- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

                                 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

                     -------------------------------------

                                   
Form 10-Q

            [X]
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31,June 30, 2001

            [_]
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From                      To                      
Commission File No. 0-5108
STATE STREET CORPORATION
            (Exact
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF MASSACHUSETTS
04-2456637
      (State
(State or other jurisdiction                          (I.R.S. Employer
            
of incorporation)
(I.R.S. Employer
Identification No.)
225 Franklin Street                                    02110
          
Boston, Massachusetts                                (Zip Code)
          (Address
(Address of principal
executive office)
02110
(Zip Code)
617-786-3000
             (Registrant's
(Registrant’s telephone number, including area code)

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

¨
The number of shares of the Registrant'sRegistrant’s Common Stock outstanding on March 31,June 30, 2001 was 162,696,138.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------


                            STATE STREET CORPORATION

                               Table of Contents


                                                                          Page
                                                                          ----


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statement of Income.........................................   1
Consolidated Statement of Condition......................................   2
Consolidated Statement of Changes in Stockholders' Equity................   3
Consolidated Statement of Cash Flows.....................................   4
Notes to Consolidated Financial Statements...............................   5
Independent Accountants' Review Report...................................  11

Item 2. Management's Discussion and Analysis of Financial Condition and
 Results of Operations...................................................  12

Item 3. Quantitative and Qualitative Disclosure About Market Risk........  21

PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds........................  21

Item 4. Submission of Matters to a Vote of Security Holders..............  21

Item 6. Exhibits and Reports on Form 8-K.................................  22

Signatures...............................................................  23

Exhibits
326,809,969.
PART I.  ITEM 1.
FINANCIAL STATEMENTS
Consolidated Statement of Income -– State Street Corporation (Unaudited)
- ------------------------------------------------------------------------------

(Dollars in millions, except per share data) Three months
ended March 31,                                                2001     2000
- ------------------------------------------------------------------------------

Fee Revenue
Servicing fees............................................... $   390  $   349
Management fees..............................................     126      181
Foreign exchange trading.....................................      99      106
Processing fees..............................................      60       62
Other........................................................     (39)       7
                                                              -------  -------
 Total fee revenue...........................................     636      705
Net Interest Revenue
Interest revenue.............................................     855      726
Interest expense.............................................     608      514
                                                              -------  -------
 Net interest revenue........................................     247      212
Provision for loan losses....................................       1        3
                                                              -------  -------
 Net interest revenue after provision for loan losses........     246      209
                                                              -------  -------
 Total Revenue...............................................     882      914
Operating Expenses
Salaries and employee benefits...............................     392      386
Information systems and communications.......................      87       78
Transaction processing services..............................      64       75
Occupancy....................................................      53       50
Other........................................................     103       95
                                                              -------  -------
 Total operating expenses....................................     699      684
                                                              -------  -------
 Income before income taxes..................................     183      230
Income taxes.................................................      62       80
                                                              -------  -------
 Net Income.................................................. $   121  $   150
                                                              =======  =======
Earnings Per Share
 Basic....................................................... $   .75  $   .94
 Diluted.....................................................     .73      .92
Average Shares Outstanding (in thousands)
 Basic....................................................... 162,340  159,836
 Diluted..................................................... 165,049  162,743
Cash Dividends Declared Per Share............................ $   .19  $   .16


- --------------------------------------------------------------------------------
(Dollars in millions, except per share data)    Three months ended June 30,
    
2001
  
2000
Fee Revenue
    
    
Servicing fees
    
$    422
    
$    362
Management fees
    
133
    
131
Foreign exchange trading
    
99
    
101
Processing fees
    
65
    
57
Other
    
12
    
5
  
  
  
     Total fee revenue
    
731
    
656
Net Interest Revenue
Interest revenue
    
732
    
768
Interest expense
    
493
    
553
  
  
  
     Net interest revenue
    
239
    
215
Provision for loan losses
    
3
    
2
  
  
  
     Net interest revenue after provision for loan losses
    
236
    
213
  
  
  
     Total Revenue
    
967
    
869
Operating Expenses
Salaries and employee benefits
    
416
    
366
Information systems and communications
    
90
    
75
Transaction processing services
    
60
    
66
Occupancy
    
56
    
48
Other
    
97
    
87
  
  
  
     Total operating expenses
    
719
    
642
  
  
  
     Income before income taxes
    
248
    
227
Income taxes
    
81
    
79
  
  
  
     Net Income
    
$    167
    
$    148
  
  
  
Earnings Per Share
     Basic
    
$      .51
    
$      .46
     Diluted
    
.50
    
.45
Average Shares Outstanding (in thousands)
     Basic
    
325,214
    
321,693
     Diluted
    
330,537
    
328,090
Cash Dividends Declared Per Share
    
$      .10
    
$    .085
    The accompanying notes are an integral part of these financial statements.

                                       1
PART I.  ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Condition -Income – State Street Corporation 
- -------------------------------------------------------------------------------

                                                        March 31,  December 31,
(Dollars in millions)                                     2001         2000
- -------------------------------------------------------------------------------
                                                       (Unaudited)

Assets
Cash and due from banks..............................   $  1,103     $  1,618
Interest-bearing deposits with banks.................     17,988       21,295
Securities purchased under resale agreements and
 securities borrowed.................................     18,602       21,134
Federal funds sold...................................      1,100          650
Trading account assets...............................      1,321        1,004
Investment securities (fair value of $16,767 and
 $13,743)............................................     16,757       13,740
Loans (less allowance of $58 and $57)................      5,356        5,216
Premises and equipment...............................        773          726
Accrued income receivable............................        798          845
Other assets.........................................      3,807        3,070
                                                        --------     --------
  Total Assets.......................................   $ 67,605     $ 69,298
                                                        ========     ========
Liabilities
Deposits:
 Interest-bearing--U.S...............................   $  5,145     $  2,241
 Noninterest-bearing.................................      7,340       10,009
 Interest-bearing--Non-U.S...........................     25,433       25,687
                                                        --------     --------
  Total deposits.....................................     37,918       37,937
Securities sold under repurchase agreements..........     18,312       21,351
Federal funds purchased..............................      1,883          955
Other short-term borrowings..........................        683          632
Accrued taxes and other expenses.....................      1,284        1,431
Other liabilities....................................      2,823        2,511
Long-term debt.......................................      1,218        1,219
                                                        --------     --------
  Total Liabilities..................................     64,121       66,036
Stockholders' Equity
Preferred stock, no par: authorized 3,500,000; issued
 none................................................
Common stock, $1 par: authorized 250,000,000; issued
 167,218,000 and 167,219,000.........................        167          167
Surplus..............................................        140           69
Retained earnings....................................      3,368        3,278
Other unrealized comprehensive gain (loss)...........         29           (1)
Treasury stock, at cost (4,522,000 and 5,508,000
 shares).............................................       (220)        (251)
                                                        --------     --------
  Total Stockholders' Equity.........................      3,484        3,262
                                                        --------     --------
  Total Liabilities and Stockholders' Equity.........   $ 67,605     $ 69,298
                                                        ========     ========


- --------------------------------------------------------------------------------(Unaudited)
(Dollars in millions, except per share data)     Six months ended June 30,
    
2001
    
2000
Fee Revenue
Servicing fees
    
$    812
 
    
$    711
Management fees
    
259
 
    
312
Foreign exchange trading
    
198
 
    
207
Processing fees
    
125
 
    
119
Other
    
(27
)
    
12
  
  
  
  
     Total fee revenue
    
1,367
 
    
1,361
Net Interest Revenue
Interest revenue
    
1,587
 
    
1,494
Interest expense
    
1,101
 
    
1,067
  
  
  
  
     Net interest revenue
    
486
 
    
427
Provision for loan losses
    
4
 
    
5
  
  
  
  
     Net interest revenue after provision for loan losses
    
482
 
    
422
  
  
  
  
     Total Revenue
    
1,849
 
    
1,783
Operating Expenses
Salaries and employee benefits
    
808
 
    
752
Information systems and communications
    
177
 
    
153
Transaction processing services
    
124
 
    
141
Occupancy
    
109
 
    
98
Other
    
200
 
    
182
  
  
  
  
     Total operating expenses
    
1,418
 
    
1,326
  
  
  
  
     Income before income taxes
    
431
 
    
457
Income taxes
    
143
 
    
160
  
  
  
  
     Net Income
    
$    288
 
    
$    297
  
  
  
  
Earnings Per Share
     Basic
    
$      .89
 
    
$      .93
     Diluted
    
.87
 
    
.91
Average Shares Outstanding (in thousands)
     Basic
    
324,949
 
    
320,683
     Diluted
    
330,361
 
    
326,829
Cash Dividends Declared Per Share
    
$    .195
 
    
$    .165
    The accompanying notes are an integral part of these financial statements.


                                       2
PART I.  ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Changes in Stockholders' Equity -Condition – State Street Corporation (Unaudited)


- -----------------------------------------------------------------------------------------------------------------------------------

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

Balance at December 31,
 1999...................      167,225  $ 167   $  55  $ 2,795        $ (57)       7,635  $ (308) $ 2,652
Comprehensive income:
 Net income.............                                  150                                        150
 Change in net
  unrealized gain/loss
  on available-for-sale
  securities, net of
  deferred tax benefit
  of $14................                                               (21)                          (21)
 Foreign currency
  translation, net of
  deferred tax benefit
  of $3.................                                                (5)                           (5)
                              -------  -----   -----  -------        -----       ------  ------  -------
Comprehensive income....                                  150          (26)                          124
Cash dividends
 declared--$.16 per
 share..................                                  (26)                                       (26)
Common stock issued
 pursuant to:
 Stock awards and
  options exercised,
  including nonqualified
  tax benefit of $20....           (1)             3                               (976)     40       43
 Debt conversion........                          (3)                              (104)      3
Common stock acquired...                                                            219     (16)     (16)
                              -------  -----   -----  -------        -----       ------  ------  -------
Balance at March 31,
 2000...................      167,224  $ 167   $  55  $ 2,919        $ (83)       6,774  $ (281) $ 2,777
                              =======  =====   =====  =======        =====       ======  ======  =======
Balance at December 31,
 2000...................      167,219  $ 167   $  69  $ 3,278        $  (1)       5,508  $ (251) $ 3,262
Comprehensive income:
 Net income.............                                  121                                        121
 Change in net
  unrealized gain/loss
  on available-for-sale
  securities, net of
  deferred tax expense
  of $32................                                                45                            45
 Foreign currency
  translation, net of
  deferred tax benefit
  of $10................                                               (19)                          (19)
 Other..................                                                 4                             4
                              -------  -----   -----  -------        -----       ------  ------  -------
Comprehensive income....                                  121           30                           151
Cash dividends
 declared--$.19 per
 share..................                                  (31)                                       (31)
Common stock issued
 pursuant to:
 Acquisitions...........                                                         (1,007)     45       45
 Stock awards and
  options exercised,
  including nonqualified
  tax benefit of $5.....           (1)            71                               (185)      7       78
 Debt conversion........                                                             (4)
Common stock acquired...                                                            210     (21)     (21)
                              -------  -----   -----  -------        -----       ------  ------  -------
Balance at March 31,
 2001...................      167,218  $ 167   $ 140  $ 3,368        $  29        4,522  $ (220) $ 3,484
                              =======  =====   =====  =======        =====       ======  ======  =======


- ----------------
(Dollars in millions)
    
June 30,
2001
    
December 31,
2000
 
    
(Unaudited)
    
 
 
Assets
Cash and due from banks
    
$    1,541
 
    
$    1,618
 
Interest-bearing deposits with banks
    
22,000
 
    
21,295
 
Securities purchased under resale agreements and securities borrowed
    
17,481
 
    
21,134
 
Federal funds sold
    
575
 
    
650
 
Trading account assets
    
1,610
 
    
1,004
 
Investment securities (including securities pledged to creditors of $6,355 and $7,152)
    
17,173
 
    
13,740
 
Loans (less allowance of $61 and $57)
    
5,370
 
    
5,216
 
Premises and equipment
    
823
 
    
726
 
Accrued income receivable
    
924
 
    
845
 
Other assets
    
2,821
 
    
3,070
 
  
  
  
  
  
          Total Assets
    
$ 70,318
 
    
$ 69,298
 
  
  
  
  
  
Liabilities
Deposits:
     Interest-bearing—U.S.
    
$    3,435
 
    
$    2,241
 
     Noninterest-bearing
    
8,997
 
    
10,009
 
     Interest-bearing—Non-U.S.
    
27,917
 
    
25,687
 
  
  
  
  
  
          Total deposits
    
40,349
 
    
37,937
 
Securities sold under repurchase agreements
    
16,466
 
    
21,351
 
Federal funds purchased
    
4,076
 
    
955
 
Other short-term borrowings
    
1,379
 
    
632
 
Accrued taxes and other expenses
    
1,418
 
    
1,431
 
Other liabilities
    
1,735
 
    
2,511
 
Long-term debt
    
1,218
 
    
1,219
 
  
  
  
  
  
          Total Liabilities
    
66,641
 
    
66,036
 
Stockholders’ Equity
Preferred stock, no par: authorized 3,500,000; issued none
    
    
 
    
    
 
Common stock, $1 par: authorized 500,000,000; issued 329,916,000 and
     167,219,000
    
330
 
    
167
 
Surplus
    
109
 
    
69
 
Retained earnings
    
3,340
 
    
3,278
 
Other unrealized comprehensive gain (loss)
    
13
 
    
(1
)
Treasury stock, at cost (3,106,000 and 5,508,000 shares)
    
(115
)
    
(251
)
  
  
  
  
  
          Total Stockholders’ Equity
    
3,677
 
    
3,262
 
  
  
  
  
  
          Total Liabilities and Stockholders’ Equity
    
$ 70,318
 
    
$ 69,298
 
  
  
  
  
  
The accompanying notes are an integral part of these financial statements.

                                       3
PART I.  ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Cash Flows -Changes in Stockholders’ Equity – State Street Corporation (Unaudited)

- ------------------------------------------------------------------------------
(Dollars in millions) Three months ended March 31,              2001     2000
- ------------------------------------------------------------------------------

Operating Activities
Net Income.................................................. $   121  $   150
Non-cash charges for depreciation, amortization, provision
 for loan losses and deferred income taxes..................      90       83
                                                             -------  -------
   Net income adjusted for non-cash charges.................     211      233
Adjustments to reconcile to net cash (used) provided by
 operating activities:
 Securities gains, net......................................      (6)
 Net change in:
  Trading account assets....................................    (317)    (105)
  Other, net................................................    (642)    (258)
                                                             -------  -------
   Net Cash Used by Operating Activities....................    (754)    (130)
                                                             -------  -------
Investing Activities
Payments for purchases of:
 Available-for-sale securities..............................  (4,919)  (2,294)
 Held-to-maturity securities................................  (1,623)     (62)
 Lease financing assets.....................................    (147)    (360)
 Premises and equipment.....................................     (45)     (25)
Proceeds from:
 Maturities of available-for-sale securities................   1,418      645
 Maturities of held-to-maturity securities..................   1,597       45
 Sales of available-for-sale securities.....................     598       22
 Principal collected from lease financing...................       9       23
Net proceeds from (payments for):
 Interest-bearing deposits with banks.......................   3,307    1,356
 Federal funds sold, resale agreements and securities
  borrowed..................................................   2,082      936
 Loans......................................................             (870)
                                                             -------  -------
   Net Cash Provided (Used) by Investing Activities.........   2,277     (584)
                                                             -------  -------
Financing Activities
Proceeds from issuance of:
 Non-recourse debt for lease financing......................      90      302
 Treasury stock.............................................      73       22
Payments for:
 Non-recourse debt for lease financing......................     (70)     (39)
 Cash dividends.............................................     (31)     (26)
 Purchase of common stock...................................     (21)     (16)
Net (payments for) proceeds from:
 Deposits...................................................     (19)   2,009
 Short-term borrowings......................................  (2,060)  (2,358)
                                                             -------  -------
   Net Cash Used by Financing Activities....................  (2,038)    (106)
                                                             -------  -------
   Net Decrease.............................................    (515)    (820)
Cash and due from banks at beginning of period..............   1,618    2,930
                                                             -------  -------
   Cash and Due From Banks at End of Period................. $ 1,103  $ 2,110
                                                             =======  =======


- --------------------------------------------------------------------------------

 
  
Common Stock
  
Surplus
  
Retained
Earnings
  
Other Unrealized
Comprehensive
Gain (Loss)
  
Treasury Stock
  
Total
(Dollars in millions, shares in thousands)
  
Shares
  
Amount
  
Shares
  
Amount
Balance at December 31, 1999
  
167,225
 
  
$  167
  
$    55
 
  
$  2,795
 
  
$  (57
)
  
7,635
 
  
$  (308
)
  
$  2,652
 
Comprehensive income:
  
  
  
  
  
  
  
  
     Net income
  
    
 
  
    
  
    
 
  
297
 
  
    
 
  
    
 
  
    
 
  
297
 
     Change in net unrealized gain/loss on
          available-for-sale securities, net of
          deferred tax benefit of $6
  
    
 
  
    
  
    
 
  
    
 
  
(9
)
  
    
 
  
    
 
  
(9
)
     Foreign currency translation, net
          of deferred tax benefit of $6
  
    
 
  
    
  
    
 
  
    
 
  
(9
)
  
    
 
  
    
 
  
(9
)
  
 
  
 
 
  
 
  
 
  
 
  
 
  
 
  
Comprehensive income
  
    
 
  
    
  
    
 
  
297
 
  
(18
)
  
    
 
  
    
 
  
279
 
Cash dividends declared—$.165 per
     share (post split)
  
    
 
  
    
  
    
 
  
(54
)
  
    
 
  
    
 
  
    
 
  
(54
)
Common stock issued pursuant to:
  
  
  
  
  
  
  
  
     Stock awards and options
          exercised, including
          nonqualified tax benefit of
          $39
  
(3
)
  
    
  
22
 
  
    
 
  
    
 
  
(1,748
)
  
68
 
  
90
 
     Debt conversion
  
    
 
  
    
  
(11
)
  
    
 
  
    
 
  
(226
)
  
12
 
  
1
 
Common stock acquired
  
    
 
  
    
  
    
 
  
    
 
  
    
 
  
419
 
  
(37
)
  
(37
)
  
 
  
 
 
  
 
  
 
  
 
  
 
  
 
  
Balance at June 30, 2000
  
167,222
 
  
$ 167
  
$    66
 
  
$ 3,038
 
  
$ (75
)
  
6,080
 
  
$ (265
)
  
$ 2,931
 
  
 
  
 
 
  
 
  
 
  
 
  
 
  
 
  
 
Balance at December 31, 2000
  
167,219
 
  
$  167
  
$    69
 
  
$  3,278
 
  
$    (1
)
  
5,508
 
  
$  (251
)
  
$  3,262
 
Comprehensive income:
  
  
  
  
  
  
  
  
     Net income
  
    
 
  
    
  
    
 
  
288
 
  
    
 
  
    
 
  
    
 
  
288
 
     Change in net unrealized gain/loss on
          available-for-sale securities, net of
          deferred tax expense of $18
  
    
 
  
    
  
    
 
  
    
 
  
26
 
  
    
 
  
    
 
  
26
 
     Foreign currency translation, net
          of deferred tax benefit of $9
  
    
 
  
    
  
    
 
  
    
 
  
(17
)
  
    
 
  
    
 
  
(17
)
     Other
  
    
 
  
    
  
    
 
  
    
 
  
5
 
  
    
 
  
    
 
  
5
 
  
 
  
 
 
  
 
  
 
  
 
  
 
  
 
  
Comprehensive income
  
    
 
  
    
  
    
 
  
288
 
  
14
 
  
    
 
  
    
 
  
302
 
Cash dividends declared—$.195 per
     share (post split)
  
    
 
  
    
  
    
 
  
(63
)
  
    
 
  
    
 
  
    
 
  
(63
)
Stock split in the form of a 100%
     stock dividend
  
162,698
 
  
163
  
  
(163
)
  
  
139
 
  
  
Common stock issued pursuant to:
  
  
  
  
  
  
  
  
     Acquisitions
  
    
 
  
    
  
43
 
  
    
 
  
    
 
  
(2,490
)
  
139
 
  
182
 
     Stock awards and options
          exercised, including
          nonqualified tax benefit of $9
  
(1
)
  
    
  
(2
)
  
    
 
  
    
 
  
(578
)
  
38
 
  
36
 
     Debt conversion
  
  
  
(1
)
  
  
  
(8
)
  
1
 
  
 
Common stock acquired
  
    
 
  
    
  
    
 
  
    
 
  
    
 
  
535
 
  
(42
)
  
(42
)
  
 
  
 
 
  
 
  
 
  
 
  
 
  
 
  
Balance at June 30, 2001
  
329,916
 
  
$  330
  
$ 109
 
  
$  3,340
 
  
$  13
 
  
3,106
 
  
$  (115
)
  
$  3,677
 
  
 
  
 
 
  
 
  
 
  
 
  
 
  
 
  
The accompanying notes are inan integral part of these financial statements.

                                       4
PART I.  ITEM 1.
FINANCIAL STATEMENTS (continued)
Consolidated Statement of Cash Flows – State Street Corporation (Unaudited)
(Dollars in millions)    Six months ended June 30,
    
2001
 
    
2000
 
Operating Activities
    
    
Net Income
    
$    288
 
    
$    297
 
Non-cash charges for depreciation, amortization, provision for loan losses and deferred
     income taxes
    
137
 
    
180
 
  
  
  
  
  
               Net income adjusted for non-cash charges
    
425
 
    
477
 
Adjustments to reconcile to net cash used by operating activities:
    
    
     Securities gains, net
    
(21
)
    
     Net change in:
    
    
          Trading account assets
    
(606
)
    
(539
)
          Other, net
    
(578
)
    
(63
)
  
  
  
  
  
               Net Cash Used by Operating Activities
    
(780
)
    
(125
)
  
  
  
  
  
Investing Activities
    
    
Payments for purchases of:
    
    
     Available-for-sale securities
    
(9,618
)
    
(3,594
)
     Held-to-maturity securities
    
(3,200
)
    
(194
)
     Lease financing assets
    
(404
)
    
(518
)
     Premises and equipment
    
(121
)
    
(42
)
     Business acquisitions, net of cash acquired
    
(91
)
    
Proceeds from:
    
    
     Maturities of available-for-sale securities
    
3,534
 
    
2,757
 
     Maturities of held-to-maturity securities
    
3,109
 
    
177
 
     Sales of available-for-sale securities
    
2,857
 
    
39
 
     Principal collected from lease financing
    
20
 
    
34
 
Net proceeds from (payments for):
    
    
     Interest-bearing deposits with banks
    
(705
)
    
(735
)
     Federal funds sold, resale agreements and securities borrowed
    
3,728
 
    
(757
)
     Loans
    
50
 
    
(939
)
  
  
  
  
  
               Net Cash Used by Investing Activities
    
(841
)
    
(3,772
)
  
  
  
  
  
Financing Activities
    
    
Proceeds from issuance of:
    
    
     Non-recourse debt for lease financing
    
305
 
    
435
 
     Long-term debt
    
    
300
 
     Treasury stock
    
28
 
    
50
 
Payments for:
    
    
     Non-recourse debt for lease financing
    
(79
)
    
(46
)
     Long-term debt
    
(1
)
    
(2
)
     Cash dividends
    
(62
)
    
(51
)
     Purchase of common stock
    
(42
)
    
(37
)
Net (payments for) proceeds from:
    
    
     Deposits
    
2,412
 
    
3,225
 
     Short-term borrowings
    
(1,017
)
    
 (401
)
  
  
  
  
  
               Net Cash Provided by Financing Activities
    
1,544
 
    
3,473
 
  
  
  
  
  
               Net Decrease
    
(77
)
    
(424
)
Cash and due from banks at beginning of period
    
1,618
 
    
2,930
 
  
  
  
  
  
               Cash and Due From Banks at End of Period
    
$ 1,541
 
    
$ 2,506
 
  
  
  
  
  
The accompanying notes are an integral part of these financial statements.
PART I.  ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements -– State Street Corporation (Unaudited)
Note A--BasisA—Basis of Presentation
        State Street Corporation ("(“State Street"Street” or the "Corporation"“Corporation”) is a financial holding company that provides accounting, administration, custody, daily pricing, investment management, securities lending, foreign exchange, cash management, trading and information services to clients worldwide. State Street reports two lines of business. InvestmentInvestor Services includes accounting, administration, custody, daily pricing, operations outsourcing for investment managers, securities lending, foreign exchange, recordkeeping, deposit and short-term investment facilities, lease financing and information services to support institutions. Investment Management offers a broad array of services for managing financial assets worldwide for both institutions and individual investors, and other financial products. These services include passive and active equity, money market, and fixed income strategies, and brokerage and other related services.
        The consolidated financial statements include the accounts of State Street and its subsidiaries, including its principal subsidiary, State Street Bank and Trust Company ("(“State Street Bank"Bank”). Servicing and management fee revenue is recognized when earned based on contractual terms. Transaction-based revenue is recognized as the services are provided. Revenue on interest-
earninginterest-earning assets is recognized based on the effective yield of the financial instrument. All significant intercompany balances and transactions have been eliminated upon consolidation. The results of operations of businesses purchased are included from the date of acquisition. Investments in affiliates in which the Corporation has the ability to exercise significant influence, but not control, are accounted for using the equity method.
        The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain previously reported amounts have been reclassified to conform to the current method of presentation.
        In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations”, and No. 142, “Goodwill and Other Intangible Assets” effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Corporation will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. During 2002, the Corporation will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. State Street adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", on January 1, 2001. At adoption, State Street
recorded its interest rate swaps designated as cash flow hedges with a fair
valuehas not yet determined what the effect of approximately $5 million in "Other assets"these tests will be on the Consolidated
Statement of Condition. Other unrealized comprehensive gain/loss was increased
by $5 million, as a cumulative effect adjustment for an accounting change.

  State Street records derivative instruments at fair value in the
Consolidated Statement of Condition. The change in the fair valueearnings and financial position of the Corporation's derivative instruments are recorded currently in earnings,
except for certain interest rate swap agreements that are accounted for as
cash flow hedges. The Corporation has determined that these interest rate swap
agreements constitute a fully effective hedge. The changes in fair value of
these interest rate swap agreements are recorded as a separate component of
other unrealized comprehensive gain/loss, in the Consolidated Statement of
Changes in Stockholders' Equity.Corporation.
        In the opinion of management, all adjustments consisting of normal recurring accruals, which are necessary for a fair presentation of the financial position of State Street and subsidiaries at March 31,June 30, 2001 and December 31, 2000, its cash flows for the threesix months ended March 31,June 30, 2001 and 2000, and consolidated results of its operations for the three and six months ended March 31,June 30, 2001 and 2000, have been made. These statements should be read in conjunction with the financial statements and other information included in State Street'sStreet’s latest annual report on Form 10-K.
Note B--AcquisitionB—Acquisitions
        In June 2001, State Street completed the purchase of DST Portfolio Systems, Inc. (“DST”) for 1,483,000 shares of State Street common stock and cash in a transaction accounted for as a purchase. Included in the purchase was the Portfolio Accounting System, an integrated system that automates mutual fund accounting and investment management recordkeeping processes such as security pricing and dividend calculations, income and expense accruals, securities inventories, accounting for daily shareholder activity and calculation of daily net asset values.
        In February 2001, State Street completed the purchase of a majority interest in Bel Air Investment Advisors LLC ("(“Bel Air"Air”) for 1,007,0002,015,000 shares, after adjustment for the stock split, of State Street common stock and cash in a transaction accounted for as

                                       5


PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)

Notes to Consolidated Financial Statements - State Street Corporation
(Unaudited) a purchase. Bel Air is a Los Angeles-based independent investment management firm focused on providing wealth management services to ultra-high-net-worth individuals.
        The pro forma results of operations adjusted to include DST and Bel Air for prior periods are not presented, as the results would not have been materially different.
        State Street Global Advisors® (SSgA®), the asset management division of State Street Bank, announced that it has agreed to acquire the passive equity business of Gartmore Investment Management plc (Gartmore), a subsidiary of Nationwide Mutual Insurance Company. Gartmore is a provider of active investment management products and services to professional advisers, private and institutional clients around the world. Gartmore’s passive equity business has over $25 billion of assets under management. Under the terms of agreement, SSgA will also hire the Gartmore team that manages, services and administers the passive equity business.
Note C--InvestmentC—Investment Securities
        Available-for-sale securities are recorded at fair value and held-to-
maturityheld-to-maturity securities are recorded at amortized cost on the Consolidated Statement of Condition. Investment securities consisted of the following as of the dates indicated:
- -----------------------------------------------------------------------------------------

                                  March 31, 2001                 December 31, 2000
                          ------------------------------- -------------------------------
                                     Unrealized                      Unrealized
                          Amortized ------------   Fair   Amortized ------------   Fair
(Dollars in millions)       Cost    Gains Losses  Value     Cost    Gains Losses  Value
- -----------------------------------------------------------------------------------------

Available for sale:
 U.S. Treasury and
  federal agencies......  $  6,271  $  52        $  6,323 $  5,855  $ 24   $  4  $  5,875
 State and political
  subdivisions..........     1,659     20           1,679    1,673     9      2     1,680
 Asset-backed
  securities............     3,269     32  $ 4      3,297    3,273    11      4     3,280
 Collateralized mortgage
  obligations...........     1,149     10           1,159    1,008     3      2     1,009
 Other investments......     2,952      2    2      2,952      578            2       576
                          --------  -----  ---   -------- --------  ----   ----  --------
 Total..................  $ 15,300  $ 116  $ 6   $ 15,410 $ 12,387  $ 47   $ 14  $ 12,420
                          ========  =====  ===   ======== ========  ====   ====  ========
Held to maturity:
 U.S. Treasury and
  federal agencies......  $  1,299  $  10        $  1,309 $  1,272  $  4   $  1  $  1,275
 Other investments......        48                     48       48                     48
                          --------  -----  ---   -------- --------  ----   ----  --------
 Total..................  $  1,347  $  10        $  1,357 $  1,320  $  4   $  1  $  1,323
                          ========  =====  ===   ======== ========  ====   ====  ========


- -------------------------------------------------------------------------------
 
    
June 30, 2001
    
December 31, 2000
 
    
Amortized
Cost
    
Unrealized
    
Fair
Value
    
Amortized
Cost
    
Unrealized
    
Fair
Value
(Dollars in millions)
    
Gains
    
Losses
    
Gains
    
Losses
Available for sale:
    U.S. Treasury and federal agencies
    
$    6,148
    
$ 31
    
$    4
    
$    6,175
    
$    5,855
    
$ 24
    
$    4
    
$    5,875
    State and political subdivisions
    
1,676
    
21
    
1
    
1,696
    
1,673
    
9
    
2
    
1,680
    Asset-backed securities
    
3,501
    
32
    
10
    
3,523
    
3,273
    
11
    
4
    
3,280
    Collateralized mortgage obligations
    
977
    
8
    
    
985
    
1,008
    
3
    
2
    
1,009
    Other investments
    
3,382
    
1
    
1
    
3,382
    
578
    
    
    
2
    
576
  
  
  
  
  
  
  
  
  
        Total
    
$ 15,684
    
$  93
    
$ 16
    
$ 15,761
    
$ 12,387
    
$  47
    
$ 14
    
$ 12,420
  
  
  
  
  
  
  
  
  
Held to maturity:
    U.S. Treasury and federal agencies
    
$    1,265
    
$    7
    
    
    
$    1,272
    
$    1,272
    
$    4
    
$    1
    
$    1,275
    Other investments
    
147
    
    
    
    
    
147
    
48
    
    
    
    
    
48
  
  
  
  
  
  
  
  
  
        Total
    
$    1,412
    
$    7
    
    
    
$    1,419
    
$    1,320
    
$    4
    
$    1
    
$    1,323
  
  
  
  
  
  
  
  
  
        During the threesix months ended March 31,June 30, 2001, there were gross gains of $6$21 million and gross losses of less than $1 million realized on the sales of $598
million of available-for-sale securities. During the threesix months ended March
31,June 30, 2000, there were gross gains and losses of less than $1 million realized on the sales of $22 million of available-for-sale securities.
PART I.  ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements – State Street Corporation (Unaudited)
Note D--AllowanceD—Allowance for Loan Losses
        State Street establishes an allowance for loan losses to absorb probable credit losses. Changes in the allowance for loan losses for the three months
ended March 31 were as follows:
- --------------------------------------------------------------------------------

(Dollars in millions)                                                 2001 2000
- --------------------------------------------------------------------------------

Balance at beginning of period....................................... $ 57 $ 48
Provision for loan losses............................................    1    3
Loan charge-offs.....................................................        (1)
Recoveries...........................................................
                                                                      ---- ----
 Balance at end of period............................................ $ 58 $ 50
                                                                      ==== ====


- -------------------------------------------------------------------------------

 
  
Three Months
Ended
June 30,
    
Six Months
Ended
June 30,
(Dollars in millions)
  
2001
    
2000
    
2001
    
2000
Balance at beginning of period
  
$ 58
    
$ 50
    
$ 57
    
$ 48
 
Provision for loan losses
  
3
    
2
    
4
    
5
 
Loan charge-offs
  
    
    
    
    
    
    
(1
)
Recoveries
  
    
    
1
    
    
    
1
 
     Balance at end of period
  
$ 61
    
$ 53
    
$ 61
    
$ 53
 
  
 
  
  
  
  
Note E--ProcessingE—Stockholders’ Equity
        A proposal to increase the authorized number of shares of common stock from 250 million to 500 million was approved by stockholders at the Annual Meeting in April 2001. On May 30, 2001, State Street distributed a two-for-one stock split in the form of a 100% stock dividend to stockholders of record on April 30, 2001. The par value of the additional shares was capitalized by a transfer from retained earnings to common stock. Earnings per share, dividends per share and average shares outstanding have been restated for the stock split. Period-end share data is presented on a historical basis. Treasury stock, with the exclusion of shares held in trust for deferred compensation plans, was not affected by the stock split.
Note F—Processing Fees and Other Fee Revenue
        Processing fees of $60$125 million and $62$119 million for the threesix months ended March 31,June 30, 2001 and 2000, included $21$45 million and $26$50 million, respectively, for brokerage services.
        Other fee revenue includes gains and losses on sales of investment securities, leased equipment and other assets, trading account profits and losses, profits and losses from joint ventures, and amortization of investments 6


PART I. ITEM 1.
FINANCIAL STATEMENTS (continued)

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

in tax-advantaged financings. In March 2001, State Street recorded the write-
offwrite-off of $50 million for its investment in Bridge Information Systems, Inc. The write-off decreased after-tax net income by $32$33 million, equal to $.20$.10 per basic and diluted share.
PART I.  ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements – State Street Corporation (Unaudited)
Note F--NetG—Net Interest Revenue
        Net interest revenue consisted of the following for the three months ended
March 31:

following:
 
    
Three Months
Ended June 30,
    
Six Months
Ended June 30,
(Dollars in millions)
    
2001
    
2000
    
2001
    
2000
Interest Revenue
     Deposits with banks
    
$ 199
    
$ 168
    
$  445
    
$ 315
     Investment securities:
          U.S. Treasury and federal agencies
    
107
    
134
    
228
    
262
          State and political subdivisions (exempt from federal tax)
    
19
    
21
    
37
    
42
          Other investments
    
108
    
84
    
187
    
160
     Loans
    
68
    
74
    
142
    
141
     Securities purchased under resale agreements, securities borrowed
          and federal funds sold
    
217
    
272
    
519
    
546
     Trading account assets
    
14
    
15
    
29
    
28
  
  
  
  
  
               Total interest revenue
    
732
    
768
    
1,587
    
1,494
  
  
  
  
  
Interest Expense
     Deposits
    
235
    
240
    
510
    
458
     Other borrowings
    
235
    
295
    
545
    
573
     Long-term debt
    
23
    
18
    
46
    
36
  
  
  
  
  
               Total interest expense
    
493
    
553
    
1,101
    
1,067
  
  
  
  
  
               Net interest revenue
    
$ 239
    
$ 215
    
$ 486
    
$  427
  
  
  
  
  
 
 
- -------------------------------------------------------------------------------

(Dollars in millions)                                               2001  2000
- -------------------------------------------------------------------------------

Interest Revenue
 Deposits with banks............................................... $ 246 $ 147
 Investment securities:
  U.S. Treasury and federal agencies...............................   121   128
  State and political subdivisions (exempt from federal tax).......    18    21
  Other investments................................................    79    76
 Loans.............................................................    74    67
 Securities purchased under resale agreements, securities borrowed
  and federal funds sold...........................................   302   274
 Trading account assets............................................    15    13
                                                                    ----- -----
   Total interest revenue..........................................   855   726
                                                                    ----- -----
Interest Expense
 Deposits..........................................................   275   218
 Other borrowings..................................................   310   278
 Long-term debt....................................................    23    18
                                                                    ----- -----
   Total interest expense..........................................   608   514
                                                                    ----- -----
   Net interest revenue............................................ $ 247 $ 212
                                                                    ===== =====


- -------------------------------------------------------------------------------

Note G--Operating Expenses--OtherH—Operating Expenses—Other
        The other category of operating expenses consisted of the following for the
three months ended March 31:

following:

- -------------------------------------------------------------------------------

(Dollars in millions)                                                2001  2000
- -------------------------------------------------------------------------------

Professional services............................................... $  31 $ 33
Advertising and sales promotion.....................................    17   15
Other...............................................................    55   47
                                                                     ----- ----
 Total operating expenses--other.................................... $ 103 $ 95
                                                                     ===== ====


- -------------------------------------------------------------------------------

                                       7
 
    
Three Months
Ended June 30,
    
Six Months
Ended June 30,
(Dollars in millions)
    
2001
    
2000
    
2001
    
2000
Professional services
    
$  33
    
$  34
    
$  64
    
$  67
Advertising and sales promotion
    
15
    
15
    
32
    
30
Other
    
49
    
38
    
104
    
85
  
  
  
  
  
     Total operating expenses—other
    
$  97
    
$  87
    
$200
    
$182
PART I.  ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements -– State Street Corporation (Unaudited)
Note H--RegulatoryI—Regulatory Matters
        The regulatory capital amounts and ratios were the following at March 31,June 30, 2001 and December 31, 2000:
 
    
Regulatory
Guidelines(1)
    
State Street
    
State Street Bank
(Dollars in millions)
    
Minimum
    
Well
Capitalized
    
2001
    
2000
    
2001
    
2000
Risk-based ratios:
    
    
    
    
    
    
     Tier 1 capital
    
4
%
    
6
%
    
13.3
%
    
14.5
%
    
12.4
%
    
13.4
%
     Total capital
    
8
 
    
10
 
    
14.3
 
    
15.6
 
    
12.5
 
    
13.5
 
Leverage ratio
    
3
 
    
5
 
    
5.5
 
    
5.4
 
    
5.5
 
    
5.3
 
Tier 1 capital
    
    
 
    
    
 
    
$    3,763
 
    
$    3,611
 
    
$    3,454
 
    
$    3,297
 
Total capital
    
    
 
    
    
 
    
4,038
 
    
3,885
 
    
3,491
 
    
3,331
 
Adjusted risk-weighted assets and
     market-risk equivalents:
          On-balance sheet
    
    
 
    
    
 
    
$ 21,155
 
    
$ 17,382
 
    
$ 20,906
 
    
$ 17,114
 
          Off-balance sheet
    
    
 
    
    
 
    
6,410
 
    
6,930
 
    
6,414
 
    
6,935
 
          Market-risk equivalents
    
    
 
    
    
 
    
632
 
    
629
 
    
573
 
    
598
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
               Total
    
    
 
    
    
 
    
$ 28,197
 
    
$ 24,941
 
    
$ 27,893
 
    
$ 24,647
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Quarterly average adjusted assets
    
    
 
    
    
 
    
$ 67,981
 
    
$ 66,944
 
    
$ 63,240
 
    
$ 62,201
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  

- ------------------------------------------------------------------------------------

                             Regulatory
                           Guidelines(/1/)     
(1)
State Street must meet the regulatory designation of “well capitalized” in order to maintain its status as a financial holding company. In addition, Regulation Y defines “well capitalized” for a bank holding company such as State Street Bank
                         ------------------- ------------------  ------------------
                                    Well
(Dollars in millions)    Minimum Capitalized   2001      2000      2001      2000
- ------------------------------------------------------------------------------------

Risk-based ratios:for the purpose of determining eligibility for a streamlined review process for acquisition proposals (for such purposes, “well capitalized” requires State Street to maintain a minimum Tier 1 capital.........     4%risk-based capital ratio of 6% 13.3%     14.5%     12.4%     13.4%
 Total capital..........     8        10         14.3      15.6      12.5      13.5
Leverage ratio..........     3         5          5.3       5.4       5.2       5.3
Tier 1 capital..........                     $  3,587  $  3,611  $  3,296  $  3,297
Total capital...........                        3,859     3,885     3,331     3,331
Adjusted risk-weighted
 assets and market-risk
 equivalents:
  On-balance sheet......                     $ 19,540  $ 17,382  $ 19,172  $ 17,114
  Off-balance sheet.....                        6,884     6,930     6,889     6,935
  Market-risk
   equivalents..........                          587       629       541       598
                                             --------  --------  --------  --------
   Total................                     $ 27,011  $ 24,941  $ 26,602  $ 24,647
                                             ========  ========  ========  ========
Quarterly average
 adjusted assets........                     $ 68,148  $ 66,944  $ 63,286  $ 62,201
                                             ========  ========  ========  ========
a minimum total risk-based capital ratio of 10%).


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

Note I--LinesJ—Lines of Business
        The following is a summary of the lines of business operating results for the threesix months ended March 31:


- -------------------------------------------------------------------------------

                                                        Investment  Investment
                                                         Services   Management
                                                        ----------- -----------
(Dollars in millions; taxable equivalent)               2001  2000  2001  2000
- -------------------------------------------------------------------------------

Total revenue.......................................... $ 747 $ 676 $ 199 $ 254
Income before income taxes.............................   217   202    30    44
Average assets (billions)..............................  65.8  58.1   3.0   2.6


- -------------------------------------------------------------------------------June 30:
 
    
Investor Services
    
Investment
Management
(Dollars in millions; taxable equivalent)
    
2001
    
2000
    
2001
    
2000
Total revenue
    
$ 1,530
    
$ 1,363
    
$ 398
    
$ 453
Income before income taxes
    
458
    
397
    
52
    
93
Average assets (billions)
    
66.0
    
58.8
    
2.7
    
2.1
        Total revenue presented above is greater than the consolidated statement of income by the taxable equivalent adjustmentadjustments of $14$29 million and $16$33 million for the threesix months ended March 31,June 30, 2001 and 2000, respectively. TotalFor the six months ended June 30, 2001, total revenue and income before income taxes presented above is greater than the consolidated statement of income by $50 million for the write-off of the investment in Bridge for the three months ended March 31, 2001.

                                       8
Bridge.
PART I.  ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements -– State Street Corporation (Unaudited)
Note J--EarningsK—Earnings Per Share
        The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31:


- ------------------------------------------------------------------------------

(Dollars in millions, except per share data; shares in
thousands)                                                      2001    2000
- ------------------------------------------------------------------------------

Net Income.................................................... $   121 $   150
Earnings per share
 Basic........................................................ $   .75 $   .94
 Diluted......................................................     .73     .92
Basic average shares.......................................... 162,340 159,836
 Stock options and stock awards...............................   2,364   2,230
 7.75% convertible subordinated debentures....................     345     677
                                                               ------- -------
Dilutive average shares....................................... 165,049 162,743
                                                               ======= =======


- -------------------------------------------------------------------------------

share:
 
  
Three Months
Ended June 30,
    
Six Months
Ended June 30,
(Dollars in millions, except per share data; shares in thousands)
  
2001
    
2000
    
2001
    
2000
Net Income
    
$    167
    
$    148
    
$    288
    
$    297
Earnings per share
     Basic
    
$      .51
    
$      .46
    
$      .89
    
$      .93
     Diluted
    
.50
    
.45
    
.87
    
.91
 
Basic average shares
    
325,214
    
321,693
    
324,949
    
320,683
     Stock options and stock awards
    
4,640
    
5,194
    
4,726
    
4,867
     7.75% convertible subordinated debentures
    
683
    
1,203
    
686
    
1,279
  
  
  
  
  
Dilutive average shares
    
330,537
    
328,090
    
330,361
    
326,829
  
  
  
  
  
Note K--CommitmentsL—Commitments and Contingent Liabilities
        State Street acts in a fiduciary or custodial capacity on behalf of its
clients.provides accounting, administration, custody, daily pricing, investment management, securities lending, foreign exchange, cash management, trading and information services to clients worldwide. Assets under custody and assets under management are held by State Street in a fiduciary or custodial capacity and are not included in the Consolidated Statement of Condition because such items are not assets of State Street. Management conducts regular reviews of its responsibilities for these services and considers the results in preparing its financial statements. In the opinion of management, there are no contingent liabilities at March 31,June 30, 2001 whichthat would have a material adverse effect on State Street'sStreet’s financial position or results of operations.
        State Street is subject to pending and threatened legal actions that arise in the normal course of business. In the opinion of management, after discussion with counsel, these actions can be successfully defended or resolved without a material adverse effect on State Street'sStreet’s financial position or results of operations.


                                       9
PART I.  ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements -– State Street Corporation (Unaudited)
Note L--Off-BalanceM—Off-Balance Sheet Financial Instruments, Including Derivatives
        State Street uses various off-balance sheet financial instruments, including derivatives. The following table summarizes the contractual or notional amounts of derivative financial instruments held or issued by State Street for trading and balance sheet management:
- --------------------------------------------------------------------------------

                                                          March 31, December 31,
(Dollars in millions)                                       2001        2000
- --------------------------------------------------------------------------------

Trading:
 Interest rate contracts:
  Swap agreements........................................ $  3,380    $  3,025
  Options and caps purchased.............................      305         323
  Options and caps written...............................      389         413
  Futures--short position................................    7,789       5,046
  Options on futures purchased...........................      350         320
  Options on futures written.............................      620         460
 Foreign exchange contracts:
  Forward, swap and spot.................................  183,745     138,057
  Options purchased......................................      641           2
  Options written........................................      644           2
Balance Sheet Management:
 Interest rate contracts:
  Swap agreements........................................      165         180


- -------------------------------------------------------------------------------
(Dollars in millions)
    
June 30,
2001
    
December 31,
2000
Trading:
     Interest rate contracts:
          Swap agreements
    
$    3,585
    
$    3,025
          Options and caps purchased
    
301
    
323
          Options and caps written
    
379
    
413
          Futures—short position
    
6,749
    
5,046
          Options on futures purchased
    
410
    
320
          Options on futures written
    
535
    
460
     Foreign exchange contracts:
          Forward, swap and spot
    
 194,238
    
 138,057
          Options purchased
    
1,055
    
2
          Options written
    
665
    
2
Balance Sheet Management:
     Interest rate contracts:
          Swap agreements
    
150
    
180
        The fair value of interest rate swaps designated as cash flow hedges was approximately $4$9 million at March 31,June 30, 2001, and the notional amounts of interest rate agreements designated as cash flow hedges were $150 million.
        The following is a summary of the contractual amount of State Street'sStreet’s credit-related, off-balance sheet financial instruments:
- --------------------------------------------------------------------------------

                                                          March 31, December 31,
(Dollars in millions)                                       2001        2000
- --------------------------------------------------------------------------------

Indemnified securities on loan........................... $ 110,931  $ 101,438
Loan commitments.........................................    11,836     11,367
Asset purchase agreements................................     8,488      7,112
Standby letters of credit................................     3,571      4,028
Letters of credit........................................       199        218


- -------------------------------------------------------------------------------
(Dollars in millions)
    
June 30,
2001
    
December 31,
2000
Indemnified securities on loan
    
$ 108,662
    
$ 101,438
Loan commitments
    
12,246
    
11,367
Asset purchase agreements
    
9,057
    
7,112
Standby letters of credit
    
3,522
    
4,028
Letters of credit
    
262
    
218
        On behalf of its clients, State Street lends their securities to creditworthy brokers and other institutions. In certain circumstances, State Street may indemnify its clients for the fair market value of those securities against a failure of the borrower to return such securities. State Street requires the borrowers to provide collateral in an amount equal to or in excess of 102% of the fair market value of the securities borrowed. The borrowed securities are revalued daily to determine if additional collateral is necessary. State Street held, as collateral, cash and U.S. government securities totaling $113.1$113.0 billion and $105.9 billion for indemnified securities on loan at March 31,June 30, 2001, and December 31, 2000, respectively.
PART I.  ITEM 1.
FINANCIAL STATEMENTS (continued)
Notes to Consolidated Financial Statements – State Street Corporation (Unaudited)
Note M—Off-Balance Sheet Financial Instruments, Including Derivatives (continued)
        Approximately 87%90% of the loan commitments and asset purchase agreements will expire in one year or less from the date of issue. Since many of the commitments are expected to expire without being drawn, the total commitment amounts do not necessarily represent future cash requirements.

                                      10
Independent Accountants'Accountants’ Review Report
The Stockholders and Board of Directors
State Street Corporation
We have reviewed the accompanying consolidated statement of condition of State Street Corporation as ofMarch 31,of June 30, 2001, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 2001 and 2000, and the consolidated statements of changes in stockholders'stockholders’ equity and cash flows for the three-monthsix-month periods ended March 31,June 30, 2001 and 2000. These financial statements are the responsibility of the Corporation'sCorporation’s management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated statement of condition of State Street Corporation as of December 31, 2000, and the related consolidated statements of income, changes in stockholders'stockholders’ equity and cash flows for the year then ended (not presented herein) and in our report dated January 17, 2001, except for Note Y, as to which the date is February 6, 2001, we expressed an unqualified opinion on those consolidated financial statements.

                                          Ernst & Young LLP

ERNST & YOUNG LLP
Boston, Massachusetts
April
July 17, 2001

                                      11
PART I.  ITEM 2.
MANAGEMENT'S
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Summary
        Diluted earnings per share for the firstsecond quarter were $.73, a decrease$.50, an increase of 21%11% from $.92$.45 in the firstsecond quarter of 2000. ResultsTotal revenue increased $96 million to $982 million. Net income was $167 million, up 13% from $148 million a year ago. Return on stockholders’ equity was 18.9%.
        For the six months ended June 30, 2001, reported diluted earnings per share were $.87, down from $.91 per share a year ago. Reported results for the first quarter ofsix months ended June 30, 2001, include the write-off of State Street'sStreet’s $50 million investment in Bridge Information Systems, Inc. ("Bridge"(“Bridge”). The write-off of Bridge, recorded in March 2001, decreased net income by $32$33 million and diluted earnings per share by $.20.$.10. Excluding the write-off of Bridge, defined as operating results, diluted earnings per share were $.93 in the first quarter. Total operating revenue increased $16 million
to $946 million. Operating earnings were $154 million, up 3% from $150 million
a year ago. Operating-basis return on stockholders' equity was 18.2%.

Condensed Income Statement--Taxable Equivalent Basis

- --------------------------------------------------------------------------------

                                                         Three Months Ended
                                                             March 31,
                                                       ------------------------
(Dollars in millions, except per share data)           2001   2000  Change   %
- --------------------------------------------------------------------------------

Reported Results
Fee revenue:
Servicing fees........................................ $ 390  $ 349 $  41    12
Management fees.......................................   126    181   (55)  (31)
Foreign exchange trading..............................    99    106    (7)   (7)
Processing fees.......................................    60     62    (2)   (3)
Other.................................................   (39)     7   (46)
                                                       -----  ----- -----
 Total fee revenue....................................   636    705   (69)  (10)
Net interest revenue..................................   261    228    33    14
Provision for loan losses.............................     1      3    (2)  (60)
                                                       -----  ----- -----
 Total revenue........................................   896    930   (34)   (4)
Operating expenses....................................   699    684    15     2
                                                       -----  ----- -----
 Income before income taxes...........................   197    246   (49)  (20)
Income taxes..........................................    62     80   (18)  (23)
Taxable equivalent adjustment.........................    14     16    (2)
                                                       -----  ----- -----
 Net income........................................... $ 121  $ 150 $ (29)  (19)
                                                       =====  ===== =====
Earnings Per Share
 Basic................................................ $ .75  $ .94 $(.19)  (20)
 Diluted..............................................   .73    .92  (.19)  (21)
- --------------------------------------------------------------------------------

Operating Results(/1/)
Total operating revenue............................... $ 946  $ 930 $  16     2
Operating earnings....................................   154    150     4     3
Diluted operating earnings per share..................   .93    .92   .01     1


- -------------------------------------------------------------------------------
(/1/)Operating results$.97 for the first quarter ofsix months ended June 30, 2001, exclude the write-off of
     $50 million for State Street's investment in Bridge, equal to $32 million
     after tax, or $.20 per diluted share.

Total Revenue

  In the first quarter of 2001, reported revenue was $896 million. Adjusted
for Bridge, total operating revenue was $946$1.9 billion and operating earnings were $321 million.
Condensed Income Statement—Taxable Equivalent Basis
 
    
Three Months Ended June 30,
    
Six Months Ended June 30,
(Dollars in millions, except per share data)
    
2001
    
2000
    
Change
    
%
    
2001
    
2000
    
Change
    
%
Reported Results
Fee revenue:
Servicing fees
    
$ 422
    
$  362
    
$  60
 
    
16
 
    
$    812
 
    
$    711
    
$  101
 
    
14
 
Management fees
    
133
    
131
    
2
 
    
1
 
    
259
 
    
312
    
(53
)
    
(18
)
Foreign exchange trading
    
99
    
101
    
(2
)
    
(3
)
    
198
 
    
207
    
(9
)
    
(5
)
Processing fees
    
65
    
57
    
8
 
    
15
 
    
125
 
    
119
    
6
 
    
6
 
Other
    
12
    
5
    
7
 
    
    
 
    
(27
)
    
12
    
(39
)
    
    
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    Total fee revenue
    
731
    
656
    
75
 
    
11
 
    
1,367
 
    
1,361
    
6
 
    
Net interest revenue
    
254
    
232
    
22
 
    
10
 
    
515
 
    
460
    
55
 
    
12
 
Provision for loan losses
    
3
    
2
    
1
 
    
20
 
    
4
 
    
5
    
(1
)
    
(20
)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    Total revenue
    
982
    
886
    
96
 
    
11
 
    
1,878
 
    
1,816
    
62
 
    
3
 
Operating expenses
    
719
    
642
    
77
 
    
12
 
    
1,418
 
    
1,326
    
92
 
    
7
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    Income before income taxes
    
263
    
244
    
19
 
    
8
 
    
460
 
    
490
    
(30
)
    
(6
)
Income taxes
    
81
    
79
    
2
 
    
2
 
    
143
 
    
160
    
(17
)
    
(10
)
Taxable equivalent adjustment
    
15
    
17
    
(2
)
    
(15
)
    
29
 
    
33
    
(4
)
    
(13
)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
    Net income
    
$ 167
    
$ 148
    
$  19
 
    
13
 
    
$    288
 
    
$    297
    
$      (9
)
    
(3
)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Earnings Per Share(2)
    Basic
    
$   .51
    
$   .46
    
$ .05
 
    
11
 
    
$      .89
 
    
$      .93
    
$ (.04
)
    
(4
)
    Diluted
    
.50
    
.45
    
.05
 
    
11
 
    
.87
 
    
.91
    
(.04
)
    
(4
)
 
Operating Results(1)
Total operating revenue
    
$ 982
    
$ 886
    
$ 96
 
    
11
 
    
$ 1,928
 
    
$ 1,816
    
$ 112
 
    
6
 
Operating earnings
    
167
    
148
    
19
 
    
13
 
    
321
 
    
297
    
24
 
    
8
 
Diluted operating earnings per share(2)
    
.50
    
.45
    
.05
 
    
11
 
    
.97
 
    
.91
    
.06
 
    
7
 
(1)
Operating results for the six months ended June 30, 2001 exclude the write-off of $50 million for State Street’s investment in Bridge, equal to $33 million after tax, or $.10 per diluted share.
(2)
Per share amounts have been restated to reflect the 2-for-1 stock split in the form of a 100% stock dividend distributed to stockholders on May 30, 2001 to stockholders of record as of April 30, 2001.
Total Revenue
        In the second quarter of 2001, total revenue was $982 million, up $16$96 million, or 2%11%, from a year ago. Growth came primarily from servicing fees and net interest revenue. New business from mutual and collective funds clients won in 2000 drove growth in servicing fees, despite lower equity values worldwide. Strong securities lending revenue contributed significantly to servicing fees, as well. Increased client activity and improved spreads drove the increase in net interest revenue.
        For the six months ended June 30, 2001, growth in operating revenue was partially offset by 12


PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)the effect of the formation of CitiStreet, LLC ("CitiStreet"(“CitiStreet”) in April 2000. Businesses contributed to CitiStreet are now accounted for using the equity method, reducing revenue and expenses subsequent to the formation. Adjusted to exclude the results of CitiStreet in first quarter of the prior year, total operating revenue would have increased 7%9%, primarily from growth in servicing fees and net interest revenue.
Fee Revenue
        Fee revenue comprised 73%74% of the Corporation'sCorporation’s total operating revenue in the firstsecond quarter of 2001. Fee revenue was $636$731 million, down $69up $75 million, or 10%11%, over 2000. On an operating basis and adjusted for the formation of
CitiStreet, feeFee revenue would have been up 4% from the first quarter of 2000.
Revenue growth came principally from servicing fees.
        Servicing fees is the largest component of fee revenue and is derived from U.S. and offshore mutual funds, collective funds, accounting, administration, custody, daily pricing, securities lending, performance and analytics, compliance monitoring, and operations outsourcing for investment managers. FirstSecond quarter servicing fees were $390$422 million, up 12%16% from the second quarter of 2000. New business from mutual and collective funds clients won in 2000 drove growth in servicing fees, despite lower equity values worldwide. Strong securities lending revenue, which benefited from a favorable interest rate environment in the United States, contributed significantly as well. Total assets under custody were unchanged from a year earlier, at $6.1 trillion, reflecting market value declines offset by new business and additional contributions of assets by existing clients.
        Management fees for the second quarter were $133 million, up 1% from 2000. Revenue benefited from new business from existing and new clients, including the Bel Air Investment Advisors LLC (“Bel Air”) business acquired in the first quarter of 2000. This growth was
driven by strong new business wins, including investment manager operations
outsourcing for Pacific Investment Management Co. ("PIMCO") installed in
August 2000, fund accounting and daily pricing for Merrill Lynch installed in
January 2001, and fund accounting, daily pricing and financial reporting for
Liberty Financial Companies installed in December 2000. In the United Kingdom,
business benefited from clients transferring from Lloyds TSB to State Street,
and the investment manager operations outsourcing win of Scottish Widows for
which installation began in February 2001. In Japan, business continued to
grow through State Street's alliance with Chuo Mitsui. Revenue growth from
servicing pension plans in the United States reflected strength in securities lending revenue, where interest rate cuts helped drive growth. At quarter end,
assets under custody totaled $5.8 trillion, down 7% from a year earlier,
reflecting a worldwide decline in equity values.

  Management fees were $126 million, down 31% from 2000. Adjusted for the
formation of CitiStreet, management fees were down 9%, reflectingdespite the impact of the decline in globallower equity valuations over the last twelve months and
reduced performance fees. This was partially offset by continued new business
success.values worldwide. Assets under management declined 2% over the same period. Equities,
comprising approximately two-thirds of assets under management,$727 billion were down 11%,$2 billion year-over-year. Equities assets were down slightly, while money market and fixed income assets under management increased 16%.increased.
        Foreign exchange trading revenue was $99 million, compared to $106$101 million a year ago. Foreign exchange trading revenue reflects three primary factors: the volume of cross-border transactions, currency volatility, and the mix of currencies being traded. Trading volumes remained strong. State Street
continues to increase itsThe second quarter foreign exchange trading client base with State
Street Global Link(R), an e-finance platform.revenue reflected lower currency volatility, largely offset by increased transaction volumes.
        Other fee revenue consists of gains and losses on securities, trading account profits and losses, and miscellaneous gains and fees. Other fee revenue for the firstsecond quarter of $(39)$12 million reflected a $15 million gain on the write-offsales of $50
millioncertain short-duration securities, and the gain on the sale of State Street's investment in Bridge. Ona non-strategic business unit, which was largely offset by the write-down of certain assets, principally an operating basis, otherunused data center.
        For the six months ended June 30, 2001, fee revenue was $11$1.4 billion, up $6 million compared to $7 millionfrom a year ago. Servicing fees were $812 million, up $101 million or 14%, reflecting new business and strong securities lending revenue. Management fees were $259 million, down $53 million, or 18%. Excluding the results of businesses contributed to CitiStreet from the prior year, management fees were down 4%, reflecting the decline in global equity valuations over the past year and reduced performance fees.
Net Interest Revenue
        Taxable-equivalent net interest revenue for the firstsecond quarter was $261$254 million, up 14%10% from $228$232 million a year ago. In serving sophisticated global investors, State Street provides short-term funds management, including deposit services and repurchase agreements for cash positions associated with clients'clients’ investment
activities. Client investment activities drove much of the Corporation'sCorporation’s balance sheet growth. DuringBalance sheet growth from increased client activity and improved spreads were partially offset by lower noninterest-bearing deposits and lower asset yields.
 
    
Three Months Ended June 30,
 
    
2001
    
2000
(Dollars in millions)
    
Average
Balance
    
Rate
    
Average
Balance
    
Rate
Interest-earning assets
    
$  62,743
    
4.77
%
    
$  55,706
    
5.67
%
Interest-bearing liabilities
    
  55,949
    
3.53
 
    
  47,938
    
4.64
 
  
    
  
    
  
    
  
    
  
     Excess of rate earned over rate paid
    
    
    
1.24
%
    
    
    
1.03
%
  
    
  
    
  
    
  
    
  
     Net Interest Margin
    
    
    
1.63
%
    
    
    
1.68
%
  
    
  
    
  
    
  
    
  
        For the quarter,

                                      13


PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)

growth primarily in clients' use of repurchase agreements and deposit services
increased average interest-earning assets by $7.5 billion. This growth
combined with interest rate decreases resulted in asix months ended June 30, 2001, net interest revenue was $515 million, up $55 million, or 12%, reflecting improved spreads and increased client deposit and investment activity. Net interest margin improvementfor the first half of three basis points, despite the pressure imposed by the
inversion of overnight2001 was 1.65%, compared to one-year interest rates.


- --------------------------------------------------------------------------------

                                                    Three Months Ended March
                                                               31,
                                                   ----------------------------
                                                       2001           2000
                                                   -------------  -------------
                                                   Average        Average
(Dollars in millions)                              Balance  Rate  Balance  Rate
- --------------------------------------------------------------------------------

Interest-earning assets........................... $ 62,990 5.59% $ 55,447 5.38%
Interest-bearing liabilities......................   54,279 4.54    48,245 4.28
                                                            ----           ----
 Excess of rate earned over rate paid.............          1.05%          1.10%
                                                            ====           ====
 Net Interest Margin..............................          1.68%          1.65%
                                                            ====           ====


- -------------------------------------------------------------------------------

1.66% in 2000.
Operating Expenses
        Operating expenses for the quarter were $699$719 million, up 2%12% from the firstsecond quarter of 2000 or up 9% adjusted for the formation of CitiStreet.to support new business and long-term growth initiatives.
        Salaries and employee benefits were $392$416 million in the firstsecond quarter, up 2%13% from last year, or up 9% adjusted for the formation of CitiStreet.year. The increase was primarily due to additional staff, including people hired in conjunction with the new business from PIMCO, Merrill Lynch, Liberty Financial Companies and Scottish Widows, and due to higher salaries. Salaries and
employee benefits expense growth wassalary increases, partially offset by a decrease inlower performance-based incentive compensation, reflecting the outstanding
performance in the first quarter of last year.

  Adjusted for CitiStreet, informationcompensation.
        Information systems and communications expense increased $14.5grew $15 million or 20%.to $90 million for the second quarter. This growth reflects expansion of business
capacity through information technology, including expenses relateda continued investment in the hardware and software critical to software, hardware maintenance, processing capacity, serversState Street’s growth and storage
capacity. These resources are necessary to support the increased volume and
complexity of business serviced, global expansion and introduction of new
products and services. Included in this growth were expenses for a number of
specific projects and initiatives that were new this quarter. These include
spending for the investment manager operations outsourcing product and
initiatives related to increasing system efficiency.efficiency improvements.
        Transaction processing services expense of $64$60 million was down $11$6 million, or 14%9%, reflecting lower subcustodian and brokerage fees.
        For the six months ended June 30, 2001, operating expenses were $1.4 billion, up $92 million, or 7%, from a year ago. Adjusted to exclude the results of CitiStreet from the prior year, operating expenses were up 11% year-over-year.
Income Taxes

  Taxes
        Income taxes for the firstsecond quarter of 2001 were $62$81 million, and the effective tax rate was
33.7%. Taxes on operating earnings wereup from $79 million, as compared to $80 million in the firstsecond quarter of last year. The effective rate on operating
earnings was 34.0%, down from 34.9% in the first quarter of last year and down
from 34.3% for all of last year.

  The impact of the tax benefit for the write-off of Bridge reduced the
effective tax rate for the second quarter from 34.0%of 2001 was 32.6%, bringing the year-to-date effective tax rate to 33.7%the expected full year rate of 33.3%. The full year effective tax rate on operations, excluding the write-off of the investment in Bridge Information Systems, of 33.3% is below the prior year rate of 34.3% as a result of changes in income mix and increased tax credits.
PART I.  ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Credit Quality
        At March 31,June 30, 2001, total gross loans were $5.4 billion. At quarter end, the allowance for loan losses was $58$61 million, an increase from $50$53 million a year ago. For the quarter ended March 31,June 30, 2001, the provision for 14


PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)

loan losses charged against income was $1$3 million, and there were no charge-offsrecoveries or recoveries.charge-offs. At March 31,June 30, 2001, non-performing loans were less than $1 million, down from $4 million unchanged fromat year-end 2000, and down $3$7 million from a year ago. At March 31, 2001, non-performing
assets were $12 million, down $3 million from year-end 2000 and up $1 million
from a year ago.

Lines of Business
        Following is a summary of line of business operating results for the threesix months ended March 31:

June 30:
(Dollars in millions; taxable equivalent)
    
Investor
Services
    
Investment
Management
    
2001(1)
    
2000
    
2001
    
2000
Fee revenue:
Servicing fees
    
$  812
 
    
$  711
 
    
    
Management fees
    
    
 
    
    
 
    
$ 259
 
    
$ 312
 
Foreign exchange trading
    
198
 
    
207
 
    
    
Other
    
61
 
    
43
 
    
87
 
    
88
 
  
    
  
    
  
    
  
    
  
     Total fee revenue
    
1,071
 
    
961
 
    
346
 
    
400
 
Net interest revenue after provision for loan losses
    
459
 
    
402
 
    
52
 
    
53
 
  
    
  
    
  
    
  
    
  
     Total operating revenue
    
1,530
 
    
1,363
 
    
398
 
    
453
 
Operating expense
    
1,072
 
    
966
 
    
346
 
    
360
 
  
    
  
    
  
    
  
    
  
     Operating earnings before income taxes
    
$  468
 
    
$  397
 
    
$    52
 
    
$    93
 
  
    
  
    
  
    
  
    
  
Pretax margin
    
30
%
    
29
%
    
13
%
    
21
%
Average assets(billions)
    
$ 66.0
 
    
$ 58.8
 
    
$    2.7
 
    
$    2.1
 

- --------------------------------------------------------------------------------

                                                    Investment     Investment
                                                     Services      Management
                                                  ---------------  ------------
(Dollars
(1)
Operating results for the first half of 2001 exclude the write-off of $50 million for State Street’s investment in millions; taxable equivalent)         2001(1)   2000   2001   2000
- --------------------------------------------------------------------------------

Fee revenue:
Servicing fees................................... $  390   $  349
Management fees..................................                  $ 126  $ 181
Foreign exchange trading.........................     99      106
Other............................................     25       20     46     49
                                                  ------   ------  -----  -----
 Total fee revenue...............................    514      475    172    230
Net interest revenue.............................    233      201     27     24
                                                  ------   ------  -----  -----
 Total operating revenue.........................    747      676    199    254
Operating expense................................    530      474    169    210
                                                  ------   ------  -----  -----
 Operating earnings before income taxes.......... $  217   $  202  $  30  $  44
                                                  ======   ======  =====  =====
Pretax margin....................................     29%      30%    14%    17%
Average assets (billions)........................ $ 65.8   $ 58.1  $ 3.0  $ 2.6
Bridge, equal to $33 million after tax, or $.10 per diluted share.


- -------------------------------------------------------------------------------
(1) Operating results for the first quarter of 2001 exclude the write-off of
    $50 million for State Street's investment in Bridge, equal to $32 million
    after tax, or $20 per diluted share.

  Investment
        Investor Services.    InvestmentInvestor Services includes accounting, administration, custody, daily pricing, operations outsourcing for investment managers, securities lending, foreign exchange, recordkeeping, deposit and short-term investment facilities, lease financing, and information services. These services support sophisticated investors in developing and executing their strategies, enhancing their returns, and evaluating and managing risk. Clients around the world include mutual funds and other collective investment funds, corporate and public pension plans, corporations, investment managers, not-for-profit organizations, unions, and other holders of investment assets. During 2000, State Street began providing an expanding array of operational outsourcing services to its investment management clients. This enables State Street to provide global asset managers with a comprehensive suite of services, from trade order management through settlement. Revenue from InvestmentInvestor Services comprised 78%79% of State Street'sStreet’s total revenue for the threesix months ended March 31,June 30, 2001.
        Total operating revenue for the threesix months ended March 31,June 30, 2001 increased $71$167 million to $747 million,$1.5 billion, up 10%12% from $676 million$1.4 billion reported for the first threesix months of 2000. This increase in revenue wasis driven primarily by the 12%14% increase in servicing fees. Servicing Fees reflected strongNew business from mutual and collective funds clients won in 2000 drove growth in servicing fees, despite lower equity values worldwide. Strong new business wins includingin 2000 included investment manager operations outsourcing for Pacific Investment Management Co. ("PIMCO"(“PIMCO”) installed in August 2000,, fund accounting and daily pricing for Merrill Lynch, installed in January 2001, and fund accounting, daily pricing and financial reporting for
Liberty Financial Companies
installed in December 2000.Companies. In the United Kingdom, business benefited from clients transferring from Lloyds TSB to State Street, and the investment manager operations outsourcing win of Scottish Widows for which installation
began in 2001.Widows. In Japan, business continued to grow 15


PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)

through State Street'sStreet’s alliance with Chuo Mitsui. Revenue growthStrong securities lending revenue, which benefited from servicing pension plansa favorable interest rate environment in the United States, reflected strength in securities
lending revenue, where interest rate cuts helped drive revenue growth. At
quarter end, totalcontributed significantly as well. Total assets under custody totaled $5.8 trillion, down 7%were unchanged from a year earlier, at $6.1 trillion, reflecting a worldwide decline in equity values.market value declines offset by new business and additional contributions of assets by existing clients.
        Foreign exchange trading revenue was $99$198 million, compared to $106$207 million a year ago. Foreign exchange trading revenue reflects three primary factors: the volume of cross-border transactions, currency volatility, and the mix of currencies being traded. Trading volumes remained strong. State Street
continues to increase its foreignForeign exchange trading client base with State
Street Global Link(R), an e-finance platform.revenue for the first six months of 2001 reflected lower currency volatility, largely offset by increased transaction volumes.
        Net interest revenue for the threesix months ended March 31,June 30, 2001 was $233$459 million, up $32$57 million from a year ago. In serving sophisticated global investors, State Street provides short-term funds management, including deposit services and repurchase agreements for cash positions associated with clients'clients’ investment activities. Client investment activities drove much of the averageCorporation’s balance sheet growth. Balance sheet growth from increased client activity and improved spreads were partially offset by lower noninterest-bearing deposits and lower asset growth. During the quarter, growth primarily in clients' use of
repurchase agreements and deposit services increased average interest-earning
assets by $7.5 billion. This growth combined with interest rate decreases
resulted in a net interest margin improvement of three basis points, despite
the pressure imposed by the inversion of overnight to one-year interest rates.yields.
        Operating expenses for the threesix months ended March 31,June 30, 2001 were $530
million, 12%$1.1 billion, 11% higher than a year ago. The increase was primarily due to additional staff, including people hired in conjunction with the new business from PIMCO, Merrill Lynch, Liberty Financial Companies and Scottish Widows, and due to higher salaries. Salaries and employee benefits expense growth wassalary increases, partially offset by a decrease inlower performance-based incentive compensation,
reflecting the outstanding performance in the first quarter of last year.
Expenses related to informationcompensation. Information systems and communications expense increased reflecting expansion of business capacity through information technology,
including expenses relatedcontinued investment in hardware and software critical to software, hardware maintenance,State Street’s continued growth and efficiency improvements. Transaction processing capacity, servers and storage capacity. These resources are necessary to
support the increased volume and complexity of business serviced, global
expansion, and introduction of new products and services. Included in this
growthservices were expenses for a number of specific projects and initiatives that
are new this quarter. These include spending for the investment manager
operations outsourcing product and initiatives related to increasing system
efficiency.down reflecting lower subcustodian fees.
        Investment Management.    State Street offers a broad array of services for managing financial assets worldwide for both institutions and individuals, and other financial products. Services included passive and active equity, money market, and fixed income strategies, and brokerage, and other related services. Revenue from this line of business comprised 22%21% of State Street'sStreet’s total revenue for the threesix months ended March 31,June 30, 2001. Reported results for both periods reflect the addition of other financial products to this line of business previously included in InvestmentInvestor Services.
        Total revenue for the threesix months ended March 31,June 30, 2001 was $199$398 million, down $55 million, or 22%12%, from $254$453 million reported for the first threesix months of 2000. Management fees were $126$259 million, down 31%18% from 2000. Adjusted for the formation of CitiStreet, management fees werewould have been down 9%4%, reflecting the impact of the decline in global equity valuations over the last twelve months and reduced performance fees. This was partially offset by continued new business success. Assets under management declined 2% over the
same period.of $727 billion were down $2 billion year-over-year. Equities assets, comprising approximately two-thirds of the assets under management, were down 11%,slightly, while money market and fixed income assets under management increased 16%. Other revenue declined due the reduction in
brokerage services revenue.increased.
        Operating expenses of $169$346 million decreased $41$14 million. Adjusted for the formation of CitiStreet, operating expenses werewould have been up 10%16% for the first threesix months of 2000.2001. This growth reflects higher salaries and

                                      16


PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued) additional staff offset by a decrease in performance-based incentive compensation, reflecting the outstanding performance in the first quarter of last year and growth in expenses related to new business and acquisitions.

Acquisition
PART I.  ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Acquisitions
        In June 2001, State Street completed the purchase of DST Portfolio Systems, Inc. for 1,483,000 shares of State Street common stock and cash in a transaction accounted for as a purchase. Acquired in the purchase was the Portfolio Accounting System, an integrated system that automates mutual fund accounting and investment management recordkeeping processes such as security pricing and dividend calculations, income and expense accruals, securities inventories, accounting for daily shareholder activity and calculation of daily net asset values.
        In February 2001, State Street completed the purchase of a majority interest in Bel Air Investment Advisors LLC ("Bel Air") for 1,007,0002,015,000 shares, after adjustment for the stock split, of State Street common stock and cash in a transaction accounted for as a purchase. Bel Air is a Los Angeles-based independent investment management firm focused on providing wealth management services to ultra-high-net-worth individuals.
        State Street Global Advisors® (SSgA)®, the asset management division of State Street Bank, announced that it has agreed to acquire the passive equity business of Gartmore Investment Management plc (Gartmore), a subsidiary of Nationwide Mutual Insurance Company. Gartmore is a provider of active investment management products and services to professional advisers, private and institutional clients around the world. Gartmore’s passive equity business has over $25 billion of assets under management. Under the terms of agreement, SSgA will also hire the Gartmore team that manages, services and administers the passive equity business.
Liquidity and Capital
        Liquidity.    The primary objective of State Street'sStreet’s liquidity management is to ensure that the Corporation has sufficient funds to meet its commitments and business needs, and to accommodate the transaction and cash management requirements of its clients. Liquidity is provided by State Street'sStreet’s access to global debt markets, its ability to gather additional deposits from its clients, maturing short-term assets, the sales of securities and payments of loans. Client deposits and other funds provide a multi-currency, geographically diverse source of liquidity. State Street maintains a large portfolio of liquid assets. As of March 31,June 30, 2001, the Corporation'sCorporation’s liquid assets were 84%86% of total assets.
        Capital.    State Street'sStreet’s objective is to maintain a strong capital base in order to provide financial flexibility for its business needs, including funding corporate growth and clients'clients’ cash management needs. As a state-
charteredstate-chartered bank and member of the Federal Reserve System, State Street Bank, State Street'sStreet’s principal subsidiary, is regulated by the Federal Reserve Board, which has established guidelines for minimum capital ratios. State Street has developed internal capital adequacy policies to ensure that State Street Bank meets or exceeds the level required for the "well capitalized"“well capitalized” category, the highest of the Federal Reserve Board'sBoard’s five capital categories. State Street'sStreet’s capital management emphasizes risk exposure rather than asset levels. At March 31,June 30, 2001, State Street Bank'sBank’s Tier 1 risk-based capital ratio was 12.4% and the Corporation'sCorporation’s Tier 1 risk-based capital ratio was 13.3%. Both significantly exceed the regulatory minimum of 4% and the "well
capitalized"well-capitalized category of 6%. See Note HI to the Consolidated Financial Statements for further information.
        In June 2001, State Street'sStreet’s Board of Directors has authorizedincreased by 4 million shares the authorization for the purchase of State Street common stock for use in employee benefit programs and for general corporate purposes. State Street purchased 200,000 shares in the first three
months of 2001 as part of the stock purchase program. As of March 31,June 30, 2001, an
additional 27.6 million shares may be purchased withinunder the stock purchase program. There were an additional 10,000 shares acquired during the first
three months of 2001 for other deferred compensation plans that are not part
of the stock purchase program.
        On December 21, 2000, State Street'sStreet’s Board of Directors approved a 2-for-1 stock split in the form of a 100% stock dividend, subject to stockholder approval of an increase in the authorized number of shares at the Annual Meeting of Stockholders. Approval of an increase in the authorized number of shares by stockholders was received at the Annual Meeting in April 2001. The stock dividend will bewas distributed on May 30, 2001, to stockholders of record as of April 30, 2001.
PART I.  ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Trading Activities: Foreign Exchange and Interest Rate Sensitivity
        As part of its trading activities, the Corporation assumes positions in both the foreign exchange and interest rate markets by buying and selling cash instruments and using financial derivatives, including forward foreign 17


PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)

exchange contracts, foreign exchange and interest rate options, and interest rate swaps. As of March 31,June 30, 2001, the notional amount of these derivative instruments was $197.9$207.9 billion, of which $183.7$194.2 billion was foreign exchange forward contracts. Long and short foreign exchange forward positions are closely matched to minimize currency and interest rate risk. All foreign exchange contracts are valued daily at current market rates.
        The following table presents State Street'sStreet’s market risk for its trading activities as measured by its value at risk methodology:
Value at Risk for the threesix months ended March 31,


- --------------------------------------------------------------------------------

(Dollars in millions)                                    Average Maximum Minimum
- --------------------------------------------------------------------------------

2001:
 Foreign exchange contracts.............................  $ 1.0   $ 1.6   $ .4
 Interest rate contracts................................    3.4     3.9    3.0
2000:
 Foreign exchange contracts.............................    1.1     2.1     .6
 Interest rate contracts................................    4.0     5.3    3.6


- -------------------------------------------------------------------------------June 30,
(Dollars in millions)
    
Average
    
Maximum
    
Minimum
2001:
     Foreign exchange contracts
    
$ 1.0
    
$ 1.9
     Interest rate contracts
    
3.8
    
4.9
    
$ 3.0
2000:
     Foreign exchange contracts
    
1.0
    
2.1
    
.4
     Interest rate contracts
    
3.8
    
5.3
    
3.1
        State Street uses actual profit and loss data from daily trading activities to estimate one-day value at risk. During the first threesix months of 2001, State Street did not experience any one-day trading loss in excess of its end of day value at risk estimate.
Financial Goals and Factors That May Affect Them
        State Street'sStreet’s primary financial goal is sustainable real growth in earnings per share. The Corporation has two supporting goals, one for total revenue growth and one for return on common stockholder'sstockholders’ equity (ROE). The long-term revenue goal is for a 12.5% real, or inflation adjusted, compound annual growth rate of revenue from 2000 through 2010. At present, this equates to approximately a 15% nominal compound annual growth rate. The annual return on stockholder'sstockholders’ equity goal is 18%.
        State Street considers these to be financial goals, not projections or forward-looking statements. However, the discussion included in Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, and in other portions of this report on Form 10-Q, may contain statements that are considered "forward-looking statements"“forward-looking statements” within the meaning of the federal securities laws. These statements may be identified by such forward-looking terminology as "expect," "look," "believe," "anticipate," "may," "will,"“expect,” “look,” “believe,” “anticipate,” “may,” “will,” or similar statements or variations of such terms. The Corporation'sCorporation’s financial goals and such forward-looking statements involve certain risks and uncertainties, including the issues and factors listed below and factors further described in conjunction with the forward-looking information, which could cause actual results to differ materially.
PART I.  ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
        Factors that may cause such differences include, but are not limited to, the factors discussed in this section and elsewhere in this Form 10-Q. Each of these factors, and others, are also discussed from time to time in the Corporation'sCorporation’s other filings with the Securities and Exchange Commission, including in the Corporation'sCorporation’s Form 10-K. The forward-looking statements contained in this report on Form 10-Q speak only as of the time the statements were given, and the Corporation does not undertake to revise those forward-
lookingforward-looking statements to reflect events after the date of this report.


                                      18


PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
        Cross-border investing.    Increases in cross-border investing by clients worldwide benefit State Street'sStreet’s revenue. Future revenue may increase or decrease depending upon the extent of increases or decreases in cross-border investments made by clients or future clients.
        Savings rate of individuals.    State Street benefits from the savings of individuals that are invested in mutual funds and other collective funds or in defined contribution plans. Changes in savings rates or investment styles may affect revenue.
        Value of worldwide financial markets.    As worldwide financial markets increase or decrease in value, State Street'sStreet’s opportunities to invest and service financial assets may change. Since a portion of the Corporation'sCorporation’s fees are based on the value of assets under custody and management, fluctuations in worldwide securities market valuations will affect revenue. State Street estimates that if equity values worldwide were to increase or decrease by 10%, this, by itself, would cause approximately a 2% change in State Street'sStreet’s total revenue. If bond values worldwide were to change by 10%, State Street would anticipate a corresponding 1% change in its total revenue.
        Dynamics of markets served.    Changes in markets served, including the growth rate of collective funds worldwide, the pace of debt issuance, and outsourcing decisions, mergers, acquisitions and consolidations among clients and competitors, can affect revenue. In general, State Street benefits from an increase in the volume of financial market transactions serviced.
        State Street provides services worldwide. Global and regional economic factors and changes or potential changes in laws and regulations affecting the Corporation'sCorporation’s business, including volatile currencies, pace of inflation, changes in monetary policy, and social and political instability, could affect results of operations. For example, the significant slowing U.S. economyof economic growth globally is affecting worldwide equity values and continuing
pressures on the Japanese economy are affecting the value of the U.S. and
Japanese financial markets;constraining business growth; also, recent legislation enacted by the U.S. Congress may cause changes in the competitive environment in which State Street operates, which could include, among other things, broadening the scope of activities of significant competitors, or facilitating consolidation of competitors into stronger entities, or attracting large and well-capitalized new competitors into State Street'sStreet’s traditional businesses. Such factors and changes and the ability of the Corporation to address and adapt to the regulatory and competitive challenges may affect future results of operations.
        Interest rates.    Market interest rate levels, the shape of the yield curve, and the direction of interest rate changes affect net interest revenue, as well as securities lending revenue recorded in servicing and management fees. All else being equal, in the short term, State Street'sStreet’s net interest revenue benefits from falling interest rates and is negatively affected by rising rates because interest-bearing liabilities reprice sooner than interest-
earninginterest-earning assets. In general, sustained lower interest rates have a constraining effect on the net interest revenue growth rate.
        Volatility of currency markets.    The degree of volatility in foreign exchange rates can affect the amount of foreign exchange trading revenue. In general, State Street benefits from currency volatility.
        Pace of pension reform.    State Street expects to benefit from worldwide pension reform that creates additional pools of assets that use custody and related services, and investment management services. The pace
of pension reform and resulting programs, including public and private pension schemes may affect the pace of revenue growth.
        Pricing/competition.    Future prices the Corporation is able to obtain for its products may increase or decrease from current levels depending upon demand for its products, its competitors'competitors’ activities and the introduction of new products into the marketplace.

                                      19


PART I. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
        Pace of new business.    The pace at which State Street attracts new clients, and the pace at which existing and new clients use additional services and assign additional assets to State Street for management or custody will affect future results of operations.
        Business mix.    Changes in business mix, including the mix of U.S. and non-
U.S.non-U.S. business, may affect future results of operations.
        Rate of technological change.    Technological change creates opportunities for product differentiation and reduced costs, as well as the possibility of increased expenses. Developments in the securities processing industry, including shortened settlement cycles and ultimately straight-through-
processing,straight-through-processing, will result in changes to existing procedures. Alternative delivery systems have emerged, including the widespread utilization of the Internet. State Street'sStreet’s financial performance depends in part on its ability to develop and market new and innovative services, and to adopt or develop new technologies that differentiate State Street'sStreet’s products or provide cost efficiencies.
        There are risks inherent in this process. These include rapid technological change in the industry, the Corporation'sCorporation’s ability to access technical and other information from clients, and the significant and ongoing investments required to bring new services to market in a timely fashion at competitive prices. Further, there is risk that competitors may introduce services that could replace or provide lower-cost alternatives to State Street services.
        State Street uses appropriate trademark, trade secret, copyright and other proprietary rights procedures to protect its technology, and has applied for a limited number of patents in connection with certain software programs. However, in the event a third party asserts a claim of infringement of its proprietary rights, obtained through patents or otherwise, against the Corporation, State Street may be required to spend significant resources to defend against such claims, develop a non-infringing program or process, or obtain a license to the infringed process.
        Acquisitions and alliances.    Acquisitions of complementary businesses and technologies, and development of strategic alliances are an active part of State Street'sStreet’s overall business strategy. The Corporation has completed several acquisitions and alliances in recent years. However, there can be no assurance that services, technologies, key personnel and businesses of acquired companies will be effectively assimilated into State Street'sStreet’s business or service offerings or that alliances will be successful.

                                      20
PART I.  ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
        See information under the caption "Trading“Trading Activities: Foreign Exchange and Interest Rate Sensitivity"Sensitivity” on pages 17-18.

page 21.
PART II--OTHERII—OTHER INFORMATION
ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS
        (c)  DirectorsIn June 2001, Registrant completed the purchase of the Corporation who are not employees receive an annual
retainer of $50,000 payable at their election inDST Portfolio Systems, Inc. from DST Systems, Inc. (“DST”) for 1,483,000 shares of Common StockRegistrant’s common stock and cash. Included in the purchase was the Portfolio Accounting System, an integrated system that automates mutual fund accounting and investment management recordkeeping processes such as security pricing and dividend calculations, income and expense accruals, securities inventories, accounting for daily shareholder activity and calculation of the
Corporation or in cash. In April 2001, a total of 5,975 shares were issued and
receipt of 1,195 shares was deferred as payment for the 2001 annual retainer.daily net asset values. Exemption from registration of the shares is claimed by the CorporationRegistrant under Section 4(2) of the Securities Act of 1933.

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

  Registrant's annual meeting1933; DST acquired the shares of stockholders was held on April 18, 2001. At
the meeting, the following nomineesRegistrant’s common stock for Director were elected:


                                                             Number of Shares
                                                           ---------------------
                                                               For     Withheld
                                                           ----------- ---------
   
   Ronald E. Logue........................................ 138,170,847 1,082,574
   Nicholas A. Lopardo.................................... 138,152,689 1,100,732
   David A. Spina......................................... 138,077,012 1,176,409
   David P. Gruber........................................ 138,183,222 1,070,199
   Linda A. Hill.......................................... 138,153,761 1,099,660
   Charles R. LaMantia.................................... 138,179,335 1,074,086
   Alfred Poe............................................. 138,145,720 1,107,701
   Diana Chapman Walsh.................................... 138,163,161 1,090,260
   Robert E. Weissman..................................... 138,128,305 1,125,116


  The following directors continue in office: Tenley E. Albright, M.D., Nader
F. Darehshori, John M. Kucharski, Bernard W. Reznicek, I. MacAllister Booth,
Truman S. Casner, Arthur L. Goldstein, Dennis J. Picard,its own account and Richard P.
Sergel.

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


                                                Number of Shares
                                  ---------------------------------------------
                                                            Abstain
                                                            or Not     Broker
                                      For        Against    Voting    Nonvotes
                                  ------------ ----------- --------- ----------

Vote to increase the
 Corporation's authorized number
 of shares of Common Stock......   133,263,771   5,360,974   628,676
Vote to approve the
 Corporation's Senior Executive
 Annual Incentive Plan..........   131,552,231   6,597,930 1,103,260
Vote on Application on the Model
 Business Corporation Act to the
 Corporation....................     9,894,597 106,317,182 4,071,707 18,969,935
Vote to Amend the By-laws to
 Provide Rules on Stockholder
 Meetings.......................     4,476,259 111,823,603 4,008,295 18,945,264



                                      21


PART II. not with a view to any distribution thereof.
ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K
        (a)  Exhibit Index

                                                                     Page
                                                                      of
 Exhibit                                                             this
 Number                                                             Report
 ------- --------------------------------------------------------   ------
 
 12      Ratio of earnings to fixed charges                           24
 15      Letter regarding unaudited interim financial information     25
Exhibit
Number
    
    
Page
of this
Report
3.1
    
Restated Articles of Organization of Registrant, as amended to date
    
26
12
    
Ratio of earnings to fixed charges
    
92
15
    
Letter regarding unaudited interim financial information
    
93
        (b)  Current Reports on Form 8-K

  A current report on Form 8-K dated April 18, 2001 was filed, by the
Registrant, on April 18, 2001 with the Securities and Exchange Commission that
reported the Corporation's first quarter 2001 financial results.

                                       22
        None
SIGNATURES
        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

                                          State Street Corporation

STATE STREET CORPORATION
Date: MayAugust 2, 2001                         By:     /s/ Ronald L. O'Kelley
                                            -----------------------------------
                                                    Ronald L. O'Kelley
                                                 Executive Vice President,
                                               Treasurer and Chief Financial
                                                          Officer

By:
/S / RONALD L. O’KELLEY
Ronald L. O’Kelley
Executive Vice President, Treasurer
and Chief Financial Officer
Date: MayAugust 2, 2001                                /s/ Frederick P. Baughman
                                          By:
                                            -----------------------------------
                                                   Frederick P. Baughman
                                             Senior Vice President, Controller
                                               and Chief Accounting Officer

                                      23