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State Street Corporation (NYSE:STT)

Update Call

January 3, 2008 8:30 am ET

Executives

Kelley MacDonald – IR

Ronald E. Logue – Chairman and CEO

Edward J. Resch - CFO

Analysts

Glenn Schorr - UBS

Nancy Bush - NAB Research, LLC

Ken Usdin - Banc Of America Securities

Brian Bedell - Merrill Lynch

Gerard Cassidy - RBC Capital Markets

David Hilder - Bear Stearns

Betsy Graseck - Morgan Stanley

Operator

Good morning and welcome to State Street Corporation’s Conference Call and webcast to discuss its reserve announcement. Today’s call is being broadcast live on State Street’s website at www.StateStreet.com/stockholder.

This call is also being recorded for replay. State Street call is copyrighted, all rights are reserved. The call may not be recorded or rebroadcast for distribution, in whole or in part, without expressed written authorization from State Street. The only authorized broadcast of this call is housed on State Street’s website.

Now I would like to introduce Kelley MacDonald, Senior Vice President for Investor Relations atState Street. Please go ahead, ma’am.

Kelley MacDonald

Good morning, everyone. Before Ron Logue, our Chairman and CEO, and CFO Ed Resch begin their remarks, I would like to remind you that during this call we may make forward-looking statements relating to the corporation’s financial outlook, business environment, exposure to claims and the adequacy of its reserve, among other things. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in State Street’s 2006 annual report on Form 10-K and its subsequent filings with the SEC.

We encourage you to review those filings, including the sections on risk factors concerning any forward-looking statements we may make today. Any such forward-looking statements speak only as of today, January 3, 2008 and the corporation does not undertake to revise such forward-looking statements to reflect events or changes after today.

Now I’ll turn the call over to Ron.

Ronald E. Logue

Thank you, Kelley and good morning. We initiated this call today to explain a decision we’ve made to address legal exposures and other costs relating to the underperformance during 2007 of a small number of our active fixed income strategies managed at State Street Global Advisors. As a consequence of the unprecedented events inthe credit markets over the past six months, these strategies were adversely affected by exposure to, and the lack of liquidity in, sub-prime mortgage markets.

First I’ll focus on what happened and why we are taking the charge at this time. Then I’ll talk about what we’ve done to make sure it does not happen again. I know charges like this are not what you have come to expect from State Street, and I’m determined to avoid it happening again.

Lastly, I’ll discuss the impact on our 2007 performance and what we think about the effect on 2008. Ed will then provide specific details on our expectations for the fourth quarter and the full year 2007, as well as the impact on our capital.

First let me address what happened. I am going to start with some metrics to give you a sense of the scope of the issue. Active fixed income strategies represent less than 2% of the $2 trillion in assets managed by SSGA. As we disclosed inthe third quarter 10-Q, as of June 30, 2007, SSGA managed $222 billion in fixed income assets; about $38 billion of which was in active fixed income. As of September 30, 2007 SSGA managed $244 billion in fixed income assets, of which $36 billion were actively managed.

Of the active fixed income assets atJune 30, 2007 approximately $13.9 billion, or less than 1% of total assets under management, was in active strategies that had holdings in financial instruments collateralized by sub-prime mortgages. By September 30, 2007 this $13.9 billion had declined to approximately $8.2 billion due to redemptions, transfers to other funds, and market conditions.

So what drove this decline? Among other things, the portfolio managers of certain actively managed fixed income strategies materially increased the exposure of these strategies to securities backed by sub-prime mortgages and shifted the weighting of these portfolios to more highly rated sub-prime instruments.

During the third quarter, as liquidity and valuations of these securities -- including the more highly rated instruments -- came under increased pressure, the performance of these strategies were adversely affected; in some cases, significantly.

This negative performance resulted in increased redemption activity which worsened the liquidity issues in certain instances. The underperformance, which was greater than that typically associated with fixed income funds, also caused a number of clients to question whether the execution of these strategies was consistent with their investment intent.

The issues have resulted in five civil suits, including three class action claims. Given these issues, and our desire to fully respond to customer concerns, following the end of the third quarter we undertook a further review of all actively managed fixed income strategies at SSGA that were exposed to sub-prime investments.

Based on our review and ongoing discussions with customers who were invested in these strategies, we have now determined that accounting requirements, prudence and our goal of providing as much financial transparency as possible require the establishment of a reserve to address legal exposure.

First and foremost, State Street values its reputation as a trusted fiduciary to institutions around the world. We fully recognize the critical importance of preserving this reputation with our customers. As such, we are determined to address customer concerns where and to the extent merited by the particular circumstances.

However, I want to be clear here: we will continue to defend ourselves vigorously against inappropriate claims, including those that seek recovery of investment losses arising solely from changes in market conditions. We’ve worked with our legal and accounting advisors so that this reserve is set atthe appropriate level, is well supported and is expected to be adequate to cover our liability.

Let me now address the steps we have taken to prevent a similar occurrence in the future. In taking this charge and establishing the reserve we have carefully reviewed the portions of our business, both in SSGA and more broadly, that have been, or may potentially be, impacted by the liquidity crisis in the fixed income markets. While we cannot predict future developments in that marketplace, we are confident that we have identified and are managing the known liquidity risks throughout our company.

Ed will later update the performance of our asset-backed commercial paper conduits and our investment portfolio, which we discussed in some detail on the third quarter conference call.

We have avoided any sub-prime investments in our money market products and have none of this exposure in our U.S. registered or unregistered money market products. Our global markets and our securities finance businesses remain strong and our investor servicing business has not been adversely affected by disruption inthe fixed income markets.

Within SSGA, we have taken steps to build upon our experienced management team and put the issues in the active fixed income funds behind us. We also announced today that Jim Phalen has been named Interim CEO while we conduct a search for a permanent CEO for SSGA. Jim is a long-time State Street senior executive and member of our operating group, who spent five years in senior roles at SSGA. About a year ago, I asked Jim to take on a new role leading our investment servicing and trading and research businesses globally, based out of London.

He also chaired with Mark Lazberger of SSGA, our European and Asia Pacific executive boards that determine strategy for these important regions. Jim has adeep knowledge of the business and importantly, SSGA’s customers. He will work closely with SSGA’s management team to ensure that the leadership transition is effective, as smoothly as possible, and that it is very much business as usual for our customers.

Now as we announced in November, we have appointed a new Chief Investment Officer for Fixed Income and appointed CIOs for our other asset classes. The individuals heading these asset classes have combined experience of more than 100 years.

As we have done for the past several years, we are and will continue to increase our investment in SSGA’s risk and compliance personnel and infrastructure. This is not just about people though; it is also about policies and procedures. As a cautionary measure, we are also undertaking a systematic review of the risk, compliance and control infrastructure across the broad array of SSGA’s products and its operations to help protect us against any future negative surprises, and we are being aided in this review by experienced, third party consultants.

We have also closed certain funds or modified the investment policies of the active fixed income strategies that were exposed to sub-prime markets and suffered significant losses during the third quarter. The investors have either set up separate accounts to manage their funds, or they have redeemed their assets or transferred their assets to other SSGA funds. We are not abandoning the active fixed income space and we are committed to rebuilding both the team and the product line.

As you may have read, several fixed income investment professionals left State Streetin November. While these are personal actions which we will not comment on, we intend to add to teams that manage our active fixed income strategies. We also have adeep bench to draw from, evidenced by how quickly we appointed Mark Marinella as the fixed income CIO.

Now let me comment on the impact on 2007 results. When we announced the results of the third quarter, we indicated that in 2007 we expected to perform above our ranges for operating earnings per share, operating revenue and operating return on equity, excluding the impact of the investors financial merger and integration costs. As you may recall, those ranges are growth in operating earnings per share of 10% to 15%, growth in operating revenue of 20% to 22% and operating return on equity of 14% to 17%.

Under GAAP, earnings per share for 2007 is now expected to be between $3.42 and $3.45 per share and return on equity is expected to be approximately 13%. I would like to mention that our 2007 earnings per share excluding just the merger and integration costs and the tax adjustment in 2006, but not the impact of the reserve would still be up about 10%, the lower end of the range we provided last February.

On an operating basis, that is excluding the impact of the reserve, the merger and integration costs associated with our acquisition of Investors Financial in July 2007, and the effect of the $65 million or $0.20 per share of 2006 tax adjustments, we continue to expect earnings per share to be between $4.54 and $4.57 and the return on equity to be approximately 17.5%, both above the ranges provided on October 16, 2007.

This full year earnings per share outlook on an operating basis compares to the results of 2006 of $3.46 per share. We continue to expect to exceed the year-over-year revenue growth range provided of 20% to 22%. In fact, as we announced this morning, we now expect our revenue to growin excess of 30% in 2007.

Now before I turn the call over to Ed, let me remind you of the strength of our core business. As I noted on our third quarter earnings conference call, the recent market volatility has created some opportunities for us in trading and in securities finance. Our balance sheet strategies continue to pay off for us as our net interest income through nine months was up 47%, compared to the first nine months of 2006, and our net interest margin was 161 basis points through nine months, up 39 basis points from 122 basis points through the first nine months of 2006.

As I mentioned on the third quarter call, we won $825 billion in assets in our servicing business in the third quarter, which positively affected revenue inthe fourth quarter of 2007 and will positively affect revenue inthe first two quarters of 2008. We also won $26 billion in assets in net new business at SSGA during the third quarter.

On the servicing side, in the first two months of the fourth quarter we won approximately $250 billion in assets. On the management side, we won approximately $17 billion in assets. Due to the strong growth in our core business lines, as well as continued expansion of net interest margin and strength in trading services, we continue to be very comfortable about achieving our long-term financial goals in 2008. On our fourth quarter 2007 earnings call on January 15, I’ll provide additional guidance regarding our 2008 financial goals.

Now, let me turn the call over to Ed, who will provide more detail as to the financial impact of decision.

Edward J. Resch

Thank you, Ron and good morning. First, regarding the earnings, we expect to see continued strength in our core businesses, both asset servicing and asset management and we expect operating earnings per share to improve about 50% over the prior year’s fourth quarter. Volatility inthe market should provide some strength in both foreign exchange and in securities finance compared to the prior year’s fourth quarter as well.

Net interest income should also improve significantly against last year’s fourth quarter and also improve in double-digits when compared to this year’s third quarter.

Excluding the charge and the merger and integration costs in 2007, we expect to again achieve positive operating leverage on a year-over-year basis as well as on a sequential quarter basis.

Both fee revenue and net interest revenue appear on track to be strong, fueled by the new business wins we’ve announced over the past year, so we expect to perform above 20% to 22% range of revenue growth we established following the acquisition of Investors Financial. Specifically, we expect revenue to increase more than 30% compared to 2006. We expect our effective tax rate for the year to be 35% on an operating basis.

So while the impact on our fourth quarter GAAP results will be significant, we expect to perform above the top of the ranges for operating earnings per share and operating return on equity as we have defined them. As Ron indicated, we expect operating earnings per share for 2007 to be between $4.54 and $4.57, up about 30% from operating earnings in 2006.

Let me add just a little more information about the consolidation of Investors Financial. The Investors Financial business continues to perform very well; in fact, above the level of our deal model. Due to strong revenue performance, we continue to expect dilution per share from the acquisition in 2007 to be about $0.06, down from the original $0.14 dilution per share.

The consolidation continues on schedule. The conversion of customer accounts is about 25% complete. As we indicated on the third quarter call, we continue to expect to retain at least 90% of the revenue. Even with this charge, State Street will only be slightly below the middle of our target leverage ratio range. We have met with our regulators inthe rating agencies about the reserve and reviewed our capital plans with them.

The principal ratio that we manage to is atier 1 leverage ratio. We will continue to target for both the corporation and the bank to be slightly above the high end of our range of 5.25% and 5.75%. For the corporation, we expect thetier 1 leverage ratio to be inthe range of 5.2% to 5.3%, and the bank’s tier 1 leverage ratio to bein the range of 5.4% to 5.5% as of December 31 and we expect the corporation’s tangible common equity ratio to be between 3.4% and 3.5%.

We arein the process of evaluating over the next few weeks the specifics of raising non-dilutive tier 1 qualified capital. We will obviously update you as we reach a decision. This expected capital raising, plus the capital generated from retained earnings, should put us ina strong position by the second quarter of 2008. I remind you that the corporation’s tier 1 capital ratio stood at 11.65% at September 30, 2007 and we expect it to be inthe range of 11.3% to 11.4% as of December 31, 2007 after the impact of the charge. We expect the bank’s tier 1 capital ratio to be inthe range of 11.3% to 11.4%.

We expect our balance sheet to grow slightly, primarily based on growth in customer deposits as well as the increased level of liquidity we carried in response to market conditions which occurred inthe quarter.

I will update you in general about the performance of the asset-backed commercial paper issued by our conduits, as well as the performance of the investment portfolio, since I assume those two areas are on your minds. First, the commercial paper has continued to attract liquidity inthe marketplace at increased spreads compared to earlier in 2007, but not as high as the spreads we experienced in August and early September. The overall asset quality and diversification of the conduit portfolio has not changed materially from the data we disclosed in the third quarter 10-Q and on the third quarter conference call.

At this time, we believe that we do not need to consolidate the conduits. As of the year end, State Street had funded $2 million in commercial paper, down from $730 million we held on September 30, 2007 and also down from the $222 million we funded as of October 15, 2007.

Our investment portfolio is performing as expected, particularly that portion of the portfolio which is invested in asset-backed securities collateralized by sub-prime mortgages. As of year end, those securities totaled $6.3 billion of which 72% are AAA-rated and 28% are AA-rated. Due to paydowns, we have credit enhancement of 40% on these securities.

We have experienced no ratings downgrades to these securities; however, five securities -- or $25 million in total -- have been placed on watch for downgrade due to recent rating agency concerns regarding certain financial guarantors.

So we’re confident about managing our capital position, the performance of our investment portfolio and the administration of our conduit program. Our operating results are expected to be very strong for both the fourth quarter and the full year.

Now I’ll turn the call back to Ron.

Ronald E. Logue

Thank you, Ed. I hope during our comments today we have given you a sense of what happened within a small number of our actively managed fixed income strategies which result in this charge; what we are doing to help prevent the reoccurrence of issues such as this and what we see as the outlook for 2007 and 2008.

But before we move to your questions, I want to make one other comment. I strongly believe that the time to assess the measure of a company is not when things are going well, but how it performs when faced with adversity. Now thekey judgment, in my opinion, is how does a company deal with its issues and face its challenges. The way we face such a difficulty at State Street is to follow the values that are atthe core of our company.

These are values that we consistently communicate within and outside our company and are represented by the four constituencies we serve. You have heard me talk about them before: our shareholders, our customers, our employees, and our community. Our actions with regard to all four of these constituencies are guided by doing what is right.

We need to be open and transparent with our shareholders. We need to be fair to our customers. We need to judge the performance of our employees accurately and we always need to give back to the communities where we live.

It’s through these actions, even during times of difficulty, that will sustain the long-term financial performance and growth of this company. Soin keeping with this belief, we are committed to addressing the issues that have been identified within our fixed income strategies ina manner that is balanced, responsible and fair and that helps us put these issues firmly behind us, because we have so much momentum right now and we need to take advantage of it.

Ed and I are now happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Glenn Schorr - UBS.

Glenn Schorr - UBS

What’s the distinction between a good claim versus not a good claim? In other words, you made a clear comment about defending vigorously against drops in market valuation. I guess I’m just missing… you know, the assets were so big and now they are smaller. They fell due to an over-concentration in assets. Either the assets belong in the portfolio or not. I guess I’m missing how you come up with $618 million pre-tax reserve to begin with.

Ronald E. Logue

Let me maybe answer the question two ways, and let me first say that obviously, I’m going to talk somewhat in general terms, because we are still in litigation, so I have to do that. But I also want to try and be as transparent as I can here.

The reserve first of all was built from the bottom up, customer by customer, working very closely with our legal and accounting partners as you might imagine and we spent along time presenting what that is. Probably the best way I can differentiate, if that’s the right word, is to talk a little bit about the process itself.

Portfolio managers make investment decisions. The CIOs, as you might imagine, review and approve those decisions. An investment committee periodically reviews, generally, those decisions. Overlaying all of that there is a risk and compliance process to ensure that those investment decisions are proper and consistent with customer guidelines. There can be gray areas there from time to time and in many cases, it’s very clear and very obvious and well-communicated as to what was happening; and in some other cases, it’s not as clear.

That’s probably the biggest distinction, Glenn, that I can explain. On those situations, what is important for us to do is to listen very carefully to the customer concerns and very carefully understand and try to determine what those issues are and as I said, be fair. That’s the biggest distinction.

Glenn Schorr - UBS

I get that. That’s very helpful. I appreciate that. Is there any insurance that we should be thinking about?

Ronald E. Logue

There is insurance, it’s not included inthe reserve for accounting reasons, but we do have insurance and we would expect that we would get some claims back on insurance.

Glenn Schorr - UBS

That’s something that we will just wait on over time, I guess?

Ronald E. Logue

Yes, that’s right.

Glenn Schorr - UBS

We are looking at a fourth quarter that could have been around $1.40. That’s well above where we all were guesstimating. I know we had a good volatile quarter so I am guessing FX and sec lending were strong, but you made comments also about net interest income up double-digits versus last quarter. That, plus just good core business momentum, that’s how we get to the overage, those four components?

Ronald E. Logue

Obviously, trading in securities finance were very strong just like they were inthe third quarter, that we talked about, Glenn. But the fundamental business is extremely strong being driven by significant net new business at $825 billion. The fee income is very, very strong, and will be recurring into the first half of ’08 so there is a lot of strength there, and obviously there continues to be significant strength in NIR and I would expect that would continue.

Operator

And our next question comes from Nancy Bush - NAB Research, LLC.

Nancy Bush - NAB Research, LLC

You said that you are conducting a review now of risk management in SSGA. Do you have any preliminary observations about where perhaps risk management or oversight was flawed in this whole sub-prime crisis debacle? Is it simply a matter of the markets? If you could just expand on your preliminary thoughts on that, I would appreciate it.

Ronald E. Logue

The markets obviously led to some of that. From what we can see here, as we sit here today it still seems to be isolated into the active fixed income areas. Processes arein place. I think what we need to do is obviously because of the fact that markets are different now and probably are going to stay different, then we obviously have to redouble our efforts there and enhance those policies and procedures.

A year ago at this time I don’t think we would have ever considered 100% liquidity as an issue. So the issue here I think is one of looking atthe new market realities and making sure that we have in place enhanced risk and compliance issues to deal with those realities. I think that’s the big lesson learned here for us, and probably for many others.

Nancy Bush - NAB Research, LLC

This is happening; I mean, there is obviously headline risk here. Thank God this is happening inthe midst of a time when the fundamentals are quite strong, but there is continued headline risk and it’s happening ata time when there is abig integration going on at one of your competitors.

What are you doing? Are you finding that you have to do anything extra special to make sure this does not impact your prospects for winning new business from what’s going on inthe industry?

Ronald E. Logue

Well obviously one of the reasons we are doing this is to get this behind us, to eliminate some of the distractions, but more importantly I think that the integrations that are going on at our competitors, and here ourselves have to do with asset servicing, not asset management, so they are pretty distinct and separate, so I don’t see any issue there.

I think the proof of the pudding is the fact that we won $825 billion in the third quarter and in the first two months of the fourth quarter another $250 billion, which is fairly significant.

Operator

Your next question comes from Ken Usdin - Banc Of America Securities.

Ken Usdin - Banc Of America Securities

You mentioned about being very confident about achieving your long-term goals in 2008. I just want to make sure that I am thinking about this the right way. Would that imply that you are expecting to be within your typical growth range goals on an operating basis versus the $4.54 to $4.57, just using EPS as one of the three goals? Is that what you’re saying?

Ronald E. Logue

What we’re saying is we expect to be back on a GAAP basis – well not on a GAAP basis, but we expect to be back on an operating basis.

Ken Usdin - Banc Of America Securities

So you still expect to be growing on an operating basis within your long-term growth ranges in 2008, even after this very strong result that you’re posting for ‘07?

Edward J. Resch

Just one added comment there, which is that because we only had IFIN for half a year this year in ’07 we’ll be adjusting upward our long-term revenue growth goal to reflect the fact we’ll have a full year of IFIN in 2008. But other than that, absolutely; the question is do we expect, long term, to be within our long-term financial goals for 2008.

Ken Usdin - Banc Of America Securities

As far as the fourth quarter concerns this extremely strong result, obviously you mentioned the continued strength and the volatility on the volume side of FX and sec lending. Is there some of that you think doesn’t recur? Does this really correspond to the environment? How much do you think that this heightened volatility type of environment is going to continue as well?

Edward J. Resch

I think that really depends on what happens inthe markets going forward. I would say if there is a gradual easing in the credit markets over time that absent any other variable, that I would expect that those two business wouldn’t continue to beat the same levels.

Ken Usdin - Banc Of America Securities

Can you walk us through how the $618 million gets to $279 million and how you net out the taxes and the incentive comp against the pre-tax charge?

Edward J. Resch

We start with our bottom-up analysis that Ron I think took everybody through and come up with a number of $600 million. To that, we add some other expenses, which are basically severance and professional costs associated with the reserve that gets you to the $618 million. Based on the way that our incentive compensation formulas work, there is an effective reduction to incentive compensation of about 25% of the gross reserves, so call that $151 million. That gives you $467 million. And then you tax effect that at our marginal rate of about 40% and that brings you down to $279 million after tax effect and that translates into $0.71 inthe fourth quarter.

Ken Usdin - Banc Of America Securities

So the comp, essentially, and the related revenues come out of expenses?

Edward J. Resch

Yes.

Ken Usdin - Banc Of America Securities

So that’s incentive comp that was previously accrued that gets reversed or just as a net to the charge?

Edward J. Resch

No, it’s on two lines, Ken. The comp is reflected on salaries and benefits and the charge is reflected as other, so it’s not netted on our income statement, although there is a reduction in previously accrued incentive comp.

Ken Usdin - Banc Of America Securities

The go-forward impact of this is also just revenues within a piece of SSGA?

Ronald E. Logue

Yes. I mean, SSGA continues to perform extremely well. Just yesterday I read a Reuters article that said SSGA had the highest inflows for the month of November, I think it was $6.1 billion. ETFs are extremely strong, active equities continue to be extremely strong. SSGA continues to perform and attract significant inflows.

Operator

Your next question comes from Brian Bedell - Merrill Lynch.

Brian Bedell - Merrill Lynch

Just to zero in on a couple of the drivers for 4Q. Ed, you said net interest income was up double-digits 3Q to 4Q -- is that not annualized?

Edward J. Resch

That’s just the percentage increase.

Brian Bedell - Merrill Lynch

Yes, but you’re not annualizing that number, correct?

Edward J. Resch

No.

Brian Bedell - Merrill Lynch

Is that more due to an expansion or due to growth inthe balance sheet?

Edward J. Resch

It’s more due to net interest margin expansion. I mean basically in the fourth quarter, what we had inthe third quarter, Brian, I mean the fourth quarter margin will bein the range of 195 or so and the full year will be around 170 basis points. So there’s margin expansion driven by a little bit bigger balance sheet driven by the foreign transaction deposit flows that we’ve talked a lot about.

Brian Bedell - Merrill Lynch

Do you think that 195 is sustainable into ‘08?

Edward J. Resch

Well, it’s atthe high end of the guidance that I talked about on the third quarter call and I’d like to reserve further comments about ‘08 until our earnings call or even our investor day. But we are standing by the 185 to 195 range we set for ’08 for now.

Brian Bedell - Merrill Lynch

On the fee lines, the $825 billion that you won, was only part of that in fourth quarter and you are saying more is being converted inthe first half?

Ronald E. Logue

Just a portion of that, Brian, is inthe fourth quarter. You will see, I would think a majority of the remainder, reflected in first and second quarter fee numbers.

Brian Bedell - Merrill Lynch

So we continue to have a tail end from that influx of $250 billion that you won during this quarter?

Ronald E. Logue

Correct.

Brian Bedell - Merrill Lynch

Did you say $66 billion in net new assets won at SSGA in the fourth quarter?

Ronald E. Logue

There was a Reuters article in that came out yesterday that I saw.

Brian Bedell - Merrill Lynch

It was $6.1 billion.

Ronald E. Logue

$6.1 billion in net inflows.

Brian Bedell - Merrill Lynch

Right. That’s your mutual funds, right? But do you have an SSGA net flow?

Ronald E. Logue

That was SSGA.

Brian Bedell - Merrill Lynch

Yes, but they are referring to mutual funds in that one.

Ronald E. Logue

EPS is probably the biggest piece of that. I haven’t looked atthe numbers specifically to see how it’s broken down, but my bet, it would be significantly skewed towards EPS.

Brian Bedell - Merrill Lynch

Is foreign exchange higher in the fourth quarter than it was in the third quarter?

Ronald E. Logue

Yes.

Edward J. Resch

Yes. Double-digits.

Brian Bedell - Merrill Lynch

Double-digits, not annualized.

Edward J. Resch

Nope.

Brian Bedell - Merrill Lynch

Going back to the compensation charge, it sounds like if we exclude the charge, the compensation that you will report inthe fourth quarter is a normalized compensation number, is that correct?

Edward J. Resch

Well, it would be normalized given the strong performance that the company had for 2007, yes, based on our compensation plans.

Brian Bedell - Merrill Lynch

So the tax benefit that you’re getting is not that large, I guess? It looked like originally there was a very large tax benefit because of the way we were applying that 279 to the 618, but what you’re saying is $150 million of that --

Ronald E. Logue

Just 40% of the net.

Brian Bedell - Merrill Lynch

So the $140 million, roughly 4Q07 is acore operating earnings run rate that’s essentially sustainable depending on how the market conditions go, of course, but basically we should be using that 140 as a pretty good guide for quarterly earnings power, is that correct?

Ronald E. Logue

I’m not clear, Brian, on the $140 million that you’re referring to. Could you repeat that please?

Brian Bedell - Merrill Lynch

Backing out theIFIN charges and the $0.71, your operating earnings would be about $139 million to $140 million?

Edward J. Resch

Yes.

Brian Bedell - Merrill Lynch

What I was thinking prior to this call was that there was a large reduction in the compensation, but that’s actually included inthe charge. Soin other words, that $139 million to $142 million is actually a good quarterly run rate to go from?

Ronald E. Logue

Well yes, given the revenue strength that we experienced inthe fourth quarter, yes.

Brian Bedell - Merrill Lynch

Yes, and nothing unusual in that number with regards to compensation?

Ronald E. Logue

No, not at all; just the normal compensation that would go with the revenue strength that we’ve talked about inthe quarter.

Brian Bedell - Merrill Lynch

I think to Ken’s question for 2008, we should be using something around the 454 to 457 ranges for ‘07 base and then if you’re in with your long-term goals of 10% to 15%, we should be growing that between 10% and 15%?

Ronald E. Logue

Yes.

Brian Bedell - Merrill Lynch

On the $618 million, you guys explained it pretty well, but I was a little surprised by the size of that charge relative to the legal exposures that we’ve seen so far; Prudential was $80 million and you had a few other suits in there. But it seems like you are capitulating on that but yet you are saying that you did plan to defend it vigorously. Do you expect some of this to be reversed in 2008 as you defend it successfully?

Ronald E. Logue

Brian, we’re not going to talk about any individual claim, but obviously it’s going to depend on the merits of each of these claims. We’re not capitulating on anything.

Brian Bedell - Merrill Lynch

You’re just being conservative and reserving for it?

Ronald E. Logue

We’re just trying to put it behind us.

Operator

Your next question comes from Gerard Cassidy - RBC Capital Markets.

Gerard Cassidy - RBC Capital Markets

You mentioned that you thought that the 2007 revenues could exceed 30% growth over 2006. If you back out the Investors Financial, what kind of growth do you think you guys would have recorded to take into account the purchase accounting?

Ronald E. Logue

It’s significant, actually Ed has those numbers.

Edward J. Resch

The Investors Financial acquisition contributes about seven percentage points of our year-over-year revenue growth. State Street without Investors Financial, if you will, if we start with a 30% level of revenue growth would be about 23%.

Gerard Cassidy - RBC Capital Markets

Should we expect then inthe second half of ‘08, because we will have a full 12 months of Investors Financial that on a percentage basis you could seea deceleration because you don’t have the Investors Financial inthe first half of ‘07?

Ronald E. Logue

It really depends on how well we sell inthe first half of ‘08 as well. Right now our pipelines are pretty full so I feel pretty good in terms of our ability to sell inthe first half of ‘08 and install in the second half of ‘08 which is what we usually try and do.

Gerard Cassidy - RBC Capital Markets

In terms of this growth, are you seeing more income from non-U.S. areas over inEurope and other places, or is theU.S. as strong as ever?

Ronald E. Logue

Well, if I could characterize the third quarter growth, a lot of that was U.S. and a couple big takeaways – that may bean anomaly, but -- the non-U.S. growth has continued to be strong consistently, quarter after quarter. I would expect that would continue, especially Asia Pacific.

Gerard Cassidy - RBC Capital Markets

You mentioned thebig takeaways. Is that from companies that are not as focused on this business, or is it more due to an integration of maybe one of your competitors?

Ronald E. Logue

I can’t comment on the names, but they were from some of our big competitors.

Operator

Your next question comes from David Hilder - Bear Stearns.

David Hilder - Bear Stearns

Could you just provide some thoughts on your reason for proceeding with capital raising?

Ronald E. Logue

Yes, we’re evaluating what we are going to do, specifically. The mode that we are in is one of being conservative from a capital standpoint; I think we have talked about that for the last half of ’07. That is going to continue going into our thinking about capital as we go into ‘08, given that the markets in our view anyway have not yet returned to their Q2 levels of stability, so we are playing it conservative. We are not thinking about it as a capital raising of significant size, but we are considering possibly raising some tier 1 qualifying capital just to hold through our ratios as we move into the first quarter.

David Hilder - Bear Stearns

Just a little more detail, is that because you expect significant balance sheet growth or is it really moving towards a different target capital ratio, given some of the reviews that Ron talked about?

Edward J. Resch

We are not anticipating a significant balance sheet growth; we’re expecting the balance sheet in ‘08 to grow in line with customer deposit growth which we are expecting to be fairly moderate.

But we are thinking about raising the qualifying capital, again in order to run at a level on our leverage ratio higher than the 5.75 which I’ve said is our long-term goal, the top end of it. So, if we’re running at about 6% on the leverage ratio, 6% in order to be conservative, I think that’s where we want to be and that’s why we’re thinking about raising the capital, basically to replace the charge that we just talked about on this call.

David Hilder - Bear Stearns

Ron, is there anything you can tell us about the status of the Prudential action?

Ronald E. Logue

No, there really isn’t. There hasn’t been a lot of action there, right now atall on that. I can’t comment on any specific one.

Operator

Your next question comes from Betsy Graseck - Morgan Stanley.

Betsy Graseck - Morgan Stanley

Just as a follow-up on the last question on capital raising, do your new expectations for ‘08 take into consideration the interest expense associated with expected capital raisings?

Ronald E. Logue

Yes, it does.

Operator

At this time it does appear that we have no further questions. Mr. Logue, I will turn the call back over to you for additional or closing remarks.

Ronald E. Logue

I have no other closing remarks. I look forward to speaking with you all on our earnings call in a couple of weeks and I think we will be able to provide some more information at that time.

I also look forward to talking to you allat our investors day in February. We will, again, talk to you ina couple of weeks. Thank you very much for attending the call on such short notice as well.

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