unrecognized\tloss\trelated\tto\tdiscontinued\toperations | — | 58 |
| Allowance\tfor\tloan\tlosses | 11 | 11 |
| Tax\tcarryforwards | 1 | 1 |
| Other | 76 | 12 |
| Total\tdeferred\ttax\tassets | 430 | 326 |
| Valuation\tallowance\tfor\tdeferred\ttax\tassets | (1) | (1) |
| Net\tdeferred\ttax\tassets | 429 | 325 |
| Net\tdeferred\ttax\tliabilities | $ 1,514 | $ 1,523 |

Management	considers	the	valuation	allowance	adequate	to	reduce	the	total	deferred	tax	asset	to	an	amount	that	will	more	likely	than	not	be	realized.	At December	31,	2006,	we	had	non-U.S.	and	state	tax	loss	carryforwards	of	$1	million	that	expire	beginning	in	2007.

A	reconciliation	of	the	U.S.	statutory	income	tax	rate	to	the	effective	tax	rate	based	on	income	from	continuing	operations	before	income	taxes	was	as	follows	for the	years	ended	December	31:

|  | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| U.S.\tfederal\tincome\ttax\trate | 35.0% 35.0% | 35.0% 35.0% | 35.0% |
| Changes\tfrom\tStatutory\tRate: |  |  |  |
| State\ttaxes,\tnet\tof\tfederal\tbenefit | 2.9 | 3.3 | 3.7 |
| Tax-exempt\tinterest\trevenue,\tnet\tof\tdisallowed\tinterest | (1.1) | (1.5) | (2.2) |
| Tax\tcredits | (1.4) | (1.3) | (.6) |
| Foreign\ttax\tdifferential | (1.2) | (1.0) | (1.1) |
| Provision\trelated\tto\tTIPRA | 1.8 | — | — |
| Provision\trelated\tto\tLILO\tand\tSILO\ttransactions | 2.6 | — | — |
| Leveraged\tlease\ttransactions—cumulative\tbenefit | — | — | (.9) |
| Other,\tnet | (.5) | (.5) | (.8) |
| Effective\ttax\trate | 38.1% 34.0% | 38.1% 34.0% | 33.1% |

See	Note	10	for	information	about	the	IRS's	review	of	our	federal	income	tax	returns	and	contingencies	related	to	LILO	and	SILO	transactions.

# Note	21.	Earnings	Per	Share

The	following	table	presents	the	computation	of	basic	and	diluted	earnings	per	share	for	the	years	ended	December	31:

| (Dollars	in	millions,	except	per	share	amounts) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Net\tIncome | $\t\t\t1,106 | $\t\t\t\t\t\t838 | $\t\t\t\t\t\t798 |
| Average\tShares\tOutstanding\t(in\tthousands): |  |  |  |
| Basic\taverage\tshares | 331,350 | 330,361 | 334,606 |
| Effect\tof\tdilutive\tsecurities: |  |  |  |
| Stock\toptions\tand\tstock\tawards | 4,349 | 2,762 | 3,358 |
| Equity-related\tfinancial\tinstruments | 33 | 1,513 | 1,641 |
| Dilutive\taverage\tshares | 335,732 | 334,636 | 339,605 |
| Anti-dilutive\tsecurities\t(in\tthousands)(1) | 973 | 8,791 | 10,289 |
| Earnings\tper\tShare |  |  |  |
| Basic | $\t\t\t\t\t3.34 | $\t\t\t\t\t2.53 | $\t\t\t\t\t2.38 |
| Diluted | 3.29 | 2.50 | 2.35 |

(1)										Represents	stock	options	outstanding	but	not	included	in	the	computation	of	diluted	average	shares	because	the	exercise	prices	of	the	instruments	were	greater	than the	average	fair	value	of	our	common	stock	during	those	periods.

# Note	22.	Line	of	Business	Information

We	report	two	lines	of	business:	Investment	Servicing	and	Investment	Management.	Given	our	services	and	management	organization,	the	results	of	operations	for these	lines	of	business	are	not	necessarily	comparable	with	those	of	other	companies,	including	companies	in	the	financial	services	industry.

Investment	Servicing	provides	services	for	U.S.	mutual	funds,	collective	investment	funds	worldwide,	corporate	and	public	retirement	plans,	insurance	companies, foundations,	endowments,	and	other	investment	pools.	Products	include	custody,	accounting,	daily	pricing	and	administration;	master	trust	and

master	custody;	recordkeeping;	foreign	exchange,	brokerage	and	other	trading	services;	securities	finance;	deposit	and	short-term	investment	facilities;	loans	and	lease financing;	investment	manager	and	hedge	fund	manager	operations	outsourcing;	and	performance,	risk	and	compliance	analytics	to	support	institutional	investors.	We provide	shareholder	services,	which	include	mutual	fund	and	collective	investment	fund	shareholder	accounting,	through	50%-owned	affiliates,	Boston	Financial	Data Services,	Inc.	and	the	International	Financial	Data	Services	group	of	companies.

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

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

The	following	is	a	summary	of	line	of	business	results.	These	results	exclude	the	income	(loss)	from	discontinued	operations	related	to	our	divestiture	of	Bel	Air, more	fully	discussed	in	Note	2.	The	"Other/One-Time"	column	for	2005	includes	the	additional	gain	from	our	sale	of	the	PAM	business,	more	fully	discussed	in	Note	2. For	2004,	this	column	includes	merger	and	integration	costs	related	to	the	GSS	acquisition.

|  | Investment	Servicing | Investment	Servicing |  | Management | Investment |  | Other/One-Time | Other/One-Time | Other/One-Time |  | Total |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Years\tended\tDecember\t31,\n(Dollars\tin\tmillions,\texcept\twhere\totherwise\tnoted) | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 |
| Fee\trevenue: |  |  |  |  |  |  |  |  |  |  |  |  |
| Servicing\tfees | $\t2,723 | $\t2,474 | $\t2,263 |  |  |  |  |  |  | $\t2,723 | $\t2,474 | $\t2,263 |
| Management\tfees | — | — | — | $\t943 | $\t751 | $\t623 |  |  |  | 943 | 751 | 623 |
| Trading\tservices | 862 | 694 | 595 | — | — | — |  |  |  | 862 | 694 | 595 |
| Securities\tfinance | 292 | 260 | 211 | 94 | 70 | 48 |  |  |  | 386 | 330 | 259 |
| Processing\tfees\tand\tother | 208 | 221 | 239 | 64 | 81 | 69 |  |  |  | 272 | 302 | 308 |
| Total\tfee\trevenue | 4,085 | 3,649 | 3,308 | 1,101 | 902 | 740 |  |  |  | 5,186 | 4,551 | 4,048 |
| Net\tinterest\trevenue | 986 | 826 | 816 | 124 | 81 | 43 |  |  |  | 1,110 | 907 | 859 |
| Provision\tfor\tloan\tlosses | — | — | (18) | — | — | — |  |  |  | — | — | (18) |
| Net\tinterest\trevenue\tafter\tprovision\tfor\tloan\tlosses | 986 | 826 | 834 | 124 | 81 | 43 |  |  |  | 1,110 | 907 | 877 |
| Gains\t(Losses)\ton\tsales\tof\tavailable-for-sale |  |  |  |  |  |  |  |  |  |  |  |  |
| investment\tsecurities,\tnet | 15 | (1) | 26 | — | — | — |  |  |  | 15 | (1) | 26 |
| Gain\ton\tsale\tof\tdivested\tbusiness | — | — | — | — | — | — |  | $\t16 |  | — | 16 | — |
| Total\trevenue | 5,086 | 4,474 | 4,168 | 1,225 | 983 | 783 |  | 16 |  | 6,311 | 5,473 | 4,951 |
| Operating\texpenses | 3,742 | 3,363 | 3,115 | 798 | 678 | 582 |  | — | $\t62 | 4,540 | 4,041 | 3,759 |
| Income\tfrom\tcontinuing\toperations\tbefore\tincome |  |  |  |  |  |  |  |  |  |  |  |  |
| taxes | $\t1,344 | $\t1,111 | $\t1,053 | $\t427 | $\t305 | $\t201 |  | $\t16 | $\t(62) | $\t1,771 | $\t1,432 | $\t1,192 |
| Pre-tax\tmargin | 26% | 25% | 25% | 35% | 31% | 26% |  |  |  |  |  |  |
| Average\tassets\t(in\tbillions) | $\t103.4 | $\t96.9 | $\t92.5 | $\t\t3.0 | $\t2.9 | $\t2.6 |  |  |  | $\t106.4 | $\t99.8 | $\t95.1 |

# Note	23.	Non-U.S.	Activities

We	define	non-U.S.	activities	as	those	revenue-producing	assets	and	transactions	that	arise	from	customers	domiciled	outside	the	United	States.	Due	to	the	nature of	our	business,	precise	segregation	of	U.S.	and	non-U.S.	activities	is	not	possible.	Subjective	judgments	have	been	used	to	arrive	at	operating	results	related	to	non-U.S. activities,	including	the	application	of	transfer	pricing	and	asset	and	liability	management	policies.	Interest	expense	allocations	are	based	on	the	average	cost	of	short- term	borrowed	funds.

The	following	table	summarizes	non-U.S.	operating	results	for	the	years	ended	December	31,	and	assets	as	of	December	31,	based	on	the	domicile	location	of customers:

| (In	millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Results\tof\tOperations: |  |  |  |
| Total\tfee\trevenue | $\t2,349 | $\t1,881 | $\t1,549 |
| Interest\trevenue | 749 | 653 | 660 |
| Interest\texpense | 357 | 404 | 393 |
| Net\tinterest\trevenue | 392 | 249 | 267 |
| Total\trevenue | 2,741 | 2,130 | 1,816 |
| Operating\texpenses | 1,840 | 1,589 | 1,309 |
| Income\tbefore\tincome\ttaxes | 901 | 541 | 507 |
| Income\ttax\texpense | 346 | 205 | 191 |
| Net\tincome | $\t\t\t\t555 | $\t\t\t\t336 | $\t\t\t\t316 |
| Assets: |  |  |  |
| Interest-bearing\tdeposits\twith\tbanks | $\t5,193 | $\t11,235 | $\t20,451 |
| Other\tassets | 19,510 | 8,800 | 6,719 |
| Total\tassets | $\t24,703 | $\t20,035 | $\t27,170 |

Non-U.S.	revenue	for	2006	included	$833	million	in	the	United	Kingdom,	primarily	from	our	London	operations.

# Note	24.	Fair	Values	of	Financial	Instruments

Fair	value	estimates	are	generally	subjective	in	nature,	and	are	made	as	of	a	specific	point	in	time	based	on	the	characteristics	of	the	financial	instruments	and relevant	market	information.	Disclosure	of	fair	values	is	not	required	for	certain	items,	such	as	lease	financing,	equity	method	investments,	obligations	for	pension	and other	postretirement	plans,	premises	and	equipment,	other	intangible	assets	and	income	tax	assets	and	liabilities.	Accordingly,	aggregate	fair	value	amounts	presented	do not	purport	to	represent,	and	should	not	be	considered	representative	of,	our	underlying	"market"	or	franchise	value.	In	addition,	because	of	differences	in methodologies	and	assumptions	used	to	estimate	fair	values,	our	fair	values	should	not	be	compared	to	those	of	other	financial	institutions.

We	use	the	following	methods	to	estimate	the	fair	value	of	financial	instruments:

·							For	financial	instruments	that	have	quoted	market	prices,	those	quoted	prices	are	used	to	determine	fair	value.

·							Financial	instruments	that	have	no	defined	maturity,	have	a	remaining	maturity	of	180	days	or	less,	or	reprice	frequently	to	a	market	rate	are	assumed	to	have	a fair	value	that	approximates	reported	value,	after	taking	into	consideration	any	applicable	credit	risk.

·							If	no	quoted	market	prices	are	available,	financial	instruments	are	valued	by	discounting	the	expected	cash	flow(s)	using	an	estimated	current	market	interest	rate for	the	financial	instrument.

·							For	derivative	financial	instruments,	fair	value	is	estimated	as	the	amount	at	which	an	asset	or	liability	could	be	bought	or	sold	in	a	current	transaction	between willing	parties,	other	than	in	a	forced	liquidation	or	sale.

The	short	maturity	of	our	assets	and	liabilities	results	in	a	significant	number	of	financial	instruments	for	which	fair	value	equals	or	closely	approximates	the	value reported	in	our	consolidated	statement	of	condition.	These	financial	instruments	are	reported	in	the	following	captions	in	the	consolidated	statement	of	condition:	cash and	due	from	banks;	interest-bearing	deposits	with	banks;	securities	purchased	under	resale	agreements;	accrued	income	receivable;	deposits;	securities	sold	under repurchase	agreements;	federal	funds	purchased;	and	other	short-term	borrowings.	The	fair	value	of	trading	account	assets	equals	their	reported	value.	In	addition,	due	to the	relatively	short-term	nature	of	our	net	loans	(excluding	leases),	substantially	all	of	which	are	due	within	one	year,	we	have	determined	that	fair	value	approximates the	reported	value.	Loan	commitments	have	no	reported	value	because	terms	are	at	prevailing	market	rates.

The	reported	value	and	fair	value	for	other	captions	in	the	consolidated	statement	of	condition	were	as	follows	as	of	December	31:

# STATEMENT	OF	CONDITION

| As	of	December	31,<br>(In	millions) | 2006 | 2005 |
| :--- | :--- | :--- |
| Assets: |  |  |
| Interest-bearing\tdeposits\twith\tbank\tsubsidiary | $841 | $550 |
| Securities\tpurchased\tunder\tresale\tagreements\tfrom: |  |  |
| External\tparties | 9,269 | 8,464 |
| Consolidated\tnon-bank\tsubsidiary\tand\tunconsolidated\taffiliates | 21 | 615 |
| Investment\tsecurities\tavailable\tfor\tsale | 103 | 91 |
| Investments\tin\tsubsidiaries: |  |  |
| Consolidated\tbank\tsubsidiary | 6,768 | 6,139 |
| Consolidated\tnon-bank\tsubsidiaries | 940 | 983 |
| Unconsolidated\taffiliates | 166 | 164 |
| Notes\tand\tother\treceivables\tfrom: |  |  |
| Consolidated\tbank\tsubsidiary | 3 | 19 |
| Consolidated\tnon-bank\tsubsidiaries\tand\taffiliates | 120 | 71 |
| Other\tassets | 140 | 70 |
| Total\tassets | $18,371 | $17,166 |
| Liabilities: |  |  |
| Securities\tsold\tunder\trepurchase\tagreements | $8,772 | $8,624 |
| Commercial\tpaper | 998 | 864 |
| Accrued\ttaxes,\texpenses\tand\tother\tliabilities\tdue\tto: |  |  |
| Consolidated\tbank\tsubsidiary | 54 | 33 |
| Consolidated\tnon-bank\tsubsidiaries | 7 | 7 |
| External\tparties | 167 | 148 |
| Long-term\tdebt | 1,121 | 1,123 |
| Total\tliabilities | 11,119 | 10,799 |
| Shareholders'\tequity | 7,252 | 6,367 |
| Total\tliabilities\tand\tshareholders'\tequity | $18,371 | $17,166 |

# STATEMENT	OF	CASH	FLOWS

| Years	ended	December	31,<br>(In	millions) | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Net\tCash\tProvided\tby\tOperating\tActivities | $497 | $512 | $412 |
| Investing\tActivities: |  |  |  |
| Net\tdecrease\t(increase)\tin\tinterest-bearing\tdeposits\twith\tbank\tsubsidiary | (291) | 580 | (327) |
| Net\t(increase)\tdecrease\tin\tsecurities\tpurchased\tunder\tresale\tagreements | (211) | (6,845) | 5,154 |
| Purchases\tof\tavailable-for-sale\tsecurities | (2) | (378) | (43) |
| Sales\tof\tavailable-for-sale\tsecurities | — | 385 | 43 |
| Investments\tin\tconsolidated\tbank\tsubsidiary | (5) | — | — |
| Investments\tin\tnon-bank\tsubsidiaries\tand\taffiliates | 22 | (20) | (75) |
| Net\tdecrease\tin\tnotes\treceivable\tfrom\tsubsidiaries | 1 | 15 | 26 |
| Other | 141 | 12 | 13 |
| Net\tcash\t(used\tin)\tprovided\tby\tinvesting\tactivities | (345) | (6,251) | 4,791 |
| Financing\tActivities: |  |  |  |
| Net\tincrease\t(decrease)\tin\tshort-term\tborrowings | 148 | 6,506 | (4,914) |
| Net\tincrease\t(decrease)\tin\tcommercial\tpaper | 134 | (102) | (15) |
| Repayments\tof\tlong-term\tdebt | — | (345) | — |
| Proceeds\tfrom\tSPACES,\tnet\tof\tissuance\tcosts | — | 345 | — |
| Purchases\tof\tcommon\tstock | (368) | (664) | (178) |
| Proceeds\tfrom\tissuance\tof\ttreasury\tstock\tfor\tstock\tawards\tand\toptions\texercised | 193 | 231 | 113 |
| Payments\tfor\tcash\tdividends | (259) | (232) | (209) |
| Net\tcash\t(used\tin)\tprovided\tby\tfinancing\tactivities | (152) | 5,739 | (5,203) |
| Net\tchange | — | — | — |
| Cash\tand\tdue\tfrom\tbanks\tat\tbeginning\tof\tyear | — | — | — |
| Cash\tand\tdue\tfrom\tbanks\tat\tend\tof\tyear | $— | $— | $— |

# Distribution	of	Average	Assets,	Liabilities	and	Shareholders'	Equity;	Interest	Rates	and	Interest	Differential

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

| Years	ended	December	31, |  | 2006 |  |  | 2005 |  |  | 2004 |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Average |  | Average | Average |  | Average | Average |  | Average |
| (Dollars\tin\tmillions;\tfully\ttaxable-equivalent) | Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate |
| Assets: |  |  |  |  |  |  |  |  |  |
| Interest-bearing\tdeposits\twith\tnon-U.S.\tbanks | $\t9,581 | $\t412 | 4.30% $\t17,186 | 4.30% $\t17,186 | $\t527 | 3.07% | $\t27,221 | $\t589 | 2.17% |
| Interest-bearing\tdeposits\twith\tU.S.\tbanks | 40 | 2 | 5.00 | 74 | 2 | 2.60 | 167 | 2 | .94 |
| Securities\tpurchased\tunder\tresale\tagreements | 12,543 | 649 | 5.18 | 12,579 | 403 | 3.21 | 13,733 | 191 | 1.39 |
| Federal\tfunds\tsold | 277 | 14 | 4.91 | 311 | 9 | 2.82 | 359 | 5 | 1.29 |

| Trading	account	assets(2) | 975 | 48 | 4.91 | 470 | 21 | 4.39 | 614 | 14 | 2.36 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Investment\tsecurities: |  |  |  |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tfederal\tagencies | 21,160 | 1,011 | 4.78 | 24,833 | 866 | 3.49 | 22,314 | 536 | 2.40 |
| State\tand\tpolitical\tsubdivisions(2) | 2,616 | 115 | 4.45 | 1,839 | 78 | 4.23 | 1,945 | 77 | 3.93 |
| Other\tinvestments | 37,803 | 1,830 | 4.84 | 24,481 | 873 | 3.56 | 11,834 | 277 | 2.31 |
| Commercial\tand\tfinancial\tloans | 5,338 | 205 | 3.84 | 3,718 | 106 | 2.85 | 3,433 | 59 | 1.72 |
| Lease\tfinancing(2) | 2,332 | 83 | 3.59 | 2,295 | 87 | 3.81 | 2,256 | 82 | 3.61 |
| Total\tinterest-earning\tassets(2) | 92,665 | 4,369 | 4.72 | 87,786 | 2,972 | 3.39 | 83,876 | 1,832 | 2.18 |
| Cash\tand\tdue\tfrom\tbanks | 2,977 |  |  | 2,598 |  |  | 2,853 |  |  |
| Other\tassets | 10,802 |  |  | 9,385 |  |  | 8,413 |  |  |
| Total\tassets | $\t106,444 |  |  | $\t99,769 |  |  | $\t95,142 |  |  |
| Liabilities\tand\tShareholders'\tEquity: |  |  |  |  |  |  |  |  |  |
| Interest-bearing\tdeposits: |  |  |  |  |  |  |  |  |  |
| Time | $\t1,617 | 57 | 3.52 | $\t2,058 | 66 | 3.19 | $\t5,352 | 72 | 1.35 |
| Savings | 836 | 32 | 3.81 | 934 | 21 | 2.28 | 855 | 6 | .72 |
| Non-U.S. | 53,182 | 1,802 | 3.39 | 46,711 | 1,045 | 2.24 | 39,046 | 434 | 1.11 |
| Total\tinterest-bearing\tdeposits | 55,635 | 1,891 | 3.40 | 49,703 | 1,132 | 2.28 | 45,253 | 512 | 1.13 |
| Securities\tsold\tunder\trepurchase\tagreements | 20,883 | 914 | 4.38 | 22,432 | 613 | 2.73 | 22,989 | 234 | 1.02 |
| Federal\tfunds\tpurchased | 2,777 | 140 | 5.04 | 2,306 | 75 | 3.23 | 2,891 | 41 | 1.40 |
| Other\tshort-term\tborrowings | 2,039 | 91 | 4.46 | 1,970 | 65 | 3.30 | 1,736 | 40 | 2.28 |
| Long-term\tdebt | 2,621 | 178 | 6.77 | 2,461 | 138 | 5.63 | 2,319 | 101 | 4.36 |
| Total\tinterest-bearing\tliabilities | 83,955 | 3,214 | 3.83 | 78,872 | 2,023 | 2.57 | 75,188 | 928 | 1.23 |
| Noninterest-bearing\tdeposits: |  |  |  |  |  |  |  |  |  |
| Special\ttime | 7,282 |  |  | 6,880 |  |  | 6,697 |  |  |
| Demand | 663 |  |  | 1,243 |  |  | 1,296 |  |  |
| Non-U.S.(3) | 329 |  |  | 170 |  |  | 53 |  |  |
| Other\tliabilities | 7,471 |  |  | 6,426 |  |  | 5,900 |  |  |
| Shareholders'\tequity | 6,744 |  |  | 6,178 |  |  | 6,008 |  |  |
| Total\tliabilities\tand\tshareholders'\tequity | $\t106,444 |  |  | $\t99,769 |  |  | $\t95,142 |  |  |
| Net\tinterest\trevenue |  | $\t1,155 |  |  | $\t949 |  |  | $\t904 |  |
| Excess\tof\trate\tearned\tover\trate\tpaid |  |  | .89% |  |  | .82% |  |  | .95% |
| Net\tinterest\tmargin(1) |  |  | 1.25 |  |  | 1.08 |  |  | 1.08 |

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

(2)													Fully	taxable-equivalent	revenue	is	a	method	of	presentation	in	which	the	tax	savings	achieved	by	investing	in	tax-exempt	securities	are	included	in	interest	revenue	with	a	corresponding	charge to	income	tax	expense.	This	method	facilitates	the	comparison	of	the	performance	of	tax-exempt	and	taxable	securities.	The	adjustment	is	computed	using	a	federal	income	tax	rate	of	35%, adjusted	for	applicable	state	income	taxes,	net	of	the	related	federal-tax	benefit.	The	fully	taxable-equivalent	adjustments	included	in	interest	revenue	above	were	$45	million,	$42	million	and $45	million	for	the	years	ended	December	31,	2006,	2005	and	2004,	respectively.

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

| Years	ended	December	31,<br>(Dollars	in	millions;	fully	taxable-equivalent) | Change	in<br>Volume | 2006	Compared	to	2005<br>Change	in<br>Rate | Net	(Decrease)<br>Increase | Change	in<br>Volume | 2005	Compared	to	2004<br>Change	in<br>Rate | Net	(Decrease)<br>Increase |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Interest\tRevenue\tRelated\tto: |  |  |  |  |  |  |
| Interest-bearing\tdeposits\twith\tnon-U.S. |  |  |  |  |  |  |
| banks | $\t(233) | $\t\t118 | $\t(115) | $\t(219) | $\t\t157 | $\t\t\t(62) |
| Interest-bearing\tdeposits\twith\tU.S.\tbanks | (1) | 1 | — | — | — | — |
| Securities\tpurchased\tunder\tresale |  |  |  |  |  |  |
| agreements | (1) | 247 | 246 | (16) | 228 | 212 |
| Federal\tfunds\tsold | (1) | 6 | 5 | (1) | 5 | 4 |
| Trading\taccount\tassets | 22 | 5 | 27 | (3) | 10 | 7 |
| Investment\tsecurities: |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tfederal\tagencies | (128) | 273 | 145 | 60 | 270 | 330 |
| State\tand\tpolitical\tsubdivisions | 20 | 17 | 37 | (4) | 5 | 1 |
| Other\tinvestments | 488 | 469 | 957 | 296 | 300 | 596 |
| Commercial\tand\tfinancial\tloans | 46 | 53 | 99 | 5 | 42 | 47 |
| Lease\tfinancing | 1 | (5) | (4) | 1 | 4 | 5 |
| Total\tinterest-earning\tassets | 213 | 1,184 | 1,397 | 119 | 1,021 | 1,140 |
| Interest\tExpense\tRelated\tto: |  |  |  |  |  |  |
| Deposits: |  |  |  |  |  |  |
| Time | (14) | 5 | (9) | (44) | 38 | (6) |
| Savings | (2) | 13 | 11 | 1 | 14 | 15 |
| Non-U.S. | 145 | 612 | 757 | 85 | 526 | 611 |
| Securities\tsold\tunder\trepurchase |  |  |  |  |  |  |
| agreements | (42) | 343 | 301 | (5) | 384 | 379 |
| Federal\tfunds\tpurchased | 15 | 50 | 65 | (8) | 42 | 34 |
| Other\tshort-term\tborrowings | 2 | 24 | 26 | 5 | 20 | 25 |
| Long-term\tdebt | 10 | 30 | 40 | 6 | 31 | 37 |
| Total\tinterest-bearing\tliabilities | 114 | 1,077 | 1,191 | 40 | 1,055 | 1,095 |
| Net\tinterest\trevenue | $\t\t\t99 | $\t\t107 | $\t\t206 | $\t\t\t79 | $\t\t\t(34) | $\t\t\t\t45 |

# Quarterly	Summarized	Financial	Information

(Dollars	and	shares	in	millions, except	per	share	amounts)

Fourth

2006	Quarters Third Second First

Third Second

First

| Total	fee	revenue | $1,305 | $1,246 | $1,375 | $1,260 | $1,176 | $1,135 | $1,143 | $1,097 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Interest\trevenue | 1,226 | 1,103 | 1,034 | 961 | 861 | 773 | 693 | 603 |
| Interest\texpense | 910 | 837 | 772 | 695 | 619 | 537 | 476 | 391 |
| Net\tinterest\trevenue | 316 | 266 | 262 | 266 | 242 | 236 | 217 | 212 |
| Provision\tfor\tloan\tlosses | — | — | — | — | — | — | — | — |
| Net\tinterest\trevenue\tafter\tprovision\tfor\tloan |  |  |  |  |  |  |  |  |
| losses | 316 | 266 | 262 | 266 | 242 | 236 | 217 | 212 |
| Gains\t(Losses)\ton\tsales\tof\tavailable-for-sale |  |  |  |  |  |  |  |  |
| securities,\tnet | 1 | 3 | 14 | (3) | (2) | 1 | 1 | (1) |
| Gain\ton\tsale\tof\tdivested\tbusiness | — | — | — | — | — | 16 | — | — |
| Total\trevenue | 1,622 | 1,515 | 1,651 | 1,523 | 1,416 | 1,388 | 1,361 | 1,308 |
| Total\toperating\texpenses | 1,178 | 1,090 | 1,176 | 1,096 | 1,039 | 1,008 | 1,028 | 966 |
| Income\tfrom\tcontinuing\toperations\tbefore |  |  |  |  |  |  |  |  |
| income\ttaxes | 444 | 425 | 475 | 427 | 377 | 380 | 333 | 342 |
| Income\ttax\texpense\tfrom\tcontinuing |  |  |  |  |  |  |  |  |
| operations | 135 | 147 | 248 | 145 | 128 | 130 | 113 | 116 |
| Income\tfrom\tcontinuing\toperations | 309 | 278 | 227 | 282 | 249 | 250 | 220 | 226 |
| Net\tincome\t(loss)\tfrom\tdiscontinued |  |  |  |  |  |  |  |  |
| operations | — | — | — | 10 | — | (107) | — | — |
| Net\tincome | $309 | $278 | $227 | $292 | $249 | $143 | $220 | $226 |
| Earnings\tPer\tShare\tFrom\tContinuing |  |  |  |  |  |  |  |  |
| Operations: |  |  |  |  |  |  |  |  |
| Basic | $.93 | $.84 | $.69 | $.85 | $.75 | $.76 | $.67 | $.68 |
| Diluted | .91 | .83 | .68 | .84 | .74 | .75 | .66 | .67 |
| Income\t(Loss)\tPer\tShare\tFrom\tDiscontinued |  |  |  |  |  |  |  |  |
| Operations: |  |  |  |  |  |  |  |  |
| Basic | $— | $— | $— | $.03 | $— | $(.33) | $— $— | $— $— |
| Diluted | — | — | — | .03 | — | (.32) | — | — |
| Earnings\tPer\tShare: |  |  |  |  |  |  |  |  |
| Basic | $.93 | $.84 | $.69 | $.88 | $.75 | $.43 | $.67 | $.68 |
| Diluted | .91 | .83 | .68 | .87 | .74 | .43 | .66 | .67 |
| Average\tShares\tOutstanding: |  |  |  |  |  |  |  |  |
| Basic | 331 | 330 | 331 | 333 | 331 | 329 | 330 | 332 |
| Diluted | 337 | 336 | 336 | 337 | 337 | 334 | 334 | 335 |
| Dividends\tper\tshare | $.21 | $.20 | $.20 | $.19 | $.19 | $.18 | $.18 | $.17 |
| Stock\tprice: |  |  |  |  |  |  |  |  |
| High | $68.36 | $63.67 | $65.91 | $62.95 | $59.80 | $51.50 | $51.93 | $49.25 |
| Low | 61.50 | 54.49 | 56.86 | 55.44 | 48.47 | 47.20 | 40.62 | 42.60 |
| Close | 67.44 | 62.40 | 58.09 | 60.43 | 55.44 | 48.92 | 48.25 | 43.72 |

# ITEM	9.																CHANGES	IN	AND	DISAGREEMENTS	WITH	ACCOUNTANTS	ON	ACCOUNTING	AND	FINANCIAL	DISCLOSURE

# ITEM	9A.								CONTROLS	AND	PROCEDURES

DISCLOSURE	CONTROLS	AND	PROCEDURES:	CHANGES	IN	INTERNAL	CONTROL	OVER	FINANCIAL	REPORTING

State	Street	has	established	and	maintains	disclosure	controls	and	other	procedures	that	are	designed	to	ensure	that	material	information	relating	to	State	Street	and its	subsidiaries	on	a	consolidated	basis	required	to	be	disclosed	in	its	reports	filed	or	submitted	under	the	Securities	Exchange	Act	of	1934	is	recorded,	processed, summarized,	and	reported	within	the	time	periods	specified	in	the	SEC's	rules	and	forms,	and	that	such	information	is	accumulated	and	communicated	to	State	Street management,	including	its	Chief	Executive	Officer	and	Chief	Financial	Officer,	as	appropriate,	to	allow	timely	decisions	regarding	required	disclosure.	For	the	fiscal quarter	ended	December	31,	2006,	State	Street	carried	out	an	evaluation,	under	the	supervision	and	with	the	participation	of	State	Street	management,	including	its	Chief Executive	Officer	and	Chief	Financial	Officer,	of	the	effectiveness	of	the	design	and	operation	of	State	Street's	disclosure	controls	and	procedures.	Based	on	the evaluation	of	these	disclosure	controls	and	procedures,	the	Chief	Executive	Officer	and	Chief	Financial	Officer	concluded	that	State	Street's	disclosure	controls	and procedures	were	effective	as	of	December	31,	2006.

State	Street	has	also	established	and	maintains	internal	control	over	financial	reporting	as	a	process	designed	to	provide	reasonable	assurance	regarding	the reliability	of	financial	reporting	and	the	preparation	of	consolidated	financial	statements	for	external	purposes	in	accordance	with	accounting	principles	generally accepted	in	the	United	States.	In	the	ordinary	course	of	business,	State	Street	routinely	enhances	its	internal	controls	and	procedures	for	financial	reporting	by	either upgrading	its	current	systems	or	implementing	new	systems.	Changes	have	been	made	and	will	be	made	to	State	Street's	internal	controls	and	procedures	for	financial reporting	as	a	result	of	these	efforts.	During	the	fiscal	quarter	ended	December	31,	2006,	there	was	no	change	in	State	Street's	internal	control	over	financial	reporting that	has	materially	affected,	or	is	reasonably	likely	to	materially	affect,	State	Street's	internal	control	over	financial	reporting.

# INTERNAL	CONTROL	OVER	FINANCIAL	REPORTING

# Management's	Report	on	Internal	Control	Over	Financial	Reporting

The	management	of	State	Street	is	responsible	for	the	preparation	and	fair	presentation	of	the	financial	statements	and	other	financial	information	contained	in	this Form	10-K.	Management	is	also	responsible	for	establishing	and	maintaining	adequate	internal	control	over	financial	reporting.	Management	has	designed	business processes	and	internal	controls	and	has	also	established	and	is	responsible	for	maintaining	a	business	culture	that	fosters	financial	integrity	and	accurate	reporting.	To these	ends,	management	maintains	a	comprehensive	system	of	internal	controls	intended	to	provide	reasonable	assurances	regarding	the	reliability	of	financial	reporting and	the	preparation	of	the	consolidated	financial	statements	of	State	Street	in	accordance	with	generally	accepted	accounting	principles.	State	Street's	accounting policies	and	internal	controls	over	financial	reporting,	established	and	maintained	by	management,	are	under	the	general	oversight	of	State	Street's	Board	of	Directors, including	State	Street's	Examining	and	Audit	Committee.

Management	has	made	a	comprehensive	review,	evaluation,	and	assessment	of	State	Street's	internal	control	over	financial	reporting	as	of	December	31,	2006.	The standard	measures	adopted	by	management

in	making	its	evaluation	are	the	measures	in	the	Integrated	Framework	published	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(the COSO	Framework).

Based	upon	its	review	and	evaluation,	management	has	concluded	that	State	Street's	internal	control	over	financial	reporting	is	effective	at	December	31,	2006, and	that	there	were	no	material	weaknesses	in	State	Street's	internal	control	over	financial	reporting	as	of	that	date.

Ernst	&	Young	LLP,	an	independent	registered	public	accounting	firm,	which	has	audited	and	reported	on	the	consolidated	financial	statements	contained	in	this Form	10-K,	has	issued	its	written	attestation	report	on	management's	assessment	of	State	Street's	internal	control	over	financial	reporting	which	follows	this	report.

# Report	of	Independent	Registered	Public	Accounting	Firm	on	Internal	Control	Over	Financial	Reporting

# THE	SHAREHOLDERS	AND	BOARD	OF	DIRECTORS

We	have	audited	management's	assessment,	included	in	the	accompanying	Management's	Report	on	Internal	Control	Over	Financial	Reporting,	that	State	Street Corporation	maintained	effective	internal	control	over	financial	reporting	as	of	December	31,	2006,	based	on	criteria	established	in	Internal	Control—Integrated Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(the	COSO	criteria).	State	Street	Corporation's	management	is responsible	for	maintaining	effective	internal	control	over	financial	reporting	and	for	its	assessment	of	the	effectiveness	of	internal	control	over	financial	reporting.	Our responsibility	is	to	express	an	opinion	on	management's	assessment	and	an	opinion	on	the	effectiveness	of	the	company's	internal	control	over	financial	reporting	based on	our	audit.

We	conducted	our	audit	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we	plan and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	effective	internal	control	over	financial	reporting	was	maintained	in	all	material	respects.	Our	audit included	obtaining	an	understanding	of	internal	control	over	financial	reporting,	evaluating	management's	assessment,	testing	and	evaluating	the	design	and	operating effectiveness	of	internal	control,	and	performing	such	other	procedures	as	we	considered	necessary	in	the	circumstances.	We	believe	that	our	audit	provides	a	reasonable basis	for	our	opinion.

A	company's	internal	control	over	financial	reporting	is	a	process	designed	to	provide	reasonable	assurance	regarding	the	reliability	of	financial	reporting	and	the preparation	of	financial	statements	for	external	purposes	in	accordance	with	generally	accepted	accounting	principles.	A	company's	internal	control	over	financial reporting	includes	those	policies	and	procedures	that	(1)	pertain	to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and dispositions	of	the	assets	of	the	company;	(2)	provide	reasonable	assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial	statements	in accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the	company	are	being	made	only	in	accordance	with	authorizations	of management	and	directors	of	the	company;	and	(3)	provide	reasonable	assurance	regarding	prevention	or	timely	detection	of	unauthorized	acquisition,	use,	or disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of effectiveness	to	future	periods	are	subject	to	the	risk	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of	compliance	with	the policies	or	procedures	may	deteriorate.

In	our	opinion,	management's	assessment	that	State	Street	Corporation	maintained	effective	internal	control	over	financial	reporting	as	of	December	31,	2006,	is fairly	stated,	in	all	material	respects,	based	on	the	COSO	criteria.	Also,	in	our	opinion,	State	Street	Corporation	maintained,	in	all	material	respects,	effective	internal control	over	financial	reporting	as	of	December	31,	2006,	based	on	the	COSO	criteria.

We	also	have	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	consolidated	statement	of condition	of	State	Street	Corporation	as	of	December	31,	2006	and	2005,	and	the	related	consolidated	statements	of	income,	changes	in	shareholders'	equity,	and	cash flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2006	of	State	Street	Corporation	and	our	report	dated	February	15,	2007	expressed	an	unqualified opinion	thereon.

# ITEM	9B.							OTHER	INFORMATION

# PART	III

# ITEM	10.									DIRECTORS,	EXECUTIVE	OFFICERS	AND	CORPORATE	GOVERNANCE

Information	concerning	our	directors	will	appear	in	our	Proxy	Statement	for	the	2007	Annual	Meeting	of	Shareholders,	to	be	filed	pursuant	to	Regulation	14A	on	or before	April	30,	2007,	under	the	caption	"Election	of	Directors."	Such	information	is	incorporated	herein	by	reference.

Information	concerning	our	executive	officers	appears	under	the	caption	"Executive	Officers	of	the	Registrant"	in	Item	4A	of	this	Form	10-K.

Information	concerning	our	Examining	and	Audit	Committee	will	appear	in	our	Proxy	Statement	for	the	2007	Annual	Meeting	of	Shareholders,	to	be	filed	pursuant to	Regulation	14A	on	or	before	April	30,	2007,	under	the	caption	"Corporate	Governance	at	State	Street—Committees	of	the	Board	of	Directors."	Such	information	is incorporated	herein	by	reference.

Information	concerning	compliance	with	Section	16(a)	of	the	Securities	Exchange	Act	will	appear	in	our	Proxy	Statement	for	the	2007	Annual	Meeting	of Shareholders,	to	be	filed	pursuant	to	Regulation	14A	on	or	before	April	30,	2007,	under	the	caption	"Section	16(a)	Beneficial	Ownership	Reporting	Compliance."	Such information	is	incorporated	herein	by	reference.

Our	Board	has	adopted	a	Code	of	Ethics	for	Senior	Financial	Officers	that	applies	to	our	Chief	Executive	Officer,	Chief	Financial	Officer	and	Corporate	Controller. The	code	of	ethics	has	been	posted	on	our	Internet	website	at	www.statestreet.com.	We	intend	to	satisfy	the	disclosure	requirements	under	Item	5.05	of	Form	8-K regarding	an	amendment	to,	or	waiver	from,	a	provision	of	the	code	of	ethics,	and	that	relates	to	a	substantive	amendment	or	material	departure	from	a	provision	of	the code	of	ethics,	by	posting	such	information	on	our	Internet	website	at	www.statestreet.com.	We	also	intend	to	satisfy	the	disclosure	requirements	of	the	NYSE	listing standards	regarding	waivers	of	the	Standard	of	Conduct	for	Directors,	and	waivers	for	executive	officers	of	the	Standard	of	Conduct	at	State	Street,	by	posting	such information	on	our	Internet	website	at	www.statestreet.com.

On	February	15,	2007,	State	Street	and	State	Street	Bank	entered	into	agreements	with	each	of	the	directors	and	executive	officers	that	provided	for	indemnification consistent	with	Chapter	156D	of	the	Massachusetts	General	Laws.

Information	in	response	to	this	item	will	appear	in	our	Proxy	Statement	for	the	2007	Annual	Meeting	of	Shareholders,	to	be	filed	pursuant	to	Regulation	14A	on	or before	April	30,	2007,	under	the	caption	"Executive	Compensation."		Such	information	is	incorporated	herein	by	reference.

On	February	14,	2007,	the	Executive	Compensation	Committee	of	the	Board	approved	a	supplemental	award	to	William	W.	Hunt,	Vice	Chairman	of	State	Street and	President	and	Chief	Executive	Officer	of	State	Street	Global	Advisors,	in	the	amount	of	$1,542,000.	This	award	is	intended	to	reward	Mr.	Hunt	for	his	individual accomplishments	and	to	align	his	compensation	more	closely	with	the	compensation	levels	and	mix	of	pay	provided	to	comparable	executives	in	peer	companies	used	as comparators	for	compensation	purposes.		The	supplemental	award	will	not	qualify	for	the	performance-based	compensation	exception	to	the	federal	income	tax deduction	limit	of	Section	162(m)	of	the	Internal	Revenue	Code	and,	accordingly,	may	not	be	deductible	for	income	tax	purposes	in	whole	or	in	part.

# ITEM	12.									SECURITY	OWNERSHIP	OF	CERTAIN	BENEFICIAL	OWNERS	AND	MANAGEMENT	AND	RELATED	STOCKHOLDER	MATTERS

Information	concerning	security	ownership	of	certain	beneficial	owners	and	management	will	appear	in	our	Proxy	Statement	for	the	2007	Annual	Meeting	of Shareholders,	to	be	filed	pursuant	to	Regulation	14A	on	or	before	April	30,	2007,	under	the	caption	"Beneficial	Ownership	of	Shares."	Such	information	is	incorporated herein	by	reference.

The	following	table	discloses	the	number	of	outstanding	options,	warrants	and	rights	granted	by	State	Street	to	participants	in	equity	compensation	plans,	as	well	as the	number	of	securities	remaining	available	for	future	issuance	under	these	plans,	as	of	December	31,	2006.		The	table	provides	this	information	separately	for	equity compensation	plans	that	have	and	have	not	been	approved	by	shareholders.

| (Shares	in	thousands) | (a)<br>Number	of	securities<br>to	be	issued<br>upon	exercise	of<br>outstanding	options,<br>warrants	and	rights | (b)<br>Weighted-average<br>exercise	price	of<br>outstanding	options,<br>warrants	and	rights | remaining	available	for<br>future	issuance	under<br>equity	compensation<br>plans	(excluding<br>securities	reflected<br>in	column	(a)) |
| :--- | :--- | :--- | :--- |
| Plan\tCategory: |  |  |  |
| Equity\tcompensation\tplans\tapproved\tby\tshareholders | 26,972 | $48.33 | 21,200 |
| Equity\tcompensation\tplans\tnot\tapproved\tby\tshareholders | 143 | 44.98 | — |
| Total | 27,115 | 48.33 | 21,200 |

One	compensation	plan	under	which	equity	securities	of	State	Street	are	authorized	for	issuance	has	been	adopted	without	the	approval	of	shareholders.

In	2001,	the	Board	adopted	the	State	Street	Corporation	Savings-Related	Stock	Plan,	or	"SAYE	Plan,"	for	employees	in	the	United	Kingdom.	Under	the	SAYE Plan,	employee-participants	could	commit	to	save	a	specified	amount	from	after-tax	pay	for	a	fixed	period	(either	three	or	five	years).	Savings	are	deducted automatically.	At	the	end	of	the	period	chosen,	a	tax-free	bonus	is	added	by	State	Street	to	the	savings	amount	(the	level	of	the	bonus	depends	on	the	length	of	the	fixed period	of	savings),	and	participants	have	the	option	to	receive	the	savings	and	bonus	amount	in	cash,	or	to	use	the	amount	to	purchase	common	stock	from	State	Street	at an	exercise	price	equal	to	the	market	price	of	the	stock	as	of	the	date	of	joining	the	SAYE	Plan	less	a	discount	fixed	by	State	Street	at	the	date	of	joining.	For	participants joining	the	SAYE	Plan	in	2001,	the	discount	was	15%.	There	was	no	discount	for	participants	joining	in	2002.	Options	granted	under	the	SAYE	Plan	are	non- transferable.	If	a	participant	withdraws	from	participation	before	the	end	of	the	fixed	period,	the	options	to	purchase	stock	are	forfeited.	If	a	participant	terminates	during the	period	due	to	retirement,	disability,	redundancy	or	sale	of	the	employer	from	State	Street's	group,	the	options	may	be	exercised	within	six	months	of	the	occurrence, or	one	year	if	by	reason	of	death.	Under	the	SAYE	Plan,	an	aggregate	of	170,000	shares	of	common	stock	was	authorized	for	issuance.	The	SAYE	Plan	has	been discontinued	and	no	new	participations	under	the	SAYE	Plan	are	permitted.	At	December	31,	2006,	a	total	of	24,000	shares	of	common	stock	are	eligible	to	be purchased	under	outstanding	options.

In	addition,	individual	directors	who	are	not	our	employees	have	received	annual	awards	of	deferred	stock	for	a	number	of	shares	based	on	the	amount	of	their annual	retainer,	payable	after	the	director	leaves	the	Board	or	attains	a	specific	age.	The	number	of	deferred	shares	includes,	in	the	case	of	certain	directors,	additional deferred	share	amounts	in	respect	of	an	accrual	under	a	terminated	retirement	plan,	and	for	all	directors	is	increased	to	reflect	dividends	paid	on	the	common	stock.	Also, directors	who	are	not	our	employees	may	receive	their	annual	retainer	payable	at	their	option	either	in	shares	of	our	common	stock	or	cash,	and	may	further	elect	to defer	either	50%	or	100%	until	after	termination	of	their	services	as	a	director.	The	number	of	deferred	shares	is	increased	to	reflect	dividends	paid	on	the	common stock.	A	total	of	211,000	shares	of	common	stock	were	outstanding	at	December	31,	2006;	awards	made	through	June	30,	2003	have	not	been	approved	by shareholders.	Awards	of	deferred	stock	made	or	non-deferred	retainer	shares	paid	to	individual	directors	after	June	30,	2003	have	been	or	will	be	made	under	our	1997 or	2006	Equity	Incentive	Plan,	approved	by	shareholders.

# ITEM	13.									CERTAIN	RELATIONSHIPS	AND	RELATED	TRANSACTIONS,	AND	DIRECTOR	INDEPENDENCE

Information	concerning	certain	relationships	and	related	transactions	will	appear	in	our	Proxy	Statement	for	the	2007	Annual	Meeting	of	Shareholders,	to	be	filed pursuant	to	Regulation	14A	on	or	before	April	30,	2007,	under	the	caption	"Related	Person	Transactions."	Such	information	is	incorporated	herein	by	reference.

# ITEM	14.									PRINCIPAL	ACCOUNTANT	FEES	AND	SERVICES

Information	concerning	principal	accountant	fees	and	services	will	appear	in	our	Proxy	Statement	for	the	2007	Annual	Meeting	of	Shareholders,	to	be	filed	pursuant to	Regulation	14A	on	or	before	April	30,	2007,	under	the	caption	"Relationship	with	Independent	Registered	Public	Accounting	Firm."	Such	information	is	incorporated herein	by	reference.

# PART	IV

# ITEM	15.			EXHIBITS	AND	FINANCIAL	STATEMENT	SCHEDULES

# (A)(1)			FINANCIAL	STATEMENTS

The	following	consolidated	financial	statements	of	State	Street	are	included	in	Item	8	hereof:

Consolidated	Statement	of	Condition—As	of	December	31,	2006	and	2005

Consolidated	Statement	of	Changes	in	Shareholders'	Equity—Years	ended	December	31,	2006,	2005	and	2004

Consolidated	Statement	of	Cash	Flows—Years	ended	December	31,	2006,	2005	and	2004

# (A)(2)			FINANCIAL	STATEMENT	SCHEDULES

Certain	schedules	to	the	consolidated	financial	statements	have	been	omitted	if	they	were	not	required	by	Article	9	of	Regulation	S-X	or	if,	under	the	related instructions,	they	were	inapplicable,	or	the	information	was	contained	elsewhere	herein.

A	list	of	the	exhibits	filed	or	incorporated	herein	by	reference	is	as	follows:

10.4† Forms	of	Employment	Agreement	with	Officers	(Levels	1,	2,	and	3)	approved	by	the	Board	of Directors	on	September	1995	(filed	as	Exhibit	10.20	to	State	Street's	Annual	Report	on Form	10-K	for	the	year	ended	December	31,	1995	and	incorporated	herein	by	reference)

# 10.5† State	Street	Global	Advisors	Equity	Compensation	Plan	(filed	as	Exhibit	10	to	State	Street's

Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	September	30,	1996	and	incorporated herein	by	reference)

# 10.6† State	Street's	Executive	Compensation	Trust	Agreement	dated	December	6,	1996	(Rabbi Trust)	(filed	as	Exhibit	10.18	to	State	Street's	Annual	Report	on	Form	10-K	for	the	year	ended December	31,	1996	and	incorporated	herein	by	reference)

10.7F† Form	of	Performance	Award	agreement	under	the	1997	Equity	Incentive	Plan,	payable	in shares	(filed	as	Exhibit	10.2	to	State	Street's	Quarterly	Report	on	Form	10-Q	for	the	quarter ended	June	30,	2006	and	incorporated	herein	by	reference)

10.7G† Form	of	Performance	Award	deferral	election	agreement	under	the	1997	Equity	Incentive	Plan (filed	as	Exhibit	10.2	to	State	Street's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended September	30,	2004	and	incorporated	herein	by	reference)

10.7H† Form	of	Non-Qualified	Stock	Option	Award	agreement	under	the	1997	Equity	Incentive	Plan (filed	as	Exhibit	10.3	to	State	Street's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended September	30,	2004	and	incorporated	herein	by	reference)

10.7I† Form	of	Incentive	Stock	Option	Award	agreement	under	the	1997	Equity	Incentive	Plan	(filed as	Exhibit	10.4	to	State	Street's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended September	30,	2004	and	incorporated	herein	by	reference)

10.10† State	Street's	401(k)	Restoration	and	Voluntary	Deferral	Plan	(filed	as	Exhibit	10	to	State

Street's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	June	30,	2000	and	incorporated herein	by	reference)

†																				Denotes	management	contract	or	compensatory	plan	or	arrangement

# SIGNATURES

Pursuant	to	the	requirement	of	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934,	the	registrant	has	duly	caused	this	report	to	be	signed	on	its	behalf	by	the undersigned,	on	February	15,	2007,	thereunto	duly	authorized.

By /s/	EDWARD	J.	RESCH

EDWARD	J.	RESCH,

Executive	Vice	President,

Chief	Financial	Officer	and	Treasurer

/s/	JAMES	J.	MALERBA

JAMES	J.	MALERBA,

Senior	Vice	President	and

Corporate	Controller

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	report	has	been	signed	below	on	February	15,	2007	by	the	following	persons	on	behalf	of the	registrant	and	in	the	capacities	indicated.

# OFFICERS:

Director

# DIRECTORS:

/s/	TENLEY	E.	ALBRIGHT

TENLEY	E.	ALBRIGHT,	M.D.

/s/	PETER	COYM

PETER	COYM

/s/	AMELIA	C.	FAWCETT AMELIA	C.	FAWCETT

/s/	EDWARD	J.	RESCH

EDWARD	J.	RESCH, Executive	Vice	President, Chief	Financial	Officer	and	Treasurer

/s/	JAMES	J.	MALERBA JAMES	J.	MALERBA, Senior	Vice	President	and	Corporate	Controller

/s/	KENNETT	F.	BURNES

KENNETT	F.	BURNES

/s/	DAVID	P.	GRUBER

DAVID	P.	GRUBER

/s/	CHARLES	R.	LAMANTIA CHARLES	R.	LAMANTIA

/s/	MAUREEN	J.	MISKOVIC MAUREEN	J.	MISKOVIC

/s/	RONALD	L.	SKATES RONALD	L.	SKATES

LINDA	A.	HILL

/s/	RONALD	E.	LOGUE RONALD	E.	LOGUE

/s/	RICHARD	P.	SERGEL RICHARD	P.	SERGEL

/s/	GREGORY	L.	SUMME GREGORY	L.	SUMME

# EXHIBIT	INDEX



Question: what is the percentage change in total assets in unconsolidated conduits from 2005 to 2006?
Calculation: unconsolidated_conduits_2005 = 17.90 * 1000000
unconsolidated_conduits_2006 = 25.25 * 1000000
change = unconsolidated_conduits_2006 - unconsolidated_conduits_2005
percent_change = change / unconsolidated_conduits_2005
answer = percent_change * 100
Answer: 41.1%