UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended JuneSeptember 30, 2008

or

For the transition period from                      to                     

Commission File No. 001-07511

STATE STREET CORPORATION

(Exact name of registrant as specified in its charter)

617-786-3000

(Registrant’s telephone number, including area code)

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

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

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

The number of shares of State Street’s common stock outstanding on July 31,October 27, 2008 was 431,747,778.431,953,026.

STATE STREET CORPORATION

Quarterly Report on Form 10-Q for the Quarterly Period Ended JuneSeptember 30, 2008

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

GENERAL

State Street Corporation is a financial holding company headquartered in Boston, Massachusetts. Through its subsidiaries, including its principal bank subsidiary, State Street Bank and Trust Company, which we refer to as State Street Bank, State Street Corporation provides a full range of products and services to meet the needs of institutional investors worldwide. Unless otherwise indicated or unless the context requires otherwise, all references in this Management’s Discussion and Analysis to “State Street,” “we,” “us,” “our” or similar terms mean State Street Corporation and its subsidiaries on a consolidated basis. All references in this Form 10-Q to the parent company are to State Street Corporation. At JuneSeptember 30, 2008, we had consolidated total assets of $146.22$285.56 billion, consolidated total deposits of $97.25$150.87 billion, consolidated total shareholders’ equity of $14.04$13.06 billion and employed 28,700.28,950.

Our customers include mutual funds and other collective investment funds, corporate and public retirement plans, insurance companies, foundations, endowments and other investment pools, and investment managers. Our two lines of business, Investment Servicing and Investment Management, provide products and services including custody, recordkeeping, daily pricing and administration, shareholder services, foreign exchange, brokerage and other trading services, securities finance, deposit and short-term investment facilities, loan and lease financing, investment manager and hedge fund manager operations outsourcing, performance, risk and compliance analytics, investment research and investment management, including passive and active U.S. and non-U.S. equity and fixed-income strategies. We had $15.26$14.05 trillion of assets under custody and $1.89$1.69 trillion of assets under management at JuneSeptember 30, 2008. Financial information about our business lines is provided later in the “Line of Business Information” section of this Management’s Discussion and Analysis.

This Management’s Discussion and Analysis is part of our Quarterly Report on Form 10-Q filed with the SEC, and updates the Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2007, which we refer to as the 2007 Form 10-K, and in our Quarterly ReportReports on Form 10-Q for the quarterquarters ended March 31, 2008 and June 30, 2008. We previously filed both of these reports with the SEC. You should read the financial information in this Management’s Discussion and Analysis and elsewhere in this Form 10-Q in conjunction with the financial information contained in those reports, and in conjunction with the risk factors discussion provided in our Current Report on Form 8-K dated June 2,October 15, 2008. Certain previously reported amounts have been reclassified to conform to current period classifications as presented in this Form 10-Q.

We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles, which we refer to as GAAP, and which require management to make judgments in the application of its accounting policies that involve significant estimates and assumptions about the effect of matters that are inherently uncertain. Accounting policies considered relatively more significant in this respect are accounting for the fair value of financial instruments, special purpose entities, goodwill and income taxes. Additional information about these accounting policies is included in the “Significant Accounting Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2007 Form 10-K. No significant changes were made to these accounting policies during the first sixnine months of 2008.

On July 1, 2008, we completed the previously announced sale of our 50% interest in CitiStreet, a benefits servicing business that provides retirement plan recordkeeping and administrative services. In connection with the sale, we expect to record a pre-tax gain, net of exit and other costs associated with the sale, of approximately $345 million during the third quarter of 2008.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

OVERVIEW OF FINANCIAL RESULTS

Summary

Our financial results for the second quarter and first six months of 2008 reflected growth in revenue along with our ability to balance expense growth with revenue growth.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

Certain financial information is presentedprovided in this Management’s Discussion and discussed in the following sectionsAnalysis has been prepared on both a GAAP basis and an “operating” basis. Management measures and compares certain financial information on an operating basis, as it believes this presentation supports meaningful comparisons from period to period and the analysis of comparable financial trends with respect to State Street’s normal ongoing business operations. Management believes that operating-basis financial information, which includes the impact ofreports revenue from non-taxable sources

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

on a fully taxable-equivalent basis and excludes the impact of non-recurringrevenue and expenses outside of the normal course of our business, facilitates an investor’s understanding and analysis of State Street’s underlying financial performance and trends in addition to financial information prepared in accordance with GAAP.

Financial HighlightsRECENT GOVERNMENT ACTIONS

SecondCapital Purchase Program

On October 14, 2008, the U.S. Department of the Treasury announced its capital purchase program designed to encourage U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy. Under this program, Treasury will purchase up to $250 billion of shares of senior preferred stock from qualifying U.S. financial institutions. The minimum and maximum subscription amounts available to a participating financial institution are 1% of its risk-weighted assets and the lesser of $25 billion or 3% of its risk-weighted assets, respectively.

We and eight other large financial institutions entered into commitments to participate in this program, and on October 28, 2008, we issued 20,000 shares of our Series B fixed-rate cumulative perpetual preferred stock, $100,000 liquidation preference per share, and a warrant to purchase 5,576,208 shares of our common stock at an exercise price of $53.80 per share, to Treasury, and received total aggregate proceeds of $2 billion.

The preferred shares, which qualify as tier 1 regulatory capital, will pay cumulative quarterly dividends at a rate of 5% per year for the first five years, and 9% per year thereafter. The preferred shares are non-voting, other than class voting rights on certain matters that could adversely affect the shares. We can redeem the preferred shares at par after December 15, 2011. Prior to this date, we can only redeem the preferred shares at par in an amount up to the cash proceeds (minimum $500 million) from qualifying equity offerings of any tier 1-eligible perpetual preferred or common stock. Any redemption is subject to the consent of the Board of Governors of the Federal Reserve System. Until October 28, 2011, or such earlier time as the preferred stock has been redeemed or transferred by Treasury, we will not, without Treasury’s consent, be permitted to increase the dividend per share on our common stock or repurchase our common stock.

The warrant is immediately exercisable, and has a 10-year term. The exercise price of $53.80 per share was based upon the average of the closing prices of our common stock during the 20-trading day period ended October 10, 2008, the last trading day prior to our election to participate in the program. The exercise price and number of shares subject to the warrant are both subject to anti-dilution adjustments. Treasury has agreed not to exercise voting power with respect to any shares of our common stock issued upon exercise of the warrant. If we receive aggregate gross cash proceeds of at least $2 billion from one or more qualifying equity offerings of tier 1-eligible perpetual preferred or common stock on or prior to December 31, 2009, the number of shares of common stock underlying the warrant then held by Treasury will be reduced by one-half of the original number of shares, considering all adjustments, underlying the warrant.

The proceeds from the issuance will be allocated on a relative fair value basis between the preferred shares and the warrant. The preferred shares and the warrant will both be classified in shareholders’ equity in our consolidated statement of condition. The issuance, including dividends, is expected to result in a reduction of basic and diluted earnings per common share.

We issued the preferred shares and the warrant in a private placement exempt from the SEC’s registration requirements, and will file a registration statement covering the preferred shares, the warrant and the shares of

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

common stock underlying the warrant. Neither the preferred shares nor the warrant are subject to any contractual restrictions on transfer, except that Treasury may only transfer or exercise an aggregate of one-half of the warrant shares prior to December 31, 2009, unless State Street has received gross proceeds from qualified equity offerings that are at least equal to the $2 billion initially received from Treasury. During the period that Treasury holds any of the preferred shares, the warrant or any shares of our common stock issuable upon exercise of the warrant, we are subject to certain restrictions on the compensation of our senior executive officers.

Commercial Paper Funding Facility

On October 7, 2008, the Federal Reserve Board announced the creation of the “Commercial Paper Funding Facility,” referred to as the CPFF, to complement its existing credit facilities. The CPFF is intended to assist in providing liquidity to the term funding markets by providing eligible domestic issuers of commercial paper with a source of back-up liquidity. The CPFF will facilitate the issuance of term commercial paper by eligible issuers through the formation of a special purpose vehicle that will purchase three-month unsecured and asset-backed commercial paper directly from the issuers.

The CPFF is intended to increase investor demand for commercial paper and reduce the risk that eligible issuers will not be able to repay investors by rolling over their commercial paper obligations. The increased demand should encourage investors to engage in term lending in the commercial paper market and enhance the ability of financial intermediaries to facilitate credit.

We have elected not to participate in the CPFF at this time. However, we may participate in the CPFF in the future. In October 2008, we were hired to administer the CPFF and provide custody services with respect to commercial paper purchased by the special purpose vehicle from issuers.

Asset-Backed Commercial Paper Money Market Mutual Funds Liquidity Facility

In September 2008, the Federal Reserve Bank of Boston instituted the “Asset-Backed Commercial Paper Money Market Mutual Funds Liquidity Facility,” referred to as the AMLF. The AMLF was designed to assist in restoring liquidity to the asset-backed commercial paper markets and assist registered money market mutual funds in maintaining adequate liquidity to meet investor redemption demand. The AMLF will be available until January 30, 2009, unless extended by the Board of Governors of the Federal Reserve, and allows a depository institution or bank holding company to borrow funds on a non-recourse basis from the Federal Reserve Bank’s discount window at fixed interest rates to fund purchases of qualifying asset-backed commercial paper from an eligible money market mutual fund or other eligible entity under certain conditions. The term of the borrowing must equal the maturity of the eligible asset-backed commercial paper collateralizing the borrowing. The terms of the AMLF permit exclusion of the assets from regulatory leverage and risk-based capital calculations, since the borrowings are extended on a non-recourse basis and, as a result, there is no credit or market risk exposure to us on the assets.

We participated in the AMLF during the third quarter of 2008 to provide liquidity to certain eligible unaffiliated money market mutual funds, and as of September 30, 2008, we carried asset-backed commercial paper of $76.66 billion purchased under this facility, with corresponding outstanding borrowings totaling $76.63 billion, in our consolidated balance sheet. As of September 30, 2008, the aggregate securities we held in connection with our participation in the AMLF included approximately $1.63 billion of eligible asset-backed commercial paper issued by the State Street-administered asset-backed commercial paper conduits. During the third quarter of 2008, we earned net interest revenue of approximately $8 million by earning a spread between the yield we earned on the securities and the rate we paid on the borrowings.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

Additional information with respect to our participation in the AMLF is provided in note 6 to the consolidated financial statements included in this Form 10-Q.

FORWARD-LOOKING STATEMENTS

This Form 10-Q, particularly this Management’s Discussion and Analysis, contains statements that are considered “forward looking statements” within the meaning of United States securities laws. In addition, management may make other written or oral communications from time to time that contain forward-looking statements. Forward-looking statements, including statements about industry trends, management’s future expectations and other matters that do not relate strictly to historical facts, are based on assumptions by management, and are often identified by such forward-looking terminology as “expect,” “look,” “believe,” “anticipate,” “estimate,” “seek,” “may,” “will,” “trend,” “target,” and “goal” or similar statements or variations of such terms.

Forward-looking statements are subject to various risks and uncertainties, which change over time, are based on management’s expectations and assumptions at the time the statements are made, and are not guarantees of future results. Management’s expectations and assumptions, and the continued validity of the forward-looking statements, are subject to change due to a broad range of factors affecting the national and global economies, the equity, debt, currency and other financial markets, as well as factors specific to State Street and its subsidiaries, including State Street Bank. Forward-looking statements may include, among other things, statements about our confidence in our strategies and our expectations about financial performance, market growth, market and regulatory trends and developments, acquisitions and divestitures, new technologies, services and opportunities, and earnings.

Factors that could cause changes in the expectations or assumptions on which forward-looking statements are based include, but are not limited to:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

Therefore, actual outcomes and results may differ materially from what is expressed in our forward-looking statements and from our historical financial results due to the factors discussed above and elsewhere in this Form 10-Q or disclosed in our other SEC filings. Forward-looking statements should not be relied upon as representing our expectations or beliefs as of any time subsequent to the time this Form 10-Q is filed with the SEC. State Street undertakes no obligation to revise the forward-looking statements contained in this Form 10-Q to reflect events after the time it is filed with the SEC. The factors discussed above and elsewhere in this Form 10-Q are not intended to be a complete summary of all risks and uncertainties that may affect our businesses. Though we strive to monitor and mitigate risk, we cannot anticipate all potential economic, operational and financial developments that may adversely impact our operations and our financial results.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

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

OVERVIEW OF FINANCIAL RESULTS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

Highlights of Financial Results

Third quarter 2008 net income of $548$477 million increased 50%33%, and diluted earnings per share of $1.35$1.09 increased 26%20%, from net income of $366$358 million and diluted earnings per share of $1.07$.91 for the secondthird quarter of 2007. Net income was $1.08$1.56 billion and diluted earnings per share were $2.70$3.78 for the first sixnine months of 2008, compared to net income of $680 million$1.04 billion and diluted earnings per share of $2.00$2.91, respectively, for the first sixnine months of 2007. These financial resultsResults for the 2008 periods included the impactfollowing significant items outside of $32the ordinary course of our business.

Comparing the secondthird quarter of 2008 to the secondthird quarter of 2007, our total revenue grew 39%24% to $2.67$2.77 billion, reflective of the contributionCitiStreet gain and the growth of revenue of the acquired Investors Financial business to 2008 results and growthcertain of our existing businesses. Total fee revenue was up 31%6%, with increases in all income statement revenue line items except management fees, which declined 1%. The growth in total fee revenue was composed of growth in servicing fees up 28%(up 3%), trading services revenue up 23%,(up 13%) and securities finance revenue up 117%,(up 49%). Management fees and processing fees and other revenue up 18%.declined 13% and 19%, respectively, compared to the third quarter of 2007.

The increase in servicing fee revenue resulted from the contribution of revenue from the acquired Investors Financial business, as well as the impact of increased business from new business,and existing customers, partly offset by the impact of lower average equity market declines during the second quarter.valuations. Management fees decreased slightly due to a declinedeclines in month-end equity market valuations and performance fees. Both servicing fees and the impactmanagement fees are sensitive to changes in market valuations, particularly equity valuations, as our fees are based, in part, on levels of the decline in equity markets during the second quarter, mostly offset by the impact of new business.assets under custody, administration or management. Trading services revenue, particularly foreign exchange trading revenue, benefited from increasesa 51% increase in currency volatility and customer volumes, with volatilities declining from the higher levels experienced earlier in 2008.

volatility. The increase

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

in securities finance revenue was primarily driven by wider average credit spreads, which were partly offset by lower volumes of securities on loan. This business benefitedloan caused by lower equity market valuations and shorter loan durations. Some institutional investors have suspended or withdrawn from the continuing volatility attributablesecurities lending programs, which is anticipated to the above-mentioned disruptioncontinue to result in the fixed-income markets. Spreads also benefited from the Federal Reserve Board’s aggregate 225 basis point reduction in the federal funds ratelower volumes of securities on loan during the first six monthsfourth quarter of 2008.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

Processing fees and other revenue declined as a result of a lower level of fees and lower revenue from joint ventures.

Net interest revenue increased 71%13% for the secondthird quarter of 2008 compared to the prior-year secondthird quarter, or 14% on a fully taxable-equivalent basis ($550 million compared to $481 million, reflecting tax-equivalent adjustments of $25 million and $17 million, respectively), with a related increase in net interest margin of 6710 basis points. These increases were primarily due to wider spreads on fixed-rate investment securitiesthe impact of Federal Reserve reductions in interest rates during 2008 and an increase in customer deposits. If the additional net interest revenue of $8 million from our participation in the AMLF and the contribution$98 million reduction of interest-earning assets from Investors Financial. Overall, we benefitted from higher levelsnet interest revenue related to SILO leveraged leases are excluded, net interest revenue for the third quarter of customer deposits and2008 was $640 million ($550 million less $8 million plus $98 million), an increase of 33% compared to $481 million for the favorable U.S. and non-U.S. interest rate environment.third quarter of 2007.

Total operating expenses increased 36% to $1.84 billion for14% over the second quarter of 2008 compared to the 2007 quarter, primarily the result of the addition of the operating expenses of the acquired Investors Financial business, increased staffing levels to support new business, and higher benefits costs and professional services fees.prior-year quarter. Operating expenses for the secondthird quarter of 2008 and 2007 included $32$30 million and $141 million, respectively, of merger and integration costs associated with the acquisition of Investors Financial. OnFinancial and, for the third quarter of 2008, included a $200 million charge to provide for our estimated net exposure to customers on an operating basis, which excludes these costs,indemnification obligation associated with collateralized repurchase agreements with an affiliate of Lehman Brothers Holdings Inc. The increase in total operating expenses grew 33% to $1.81 billionresulted primarily from $1.36 billionthe provision for the second quarter of 2007.indemnification obligation. If the provision for the indemnification obligation and the merger and integration costs associated with the Investors Financial acquisition are excluded, total operating expenses increased to $1.695 billion ($1.925 billion less $30 million and $200 million) from $1.548 billion ($1.689 billion less $141 million), or 9.5%, primarily due to increased staffing levels to support new business and higher benefits costs.

With growth in total revenue of 39% exceeding the growth in total operating expenses of 33% (the latter presented on an operating basis to adjust for $32 million of merger and integration costs for the second quarter of 2008) in the quarterly comparison,and year-to-date comparisons, we achieved positive operating leverage of approximately 600 basis points. In the six-month comparison, growth in total revenue of 45% exceeded growth in total operating expenses of 38% (the latter presented on an operating basis to adjust for $58 million of merger and integration costs for the first six months of 2008), and on that basis we achieved positive operatingboth periods. Operating leverage of approximately 700 basis points. We define operating leverage as discussed above asrepresents the difference between the growth rate of total revenue and the growth rate of total operating expenses, with total operating expenses presented on an operating basis.expenses.

Our Investment Servicing business line continued to generate new business. During the secondthird quarter of 2008, we generated approximately $400$280 billion of new business in assets to be serviced, for which we provided or will provide various services including dailyaccounting, fund accounting and valuation, performance analytics,administration, custody, collateral administration, foreign exchange, transition management, currency management, securities lendingfinance, transfer agency, performance analytics, compliance reporting and monitoring, hedge fund administration. Most ofservicing and private equity administration, and investment manager operations outsourcing. With respect to this new business, we will generateearn fee revenue in future periods as we service the assets.

At JuneSeptember 30, 2008, we had aggregate assets under custody of $15.26$14.05 trillion, which decreased $42 billion$1.25 trillion, or 8%, from $15.30 trillion at December 31, 2007, and increased $2.22decreased $1.10 trillion, or 17%7%, from $13.04$15.15 trillion at JuneSeptember 30, 2007. The acquisition of Investors Financial contributed $1.9 trillion of assets under custody when that acquisition was completed on July 2, 2007. At JuneSeptember 30, 2008, we had aggregate assets under management of $1.89$1.69 trillion, which decreased from $1.98 trillion at December 31, 2007 and $1.93$2.00 trillion at JuneSeptember 30, 2007. The decreases in assets under custody and assets under management from December 31, 2007 to JuneSeptember 30, 2008 were caused primarily by the continued instability in the financial markets and resulting declines in asset valuations.

Our effective income tax rate for the second quarter and first six months of 2008 was 34%, compared to 35% for both periods in 2007, and 33.7% for full-year 2007.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

Our effective income tax rate for the third quarter of 2008 was 43.7%, compared to 35% in the 2007 quarter, and 33.7% for full-year 2007. The increase in the effective rate for 2008 was primarily the result of the net tax impact of the significant items described previously under “Highlights of Financial Results.”

CONSOLIDATED RESULTS OF OPERATIONS

This section discusses our consolidated results of operations for the secondthird quarter and first sixnine months of 2008 compared to the same periods in 2007, and should be read in conjunction with the consolidated financial statements and accompanying condensed notes included in this Form 10-Q.

TOTAL REVENUE

Fee Revenue

Servicing fees and management fees collectively comprised approximately 63%65% of total fee revenue for the secondthird quarter and 63% for the first sixnine months of 2008, compared to approximately 68% and 70%69%, respectively, for each of the comparablecorresponding prior-year periods. These fee levels are a function of several factors, including the mix and volume of assets under custody and assets under management, securities positions held and the volume of portfolio transactions, as well as the types of products and services used by customers. These fees are affected by changes in worldwide equity and fixed-income asset valuations. Generally, servicing fees are affected, in part, by changes in daily average valuations of assets under custody, while management fees are affected by changes in month-end valuations of assets under management. As a result, management fee revenue is generally more sensitive to changes in market valuations than servicing fee revenue. Additional factors, such as the level of transaction volumes, changes in service level, balance credits, customer minimum balances, pricing concessions and other factors, may have a significant impact on servicing fee revenue. Performance fees, a component of management fee revenue, are generated when the performance of managed funds exceeds benchmarks specified in the management agreements.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

Servicing fees

Servicing fees are derived from custody, product- and participant-level accounting, daily pricing and administration; recordkeeping; investment manager and hedge fund manager operations outsourcing; master trust and master custody; and performance, risk and compliance analytics. The increase in servicing fees in the quarterly and six-monthnine-month comparisons was driven primarily by the aggregate contribution of $141 million and $282 million, respectively, of servicing fee revenue from the acquired Investors Financial business andattributable to the impact of new asset servicing business from existingnew and newexisting customers, partly offset by the impact of declines in daily average equity market valuations. The nine-month comparison also benefited from the contribution of servicing fee revenue from the acquired Investors Financial business, which for 2007 contributed revenue only for the third quarter of that year. The daily average values for the secondthird quarter of 2008 for the S&P 500 Index were down 8%16%, and for the MSCI^® EAFE Index were down 6%19%, compared with the secondthird quarter of 2007. For the first halfnine months of the year, daily average values for the S&P 500 Index and MSCI^® EAFE Index were down 7%10% and 4%9%, respectively. During 2008, the portion of assets under custody composed of equities, which generally earn higher fees, declined as a percentage of total assets under custody, reflecting the impact of declines in equity market valuations.

Management fees

The decrease in management fees in the quarterly and nine-month comparisons was primarily due to the impact of declines in average month-end equity market valuations and performance fees. The decrease in the nine-month comparison was partly offset by higher management fees earned on new business awarded in prior periods. The averages of month-end values for the S&P 500 Index were down 17%, and for the MSCI^® EAFE Index were down 21%, compared with the third quarter of 2007, and in the nine-month comparison the average month-end equity market valuations were down 11% for each of the S&P 500 Index and the MSCI^® EAFE Index. Performance fees composed about 3% of our management fee revenue for the third quarter of 2008 and 2% for the first nine months of 2008, compared to about 6% for each of the third quarter and first nine months of 2007. Performance fees were $7 million and $18 million for the third quarter and first nine months of 2008, respectively, compared to $18 million and $51 million for the third quarter and first nine months of 2007. The

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

Management fees

The slight decrease in management fees in the quarterly comparison was primarily due to a decline in performance fees and the impact of a 10% decline in average month-end equity market valuations, partly offset by the impact of new business from existing and new customers. The increase in the year-to-date comparison resulted from the impact of new business partly offset by a decline in performance fees and the impact of lower average month-end equity market valuations. The averages of month-end values for the S&P 500 Index were down 10%, and for the MSCI^® EAFE Index were down 8%, compared with the second quarter of 2007. Performance fees composed about 1% of our management fee revenue for the second quarter of 2008 and 2% for the first six months of 2008, compared to about 6% for both the second quarter and first six months of 2007. Performance fees were $4 million and $11 million for the second quarter and first six months of 2008, respectively, compared to $18 million and $34 million for the second quarter and first six months of 2007. The decreases in both comparisons generally resulted from somewhat lower performance measured against the specified benchmarks in significantly declining equity markets during 2008, as well as reduced levels of assets under management on which such fees were earned.

The following table presents a summary of activity in assets under management for the twelve months ended JuneSeptember 30, 2008.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

Trading services

Trading services revenue, which includes foreign exchange trading revenue and brokerage and other trading fees, increased 23%13% for the secondthird quarter of 2008 compared to the secondthird quarter of 2007 and increased 43%31% in the six-monthnine-month comparison. Foreign exchange trading revenue for the secondthird quarter and first sixnine months of 2008 totaled $227$258 million and $492$750 million, respectively, up 30%15% and 51%36% from the corresponding prior-year periods. The quarterly increase in foreign exchange trading revenue reflected a 77%51% increase in currency volatility, andpartially offset by a 16% increase3% decline in aggregate customer volumes, mostly in foreign exchange sales trading (a 16% increase), and included the contribution of $25 million of foreign exchange revenue from the acquired Investors Financial business. Volumes in custody foreign exchange services increased 14% over last year.volumes. The six-monthnine-month increase in foreign exchange trading revenue resulted from a 66%60% increase in currency volatility along with a 21%12% increase in customer volumes, as well as the contribution of $48 million of foreign exchange revenue from the acquired Investors Financial business. Foreign exchange trading revenue decreased 14%business compared to the firstone quarter of 2008, primarily due to a decline in currency volatility and a slight decline in customer volumes. Duringrevenue for the second half of this year, we expect quarterly levels of foreign exchange trading revenue to continue to be lower compared to the first quarter of 2008.2007 period.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (Continued)

Brokerage and other trading fees totaled $93$105 million for the secondthird quarter of 2008, up 8%9% from the secondthird quarter of 2007, and $194$299 million for the first sixnine months of 2008, up 26%20% from the corresponding 2007 period, in both instances primarily due to the strength in electronic trading and the contribution of fees from the acquired Currenex operations as well asacquired in March 2007, increased fees from transition management.brokerage services and higher trading profits.

Securities finance

Securities finance revenue for the secondthird quarter of 2008 increased 117%49% compared to the secondthird quarter of 2007 and 152%112% in the six-monthnine-month comparison, with both increases primarily due to wider credit spreads across all lending programs. In the quarterly comparison,both comparisons, the widening in spreads was partly offset by a decreasedecline in the volume of securities on loan. Securities lending volumes increased slightly inThe nine-month comparison also benefited from revenue contributed by the six-month comparison.acquired Investors Financial business. Spreads benefited from the continued disruption in the global fixed-income securities markets, as well as from the Federal Reserve Board’s aggregate 225 basis point reduction in the federal funds rate during 2008. Since the first six monthsmiddle of 2008. We expect the growth in securities finance revenue to moderate during the second halfthird quarter of 2008, compareda number of institutional investors have suspended or limited participation in our securities lending program. This has resulted in decreased lending volumes, partly offset by higher spreads. The decreased lending volumes are expected to the first half of this year,continue as long as the benefitsuspended or limited participation continues or increases. We have seen increased withdrawal activity from wider spreads is reduced.the underlying collateral pools, but have been able to manage these outflows in a manner that substantially mitigates the risk of loss to our customers.

Processing Fees and Other

The 18% increase19% decrease in processing fees and other revenue in the quarterly comparison resulted from the contributiona lower level of fees as well as lower revenue from the acquired Investors Financial business, partially offset by a decline in revenue from our Structured Products group, primarily associated with the impact of the disruption in the fixed-income securities markets.joint ventures. The 5%10% decrease in the six-monthnine-month comparison resulted from the decline in fee revenue from our Structured Products group as well as lower joint venture-related revenue, partly offset by the contribution of revenue from the acquired Investors Financial business.business for the full nine-month period in 2008. The marketglobal financial markets disruption continued to reduce fees generated from our State Street-administered asset-backed commercial paper activities, as rates paid on commercial paper remained at high levels and spreads between the overall yield on the assets collateralizing the commercial paper and the rates paid to investors in the commercial paper narrowed.

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NET INTEREST REVENUE

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Net interest revenue is defined as the total of interest revenue earned on interest-earning assets less interest expense paid on interest-bearing liabilities. Interest-earning assets, which consist of investment securities, loans and leases and money marketother liquid assets, are financed primarily by customer deposits and short-term borrowings. Net interest margin represents the relationship between net interest revenue and average interest-earning assets. Changes in the components of average interest-earning assets and average interest-bearing liabilities are discussed in more detail below. Additional detail about the components of interest revenue and interest expense is in note 1113 to the consolidated financial statements included in this Form 10-Q.

On a fully taxable-equivalent basis, net interest revenue for the secondthird quarter of 2008 increased 73%14% compared to the secondthird quarter of 2007, and net interest margin increased to 2.31%1.83% from 1.64%1.73%. For the sixnine months ended JuneSeptember 30, 2008, on a fully taxable-equivalent basis, net interest revenue increased 82%55% compared to the corresponding 2007 period, and net interest margin increased to 2.26%2.12% from 1.55%1.62%. ThisThe growth was the result of several favorable factors. First, spreads widened on fixed-rate investment securities. Second, the acquired Investors Financial business contributed interest-earning assets, which, including acquisition financing costs, generated $49 million of fully taxable-equivalent net interest revenue ($34 million on a GAAP basis) for the second quarter of 2008 and $92 million ($65 million on a GAAP basis) for the first half of 2008. Third, spreads widened on floating-rate asset-backed investment securities. Finally, foreign transaction deposit volumes increased. Average transaction deposit volumes, particularly non-U.S. deposits, increased 25% in both the second quarter and six-month comparisons. Volume increases resulted from new business in non-U.S. assets under custody, as we continue to grow our asset servicing business internationally.

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comparisons was generally the result of the widening of spreads on fixed-rate investment securities and floating-rate asset-backed investment securities. In addition, average interest-bearing deposits grew 23% in the nine-month comparison, largely attributable to the addition of deposits associated with the Investors Financial acquisition and an increase in non-U.S. transaction deposits. Average transaction deposit volumes, particularly non-U.S. deposits, increased 15% in the third quarter and 22% in the nine-month comparison, primarily the result of customers’ accumulation of cash balances to build liquidity.

Average federal funds sold and securities purchased under resale agreements increased 16%decreased 13%, or $2.14$1.88 billion, to $15.53$12.57 billion, for the secondthird quarter of 2008 compared to the secondthird quarter of 2007, and increased 15%5%, or $2.05 billion,$730 million, to $15.98$14.83 billion in the six-monthnine-month comparison. The increase reflecteddecrease in the impactthird quarter comparison was due to a re-allocation of excess liquidity as the continued disruption in the financial markets led to the placement of excess short-term funds with financial institutions, including State Street, by institutional investors.U.S. Treasury securities.

Our average investment securities portfolio increaseddecreased from approximately $67.69$74.62 billion to approximately $71.69$72.09 billion for the secondthird quarter of 2008 compared to the secondthird quarter of 2007, and increased from approximately from $66.67$69.35 billion to approximately $72.51$72.37 billion in the six-monthnine-month comparison. The decrease in the third quarter was due to reduced levels of re-investment in order to build liquidity, as well as lower market valuations in the available-for-sale portfolio. The increase in both comparisonsthe nine-month comparison was primarilymainly due to the acquisitionaddition of the investment securities of Investors Financial as well as increases in our tax-exempt securities portfolio, the latter the result of increased demand associated with our tax-exempt investment program and improved spreads. The increases were partly offset by runoff as investment securities matured. We continued to invest in securities rated “AAA” and “AA.” Securities rated “AAA” and “AA” composed approximately 93% of the investment securities portfolio, with approximately 84% rated “AAA,” at June 30, 2008.Financial.

Loans and leases averaged $11.59$11.60 billion, up 23%14% or $2.18$1.45 billion, for the six-monthnine-month 2008 period compared to the corresponding six-monthnine-month 2007 period average of $9.41$10.15 billion. The increase was primarily related to higher average levels of customer overdraft activity associated with the growth in our asset servicing business, particularly internationally.customer deposits. Approximately 69% of the average loansloan and leaseslease portfolio was composed of U.S. and non-U.S. short-duration advances, primarily related to the processing of custodied customer investments, which averaged approximately $8.04$7.95 billion for the sixnine months ended JuneSeptember 30, 2008, up $1.53 billion,$903 million, or 24%13%, from $6.51$7.05 billion for the comparable period in 2007.

Average other interest-earning assets increased 294%97%, or $16.07$9.06 billion, to $21.53$18.37 billion for the secondthird quarter of 2008 compared to the secondthird quarter of 2007, and increased 232%171%, or $13.08$11.72 billion, to $18.71$18.59 billion for the six-monthnine-month period compared to the corresponding period for 2007. The increases in both comparisons were principally due to an increase in interest-bearing deposits with banks, which primarily resulted from the investment of excess liquidity.short-term liquidity with an average duration of less than one month.

Our average interest-bearing deposits increased $21.65$1.09 billion, or 35%1%, from $61.45$74.28 billion to $83.10$75.37 billion for the secondthird quarter of 2008 compared to the secondthird quarter of 2007, and increased $22.01$14.97 billion, or 37%23%, from $59.22$64.29 billion to $81.23$79.27 for the six-monthnine-month period compared to the corresponding period for 2007. Both increases wereThe increase in the third quarter comparison was due to an increase in non-U.S. transaction deposits partly offset by a decrease in domestic certificates of deposit, and in the nine-month comparison was mainly due to the impact of the acquisition of Investors Financial and an increase in low-cost customernon-U.S. transaction deposits. This deposit growth was the majormost significant contributor to the overall increase in average interest-earning assets in bothfor the quarterly and six-month comparisons.nine-month comparison.

Average other short-term borrowings decreased $1.22 billion,$580 million, or 5%3%, from $22.21$20.25 billion to $21.00$19.67 billion in the quarterly comparison and $2.74decreased $2.01 billion, or 12%9%, from $23.72$22.55 billion to $20.98$20.54 billion in the six-month comparison,nine-month comparison. The decrease in both casescomparisons was primarily due to the liquidity provideda higher level of borrowings, which resulted from higher customer demand for short-term investment products, more than offset by the increase in customer deposits.increased levels of

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netting arrangements with counterparties. Average long-term debt increased 14% and 31%10% in the quarterly and six-month comparisons, respectively,comparison due to debt issuances in 2007 associated with the Investors Financial acquisition, and 23% in the nine-month comparison, due to an additional issuancesissuance in 2008 to enhance our regulatory capital position. Note 7 to the consolidated financial statements included in this Form 10-Q provides additional information on the 2008 debt issuance.

Several factors could affect future levels of our net interest revenue and margin, including the mix of customer liabilities, our continued participation in the AMLF, the shapes of the various yield curves around the world, the Federal Reserve’s ongoing actions to manage short-term interest rates, and the level and pace of changes in non-U.S. interest rates, particularly as a result of actions of the European Central Bank and the Bank of England. We expect that the levels of net interest margin achieved for the second half of this year will decline from those achieved for the first half of 2008.

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Gains (Losses) Related to Investment Securities, Net

We recorded net gains of $15$41 million from sales of available-for-sale securities in the first sixnine months of 2008, including $9$26 million in the secondthird quarter, compared to net gains of zero in the first six months of 2007, including a net loss of $1$6 million in both the secondthird quarter and first nine months of 2007. We also recorded other-than-temporary impairment of $15$44 million in the first sixnine months of 2008, including $29 million in the third quarter, and $17 million in the first nine months of 2007, all in the third quarter of that year. The aggregate impairment of $44 million for the first quarter andnine months of 2008, most of which related to one asset-backed security.five securities, resulted from our impairment analysis process. Management regularly reviews the investment securities portfolio to determine whether they expect any loss of principal or interest in light of current market and economic conditions and their expectations. The impairment adjustment was based on our analysisprocess considers, where appropriate, management expectations related to housing prices, expected borrower defaults and the security’s overall capital structure. As a result of the underlying collateral and assessment of the related monoline insurer, after which we concludedthis process, management identified securities that although only a portion of the decline in fair value of the security was attributable to credit, the security should be written down to its current fair value.they believed were impaired. Additional information about available-for-sale securities, and the gross gains and losses that compose the net sale gains, is in the “Financial Condition” section of this Management’s Discussion and Analysis and in note 23 to the consolidated financial statements included in this Form 10-Q.

Gain on Sale of CitiStreet Interest, Net of Exit and Other Associated Costs

On July 1, 2008, we completed the sale of our 50% joint venture interest in CitiStreet, a benefits servicing business that provides retirement plan recordkeeping and administrative services and at that date had approximately $220 billion in assets under administration on behalf of corporate and government entities, employee unions and other customers. The premium received in connection with the sale was $407 million, and we recorded a resulting pre-tax gain of $350 million in our consolidated statement of income during the third quarter of 2008, net of exit and other associated costs incurred in connection with the sale. These costs totaled $57 million, and consisted of incentive compensation of $30 million, professional fees of $10 million, and other related costs of $17 million.

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OPERATING EXPENSES

Salaries and employee benefits expense increases in the quarterly comparison were mainly the result of the addition of salaries and benefits expenses of the acquired Investors Financial business as well as increases in staffing levels to support new business, particularly in hedge fund servicing, global markets activities and investment management.management, as well as higher benefits costs and an increase in contract services, partly offset by reduced incentive compensation. The year-to-date increase also resulted primarily from higher incentive compensation dueincreases in staffing levels to improved performance.support new business and the contribution of salaries and benefits expenses of the acquired Investors Financial business for the full nine-month 2008 period.

The increase in information systems and communications expense was primarily the result of increased spending for new product development to support growth, and for the additionyear-to-date period, the contribution of expenses of the acquired Investors Financial business and technology spending in Europe to support growth.business. Transaction processing expense for the third quarter of 2008 was virtually unchanged from the third quarter of 2007, and for the first nine months of 2008 increased from the prior year period primarily as a result of the addition of expenses from the acquired Investors Financial business and higher transaction volumes in asset servicing.and contract services spending. The increase in occupancy costs resulted primarily from expenses added by the acquired Investors Financial business related to additional leased space, as well as additional costs to support the growth in our business in Europe.

During the secondthird quarter and first sixnine months of 2008, in connection with the Investors Financial acquisition, we recorded merger and integration costs totaling $32$30 million and $58$88 million, respectively, in our consolidated statement of income. For each of the third quarter and first nine months of 2007, merger and integration costs totaled $141 million. These costs consisted only of direct and incremental costs to integrate the acquired Investors Financial business into our operations, and do not include ongoing expenses of the combined organization. The costs were primarily related to employee retention and system and customer integration.

For the third quarter of 2008, we recorded a $200 million reserve to provide for our estimated net exposure on an indemnification obligation associated with collateralized repurchase agreements with an affiliate of Lehman Brothers Holdings Inc., or Lehman Brothers. In September and October 2008, Lehman Brothers and certain of its affiliates filed for bankruptcy or other insolvency proceedings. While we had no unsecured financial exposure to Lehman Brothers or its affiliates, we indemnified certain customers in connection with these and other collateralized repurchase agreements with Lehman Brothers entities. In the current market environment, the market value of the underlying collateral declined. To the extent these declines resulted in collateral value falling

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below the indemnification obligation, we recorded a reserve. The amount of the reserve was based on the cost of satisfying the indemnification obligation net of the fair value of the collateral, of which we took possession during the fourth quarter of 2008. We had other customer indemnification obligations under a collateralized repurchase agreement with another Lehman Brothers entity. In these cases, the fair value of the collateral at the time we committed to take possession of it was equal to or greater than the associated indemnification obligation and therefore no related reserve was recorded. We will continue to evaluate these assets and collateral and determine whether to dispose of them or hold them to maturity. The market value of these assets and collateral will continue to fluctuate and ultimately may be greater or less than the value of our indemnification obligations.

Other operating expenses presented in the table above increased primarily as a result of higher levels of spending associated with professional services, primarily legal and sales promotion spending,consulting costs related to SSgA, as well as an increase in securities processing costs and, for the year-to-date periods, the impact of nine months of expenses of the acquired Investors Financial business for 2008, including amortization of other intangible assets. Professional services included costs related to SSgA legal matters, as well as strategy and operations consulting.

Income Tax Expense

We recorded income tax expense of $283$369 million for the secondthird quarter of 2008, compared to $197$193 million for the secondthird quarter of 2007, with the increase due to higher pre-tax earnings.2007. For the first sixnine months of 2008, income tax expense was $556$925 million, compared to $366$559 million for the corresponding 2007 period. The increase in both periods was generally the result of a higher level of pre-tax earnings, but the 2008 periods also included $39 million of income tax expense related to SILO leveraged leases, $3 million of income tax expense related to net interest revenue earned from our participation in the AMLF, and $140 million of income tax expense related to the gain on the sale of our CitiStreet interest, net of an $11 million income tax benefit related to merger and integration costs (which benefit was $30 million for the nine-month period) and an $80 million income tax benefit related to the provision for our estimated net exposure related to an indemnification obligation associated with collateralized repurchase agreements with an affiliate of Lehman Brothers.

The effective tax rate for the secondthird quarter and first six months of 2008 was 34%43.7%, compared to 35%35.0% for the secondthird quarter and first six months of 2007.2007, with the increase the result of the impact of the items described above.

LINE OF BUSINESS INFORMATION

We report two lines of business: Investment Servicing and Investment Management. Given State Street’s services and management organization, the results of operations for these lines of business are not necessarily comparable with those of other companies, including companies in the financial services industry. Additional information about our lines of business is included in note 22 to the consolidated financial statements in our 2007 Form 10-K.

The following is a summary of line of business results. The amount presented in the “Other/One-Time” column represents the merger and acquisition costs recorded in connection with the acquisition of Investors Financial. These costs were not allocated to State Street’s business lines.

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