10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2005

or

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-7410

MELLON FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Pennsylvania	25-1233834
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

One Mellon Center

Pittsburgh, Pennsylvania 15258-0001

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code—(412) 234-5000

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  ü     No      

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

Yes  ü     No      

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes          No  ü 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding as of     Sept. 30, 2005
Common Stock, $.50 par value	418,124,658

MELLON FINANCIAL CORPORATION

THIRD QUARTER 2005 FORM 10-Q

TABLE OF CONTENTS AND 10-Q CROSS-REFERENCE INDEX

	Page No.
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Income Statement (unaudited)	2
Consolidated Balance Sheet (unaudited)	3
Consolidated Statement of Cash Flows (unaudited)	4
Consolidated Statement of Changes in Shareholders’ Equity (unaudited)	5
Notes to Financial Statements	7
Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk.	15
Item 4. Controls and Procedures.	59
Cautionary Statement	60
Part II - Other Information
Item 1. Legal Proceedings.	61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	61
Item 6. Exhibits.	62
Signature	63
Corporate Information	64
Index to Exhibits	65

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

CONSOLIDATED INCOME STATEMENT (unaudited)

Mellon Financial Corporation (and its subsidiaries)

		Quarter ended								Nine months ended
(dollar amounts in millions, except per share amounts)			Sept. 30, 2005			June 30, 2005			Sept. 30, 2004		Sept. 30, 2005			Sept. 30, 2004
Noninterest	Investment management (a)	$	479		$	443		$	379	$	1,351		$	1,170
revenue	Distribution and service (a)		82			74			68		227			201
	Institutional trust and custody (a)		197			193			148		564			465
	Payment solutions & investor services		122			142			133		398			427
	Foreign exchange trading		52			50			38		156			145
	Financing-related		34			35			31		101			97
	Equity investment		17			15			24		251			131
	Other (a)		55			46			43		140			126
	Total fee and other revenue (a)		1,038			998			864		3,188			2,762
	Gains on sales of securities		1			—			—		1			8
	Total noninterest revenue (a)		1,039			998			864		3,189			2,770
Net interest	Interest revenue		299			286			208		834			616
revenue	Interest expense		181			159			95		472			266
	Net interest revenue		118			127			113		362			350
	Provision for credit losses		12			3			—		14			(7	)
	Net interest revenue after provision for credit losses		106			124			113		348			357
Operating	Staff		452			427			376		1,300			1,141
expense	Professional, legal and other purchased services (a)		114			110			91		324			278
	Distribution and servicing (a)		100			90			81		271			239
	Net occupancy		61			57			57		177			192
	Equipment		44			44			41		129			127
	Business development		23			23			21		67			64
	Communications		19			19			18		63			62
	Amortization of intangible assets		6			7			4		19			13
	Other (a)		52			49			36		151			129
	Total operating expense (a)		871			826			725		2,501			2,245
Income	Income from continuing operations before income taxes		274			296			252		1,036			882
	Provision for income taxes		78			93			71		332			274
	Income from continuing operations		196			203			181		704			608
	Discontinued operations:
	Income (loss) from operations, net of tax credit of $-, $(23), $-, $(36) and $(2)		—			(49	)		—		(100	)		(7	)
	Net gain (loss) on disposals, net of tax expense of $(1), $41, $1, $40 and $2		(2	)		(29	)		2		(30	)		3
	Income (loss) from discontinued operations, net of tax expense (credit) of $(1), $18, $1, $4 and $-		(2	)		(78	)		2		(130	)		(4	)
	Net income	$	194		$	125		$	183	$	574		$	604
Earnings per	Basic:
share (b)	Continuing operations	$	.47		$	.49		$	.43	$	1.69		$	1.45
	Discontinued operations		—			(.19	)		01		(.31	)		(.01	)
	Net income	$	.47		$	.30		$	.44	$	1.38		$	1.44
	Diluted:
	Continuing operations	$	.47		$	.49		$	.43	$	1.68		$	1.43
	Discontinued operations		—			(.19	)		—		(.31	)		(.01	)
	Net income	$	.47		$	.30		$	.43	$	1.37		$	1.42
Shares	Basic average shares outstanding		414,606			414,908			419,136		416,373			419,937
outstanding	Common stock equivalents		3,305			3,036			3,978		3,438			4,796
	Diluted average shares outstanding		417,911			417,944			423,114		419,811			424,733

(a) Amounts include reclassifications as discussed in Note 1 under “Change in Reporting Classifications.”

(b) Calculated based on unrounded numbers.

See accompanying Notes to Financial Statements.

2    Mellon Financial Corporation

CONSOLIDATED BALANCE SHEET (unaudited)

Mellon Financial Corporation (and its subsidiaries)

(dollar amounts in millions)			Sept. 30, 2005			Dec. 31, 2004			Sept. 30, 2004
Assets	Cash and due from banks	$	2,770		$	2,775		$	3,278
	Interest-bearing deposits with banks		2,176			2,709			2,858
	Federal funds sold and securities under resale agreements		234			1,850			347
	Other money market investments		111			114			107
	Trading account securities		286			262			201
	Securities available for sale		16,821			13,376			12,445
	Investment securities (approximate fair value of $179, $217 and $233)		175			211			226
	Loans, net of unearned discount of $28, $28 and $29		7,558			6,754			7,025
	Reserve for loan losses		(80	)		(98	)		(98	)
	Net loans		7,478			6,656			6,927
	Premises and equipment		627			688			686
	Goodwill		2,178			2,321			2,278
	Other intangibles		154			145			148
	Assets of discontinued operations		—			40			—
	Other assets		5,733			5,968			5,595
	Total assets	$	38,743		$	37,115		$	35,096
Liabilities	Noninterest-bearing deposits in domestic offices	$	9,225		$	7,371		$	7,294
	Interest-bearing deposits in domestic offices		9,843			10,170			9,277
	Interest-bearing deposits in foreign offices		6,087			6,050			5,460
	Total deposits		25,155			23,591			22,031
	Federal funds purchased and securities under repurchase agreements		782			704			853
	Term federal funds purchased and U.S. Treasury tax and loan demand notes		551			52			6
	Commercial paper		—			6			7
	Other funds borrowed		342			153			286
	Reserve for unfunded commitments		77			67			71
	Other liabilities		2,912			2,801			2,557
	Notes and debentures (with original maturities over one year)		3,695			4,567			4,266
	Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities		1,047			1,057			1,060
	Liabilities of discontinued operations		—			15			—
	Total liabilities		34,561			33,013			31,137
Shareholders’ equity	Common stock - $.50 par value Authorized - 800,000,000 shares, Issued – 588,661,920 shares		294			294			294
	Additional paid-in capital		1,946			1,931			1,924
	Retained earnings		6,715			6,397			6,280
	Accumulated unrealized gain (loss), net of tax		(57	)		49			23
	Treasury stock of 170,537,262; 165,308,079 and 165,113,399 shares, at cost		(4,716	)		(4,569	)		(4,562	)
	Total shareholders’ equity		4,182			4,102			3,959
	Total liabilities and shareholders’ equity	$	38,743		$	37,115		$	35,096

See accompanying Notes to Financial Statements.

Mellon Financial Corporation    3

CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

Mellon Financial Corporation (and its subsidiaries)

		Nine months ended Sept. 30,
(in millions)		2005			2004
Cash flows from	Net income	$	574		$	604
operating activities	Loss from discontinued operations		(130	)		(4	)
	Income from continuing operations		704			608
	Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and other amortization		107			102
	Deferred income tax (benefit) expense		(23	)		172
	Provision for credit losses		14			(7	)
	Gain on sale of investment in Shinsei Bank		(197	)		(93	)
	Pension expense (credit)		13			(2	)
	Net (increase) decrease in trading account securities		(24	)		65
	Net change in accruals and other		233			(125	)
	Net cash provided by operating activities		827			720
Cash flows from	Net decrease in term deposits and other money market investments		536			26
investing activities	Net decrease in federal funds sold and securities under resale agreements		1,616			356
	Purchases of securities available for sale		(8,996	)		(6,574	)
	Proceeds from sales of securities available for sale		1,911			1,562
	Proceeds from maturities of securities available for sale		3,589			3,228
	Proceeds from maturities of investment securities		35			71
	Proceeds from the sale of investment in Shinsei Bank		244			120
	Net principal advances of loans to customers		(970	)		(145	)
	Loan portfolio purchases		—			(19	)
	Proceeds from the sales and securitizations of loans		143			553
	Purchases of premises and equipment/capitalized software		(110	)		(129	)
	Proceeds from divestitures		358			—
	Net cash disbursed in acquisitions		(150	)		(165	)
	Net (decrease) increase from other investing activities		(10	)		96
	Net cash used in investing activities		(1,804	)		(1,020	)
Cash flows from	Net increase in deposits		1,583			1,241
financing activities	Net increase in federal funds purchased and securities under repurchase agreements		78			99
	Net increase (decrease) in other funds borrowed		688			(29	)
	Net decrease in commercial paper		(6	)		(3	)
	Repayments of longer-term debt		(769	)		(205	)
	Net proceeds from issuance of longer-term debt		—			298
	Dividends paid on common stock		(244	)		(221	)
	Proceeds from issuance of common stock		45			32
	Repurchase of common stock		(265	)		(236	)
	Net cash provided by financing activities		1,110			976
	Effect of foreign currency exchange rates		(108	)		(3	)
	Net cash (used in) provided by discontinued operations		(30	)		3
Change in cash and	Net (decrease) increase in cash and due from banks		(5	)		676
due from banks	Cash and due from banks at beginning of period		2,775			2,602
	Cash and due from banks at end of period	$	2,770		$	3,278
Supplemental	Interest paid	$	485		$	272
disclosures	Income taxes paid (a)		303			197
	Income taxes refunded (a)		5			4

(a) Includes discontinued operations.

See accompanying Notes to Financial Statements.

4    Mellon Financial Corporation

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

Mellon Financial Corporation (and its subsidiaries)

Quarter ended Sept. 30, 2005 (in millions, except per share amounts)	Common stock		Additional paid-in capital		Retained earnings			Accumulated unrealized gain (loss), net of tax			Treasury stock			Total shareholders’ equity
Balance at June 30, 2005	$	294	$	1,930	$	6,611		$	(3	)	$	(4,710	)	$	4,122
Comprehensive results:
Net income		—		—		194			—			—			194
Other comprehensive results, net of tax		—		—		—			(54	)		—			(54	)
Total comprehensive results		—		—		194			(54	)		—			140
Dividends on common stock at $0.20 per share		—		—		(84	)		—			—			(84	)
Repurchase of common stock		—		—		—			—			(42	)		(42	)
Stock awards and options exercised		—		16		(6	)		—			26			36
Common stock issued under the 401(k) Retirement Savings Plan		—		—		—			—			6			6
Common stock issued under the Employee Stock Purchase Plan		—		—		—			—			1			1
Common stock issued under Direct Stock Purchase and Dividend Reinvestment Plan		—		—		—			—			3			3
Balance at Sept. 30, 2005	$	294	$	1,946	$	6,715		$	(57	)	$	(4,716	)	$	4,182
Mellon Financial Corporation (and its subsidiaries)
Quarter ended Sept. 30, 2004 (in millions, except per share amounts)	Common stock		Additional paid-in capital		Retained earnings			Accumulated unrealized gain (loss), net of tax			Treasury stock			Total shareholders’ equity
Balance at June 30, 2004	$	294	$	1,917	$	6,179		$	(90	)	$	(4,551	)	$	3,749
Comprehensive results:
Net income		—		—		183			—			—			183
Other comprehensive results, net of tax		—		—		—			113			—			113
Total comprehensive results		—		—		183			113			—			296
Dividends on common stock at $0.18 per share		—		—		(77	)		—			—			(77	)
Repurchase of common stock		—		—		—			—			(38	)		(38	)
Stock awards and options exercised		—		7		(5	)		—			13			15
Common stock issued under the 401(k) Retirement Savings Plan		—		—		—			—			9			9
Common stock issued under the Employee Stock Purchase Plan		—		—		—			—			2			2
Common stock issued under Direct Stock Purchase and Dividend Reinvestment Plan		—		—		—			—			3			3
Balance at Sept. 30, 2004	$	294	$	1,924	$	6,280		$	23		$	(4,562	)	$	3,959

See accompanying Notes to Financial Statements.

Mellon Financial Corporation    5

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited) (continued)

Mellon Financial Corporation (and its subsidiaries)

Nine months ended Sept. 30, 2005 (in millions, except per share amounts)	Common stock		Additional paid-in capital		Retained earnings			Accumulated unrealized gain (loss), net of tax			Treasury stock			Total shareholders’ equity
Balance at Dec. 31, 2004	$	294	$	1,931	$	6,397		$	49		$	(4,569	)	$	4,102
Comprehensive results:
Net income		—		—		574			—			—			574
Other comprehensive results, net of tax		—		—		—			(106	)		—			(106	)
Total comprehensive results		—		—		574			(106	)		—			468
Dividends on common stock at $0.58 per share		—		—		(244	)		—			—			(244	)
Repurchase of common stock		—		—		—			—			(265	)		(265	)
Stock awards and options exercised		—		15		(12	)		—			82			85
Common stock issued under the 401(k) Retirement Savings Plan		—		—		—			—			22			22
Common stock issued under the Employee Stock Purchase Plan		—		—		—			—			4			4
Common stock issued under Direct Stock Purchase and Dividend Reinvestment Plan		—		—		—			—			10			10
Balance at Sept. 30, 2005	$	294	$	1,946	$	6,715		$	(57	)	$	(4,716	)	$	4,182
Mellon Financial Corporation (and its subsidiaries)
Nine months ended Sept. 30, 2004 (in millions, except per share amounts)	Common stock		Additional paid-in capital		Retained earnings			Accumulated unrealized gain (loss), net of tax			Treasury stock			Total shareholders’ equity
Balance at Dec. 31, 2003	$	294	$	1,901	$	5,934		$	26		$	(4,453	)	$	3,702
Comprehensive results:
Net income		—		—		604			—			—			604
Other comprehensive results, net of tax		—		—		—			(3	)		—			(3	)
Total comprehensive results		—		—		604			(3	)		—			601
Dividends on common stock at $0.52 per share		—		—		(221	)		—			—			(221	)
Repurchase of common stock		—		—		—			—			(236	)		(236	)
Stock awards and options exercised		—		23		(35	)		—			83			71
Common stock issued under the 401(k) Retirement Savings Plan		—		—		(1	)		—			27			26
Common stock issued under the Employee Stock Purchase Plan		—		—		—			—			5			5
Common stock issued under Direct Stock Purchase and Dividend Reinvestment Plan		—		—		(1	)		—			10			9
Common stock issued in connection with the Arden Group, Inc. acquisition		—		—		—			—			2			2
Balance at Sept. 30, 2004	$	294	$	1,924	$	6,280		$	23		$	(4,562	)	$	3,959

See accompanying Notes to Financial Statements.

6    Mellon Financial Corporation

NOTES TO FINANCIAL STATEMENTS

Note 1 — Basis of presentation and informational disclosures

Basis of presentation

The unaudited consolidated financial statements of Mellon are prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These financial statements should be read in conjunction with Mellon’s 2004 Annual Report on Form 10-K. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the periods have been included. In addition to reclassifications related to discontinued operations, other reclassifications, including those discussed below, have been made to prior periods to place them on a basis comparable with the current period presentation.

For details of guarantees, see “Other guarantees and indemnities” in the table on page 46, and the paragraphs under the subheading “Other guarantees and indemnities” on pages 47 and 48. The information in the table and those paragraphs are incorporated by reference into these Notes to Financial Statements.

Change in Reporting Classifications

In the third quarter of 2005, Mellon began to record gross mutual fund distribution and service fees earned and paid as noninterest revenue and operating expense. The fee revenue earned from mutual funds is calculated as a percentage of the average assets of the mutual fund investment portfolios managed or administered by Mellon. In turn, we pay fees to other financial intermediaries to cover their costs for distributing and servicing the funds, as well as paying sub-advisory fees to unaffiliated asset managers. These amounts are now recorded as an expense. Previously, the net amount of these revenues/expenses was recorded in fee revenue. These reclassified amounts are primarily included as “distribution and service fees” and “distribution and servicing expense” line items on the Consolidated Income Statement. Investment management revenue, institutional trust and custody revenue, and professional, legal and other purchased services expense were also impacted to a lesser extent. Asset management revenue represents more than 50% of our consolidated revenue and this change in reporting classification is consistent with the reporting practices of other large asset managers with significant mutual fund operations. Total noninterest revenue and operating expense were increased by $102 million, $93 million and $80 million for the quarters ended Sept. 30, 2005, June 30, 2005 and Sept. 30, 2004 and $278 million and $236 million for the nine months ended Sept. 30, 2005 and 2004.

In addition, in the third quarter of 2005 we began to record revenue passed to joint ventures as other expense. Previously, the amounts were reported as a reduction of other revenue. These reclassifications totaled $10 million, $8 million and $7 million for the quarters ended Sept. 30, 2005, June 30, 2005 and Sept. 30, 2004 and $26 million for both the nine months ended Sept. 30, 2005 and 2004.

All prior periods have been reclassified. The change in both of these reporting classifications has no impact on income before taxes or net income, but reduces reported pre-tax operating margins.

Pro forma cost of stock options

Effective Jan. 1, 2003, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” prospectively for all employee awards granted, modified, or settled after Jan. 1, 2003. Stock option expense, determined by using the Black-Scholes option pricing model, totaled $4 million after-tax in the third quarter of 2005, $3 million after-tax in the third quarter of 2004 and $4 million after-tax in the second quarter of 2005. During the third quarter of 2005, options totaling 12,879 shares were granted with a weighted-average fair value of $5.33 per share and will be expensed over the future vesting period.

As required to be disclosed by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123,” the following table illustrates the

Mellon Financial Corporation    7

NOTES TO FINANCIAL STATEMENTS (continued)

pro forma effect on income and earnings per share if the fair value based method had been applied to all awards in each period. Awards under our plans generally vest over periods of three or more years.

Therefore, the cost related to stock-based employee compensation included in the determination of net income for 2005 is less than that which would have been recognized if the fair value based method had been applied to all awards granted in prior periods.

Pro forma income from continuing operations

	Quarter ended									Nine months ended
(in millions, except per share amounts)		Sept. 30, 2005			June 30, 2005			Sept. 30, 2004			Sept. 30, 2005			Sept. 30, 2004
Income as reported	$	196		$	203		$	181		$	704		$	608
Add: Stock-based employee compensation expense, using prospective method, included in reported net income, net of tax (a)		7			10			6			25			21
Deduct: Total stock-based employee compensation expense, using retroactive method, determined under fair value based method for all awards, net of tax (a)		(9	)		(13	)		(12	)		(34	)		(37	)
Pro forma income	$	194		$	200		$	175		$	695		$	592
Earnings per share:
Basic - as reported	$	.47		$	.49		$	.43		$	1.69		$	1.45
Basic - pro forma	$	.47		$	.48		$	.42		$	1.67		$	1.41
Diluted - as reported	$	.47		$	.49		$	.43		$	1.68		$	1.43
Diluted - pro forma	$	.47		$	.48		$	.41		$	1.66		$	1.39

(a) Reported and pro forma results include compensation expense for restricted stock awards, net of tax, of $3 million for the third quarter of 2005, $5 million for the second quarter of 2005, $4 million for the third quarter of 2004, $12 million for the first nine months of 2005 and $13 million for the first nine months of 2004.

The Black-Scholes option pricing model requires the use of subjective assumptions which can materially affect fair value estimates. Therefore, this model does not necessarily provide a reliable single measure of the fair value of Mellon’s stock options. The fair value of each stock option was estimated on the date of the grant using the following weighted-average assumptions:

	Sept. 30, 2005		June 30, 2005		Sept. 30, 2004
Expected dividend yields	2.6	%	2.9	%	2.6	%
Risk-free interest rates	4.0	%	3.7	%	3.7	%
Expected volatility	21	%	22	%	25	%
Expected lives of options	4.0 yrs.		4.7 yrs.		5.5 yrs.

Pension and other postretirement benefits

SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and other Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106” requires interim period disclosures of the components of net periodic benefit cost.

8    Mellon Financial Corporation

Net periodic benefit cost (a)

	Quarter ended																Nine months ended
	Sept. 30, 2005					June 30, 2005						Sept. 30, 2004					Sept. 30, 2005						Sept. 30, 2004
(in millions)	Pension benefits			Other post- retirement benefits		Pension benefits			Other post- retirement benefits			Pension benefits			Other post- retirement benefits		Pension benefits			Other post- retirement benefits			Pension benefits			Other post- retirement benefits
Service cost	$	13		$	1	$	12		$	—		$	14		$	—	$	40		$	1		$	41		$	1
Interest cost		21			1		21			1			20			1		64			3			61			3
Expected return on plan assets		(40	)		—		(40	)		—			(40	)		—		(121	)		—			(119	)		—
Amortization of transition asset		—			—		—			1			—			1		—			1			—			1
Amortization of prior service cost		1			—		1			—			1			—		3			—			4			—
Recognized net actuarial loss		10			—		11			—			8			—		33			—			22			—
(Gain) loss on divestiture (b)		—			1		2			(3	)		—			—		2			(2	)		—			—
Net periodic benefit cost (credit)	$	5		$	3	$	7		$	(1	)	$	3		$	2	$	21		$	3		$	9		$	5

(a) Includes discontinued operations expense. Pension benefits expense includes discontinued operations expense of $4 million for the second quarter of 2005, $4 million for the third quarter of 2004, $8 million for the first nine months of 2005 and $11 million for the first nine months of 2004.

(b) Relates to the sale of the HR consulting practices, benefits administration, and business process outsourcing businesses.

Mellon expects to make cash contributions to its funded defined benefit pension plans, principally outside the U.S., of approximately $4 million for the remainder of 2005. Cash contributions totaled $3 million in the third quarter of 2005 and $21 million in the first nine months of 2005.

Note 2—Contingent and deferred consideration related to acquisitions

In the third quarter of 2005, Mellon acquired the remaining 50% interest in the Russell/Mellon joint venture, renamed Mellon Analytical Solutions. The combination of our existing carrying value in the joint venture at the time of the acquisition, plus $24 million paid in cash for the remaining 50% of the venture, resulted in the recording of goodwill and intangibles of $37 million and other net assets of $20 million. There were no acquisitions completed during the second quarter of 2005. One acquisition was completed during the first quarter of 2005 for a total cost of $52 million, paid in cash. Goodwill and intangibles related to this acquisition totaled $47 million. This acquisition added $30 billion to assets under administration and custody.

Additional cash consideration for prior acquisitions of $44 million was paid in the third quarter of 2005, including a deferred consideration cash payment of $12.5 million for Standish Mellon. Additional cash consideration for prior acquisitions of $10 million was paid in the second quarter of 2005 and $20 million was paid in the first quarter of 2005.

We record contingent purchase payments when amounts are determinable and become payable. Amounts generally become determinable and payable when an acquisition reaches a certain level of performance. At Sept. 30, 2005, we are potentially obligated to pay additional consideration of approximately $120 million to $260 million, for all acquisitions, over the next five years, depending on the performance of the acquired companies. None of the potential contingent additional consideration was recorded as goodwill at Sept. 30, 2005. In addition, we are obligated to pay the last of four annual installments of $12.5 million for the Standish Mellon acquisition. The $47 million net present value of this obligation was recorded as additional goodwill in the fourth quarter of 2002.

Mellon owns 70% of Mellon Financial Services Asset Management S.A., a Brazilian institutional asset management and asset servicing company. The minority interest owners have attempted to exercise certain “put” rights, which obligate our subsidiary to purchase the remaining 30% of the

Mellon Financial Corporation    9

NOTES TO FINANCIAL STATEMENTS (continued)

company. The purchase price, as defined, is based on the levels of assets under management and administration, among other things. The minority interest owners and Mellon disagree on the computation of the purchase price. This dispute is in binding arbitration. We offered $4 million for the remaining 30% of the company and the minority interest owners made an initial request of $42 million, based upon exchange rates in effect at the time.

Note 3—Discontinued operations

In the third quarter of 2005, Mellon incurred a net loss of $2 million from discontinued operations, comprised of: a $3 million loss from additional charges relating to the sale of the HR consulting practices, benefits administration and business process outsourcing businesses included in the former Human Resources & Investor Solutions sector to Affiliated Computer Services, Inc. (ACS); a $1 million loss from additional charges relating to the sale of our Australian consulting and administration businesses; and a $2 million gain from residual activity from prior-year divestitures. A net loss from discontinued operations of $78 million was recorded in the second quarter of 2005 and a net loss of $50 million was recorded in the first quarter of 2005, for a year-to-date loss of $130 million.

On March 16, 2005, we announced the signing of a definitive agreement to sell the former HR&IS businesses to ACS, and discontinued operations accounting was applied to these businesses. The sale closed on May 26, 2005.

In the fourth quarter of 2004, we applied discontinued operations accounting for certain businesses in Australia. We sold our business providing comprehensive multi-manager defined contribution services to the intermediary market in the fourth quarter of 2004. In April 2005, we sold our Australian consulting and administration businesses to Mercer Human Resource Consulting. These businesses were formerly included primarily in the Institutional Asset Management sector.

Discontinued operations - summary

	Quarter ended
(in millions)		Sept. 30, 2005			June 30 2005			March 31, 2005			Year-to-Date Sept. 30, 2005
HR businesses (a):
Loss (b)	$	(3	)	$	(73	)	$	(40	)	$	(116	)
Operations prior to sale		—			(5	)		(8	)		(13	)
Australian businesses (a):
Loss (b)		(1	)		—			(2	)		(3	)
Operations prior to sale		—			(1	)		(1	)		(2	)
Prior year divestitures (a):
Gain (b)		2			1			1			4
Loss from discontinued operations, net of tax	$	(2	)	$	(78	)	$	(50	)	$	(130	)

(a) Pre-tax income (loss) from discontinued operations for the nine months of 2005 are as follows: HR businesses $(124) million; Australian businesses $(8) million; and prior-year divestitures $6 million.

(b) Gain (loss) as used in the table above includes gain (loss) on disposal, other sale related expenses/income and asset writedowns. Gain (loss) on the consolidated income statement reflects gain (loss) from the date of disposal. Other sale related expense/income and asset writedowns are reflected in income (loss) from operations prior to the date of disposal.

10    Mellon Financial Corporation

In accordance with Generally Accepted Accounting Principles (GAAP), the results of the businesses discussed above are reflected as discontinued operations in all income statements presented. Because the lines of business included in discontinued operations were discrete lines of business providing services no longer provided by Mellon’s continuing lines of business, the disposition of these businesses has no material impact on continuing operations going forward.

Revenue from discontinued operations totaled $1 million in the third quarter of 2005, $113 million in the second quarter of 2005 and $170 million in the third quarter of 2004. This included $104 million in the second quarter of 2005 and $162 million in the third quarter of 2004 for the HR businesses. Revenue from discontinued operations totaled $273 million in the first nine months of 2005 and $513 million in the first nine months of 2004, which included $256 million for the first nine months of 2005 and $489 million for the first nine months of 2004 for the HR businesses.

All information in these Financial Statements and Notes reflects continuing operations, unless otherwise noted.

Note 4—Securities

Securities

	Sept. 30, 2005								Dec. 31, 2004
(in millions)	Amortized cost		Gross unrealized				Fair value		Amortized cost		Gross unrealized				Fair value
			Gains		Losses						Gains		Losses
Securities available for sale:
U.S. Treasury	$	377	$	—	$	—	$	377	$	371	$	—	$	—	$	371
Other U.S. agency		3,019		1		32		2,988		1,335		1		15		1,321
Obligations of states and political subdivisions		834		20		—		854		743		16		2		757
Mortgage-backed securities:
Federal agencies		7,142		7		96		7,053		8,437		41		61		8,417
Other		5,465		5		36		5,434		2,486		1		14		2,473
Total mortgage-backed securities		12,607		12		132		12,487		10,923		42		75		10,890
Other		115		—		—		115		37		—		—		37
Total securities available for sale	$	16,952	$	33	$	164	$	16,821	$	13,409	$	59	$	92	$	13,376
Investment securities (held to maturity):
Mortgage-backed securities:
Federal agencies	$	126	$	4	$	—	$	130	$	162	$	6	$	—	$	168
Other		1		—		—		1		1		—		—		1
Total mortgage-backed securities		127		4		—		131		163		6		—		169
Stock of Federal Reserve Bank		48		—		—		48		47		—		—		47
Other securities		—		—		—		—		1		—		—		1
Total investment securities	$	175	$	4	$	—	$	179	$	211	$	6	$	—	$	217

Note: There were $1 million of gross realized gains and less than $1 million of losses on sales of securities available for sale in the third quarter of 2005. Gross realized gains were $9 million and gross realized losses were $1 million on sales of securities available for sale in the full-year 2004. At Sept. 30, 2005 and Dec. 31, 2004, securities issued by the U.S. government and its agencies and U.S. government sponsored agencies exceeded 10% of shareholders’ equity. Also, at Sept. 30, 2005 and Dec. 31, 2004, securities issued by MASTR Adjustment Rate Mortgages Trust (included in other mortgage-backed securities) exceeded 10% of shareholders’ equity, with a book value of $434 million and $501 million and a fair value of $423 million and $496 million, respectively.

Mellon Financial Corporation    11

NOTES TO FINANCIAL STATEMENTS (continued)

The gross unrealized losses on securities of $164 million was virtually all related to interest rates. Nearly all of the securities with unrealized losses are AAA rated or carry government agency guarantees. Approximately 76% of the unrealized losses on these 822 investments have been in a continuous unrealized loss position for less than 12 months. Management believes the collection of the contractual principal and interest is probable and therefore all unrealized losses are considered to be temporary.

Note 5—Goodwill and intangible assets

Goodwill

The following table shows the changes to goodwill, by business sector, for the first nine months of 2005.

Goodwill

(in millions)	Institutional Asset Management and Mutual Funds (a)			Private Wealth Management		Asset Servicing		HR&IS			PS&IS		Treasury Services/ Other Activity			Total
Balance at Dec. 31, 2004	$	1,057		$	365	$	275	$	408		$	—	$	216		$	2,321
Goodwill from acquisitions		52			—		54		—			—		—			106
Transfers between sectors (b)		42			—		—		(198	)		184		(28	)		—
Impairment losses		—			—		—		—			—		—			—
Other (c)		(43	)		1		2		—			1		—			(39	)
Discontinued operations (d)		—			—		—		(210	)		—		—			(210	)
Balance at Sept. 30, 2005	$	1,108		$	366	$	331	$	—		$	185	$	188		$	2,178

(a) During the third quarter of 2005, we combined the sector financials of the former Institutional Asset Management and Mutual Funds sectors. See page 33 for a discussion.

(b) During the first quarter of 2005, the HR&IS business sector was eliminated as a result of the decision to sell the HR services businesses. Mellon Investor Services was moved to the new PS&IS sector, as well as global cash management, SourceNet Solutions and Mellon Financial Markets, all formerly in the Treasury Services business sector.

(c) Other changes in goodwill include the effect of foreign exchange rates on non-U.S. dollar denominated goodwill, purchase price adjustments and certain other reclassifications.

(d) Reflects the goodwill for the discontinued HR Services businesses moved to assets of discontinued operations. An impairment writedown of $37 million was recorded in discontinued operations in the first quarter of 2005. Also, an impairment loss of $4 million was recorded in the first quarter of 2005 and $11 million was recorded in the fourth quarter of 2004 on the discontinued businesses in Australia. A goodwill impairment loss of $8 million was recorded in the first quarter of 2004 in continuing operations on a small non-strategic business that we exited.

12    Mellon Financial Corporation

Acquired intangible assets

Acquired intangible assets

	Net Carrying Amount
(in millions)	Sept. 30, 2005		Dec. 31, 2004
Subject to amortization:
Customer base	$	92	$	82
Technology based		28		31
Premium on deposits		6		8
Other		3		4
Total subject to amortization (a)	$	129	$	125
Not subject to amortization:
Investment management contractual relationships		25		20
Total acquired intangible assets	$	154	$	145

(a) Includes the effect of foreign exchange rates on non-U.S. dollar denominated intangible assets.

We amortize intangible assets over their estimated useful lives. During the first nine months of 2005, the net carrying amount of acquired intangible assets increased $9 million (acquisitions and contingent payments of $33 million offset by discontinued operations of $5 million and amortization expense of $19 million).

Based upon the current level of intangible assets, the estimated annual amortization expense for the years 2005 through 2010 is as follows:

For the year ended Dec. 31,	Estimated amortization expense (in millions)
2005	$27
2006	27
2007	25
2008	20
2009	17
2010	12

At Sept. 30, 2005, $1.488 billion of goodwill and acquired intangible assets is tax deductible and $844 million is non-tax deductible.

Note 6—Other assets

Other assets

(in millions)	Sept. 30, 2005		June 30, 2005		Dec. 31, 2004		Sept. 30, 2004
Corporate/bank-owned life insurance	$	1,789	$	1,771	$	1,831	$	1,763
Prepaid pension assets		1,051		1,048		1,050		1,032
Receivables related to foreign exchange and derivative instruments (a)		733		705		1,006		744
Accounts and interest receivable		899		778		694		643
Equity investments and mezzanine financings		594		598		654		652
Equity in joint ventures and other investments (b)		300		331		313		305
Other prepaid expenses		123		147		142		147
Other assets		244		262		278		309
Total other assets	$	5,733	$	5,640	$	5,968	$	5,595

(a) Reflects credit risk associated with interest rate swaps used to manage interest rate risk and derivatives used for trading activities. Credit risk associated with these instruments results from mark-to-market gains and interest receivables and is calculated after considering master netting agreements, which are generally applicable to derivative instruments used for both trading activities and interest rate risk management purposes.

(b) Relates to operating joint ventures and other investments including CIBC Mellon Global Securities Services Company, ABN AMRO Mellon Global Securities Services B.V., Banco Brascan, CIBC Mellon Trust Company (and Russell/Mellon at June 30, 2005 and Dec. 31, 2004, and Pareto Partners and Russell/Mellon at Sept. 30, 2004).

Mellon Financial Corporation    13

NOTES TO FINANCIAL STATEMENTS (continued)

Note 7—Net interest revenue

Net interest revenue

		Quarter ended						Nine months ended
(in millions)		Sept. 30, 2005		June 30, 2005		Sept. 30, 2004		Sept. 30, 2005		Sept. 30, 2004
Interest revenue	Interest and fees on loans (loan fees of $5, $5, $5, $15 and $20)	$	108	$	115	$	69	$	304	$	220
	Interest-bearing deposits with banks		17		20		19		61		49
	Federal funds sold and securities under resale agreements		3		4		3		13		6
	Other money market investments		1		1		1		4		2
	Trading account securities		1		2		2		4		5
	Securities - taxable		159		135		107		420		310
	Securities - nontaxable		10		9		7		28		24
	Total interest revenue		299		286		208		834		616
Interest	Deposits in domestic offices		59		48		18		141		41
expense	Deposits in foreign offices		41		37		21		111		58
	Federal funds purchased and securities under repurchase agreements		17		10		3		32		9
	Other short-term borrowings		3		4		5		9		15
	Notes and debentures		45		44		35		132		103
	Junior subordinated debentures		16		16		13		47		40
	Total interest expense		181		159		95		472		266
	Net interest revenue	$	118	$	127	$	113	$	362	$	350

Note 8—Business sectors

For details of business sectors, see the tables on pages 34 and 35, the paragraphs on pages 33 through 36, as well as the Treasury Services/Other Activity section on pages 41 and 42. The tables and information in those paragraphs are incorporated by reference into these Notes to Financial Statements.

Note 9—Accumulated unrealized gain (loss), net of tax

Accumulated unrealized gain (loss), net of tax

	Quarter ended
(in millions)	Sept. 30, 2005			Dec. 31, 2004			Sept. 30, 2004
Foreign currency translation adjustment	$	43		$	89		$	53
Minimum pension liability		(17	)		(19	)		(25	)
Unrealized loss on assets available for sale		(83	)		(21	)		(5	)
Accumulated unrealized gain (loss), net of tax	$	(57	)	$	49		$	23

Note 10—Supplemental information to the consolidated statement of cash flows

	Nine months ended Sept. 30,
(in millions)	2005			2004
Purchase acquisitions (a):
Fair value of noncash assets acquired, including goodwill and other intangibles	$	183		$	200
Common stock issued from treasury		—			(2	)
Liabilities assumed		(33	)		(33	)
Net cash disbursed	$	150		$	165

(a) For 2005, purchase acquisitions primarily relate to Russell’s 50% interest in the Russell/Mellon joint venture and DPM, as well as the additional consideration for Pareto Partners, Evaluation Associates Capital Markets, HBV Capital Management, Safeco Trust Company, Standish Mellon and Paragon Asset Management. For 2004, purchase acquisitions primarily relate to Talking People Limited, Safeco Trust Company, Paragon Asset Management Company, Evaluation Associates Capital Markets and the remaining 70% interest in Pareto Partners, as well as the additional consideration for Standish Mellon, The Arden Group and Vinings LLC.

Note 11—Legal proceedings

A discussion of legal actions and proceedings against Mellon and our subsidiaries is presented in Part II, Item 1, of this Form 10-Q.

14    Mellon Financial Corporation

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk.

Summary of financial results

Overview

Mellon Financial Corporation is a global financial services company that strives to meet or exceed the expectations of our clients, which are corporations, institutions and high net worth individuals primarily in the United States and Europe. In this report, Mellon Financial Corporation and our subsidiaries are also referred to as “Mellon,” “the Corporation,” “we” or “our.”

Mellon’s strategy is to capitalize on growth opportunities in asset management and securities services and to maintain leading positions in our payments services businesses. This attractive mix of fee-based businesses allows us to leverage technology and sales; to achieve low risk earnings; and to aggressively manage capital for high returns. Our goal is to be the best performing asset management and payments and securities services company. Our long-term financial goals are to achieve earnings per share growth of 11% to 14% and returns on common shareholders’ equity in excess of 20%, on a continuing operations basis.

We believe that our institutional asset management and mutual funds, private wealth management, asset servicing, payment solutions & investor services, and treasury services businesses are compatible with our strategy and goals. Our reasons follow:

• Demand for our products and services is likely to be driven by existing market and demographic trends (such as the growth in worldwide retirement and financial assets; the growth and concentration of the wealth segments; global growth in assets managed by financial institutions, particularly in the U.S. and Europe; and the globalization of the investment process).

• Many of our products complement one another.

• We leverage sales, distribution and technology across our businesses for greater efficiency, which benefits our clients, shareholders and Mellon.

• The revenue generated by our businesses is principally fee-based, providing us with lower risk earnings. In addition, our businesses do not require as much capital for growth as traditional banking.

We pursue our long-term financial goals by focusing on organic revenue growth, expense management, exceptional quality service, successful integration of acquisitions and disciplined capital management.

Our specific objectives include:

• a revenue growth rate exceeding the growth rate of U.S. financial assets over economic cycles;

• positive operating leverage over an economic cycle;

• investment spending aligned with revenue trends;

• tangible common equity ratio of 4.25% to 4.75%;

• disciplined acquisition criteria and execution; and

• use of excess capital to support reinvestment, acquisitions, dividends and share repurchases while maintaining appropriately strong capital ratios.

Our success in achieving our goals and objectives is influenced by economic and market drivers. Three key drivers have impacted our domestic results in the past:

• growth in financial assets as measured by the U.S. Federal Reserve;

• growth in nominal U.S. Gross Domestic Product (GDP); and

• changes in the S&P 500 Index.

Since 1945, these measures grew at an average rate of 7% to 8%. From 1997 to 2000, they exceeded these long-term averages, and Mellon enjoyed strong revenue growth. Since 2000, however, these measures have been below their long-term averages, directly impacting our results. Similar drivers impact our businesses outside the U.S.

Mellon Financial Corporation    15

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

Specifically, the growth rate of financial assets impacts Mellon’s asset management and asset servicing businesses and, less so, our Payment Solutions & Investor Services (PS&IS) business.

Fee revenue in these businesses is determined, in part, on the level of financial assets under management, administration or custody. (The growth rate of our financial assets includes appreciation or depreciation of existing assets and net flows of new assets.)

Nominal GDP, particularly the component that measures corporate discretionary spending, impacts revenues in outsourcing-related activities in our asset servicing businesses.

Finally, although our asset management businesses manage a wide range of equity assets, the S&P 500 Index has so far been the most representative index for estimating the sensitivity of our domestic asset management revenues to changes in equity market levels. Local market indices, such as the Financial Times Stock Exchange (FTSE), are representative indices for estimating the sensitivity to equity market movements of our non-U.S. asset management revenues.

How we reported results

All information in this Quarterly Report on Form 10-Q is reported on a continuing operations basis, unless otherwise noted.

Mellon’s financial results, as well as our levels of assets under management, administration and custody, are impacted by the translation of financial results denominated in foreign currencies to the U.S. Dollar. Mellon is primarily impacted by activities denominated in the British Pound, and to a lesser extent the Canadian Dollar and the Euro. If the U.S. Dollar depreciates versus these currencies, the translation impact is a higher level of net interest revenue, fee revenue, operating expense and assets managed, administered and under custody. If the U.S. Dollar appreciates, the translated levels of net interest revenue, fee revenue, operating expense and assets managed, administered and under custody will be lower. Throughout this report the translation impact of foreign currencies will be referred to as “the effect of foreign exchange rates.”

Foreign currency exchange rates for one U.S. Dollar

	Sept. 30, 2005	Dec. 31, 2004	Sept. 30, 2004
Spot rate:
British Pound	0.5656	0.5183	0.5525
Canadian Dollar	1.1602	1.2015	1.2650
Euro	0.8296	0.7341	0.8046
Quarterly average rate:
British Pound	0.5602	0.5363	0.5497
Canadian Dollar	1.2035	1.2204	1.3088
Euro	0.8196	0.7717	0.8179

Certain amounts are presented on a fully taxable equivalent (FTE) basis. We believe that this presentation provides comparability of amounts arising from both taxable and tax-exempt sources and is consistent with industry practice. The adjustment to an FTE basis has no impact on net income. Throughout this report, all calculations are based on unrounded numbers.

Change in reporting classifications

In the third quarter of 2005, Mellon began to record gross mutual fund distribution and service fees earned and paid as noninterest revenue and operating expense. Previously, the net amount of these revenues/expenses was recorded in fee revenue.

In addition, in the third quarter of 2005 we began to record revenue passed to joint ventures as other expense. Previously, the amounts were reported as a reduction of other revenue.

All prior periods have been reclassified. The change in both of these reporting classifications has no impact on income before taxes or net income, but reduces reported pre-tax operating margins. See Note 1 for further details regarding these changes.

16    Mellon Financial Corporation

Third quarter of 2005 compared with the third quarter of 2004 and the second quarter of 2005

Returns and margins - continuing operations (a)

	Quarter ended						Nine months ended
	Sept. 30, 2005		June 30, 2005		Sept. 30, 2004		Sept. 30, 2005		Sept. 30, 2004
Return on equity (annualized)	18.9	%	19.9	%	18.8	%	22.8	%	21.5	%
Return on assets (annualized)	2.05	%	2.25	%	2.19	%	2.55	%	2.48	%
Pre-tax operating margin (FTE)	24	%	27	%	27	%	30	%	29	%

(a) Return on equity on a net income basis was 18.7% for the third quarter of 2005, 12.3% for the second quarter of 2005, 19.0% for the third quarter of 2004, 18.6% for the first nine months of 2005 and 21.3% for the first nine months of 2004. Return on assets on a net income basis was 2.03% for the third quarter of 2005, 1.38% for the second quarter of 2005, 2.18% for the third quarter of 2004, 2.07% for the first nine months of 2005 and 2.42% for the first nine months of 2004. Return on assets was calculated on a continuing operations basis even though the prior periods balance sheet, in accordance with GAAP, is not restated for discontinued operations.

Consolidated net income totaled $194 million, or $.47 per share, in the third quarter of 2005. This compared with $183 million, or $.43 per share, in the third quarter of 2004 and $125 million, or $.30 per share, in the second quarter of 2005. Third quarter 2005 income from continuing operations totaled $196 million, or $.47 per share. This compared with income from continuing operations of $181 million, or $.43 per share, in the third quarter of 2004 and $203 million, or $.49 per share, in the second quarter of 2005.

In the third quarter of 2005, Mellon incurred a net loss of $2 million, or less than $.01 per share, from discontinued operations, primarily relating to the sale of the HR consulting practices, benefits administration and business process outsourcing businesses to Affiliated Computer Services, Inc. (ACS). We reported a gain from discontinued operations of $2 million, or less than $.01 per share, in the third quarter of 2004 and a loss of $78 million, or $.19 per share, in the second quarter of 2005. Results of discontinued operations are discussed further in Note 3 of Notes to Financial Statements. For full-year 2004, 2003 and 2002 income statements and selected other financial data restated for the impact of discontinued operations, as well as the change in reporting classifications discussed previously, see pages 55 through 58.

Supplemental Information - Reconciliation of Reported Revenue and Expense Amounts to Adjusted Non-GAAP Revenue and Expense Amounts

Throughout this Quarterly Report on Form 10-Q certain measures, which are noted, exclude:

• a $197 million pre-tax gain from the sale of our remaining investment in Shinsei Bank in the first quarter of 2005, and the $93 million pre-tax gain from the sale of approximately 35% of our investment in Shinsei Bank in the first quarter of 2004;

• a $10 million pre-tax charge associated with the early extinguishment of debt recorded in the first quarter of 2005;

• a $3 million pre-tax additional writedown recorded in the first quarter of 2005 for one of two small non-strategic businesses previously identified as held for sale, and the $19 million pre-tax charge recorded in the first quarter of 2004 associated with those two businesses, one of which was sold in 2004; and

• a $2 million pre-tax additional charge recorded in the first quarter of 2005 associated with the move to the new Mellon Financial Centre in London. An initial pre-tax charge of $24 million was recorded in the second quarter of 2004.

Mellon Financial Corporation    17

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

Reported amounts are presented in accordance with Generally Accepted Accounting Principles (GAAP). We believe that this supplemental adjusted non- GAAP information is useful to the investment community in analyzing the financial results and trends of ongoing operations. We believe they facilitate comparisons with prior periods and reflect the principal basis on which our management monitors financial performance.

See the table below for a reconciliation of nine month 2005 and 2004 revenue and expense amounts presented in accordance with GAAP to adjusted non-GAAP revenue and expense amounts, which exclude these items. We do not believe any adjustments to Reported Amounts from the third quarter of 2005, second quarter of 2005 and third quarter of 2004 are necessary to facilitate comparisons with prior quarterly periods and we have made no adjustments to Reported Amounts for the purpose of our internal assessment of quarterly financial performance.

Supplemental information

	Nine months ended
	Sept. 30, 2005							Sept. 30, 2004
(in millions)		Reported Amounts		Adjustments			Adjusted Amounts		Reported Amounts			Adjustments			Adjusted Amounts
Noninterest revenue:
Fee and other revenue	$	3,188	$	(197	)(a)	$	2,991	$	2,762		$	(93	)(d)	$	2,669
Gains on sales of securities		1		—			1		8			—			8
Total noninterest revenue		3,189		(197	)		2,992		2,770			(93	)		2,677
Net interest revenue		362		—			362		350			—			350
Provision for credit losses		14		—			14		(7	)		—			(7	)
Net interest revenue after provision for credit losses		348		—			348		357			—			357
Operating expense:
Staff expense		1,300		—			1,300		1,141			—			1,141
Net occupancy expense		177		(2	)(b)		175		192			(23	)(e)		169
Other expense		1,024		(13	)(c)		1,011		912			(20	)(e)(f)		892
Total operating expense	$	2,501	$	(15	)	$	2,486	$	2,245		$	(43	)	$	2,202

(a) Reflects the gain from the sale of our remaining investment in Shinsei Bank recorded in the first quarter.

(b) Reflects an additional charge associated with the move to the new Mellon Financial Centre in London recorded in the first quarter.

(c) Includes the $10 million charge associated with the early extinguishment of debt and a $3 million additional writedown of a business previously identified as held for sale recorded in the first quarter.

(d) Reflects the gain from the sale of approximately 35% of our investment in Shinsei Bank recorded in the first quarter.

(e) Reflects the initial charge associated with the move to the new Mellon Financial Centre in London ($23 million in net occupancy expense and $1 million in other expense) recorded in the second quarter.

(f) Reflects the $19 million charge associated with a writedown of two small non-strategic businesses held for sale, one of which was sold in 2004, recorded in the first quarter.

18    Mellon Financial Corporation

Revenue overview

For an overview of Mellon’s sources of revenue and the business sectors that generate the various types of revenue, see pages 7 and 8 of Mellon’s 2004 Financial Annual Report and for the PS&IS sector which was created in the first quarter of 2005, see pages 24 and 40 of this report. For a discussion of the changes in reporting classification, and for a discussion of distribution and service fee revenue, see the table below and the discussion on page 23, as well as Note 1.

Noninterest revenue

Noninterest revenue

										Percent Inc/(Dec)
(dollar amounts in millions, unless otherwise noted)		3Q05			2Q05			3Q04		3Q05 vs. 2Q05 (c)		3Q05 vs. 3Q04			Year to date					Percent Inc/ (Dec)
															2005			2004
Investment management (a)	$	479		$	443		$	379		8	%	26	%	$	1,351		$	1,170		15	%
Distribution and service (a)(b)		82			74			68		9		21			227			201		13
Institutional trust and custody (a)		197			193			148		3		34			564			465		21
Payment solutions & investor services		122			142			133		(14	)	(9	)		398			427		(7	)
Foreign exchange trading		52			50			38		4		39			156			145		8
Financing-related		34			35			31		(4	)	6			101			97		4
Equity investment		17			15			24		18		(24	)		251			131		92
Other (a)(d)		55			46			43		18		27			140			126		11
Total fee and other revenue (a)		1,038			998			864		4	%	20	%		3,188			2,762		15	%
Gains on sales of securities		1			—			—							1			8
Total noninterest revenue (a)	$	1,039		$	998		$	864						$	3,189		$	2,770
Fee and other revenue as a percentage of total revenue (FTE)		90	%		88	%		88	%						90	%(e)		89	%(e)
Market value of assets under management at period-end (in billions)	$	766		$	738		$	670		4	%	14	%
Market value of assets under administration or custody at period-end (in billions)	$	3,777		$	3,450		$	2,978		9	%	27	%

(a) Amounts include reclassifications as discussed in Note 1 under “Change in Reporting Classifications.”

(b) For a description of this line item, see Note 1 and the discussion on page 23.

(c) Unannualized.

(d) Includes expense reimbursements from joint ventures of $19 million, $22 million, $18 million, $60 million and $56 million.

(e) Excluding the gains on the sale of our investment in Shinsei Bank recorded in the first quarter of 2005 and the first quarter of 2004, fee and other revenue as a percentage of total revenue (FTE) would have totaled 89% for the nine months ended Sept. 30, 2005, and 88% for the nine months ended Sept. 30, 2004.

Note: For analytical purposes, the term “fee and other revenue,” as utilized throughout this Quarterly Report on Form 10-Q, is defined as total noninterest revenue (including equity investment revenue) less gains on the sales of securities.

Mellon Financial Corporation    19

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

Fee and other revenue

The 20% increase in fee and other revenue in the third quarter of 2005 compared with the third quarter of 2004 was primarily due to increases in investment management fees, institutional trust and custody fees and higher foreign exchange trading revenue. The increases reflect improved market conditions, net new business and higher performance fees, as well as the impact of acquisitions, which accounted for $35 million, or 4%, of the increase.

The 4% increase in fee and other revenue in the third quarter of 2005 compared with the second quarter of 2005 primarily resulted from an increase in investment management revenue and other fees, partially offset by a decrease in payment solutions and investor services revenue.

Investment management fee revenue

Investment management fees are dependent on the overall level and mix of assets under management and the management fees, expressed in basis points (one-hundredth of one percent) charged for managing those assets. See pages 8 and 9 of Mellon’s 2004 Financial Annual Report for a further discussion of the factors that drive the levels of investment management fee revenue and the impact on investment management fees from changes in the S&P 500 Index and an equivalent movement in the FTSE.

Investment management fee revenue - by business sector

							Percent Inc.
							3Q05 vs.		3Q05 vs.		Year to date				Percent Inc.
(in millions)	3Q05		2Q05		3Q04		2Q05 (a)		3Q04		2005		2004
Institutional Asset Management and Mutual Funds
Mutual funds	$	200	$	187	$	177	7	%	12	%	$	566	$	532	6	%
Institutional clients		133		129		98	3		36			384		294	31
Performance fees		41		26		11	58		254			94		67	40
Private clients		22		21		19	11		20			63		54	17
Total		396		363		305	9		30			1,107		947	17
Private Wealth Management
Private clients		83		79		73	3		12			243		222	9
Mutual funds		—		1		1	N/M		N/M			1		1	—
Total		83		80		74	3		12			244		223	9
Total investment management fee revenue	$	479	$	443	$	379	8	%	26	%	$	1,351	$	1,170	15	%

(a) Unannualized.

N/M - Not meaningful.

20    Mellon Financial Corporation

Investment management fees in the Institutional Asset Management and Mutual Funds sector in the third quarter and first nine months of 2005 increased compared with all prior periods. The increases primarily resulted from improved equity markets, net inflows and a higher level of performance fees. The increases compared with the third quarter and first nine months of 2004 were also impacted by acquisitions. The increase in performance fees principally reflects an increasing number of new client mandates that provide us with the opportunity to earn performance fees, as well as continued strong investment performance and the impact of acquisitions. Our institutional investment managers have the opportunity to earn performance fees when the investment performance of their products exceeds various benchmarks and satisfies other criteria.

Investment management fees in the Private Wealth Management sector in the third quarter and first nine months of 2005 increased compared with all prior periods. The increases compared with all prior periods reflect improved equity markets and net new business. The increases compared with the third quarter and first nine months of 2004 were also impacted by acquisitions.

Changes in market value of assets under management for third quarter 2005 - by business sector

(in billions)	Institutional Asset Management and Mutual Funds (a)		Private Wealth Management		Asset Servicing		Total
Market value of assets under management at June 30, 2005	$	584	$	50	$	104	$	738
Net inflows:
Long-term		9		—		—		9
Money market/securities lending		4		—		2		6
Total net inflows		13		—		2		15
Net market appreciation (b)		12		1		—		13
Market value of assets under management at Sept. 30, 2005	$	609	$	51	$	106	$	766

(a) During the third quarter of 2005, we combined the sector financials of the former Institutional Asset Management and Mutual Funds sectors. See page 33 for a discussion.

(b) Includes the effect of changes in foreign exchange rates.

Changes in market value of assets under management from Sept. 30, 2004 to Sept. 30, 2005 - by business sector

(in billions)	Institutional Asset Management and Mutual Funds (a)			Private Wealth Management		Asset Servicing		Total
Market value of assets under management at Sept. 30, 2004	$	550	(b)	$	47	$	73	$	670
Net inflows:
Long-term		20			—		—		20
Money market/securities lending		7			—		33		40
Total net inflows		27			—		33		60
Net market appreciation (c)		32			3		—		35
Acquisitions		—			1		—		1
Market value of assets under management at Sept. 30, 2005	$	609		$	51	$	106	$	766

(a) During the third quarter of 2005, we combined the sector financials of the former Institutional Asset Management and Mutual Funds sectors. See page 33 for a discussion.

(b) Restated to reflect the transfer of securities lending assets to the Asset Servicing sector as the fees associated with those assets are classified as institutional trust and custody revenue in the Asset Servicing sector.

(c) Includes the effect of changes in foreign exchange rates.

Mellon Financial Corporation    21

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

As shown in the following table, the market value of assets under management at Sept. 30, 2005 increased $96 billion, or 14%, from Sept. 30, 2004 and $28 billion, or 4% (unannualized), from June 30, 2005.

Market value of assets under management at period-end

(dollar amounts in billions)		Sept. 30, 2005		June 30, 2005		March 31, 2005		Dec. 31, 2004		Sept. 30, 2004
Institutional	$	490	$	469	$	463	$	443	$	419
Mutual funds		212		205		203		200		191
Private client		64		64		63		64		60
Total market value of assets under management	$	766	$	738	$	729	$	707	$	670
S&P 500 Index - period-end		1229		1191		1181		1212		1115
S&P 500 Index - daily average		1224		1182		1192		1163		1104

S&P 500 Index

	Third quarter 2005 compared with
	June 30, 2005		March 31, 2005		Dec. 31, 2004		Sept. 30, 2004
Period-end	3	%	4	%	1	%	10	%
Daily average	4	%	3	%	5	%	11	%

Composition of assets under management at period-end

	Sept. 30, 2005		June 30, 2005		March 31, 2005		Dec. 31, 2004		Sept. 30, 2004
Equity funds	37	%	37	%	37	%	39	%	37	%
Fixed income funds	18		19		20		20		20
Money market funds	20		20		19		21		21
Securities lending cash collateral	16		16		15		12		13
Overlay and alternative investments	9		8		9		8		9
Total	100	%	100	%	100	%	100	%	100	%

Managed mutual fund fee revenue (a)

	Quarter ended						Nine months ended
(in millions)	Sept. 30, 2005		June. 30, 2005		Sept. 30, 2004		Sept. 30, 2005		Sept. 30, 2004
Equity funds	$	93	$	87	$	77	$	265	$	227
Money market funds		58		54		56		161		172
Fixed income funds		30		31		32		91		98
Nonproprietary		19		16		13		50		36
Total managed mutual fund fee revenue	$	200	$	188	$	178	$	567	$	533

(a) Net of mutual fund fees waived and fund expense reimbursements of $13 million, $13 million, $11 million, $38 million and $32 million.

22    Mellon Financial Corporation

The largest category of investment management fees are fees from mutual funds, which primarily generate fees in the Institutional Asset Management and Mutual Funds sector. Investment management fees from managed mutual funds are based on the daily average net assets of each fund and the basis point management fee paid by that fund. As shown in the managed mutual fund fee revenue table above and in the average assets of proprietary mutual fund table below, managed mutual fund revenue increased compared with all prior periods primarily as a result of improved equity markets and inflows of institutional money market funds.

Average assets of proprietary mutual funds

(in billions)	3Q05		2Q05		3Q04
Equity funds	$	57	$	54	$	50
Money market funds		96		90		91
Fixed income funds		21		22		23
Total average proprietary mutual fund assets managed	$	174	$	166	$	164
Basis points generated on average proprietary mutual funds
(annualized)	3Q05		2Q05		3Q04
Equity funds		65bp		65bp		62bp
Money market funds		24		24		24
Fixed income funds		56		56		55
Total proprietary managed mutual funds		41bp		41bp		40bp

Distribution and service fees

Distribution and service fees earned from mutual funds are calculated as a percentage of the average assets of the mutual fund investment portfolios managed or administered by Mellon and are reported in the Institutional Asset Management and Mutual Fund sector. These fees, which include 12b -1 fees, fluctuate with the overall level of net sales, the relative mix of sales between share classes and the funds’ market values. The increase in distribution and service fee revenue in the third quarter and first nine months of 2005 compared with all prior periods primarily reflects higher market values and higher net sales volumes of mutual funds.

Institutional trust and custody fee revenue

Institutional trust and custody fees depend on:

• the volume of transactions in our clients’ accounts;

• the types of ancillary services we provide, such as performance analytics; and

• the level of assets administered and under custody.

Institutional trust and custody fees also include securities lending revenue as well as professional and license fees for software products offered by Eagle Investment Systems that are dependent on discretionary spending decisions by investment managers. Institutional trust and custody fees are reported primarily in the Asset Servicing sector. These fees increased in the third quarter and first nine months of 2005 compared with all prior periods. The increases compared with the third quarter of 2004 and first nine months of 2004 primarily resulted from net new business and improved market conditions, as well as the acquisition of DPM and the September 2005 acquisition of the remaining 50% interest in Mellon Analytical Solutions, formerly a 50/50 joint venture. The increase compared with the second quarter of 2005 resulted primarily from the same factors, partially offset by a decrease in securities lending revenue. Securities lending revenue, included in institutional trust and custody revenue, totaled $25 million in the third quarter of 2005, an increase of $9 million compared with the third quarter of 2004 and a decrease of $8 million compared with the second quarter of 2005. The increase in securities lending revenue compared with the third quarter of 2004 reflects higher volumes and improved spreads. The decrease compared with the second quarter of 2005 primarily resulted from lower international volumes and margins due to seasonality, partially offset by higher domestic volumes. The average level of securities on loan totaled $120 billion in the third quarter of 2005 compared with $88 billion in the third quarter of 2004 and $114 billion in the second quarter of 2005.

Mellon Financial Corporation    23

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

As shown in the following table, at Sept. 30, 2005, assets under administration or custody increased 27%, compared with Sept. 30, 2004 and 9% (unannualized), compared with June 30, 2005. The increase compared with both periods primarily resulted from net new business conversions and market appreciation.

Market value of assets under administration or custody at period-end

(dollar amounts in billions)	Sept. 30, 2005			June 30, 2005		March 31, 2005		Dec. 31, 2004		Sept. 30, 2004
Market value of assets under administration or custody (a)	$	3,777	(b)	$	3,450	$	3,293	$	3,233	$	2,978
S&P 500 Index - period-end		1229			1191		1181		1212		1115

(a) Includes the assets under administration or custody of CIBC Mellon Global Securities Services, a joint venture between Mellon and the Canadian Imperial Bank of Commerce, of $655 billion, $601 billion, $539 billion, $512 billion and $459 billion. Also includes the assets of ABN AMRO Mellon Global Securities Services B.V., a joint venture between Mellon and ABN AMRO, of $491 billion, $436 billion, $428 billion, $422 billion and $363 billion.

(b) Excludes assets of $328 billion that we manage and are also under administration or custody. These assets are included in assets under management.

Payment solutions & investor services fee revenue

Payment solutions & investor services fee revenue consists of cash management revenue, shareholder services revenue, and revenue earned by Mellon Financial Markets. The decrease in this revenue compared with the third quarter of 2004 primarily resulted from lower ancillary services revenue at Mellon Investor Services, partially offset by higher cash management revenue, primarily due to revenue generated by the SourceNet acquisition. The decrease compared with the second quarter of 2005 reflects lower ancillary services revenue and lower revenue from the reimbursement of out-of-pocket expenses at Mellon Investor Services, as well as lower cash management revenue due to seasonally lower lockbox processing volumes and price compression. The decrease in the first nine months of 2005 compared with the first nine months of 2004 primarily resulted from the same factors as the third quarter of 2005 compared with the prior-year period.

Foreign exchange trading revenue

Foreign exchange trading revenue, which is included primarily in the Asset Servicing sector, increased in the third quarter and first nine months of 2005 compared with all prior periods. The increase compared with the third quarter of 2004 resulted from higher levels of market volatility in key currencies and improved client volumes.

Financing-related revenue

Financing-related revenue, which is primarily included in the Treasury Services/Other Activity sector, includes: returns from corporate-owned life insurance; gains or losses on securitizations; letters of credit and acceptance fees; loan commitment fees; and gains or losses on loan sales and lease residuals.

Equity investment revenue

Equity investment revenue, which is primarily included in the Treasury Services/Other Activity sector, includes realized and unrealized gains and losses on venture capital and non-venture capital investments. Revenue from non-venture capital investments includes equity income from certain investments accounted for under the equity method of accounting and gains (losses) from other equity investments.

24    Mellon Financial Corporation

Equity investment revenue - gain (loss)

	Quarter ended							Nine months ended
(in millions)		Sept. 30, 2005			June 30, 2005		Sept. 30, 2004		Sept. 30, 2005		Sept. 30, 2004
Total venture capital activity (a)	$	18		$	12	$	22	$	46	$	31
Equity income and gains (losses) on the sale of other equity investments		(1	)		3		2		205		100
Total equity investment revenue	$	17		$	15	$	24	$	251	$	131

(a) See table on page 43 for further details.

Equity investment revenue for the first nine months of 2005 and for the first nine months of 2004 reflects gains on the sale of our non-venture capital investment in Shinsei Bank of $197 million and $93 million, respectively, recorded in the first quarters of each year.

The venture capital activity in the third quarter of 2005 primarily resulted from: $7 million of gains on sales and dividends and $3 million of net positive valuation adjustments on private direct investments; and an $8 million gain in the indirect portfolio, primarily due to fund distributions. The venture capital activity in the second quarter of 2005 primarily resulted from: net positive valuation adjustments of $18 million on private direct investments, partially offset by a $3 million loss on the sale of direct investments and $3 million of losses in the indirect portfolio, due to valuation adjustments and fees. Activity in the third quarter of 2004 primarily resulted from: $14 million of gains on sales partially offset by $5 million of net negative valuation adjustments on direct investments; and a $13 million gain in the indirect portfolio primarily from fund distributions. See page 43 of this report for further information on the venture capital investment portfolio.

Mellon’s accounting policies regarding the valuation process for venture capital investments are regarded as critical accounting policies in that they involve significant management valuation judgements. See pages 55 and 56 of Mellon’s 2004 Financial Annual Report for a description of the rating categories and for a further discussion of the factors used in the valuation process of these investments. At Sept. 30, 2005, 66% of the direct investment portfolio was risk- rated as “superior” or “meets expectations,” the two best risk-ratings, compared with 67% at June 30, 2005. Changing economic conditions and equity markets could result in further valuation changes in the future.

Other revenue

As discussed in Note 1, other revenue was impacted by the reclassification of revenue passed to joint ventures as other expense. Previously, this was reported as a reduction of other revenue. All prior periods were reclassified. The increases compared with the third quarter of 2004 and second quarter of 2005 partially reflect higher fee revenue from Affiliated Computer Services, Inc. (ACS) under a transitional services agreement.

Year-to-date 2005 compared with year-to-date 2004

Fee and other revenue for the first nine months of 2005 increased 15% compared with the first nine months of 2004. Excluding the gains on the sale of the Shinsei investment in the first quarters of 2005 and 2004, fee and other revenue increased $322 million, or 12%, primarily due to increases in investment management and institutional trust and custody fees. The impact of acquisitions accounted for $93 million of this increase.

Mellon Financial Corporation    25

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

Supplemental information - joint ventures

Mellon accounts for its interests in joint ventures under the equity method of accounting, with its share of the equity income from all joint ventures recorded primarily as institutional trust and custody fee revenue. Mellon’s portions of gross joint venture fee revenue and expense are not included in our reported fee revenue and operating expense. The following table presents the components of gross joint venture net income for informational purposes to show the trend of growth for our 50% owned joint ventures that are part of the Asset Servicing sector. The decrease in institutional trust and custody revenue and total expenses in the third quarter of 2005 compared with the second quarter of 2005, primarily resulted from the September 2005 acquisition of the remaining 50% of the Russell/Mellon joint venture.

Gross joint ventures condensed income statement

	Quarter ended						Nine months ended
(in millions)		Sept. 30, 2005		June 30, 2005		Sept. 30, 2004		Sept. 30, 2005		Sept. 30, 2004
Asset Servicing joint ventures (a):
Institutional trust and custody	$	86	$	98	$	80	$	274	$	244
Foreign exchange trading		13		12		9		37		30
Other		22		20		13		61		44
Total revenue		121		130		102		372		318
Total expenses		85		94		81		270		249
Income before taxes		36		36		21		102		69
Provision for income taxes		13		13		7		36		25
Net income	$	23	$	23	$	14	$	66	$	44
Equity income - all joint ventures:
Mellon’s share of net income from Asset Servicing joint ventures	$	11	$	12	$	7	$	33	$	22
Mellon’s share of net income in joint ventures in other business sectors		—		—		—		—		3
Total equity income for all joint ventures (b)	$	11	$	12	$	7	$	33	$	25

(a) The 50% owned joint ventures - ABN AMRO Mellon Global Securities Services B.V., CIBC Mellon Global Securities Services Company, CIBC Mellon Trust Company and Russell/Mellon - are part of the Asset Servicing sector. In September 2005, we acquired the remaining 50% interest in Mellon Analytical Solutions, formerly the Russell/Mellon 50/50 joint venture.

(b) Using the equity method of accounting.

26    Mellon Financial Corporation

Net interest revenue

Selected net interest revenue data

										Percent Inc/Dec.
										3Q05 vs.		3Q05 vs.		Year to date						Percent
	3Q05			2Q05			3Q04			2Q05 (a)		3Q04		2005			2004			Inc.
Net interest revenue	$	118		$	127		$	113		(8	)%	5	%	$	362		$	350		4	%
Tax equivalent adjustment		5			6			4		N/M		N/M			15			12		25
Net interest revenue on an FTE basis	$	123		$	133		$	117		(8	)%	5	%	$	377		$	362		4	%
Net interest margin (a)		1.84	%		2.07	%		2.03	%						1.94	%		2.14	%

(a) Unannualized.

(b) Calculated on a continuing operations basis even though the prior period balance sheet, in accordance with GAAP, is not restated for discontinued operations.

The increase in net interest revenue on a fully taxable equivalent (FTE) basis compared with the third quarter of 2004 primarily resulted from a $4.2 billion increase in the average level of securities, partially offset by a lower net interest margin as rates paid on interest-bearing liabilities increased faster than yields on interest-earning assets. The decrease in net interest revenue on an FTE basis compared with the second quarter of 2005 resulted from the cumulative effect of a client exercising its option to extend the term of an existing leveraged lease in the second quarter of 2005, partially offset by a $1.5 billion increase in average securities.

Year-to-date 2005 compared with year-to-date 2004

The increase in net interest revenue on an FTE basis in the first nine months of 2005 compared with the first nine months of 2004 primarily reflects the lease extension noted above and a $3.2 billion increase in average securities, partially offset by the impact of a lower net interest margin. The tightening of the margin reflects rates paid on interest-bearing liabilities, particularly deposits, increasing at a faster pace than yields on interest-earning assets.

Net interest revenue is expected to be in a $123 million to $127 million range on an FTE basis for the fourth quarter 2005, assuming a gradual and measured increase in interest rates and allowing for tactical investment securities decisions.

For an analysis of the changes in volumes and rates affecting net interest revenue, see the following pages.

Mellon Financial Corporation    27

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

CONSOLIDATED BALANCE SHEET — AVERAGE BALANCES AND INTEREST YIELDS/RATES

	Quarter ended
	Sept. 30, 2005					June 30, 2005					Sept. 30, 2004
(dollar amounts in millions)	Average balance			Average yields/rates		Average balance			Average yields/rates		Average balance			Average yields/rates
Assets
Interest-earning assets:
Interest-bearing deposits with banks (primarily foreign)	$	2,210		2.99	%	$	2,660		2.96	%	$	2,371		3.19	%
Federal funds sold and securities under resale agreements		386		3.79			535		3.05			808		1.46
Other money market investments		117		3.32			112		3.35			131		2.10
Trading account securities		309		2.21			293		2.24			229		1.90
Securities:
U.S. Treasury and agency securities (a)		10,279		3.99			9,779		3.80			9,864		3.66
Obligations of states and political subdivisions (a)		819		6.80			794		6.97			631		7.10
Other (a)		4,921		4.47			3,924		4.38			1,374		4.62
Total securities		16,019		4.28			14,497		4.13			11,869		3.96
Loans, net of unearned discount		7,421		5.76			7,339		6.08			7,047		4.11
Total interest-earning assets		26,462		4.55			25,436		4.52			22,455		3.80
Cash and due from banks		2,873					2,430					2,544
Premises and equipment		615					593					688
Other assets		8,096					7,898					7,946
Reserve for loan losses		(87	)				(87	)				(97	)
Other assets of discontinued operations		—					219					—
Total assets (a)	$	37,959				$	36,489				$	33,536
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Deposits in domestic offices:
Demand, money market and other savings accounts	$	8,994		2.33	%	$	8,633		1.87	%	$	8,124		0.88	%
Savings certificates		335		3.05			299		2.70			222		2.53
Other time deposits		431		2.98			367		2.72			313		1.59
Deposits in foreign offices		6,395		2.52			6,004		2.43			4,664		1.71
Total interest-bearing deposits		16,155		2.44			15,303		2.13			13,323		1.21
Federal funds purchased and securities under repurchase agreements		2,135		3.19			1,627		2.46			1,155		1.12
U.S. Treasury tax and loan demand notes and term federal funds purchased		346		3.40			378		2.76			195		1.38
Commercial paper		16		3.38			3		2.37			25		1.29
Other funds borrowed		49		2.93	(b)		61		4.47	(b)		151		9.96
Notes and debentures (with original maturities over one year)		3,804		4.67			4,256		4.16			4,254		3.33
Junior subordinated debentures		1,033		6.25			1,037		6.05			1,010		5.38
Total interest-bearing liabilities		23,538		3.05			22,665		2.73			20,113		1.93
Total noninterest-bearing deposits		7,411					7,012					6,972
Other liabilities (a)		2,868					2,683					2,571
Other liabilities of discontinued operations		—					8					—
Total liabilities		33,817					32,368					29,656
Shareholders’ equity (a)		4,142					4,121					3,880
Total liabilities and shareholders’ equity (a)	$	37,959				$	36,489				$	33,536
Rates
Yield on total interest-earning assets				4.55	%				4.52	%				3.80	%
Cost of funds supporting interest-earning assets				2.71					2.45					1.77
Net interest margin (c):
Taxable equivalent basis				1.84	%				2.07	%				2.03	%
Without taxable equivalent increments				1.77					2.00					1.96

(a) Amounts and yields exclude adjustments for fair value and the related deferred tax effect required by FAS No. 115. Average shareholders’ equity including this adjustment was $4.109 billion, $4.087 billion and $3.822 billion.

(b) Rates paid for other funds borrowed in the second and third quarters of 2005 compared with the third quarter of 2004 was impacted by the execution of a new lease on our headquarters building in Pittsburgh in the fourth quarter of 2004.

(c) Calculated on a continuing operations basis even though the prior period balance sheet, in accordance with GAAP, is not restated for discontinued operations.

Note: Interest and average yields/rates were calculated on a taxable equivalent basis, at tax rates approximating 35%, using dollar amounts in thousands and actual number of days in the years, and are before the effect of reserve requirements. Loan fees, as well as nonaccrual loans and their related income effect, have been included in the calculation of average yields/rates.

28    Mellon Financial Corporation

CONSOLIDATED BALANCE SHEET — AVERAGE BALANCES AND INTEREST YIELDS/RATES

	Nine months ended
	Sept. 30, 2005					Sept. 30, 2004
(dollar amounts in millions)	Average balance			Average yields/rates		Average balance			Average yields/rates
Assets
Interest-earning assets:
Interest-bearing deposits with banks (primarily foreign)	$	2,697		3.00	%	$	2,247		2.94	%
Federal funds sold and securities under resale agreements		608		2.95			589		1.25
Other money market investments		113		3.32			165		1.77
Trading account securities		303		2.07			284		2.19
Securities:
U.S. Treasury and agency securities (a)		10,075		3.84			9,667		3.66
Obligations of states and political subdivisions (a)		788		6.96			578		7.23
Other (a)		3,899		4.50			1,274		5.26
Total securities		14,762		4.18			11,519		4.01
Loans, net of unearned discount		7,216		5.63			7,341		4.19
Total interest-earning assets		25,699		4.41			22,145		3.85
Cash and due from banks		2,683					2,549
Premises and equipment		630					680
Other assets		8,126					8,111
Reserve for loan losses		(91	)				(98	)
Other assets of discontinued operations		73					—
Total assets (a)	$	37,120				$	33,387
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Deposits in domestic offices:
Demand, money market and other savings accounts	$	8,804		1.92	%	$	7,581		0.76	%
Savings certificates		303		2.79			226		2.39
Other time deposits		465		2.47			308		1.44
Deposits in foreign offices		6,219		2.38			4,763		1.61
Total interest-bearing deposits		15,791		2.13			12,878		1.12
Federal funds purchased and securities under repurchase agreements		1,584		2.71			1,369		0.91
U.S. Treasury tax and loan demand notes and term federal funds purchased		320		2.89			315		0.98
Commercial paper		15		2.70			20		0.96
Other funds borrowed		91		2.37	(b)		189		8.82
Notes and debentures (with original maturities over one year)		4,175		4.23			4,231		3.26
Junior subordinated debentures		1,036		6.05			1,016		5.29
Total interest-bearing liabilities		23,012		2.74			20,018		1.84
Total noninterest-bearing deposits		7,182					6,890
Other liabilities (a)		2,769					2,673
Other liabilities of discontinued operations		3					—
Total liabilities		32,966					29,581
Shareholders’ equity (a)		4,154					3,806
Total liabilities and shareholders’ equity	$	37,120				$	33,387
Rates
Yield on total interest-earning assets				4.41	%				3.85	%
Cost of funds supporting interest-earning assets				2.47					1.71
Net interest margin (c):
Taxable equivalent basis				1.94	%				2.14	%
Without taxable equivalent increments				1.87					2.07

(a) Amounts and yields exclude adjustments for fair value and the related deferred tax effect required by FAS No. 115. Average shareholders’ equity including this adjustment was $4.124 billion and $3.782 billion.

(b) Rate paid for other funds borrowed in the first nine months of 2005 was impacted by the execution of a new lease on our headquarters building in Pittsburgh in the fourth quarter of 2004.

(c) Calculated on a continuing operations basis even though the prior period balance sheet, in accordance with GAAP, is not restated for discontinued operations.

Note: Interest and average yields/rates were calculated on a taxable equivalent basis, at tax rates approximating 35%, using dollar amounts in thousands and actual number of days in the years, and are before the effect of reserve requirements. Loan fees, as well as nonaccrual loans and their related income effect, have been included in the calculation of average yields/rates.

Mellon Financial Corporation    29

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

Operating expense

Operating expense

										Percent Inc
										3Q05 vs.		3Q05 vs.		Year to date						Percent Inc/
(dollar amounts in millions)	3Q05			2Q05			3Q04			2Q05 (b)		3Q04		2005			2004			(Dec)
Staff:
Compensation	$	258		$	250		$	241		3	%	7	%	$	755		$	709		7	%
Incentive (a)		127			114			84		10		50			349			273		28
Employee benefits		67			63			51		8		31			196			159		23
Total staff		452			427			376		6		20			1,300			1,141		14
Non-staff:
Professional, legal and other purchased services (c)		114			110			91		4		25			324			278		17
Distribution and servicing (c)		100			90			81		11		25			271			239		13
Net occupancy		61			57			57		5		6			177			192		(8)
Equipment		44			44			41		—		6			129			127		1
Business development		23			23			21		—		13			67			64		6
Communications		19			19			18		—		5			63			62		1
Amortization of intangible assets		6			7			4		—		50			19			13		49
Other (c)		52			49			36		7		46			151			129		17
Total non-staff		419			399			349		5		20			1,201			1,104		9
Total operating expense (c)	$	871		$	826		$	725		5	%	20	%	$	2,501		$	2,245		11	%
Total staff expense as a percentage of total revenue (FTE)		39	%		37	%		38	%						36	%		36	%
Employees at period-end (d)		16,700			16,200			15,600

(a) Stock option expense totaled approximately $7 million, $6 million, $4 million, $19 million and $12 million. See Note 1 of Notes to Financial Statements for a further discussion of the impact of recording expense for stock options.

(b) Unannualized.

(c) Amounts include reclassifications as discussed in Note 1 under “Change in Reporting Classifications.”

(d) The increase compared with June 30, 2005 and Sept. 30, 2004 is primarily due to acquisitions.

Staff expense

Given Mellon’s mix of fee-based businesses and their dependence on high quality talent, staff expense comprised approximately 52% of total operating expense in the third quarter of 2005. Staff expense is comprised of:

• compensation expense

• base salary expense, primarily driven by headcount

• the cost of temporaries and overtime

• severance expense;

• incentive expense

• additional compensation earned under sales commission plans and incentive plans designed to reward a combination of individual, line of business and corporate performance versus goals

• stock option expense; and

• employee benefits expense

• primarily health and welfare benefits, payroll taxes and retirement benefits.

Non-staff expenses

Non-staff expenses include certain expenses that vary with the levels of business activity and levels of expensed investments, fixed costs, and expenses associated with corporate activities related to compliance, productivity initiatives and corporate development. These expenses include:

• professional, legal and other purchased services;

• distribution and servicing expense;

• occupancy and equipment;

• business development (travel, entertainment and advertising);

• communications expense (telecommunications, postage and delivery); and

• other expense (government assessments, forms and supplies, operational errors, etc.).

30    Mellon Financial Corporation

Third quarter 2005 compared with third quarter 2004

Summary - The 20% increase in operating expense compared with the third quarter of 2004, reflects a number of factors discussed below, including $32 million, or 4%, from acquisitions and an increase in distribution and servicing expense. The expense increase also reflects approximately $10 million of expenses incurred by Mellon in providing transitional services to ACS under a transitional services agreement. These expenses are largely offset by reimbursements from ACS, recorded as other revenue.

Staff expense - The 20% increase in staff expense in the third quarter of 2005 compared with the third quarter of 2004, was a result of higher incentive expense, higher compensation expense reflecting the impact of acquisitions ($13 million) and July 1, 2005 merit increases, and higher employee benefits expense. The increase in incentive expense resulted from business growth primarily in Asset Management and Asset Servicing and a $3 million increase in stock option expense. Employee benefits expense included a $6 million increase in pension expense as well as higher deferred compensation plan expense, higher payroll taxes and higher health benefits expense. The total impact from acquisitions on staff expense was $20 million. Net periodic pension expense was $5 million in the third quarter of 2005 compared with a net pension credit of less than $1 million in the third quarter of 2004.

Non-staff expenses - Non-staff expenses increased 20% compared with the third quarter of 2004. These expenses now include gross distribution and servicing expenses, as well as other expense related to payments made to joint ventures, both of which are discussed in Note 1. Previously these expenses had been netted against fee revenue and other revenue. All prior periods have been reclassified. Distribution and servicing expense represents amounts paid to other financial intermediaries to cover their costs for distribution (marketing support, administration and record keeping) and servicing of mutual funds. Generally, increases in distribution and servicing expense reflect higher market values and higher net sales volumes of mutual funds. Distribution and servicing expense accounted for $19 million, or 6%, of the increase in non-staff expenses. The remainder of non-staff expenses increased $51 million, reflecting higher professional, legal and other purchased services and higher other non-staff expenses. These expenses resulted primarily in support of business growth, from acquisitions and from providing transitional services to ACS.

Third quarter 2005 compared with second quarter 2005

The 6% increase in staff expense in the third quarter of 2005 compared with the second quarter of 2005 primarily resulted from higher incentive and compensation expense. The increase in incentive expense resulted from business growth primarily in the Institutional Asset Management and Mutual Funds sector. The increase in compensation expense resulted from the July 1, 2005 merit increase and $3 million from an acquisition. The $20 million, or 5%, increase in non-staff expense compared with the second quarter of 2005 resulted from an increase in distribution and servicing expense, higher expenses incurred in support of business growth and an acquisition.

Year-to-date 2005 compared with year-to-date 2004

Operating expense in the first nine months of 2005 increased 11% compared with the prior-year period. Excluding charges of $15 million recorded in the first nine months of 2005 and $43 million in the first nine months of 2004 related to various items discussed on pages 17 and 18, operating expense increased 13% compared with the first nine months of 2004. The increase primarily resulted from the same factors discussed in the comparison to prior quarters, including an increase in distribution and servicing expense and $80 million from acquisitions. See page 18 for a reconciliation of revenue and expense amounts presented in accordance with GAAP to adjusted non-GAAP revenue and expense amounts.

Mellon Financial Corporation    31

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

SFAS No. 123 (Revised 2004)

In April 2005, the Securities and Exchange Commission announced that companies may delay the adoption of SFAS No. 123 (Revised 2004), “Share-Based Payment” from the current required adoption date of July 1, 2005, until January 1, 2006. A discussion of this accounting standard, which relates to share-based payments, including the expensing of stock options, is presented on page 50 of our 2004 Financial Annual Report. Adoption of this accounting standard on July 1, 2005 would have increased stock option expense by approximately $3 million in 2005, primarily due to expensing nonvested ShareSuccess options which were granted prior to 2003. We now intend to adopt this accounting standard on January 1, 2006. Based on options granted and not yet vested at Sept. 30, 2005, stock option expense, on a continuing operations basis, under the current provisions of SFAS 123, will be approximately $25 million pre-tax in 2005 and would have been approximately $24 million pre-tax in 2006. However, stock option expense for options granted and not yet vested at Sept. 30, 2005, under SFAS 123 (Revised 2004) will increase to approximately $28 million pre-tax in 2006, primarily due to expensing the nonvested ShareSuccess options.

Income taxes

The provision for income taxes from continuing operations totaled $78 million in the third quarter of 2005 compared with $71 million in the third quarter of 2004 and $93 million in the second quarter of 2005. Mellon’s effective tax rate on income from continuing operations was approximately 28.5% for the third quarter of 2005, compared with approximately 28% for the third quarter of 2004 and approximately 31.5% for the second quarter of 2005. The tax rate in the third quarter of 2005 reflects an after-tax benefit of approximately $9 million relating to the favorable resolution of certain state income tax issues. The lower tax rate in the third quarter of 2005 increased earnings per share from continuing operations by 2 cents. It is currently anticipated that the tax rate for the fourth quarter of 2005 will be approximately 33%.

Lease-in-lease-out

The Internal Revenue Service (IRS) has proposed to disallow certain tax deductions previously taken, related to Mellon’s participation in several lease-in-lease-out (LILO) transactions for years 1997-2000. If any of the deductions previously taken are disallowed, they will be deductible in future years. We believe that we properly reported the tax effects of LILO transactions based on statutes, regulations and case law in effect at the time they were negotiated. We are currently at IRS Appeals for these years. Although the IRS has indicated that it will consider settling this issue with taxpayers, it is unclear if or when a settlement will be reached. However, we believe we have adequately accrued for any tax and interest exposures related to LILO transactions.

On July 14, 2005 the FASB released a proposed staff position on the application of SFAS No. 13 to leveraged leases for a change in the timing of the realization of tax benefits. While we continue to study this draft proposal, if finalized in its current form, it could result in a cumulative change in the related income recorded on these transactions. At this time, it is not possible to estimate the financial statement impact to Mellon.

32    Mellon Financial Corporation

Business sectors

Mellon’s business sectors reflect our management structure, the characteristics of our products and services, and the classes of customers to which those products and services are delivered. Our lines of business serve two distinct major classes of clients—corporations and institutions, and high net worth individuals. Lines of business that offer similar or related products and services to common or similar client decision makers have been combined into five business sectors.

In 2005, the following changes have been made to the presentation of Mellon’s business sectors (all prior periods have been reclassified):

• Historically, certain Dreyfus mutual funds have been sub-advised by other Mellon investment subsidiaries as well as third parties. Effective July 1, 2005, we completed the process of repositioning Dreyfus to focus principally on the domestic distribution of mutual fund products and shifted the investment management for equity and taxable fixed income products from Dreyfus to the investment subsidiaries of Mellon’s institutional asset managers. These sectors primarily serve institutional customers. With the reorganization, each is dependent on the other for the manufacturing of certain investment products and certain distribution activities. As a result we have combined the sector financials of Institutional Asset Management and Mutual Funds. We will continue to report separately the revenue generated by mutual funds as part of this sector.

Our lines of business have now been aggregated into five business sectors and these sectors have been aligned within three business groups. Our Asset Management Group includes the combined Institutional Asset Management and Mutual Funds sector and the Private Wealth Management sector. Our Payments and Securities Services Group includes the Asset Servicing and Payment Solutions & Investor Services (PS&IS) sectors. Our fifth sector, and third group, is Treasury Services/Other Activity.

• In the third quarter of 2005, we changed our disclosure of distribution fees associated with mutual funds. See Change in Reporting Classifications in Note 1 for a further discussion. In addition to this change, we began to record revenue passed to joint ventures as other expense. Previously the amounts were reported as a reduction of other revenue. The change in both of these reporting classifications has no impact on income before taxes or net income reported by the businesses, but does reduce reported pre-tax operating margins.

• In the first quarter of 2005, we announced the sale of the HR businesses and adopted discontinued operations accounting for the HR consulting practices, benefits administration and business process outsourcing businesses. These businesses were formerly included primarily in the HR&IS sector. As a result, a new sector, Payment Solutions & Investor Services (PS&IS) was created. PS&IS includes Mellon Investor Services, from the former HR&IS sector, as well as global cash management (which includes SourceNet Solutions) and Mellon Financial Markets, which were previously included in the Treasury Services sector. In addition, the Treasury Services/Other Activity sector was realigned to include the remaining Treasury Services businesses as well as the results formerly included in Other Activity. The realignment of the sectors had a minor impact on the Institutional Asset Management and Mutual Funds sector.

• In the first quarter of 2005, we further refined our capital allocations to our Asset Management and Payments and Securities Services business groups to better reflect credit risk, operating risk, market risk and strategic risk inherent in those businesses and the required economic capital to reflect those risks. The decrease in allocated capital was approximately $150 million versus the amount that would have been allocated using prior methodologies.

Mellon Financial Corporation    33

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

Quarterly data (income statement amounts in millions, averages in billions, presented on an FTE basis)	Institutional Asset Management and Mutual Funds						Private Wealth Management						Total Asset Management
		3Q05		2Q05		3Q04		3Q05		2Q05		3Q04		3Q05		2Q05		3Q04
Total revenue	$	487	$	443	$	378	$	142	$	141	$	133	$	629	$	584	$	511
Credit quality expense (revenue)		—		—		—		—		—		—		—		—		—
Operating expense		358		336		287		84		81		78		442		417		365
Income from continuing operations before taxes (benefits)	$	129	$	107	$	91	$	58	$	60	$	55	$	187	$	167	$	146
Average assets (a)	$	1.9	$	1.9	$	2.1	$	7.1	$	6.6	$	6.3	$	9.0	$	8.5	$	8.4
Average common equity	$	1.0	$	1.0	$	0.8	$	0.4	$	0.4	$	0.5	$	1.4	$	1.4	$	1.3
Average Tier I preferred equity	$	0.5	$	0.5	$	0.4	$	0.1	$	0.1	$	0.2	$	0.6	$	0.6	$	0.6

Quarterly data (income statement amounts in millions, averages in billions, presented on an FTE basis)	Asset Servicing						Payment Solutions & Investor Services						Total Payments and Securities Services
		3Q05		2Q05		3Q04		3Q05		2Q05		3Q04		3Q05		2Q05		3Q04
Total revenue	$	271	$	262	$	199	$	161	$	181	$	167	$	432	$	443	$	366
Credit quality expense (revenue)		—		—		—		—		—		—		—		—		—
Operating expense		217		200		168		127		135		120		344		335		288
Income from continuing operations before taxes (benefits)	$	54	$	62	$	31	$	34	$	46	$	47	$	88	$	108	$	78
Average assets (a)	$	9.0	$	8.1	$	7.0	$	7.0	$	7.2	$	7.0	$	16.0	$	15.3	$	14.0
Average common equity	$	0.5	$	0.5	$	0.5	$	0.3	$	0.3	$	0.3	$	0.8	$	0.8	$	0.8
Average Tier I preferred equity	$	0.1	$	0.1	$	0.1	$	0.1	$	0.1	$	0.1	$	0.2	$	0.2	$	0.2

Quarterly data (income statement amounts in millions, averages in billions, presented on an FTE basis)	Treasury Services/ Other Activity						Consolidated Results
		3Q05		2Q05		3Q04		3Q05		2Q05		3Q04
Total revenue (b)	$	109	$	116	$	114	$	1,170	$	1,143	$	991
Credit quality expense (revenue)		12		3		—		12		3		—
Operating expense		85		74		72		871		826		725
Income from continuing operations before taxes (benefits)	$	12	$	39	$	42	$	287	$	314	$	266
Average assets (a)	$	12.9	$	12.4	$	10.5	$	37.9	$	36.4	$	33.4
Average common equity	$	1.9	$	1.9	$	1.7	$	4.1	$	4.1	$	3.8
Average Tier I preferred equity	$	0.2	$	0.2	$	0.2	$	1.0	$	1.0	$	1.0

34    Mellon Financial Corporation

For the nine months ended Sept. 30, (income statement amounts in millions, averages in billions, presented on an FTE basis)	Institutional Asset Management and Mutual Funds				Private Wealth Management				Total Asset Management
	2005		2004		2005		2004		2005		2004
Total revenue	$	1,361	$	1,169	$	427	$	402	$	1,788	$	1,571
Credit quality expense (revenue)		—		—		—		1		—		1
Operating expense		1,017		867		245		233		1,262		1,100
Income from continuing operations before taxes (benefits)	$	344	$	302	$	182	$	168	$	526	$	470
Average assets (a)	$	1.9	$	2.0	$	6.8	$	6.2	$	8.7	$	8.2
Average common equity	$	1.0	$	0.8	$	0.4	$	0.5	$	1.4	$	1.3
Average Tier I preferred equity	$	0.5	$	0.4	$	0.1	$	0.2	$	0.6	$	0.6

For the nine months ended Sept. 30, (income statement amounts in millions, averages in billions, presented on an FTE basis)	Asset Servicing				Payment Solutions & Investor Services				Total Payments and Securities Services
	2005		2004		2005		2004		2005		2004
Total revenue	$	776	$	651	$	521	$	530	$	1,297	$	1,181
Credit quality expense (revenue)		—		—		—		—		—		—
Operating expense		605		512		395		375		1,000		887
Income from continuing operations before taxes (benefits)	$	171	$	139	$	126	$	155	$	297	$	294
Average assets (a)	$	8.5	$	7.0	$	7.3	$	6.8	$	15.8	$	13.8
Average common equity	$	0.5	$	0.6	$	0.3	$	0.3	$	0.8	$	0.9
Average Tier I preferred equity	$	0.1	$	0.1	$	0.1	$	0.1	$	0.2	$	0.2

For the nine months ended Sept. 30, (income statement amounts in millions, averages in billions, presented on an FTE basis)	Treasury Services/ Other Activity					Consolidated Results
	2005		2004			2005		2004
Total revenue (b)	$	511	$	412		$	3,596	$	3,164
Credit quality expense (revenue)		14		(8	)		14		(7	)
Operating expense		239		258			2,501		2,245
Income from continuing operations before taxes (benefits)	$	258	$	162		$	1,081	$	926
Average assets (a)	$	12.4	$	10.8		$	37.1	$	33.3
Average common equity	$	1.9	$	1.6		$	4.1	$	3.8
Average Tier I preferred equity	$	0.2	$	0.2		$	1.0	$	1.0

(a) Where average deposits are greater than average loans, average assets include an allocation of investment securities equal to the difference. There were no average assets of discontinued operations in the third quarter of 2005. Consolidated average assets includes average assets of discontinued operations of $.2 billion for the second quarter of 2005 and $.5 billion for the third quarter of 2004, $.2 billion for the first nine months of 2005 and $.5 billion for the first nine months of 2004.

(b) Consolidated results include FTE impact of $13 million for the third quarter of 2005, $18 million for the second quarter of 2005, $14 million for the third quarter of 2004, $45 million for the first nine months of 2005 and $44 million for the first nine months of 2004.

Note: Prior periods sector data may reflect immaterial reclassifications as a result of minor changes made to be consistent with current period presentation.

The results of our business sectors are presented and analyzed on an internal management reporting basis. Revenue amounts reflect fee revenue generated directly by each sector, as well as fee revenue transferred between sectors under revenue transfer agreements, with net interest revenue generated directly by or allocated to the sector. The accounting policies of the business sectors are the same as those described in Note 1 of Mellon’s 2004 Financial Annual Report except: other fee revenue and net interest revenue differ from the amounts shown in the Consolidated Income Statement because amounts presented in Business Sectors are on a fully taxable equivalent basis (FTE); and credit quality expense (revenue) for the sectors is presented on a net charge-off (recovery) basis, including the Treasury Services component of the Treasury Services/Other Activity sector.

The Business Sector information is reported on a continuing operations basis for all periods presented. See Note 3 of this report for a discussion of discontinued operations.

Following is a discussion of Mellon’s five business sectors. In the tables that follow, the income statement amounts are presented in millions and are on an FTE basis, the assets under management, administration or custody are period-end market values and are presented in billions, and the return

Mellon Financial Corporation    35

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

on common equity is annualized. Where applicable and when possible, revenue and expense growth rates are reported excluding the impact of acquisitions, divestitures or the formation of joint ventures to improve period to period comparability. The operations of acquired businesses are integrated with the existing business sectors soon after most acquisitions are completed. As a result of the integration of staff support functions, management of customer relationships, operating processes and the financial impact of funding the acquisitions, we cannot accurately determine the impact of acquisitions on income before taxes and therefore do not report it.

See pages 22 through 28 of Mellon’s 2004 Financial Annual Report for a discussion of the products and services offered, the distribution channels for the products and services and the factors that drive the performance of the Institutional Asset Management and Mutual Funds, Private Wealth Management and Asset Servicing sectors. The Payment Solutions & Investor Services and Treasury Services/Other Activity sectors are discussed below.

Institutional Asset Management and Mutual Funds

										Percent Inc/(Dec)
(income statement dollar amounts in										3Q05 vs.		3Q05 vs.		Year to date						Percent Inc/
millions, asset dollar amounts in billions)	3Q05			2Q05			3Q04			2Q05		3Q04		2005			2004			(Dec)
Mutual funds	$	200		$	187		$	177		7	%	12	%	$	566		$	532		6	%
Institutional clients		133			129			98		3		36			384			294		31
Performance fees		41			26			11		58		254			94			67		40
Private clients		22			21			19		11		20			63			54		17
Total investment management revenue		396			363			305		9		30			1,107			947		17
Distribution and service		82			74			68		9		21			227			201		13
Institutional trust and custody revenue		14			13			14		N/M		—			40			41		(3	)
Transfer revenue		1			1			(2	)	N/M		N/M			2			(5	)	N/M
Other fee revenue		—			(2	)		(1	)	N/M		N/M			1			2		N/M
Net interest revenue (expense)		(6	)		(6	)		(6	)	—		—			(16	)		(17	)	(7	)
Total revenue		487			443			378		10	%	29	%		1,361			1,169		16	%
Operating expense		358			336			287		6	%	25	%		1,017			867		17	%
Income before taxes	$	129		$	107		$	91		22	%	42	%	$	344		$	302		14	%
Return on common equity (annualized)		36	%		29	%		31	%						31	%		34	%
Pre-tax operating margin		27	%		24	%		24	%						25	%		26	%
Assets under management (a)	$	609		$	584		$	550		4	%	11	%
Plus: subadvised for other Mellon sectors		3			3			—		N/M		N/M
	$	612		$	587		$	550		4	%	11	%
Assets under administration or custody	$	3		$	8		$	8		N/M		N/M

(a) Includes $14 billion, $15 billion and $13 billion of domestic securities lending assets advised by Standish Mellon Asset Management. Sept. 30, 2004 amounts were restated to reflect the transfer of securities lending assets to the Asset Servicing sector.

N/M - Not meaningful.

36    Mellon Financial Corporation

Institutional Asset Management and Mutual Funds is comprised of Mellon Institutional Asset Management (MIAM), which consists of a number of asset management companies offering a broad range of equity, fixed income, hedge and liquidity management products; Mellon Global Investments (MGI), which distributes investment management products internationally; and the Dreyfus/Founders complex of mutual funds. Products manufactured and distributed in this sector include mutual funds (equity, fixed income and money market), collective funds, separately managed accounts and annuities.

Income before taxes increased $38 million, or 42%, compared with the third quarter of 2004. The pre-tax operating margin increased 3%, reflecting positive operating leverage. The increase in revenue in the third quarter of 2005 compared with the third quarter of 2004 primarily resulted from an increase in investment management fees, primarily due to improved equity markets, net inflows of long-term assets, a $30 million increase in performance fees and the impact of acquisitions. As shown in the table on page 21, assets under management for this sector, before amounts subadvised for other sectors, increased $59 billion from Sept. 30, 2004, resulting from $20 billion of long-term asset flows, $7 billion of money market asset flows and $32 billion of market appreciation. The increase in operating expense primarily resulted from higher incentive expense, higher distribution and servicing expense and acquisitions.

Income before taxes increased $22 million, or 22%, compared with the second quarter of 2005, reflecting positive operating leverage. The increase in revenue in the third quarter of 2005 compared with the second quarter of 2005 reflects improved equity markets, higher performance fees and net inflows. The increase in operating expense resulted from higher incentive expense and higher distribution and servicing expense. The pre-tax operating margin increased 3% compared with the second quarter of 2005.

On a year-to-date basis, income before taxes increased $42 million, or 14%, compared to the first nine months of 2004. The increase in revenue in the first nine months of 2005 compared with the prior year period primarily resulted from improved equity markets, net inflows, acquisitions and performance fees. Operating expense increased from the first nine months of 2004, largely due to higher incentive expense, acquisitions and distribution and servicing expense. The pre-tax operating margin decreased by 1% compared with the prior-year period.

Mellon Financial Corporation    37

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

Private Wealth Management

										Percent Inc/(Dec)
(income statement dollar amounts in										3Q05 vs.		3Q05 vs.		Year to date						Percent Inc/
millions, asset dollar amounts in billions)	3Q05			2Q05			3Q04			2Q05		3Q04		2005			2004			(Dec)
Investment management revenue	$	83		$	80		$	74		3	%	12	%	$	244		$	223		9	%
Institutional trust and custody revenue		3			2			3		N/M		N/M			8			7		N/M
Transfer revenue		—			—			1		N/M		N/M			—			4		N/M
Other fee revenue		4			4			2		N/M		N/M			11			8		N/M
Net interest revenue		52			55			53		(5	)	(1	)		164			160		3
Total revenue		142			141			133		N/M		6	%		427			402		6	%
Credit quality expense		—			—			—		—		—			—			1		N/M
Total operating expense		84			81			78		4	%	8	%		245			233		5	%
Income before taxes	$	58		$	60		$	55		(6	)%	3	%	$	182		$	168		7	%
Return on common equity (annualized)		37	%		38	%		31	%						38	%		31	%
Pre-tax operating margin		40	%		43	%		41	%						42	%		42	%
Total client assets at beginning of quarter	$	78		$	77		$	76
Acquisitions		—			—			1
Assets under management net inflows		—			—			1
Assets under administration or custody net inflows		2			1			—
Market appreciation (depreciation)		2			—			(2	)
Total client assets at end of quarter (a)	$	82		$	78		$	76		5	%	8	%

(a) Includes assets under management, before amounts subadvised by/for other sectors, of $51 billion, $50 billion and $47 billion.

N/M - Not meaningful.

Private Wealth Management provides investment management, wealth management, and comprehensive banking services for high net worth individuals, families, family offices, charitable gift programs, endowments, foundations, professionals and entrepreneurs. It operates from 60 locations in 14 states.

Income before taxes increased $3 million, or 3%, compared with the third quarter of 2004. The increase in revenue in the third quarter of 2005 compared with the third quarter of 2004 resulted from higher investment management fee revenue, primarily due to the impact of improved equity markets, net new business and acquisitions. The increase in expense primarily resulted from higher salaries and incentives due in part from acquisitions. Client assets increased $6 billion from Sept. 30, 2004, primarily reflecting the impact of equity market appreciation and inflows of assets under administration or custody.

Income before taxes in the third quarter of 2005 decreased $2 million, or 6%, compared with the second quarter of 2005, as revenue growth resulting from improved equity markets and net new business was more than offset by lower net interest revenue and higher operating expenses related to business growth initiatives and merit salary increases.

The $14 million, or 7%, increase in income before taxes in the first nine months of 2005 compared with the first nine months of 2004 reflected positive operating leverage. The higher investment management fee revenue was primarily due to improved equity markets, net new business and acquisitions. The higher net interest revenue reflects higher average loans and deposits. The increase in expense primarily resulted from higher staff expense and acquisitions.

38    Mellon Financial Corporation

Asset Servicing

										Percent Inc/(Dec)
(income statement dollar amounts in										3Q05 vs.		3Q05 vs.		Year to date						Percent Inc/
millions, asset dollar amounts in billions)	3Q05			2Q05			3Q04			2Q05		3Q04		2005			2004			(Dec)
Institutional trust and custody revenue	$	154		$	141		$	113		10	%	37	%	$	427		$	351		22	%
Securities lending revenue		25			33			16		(27	)	60			82			58		42
Total institutional trust and custody revenue		179			174			129		3		40			509			409		25
Transfer revenue		(3	)		(2	)		—		N/M		N/M			(7	)		(2	)	N/M
Other fee revenue (a)		73			69			53		5		40			212			195		9
Net interest revenue		22			21			17		N/M		19			62			49		26
Total revenue		271			262			199		3	%	36	%		776			651		19	%
Total operating expense		217			200			168		8	%	29	%		605			512		18	%
Income before taxes	$	54		$	62		$	31		(13	)%	77	%	$	171		$	139		24	%
Return on common equity (annualized)		30	%		33	%		14	%						31	%		20	%
Pre-tax operating margin		20	%		24	%		15	%						22	%		21	%
Assets under management (b)	$	106		$	104		$	73		2	%	45	%
Assets under administration or custody	$	3,746	(c)	$	3,416		$	2,946		10	%	27	%

(a) Primarily consists of foreign exchange revenue of $52 million, $47 million, $36 million, $152 million and $142 million.

(b) Sept. 30, 2004 amounts were restated to reflect the transfer of securities lending assets to this sector. Represents managed securities lending cash collateral. Total cash and non-cash securities lending loan volumes of Mellon, affiliates and a joint venture are approximately $165 billion at Sept. 30, 2005. Fees on those assets are recorded above as institutional trust and custody revenue.

(c) Excludes assets of $328 billion that we manage and are also under administration or custody. These assets are reported as assets under management in the Asset Management sectors.

N/M - Not meaningful.

Asset Servicing includes institutional trust and custody and related services such as securities lending, investment management backoffice outsourcing, performance measurement, benefits disbursements, transition management, fund administration, Web-based investment management software and foreign exchange and derivative products.

Income before taxes increased $23 million, or 77%, compared with the third quarter of 2004, reflecting positive operating leverage. The increase in revenue in the third quarter of 2005 compared with the third quarter of 2004 reflects net new business, improved market conditions, acquisitions, higher foreign exchange trading revenue and higher securities lending revenue. The increase in operating expense resulted from business growth and acquisitions as well as expenses associated with investing in our Investment Manager Solutions businesses. Assets under administration or custody for this sector were $3.746 trillion at Sept. 30, 2005, an increase of $800 billion, or 27%, compared with Sept. 30, 2004 resulting from net new business conversions and market appreciation.

Income before taxes in the third quarter of 2005 decreased $8 million, or 13%, compared with the second quarter of 2005 as revenue growth resulting from acquisitions, new business, market improvements and foreign exchange revenue were more than offset by seasonally lower securities lending revenue and higher operating expense. The increase in operating expense resulted from acquisitions and business growth initiatives.

On a year-to-date basis, income before taxes increased $32 million, or 24%, reflecting positive operating leverage. Revenue increased from the prior year period, primarily due to net new business impacting custody fees and securities lending revenue, improved market conditions and acquisitions. Net interest revenue increased 26% from higher average levels of deposits. Operating expense increased in support of new business growth and acquisitions.

Mellon Financial Corporation    39

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

Payment Solutions & Investor Services

										Percent Inc/(Dec)
(dollar amounts in millions)		3Q05			2Q05			3Q04		3Q05 vs. 2Q05		3Q05 vs. 3Q04			Year to date					Percent Inc/ (Dec)
															2005			2004
Payment solutions & investor services fee revenue	$	122		$	142		$	133		(14	)%	(9	)%	$	398		$	427		(7	)%
Other fee revenue		5			6			5		N/M		N/M			19			13		N/M
Net interest revenue		34			33			29		1	%	14	%		104			90		15	%
Total revenue		161			181			167		(10	)%	(4	)%		521		$	530		(2	)%
Total operating expense		127			135			120		(5	)%	6	%		395		$	375		6	%
Income before taxes	$	34		$	46		$	47		(25	)%	(28	)%	$	126		$	155		(19	)%
Return on common equity (annualized)		30	%		38	%		45	%						35	%		46	%
Pre-tax operating margin		21	%		25	%		29	%						24	%		29	%

N/M - Not meaningful.

The Payment Solutions & Investor Services sector includes:

• Global Cash Management (GCM) - The results of GCM are driven by transaction activity including automated clearinghouse, wire transfer and telecash; remittance processing services, primarily wholesale/custom and retail lockbox; ancillary processing services for check clearing, imaging and storage activities; and accounts payable and other business processing offered by SourceNet Solutions. The other significant driver to GCM’s results is net interest revenue earned from the deposit balances generated by activity across the business operations;

• Mellon Investor Services provides shareholder services that consist of a diverse array of products to shareholders and corporations including stock transfer and recordkeeping services, investment plan services, demutualizations, corporate actions and unclaimed property services; and

• Mellon Financial Markets, our full-service broker-dealer subsidiary.

Within the Payment Solutions & Investor Services business sector, investor services revenue includes earnings related to customer deposit balances maintained in an agency capacity. Customer balances held in an agency capacity and not reflected on Mellon’s balance sheet totaled $340 million at Sept. 30, 2005.

Income before taxes in the third quarter of 2005 decreased $13 million, or 28%, compared with the third quarter of 2004. The decrease in revenue in the third quarter of 2005 compared with the third quarter of 2004 primarily resulted from lower ancillary services revenue at Mellon Investor Services which was partially offset by higher net interest revenue on both cash management and investor services customer deposit balances, as well as higher global cash management processing revenue, primarily from the SourceNet acquisition. The increase in expense mainly resulted from higher staff expense reflecting higher processing volumes in cash management including the impact of the SourceNet acquisition.

The $12 million, or 25%, decrease in income before taxes for the third quarter of 2005 compared with the second quarter of 2005 reflects lower revenue at Mellon Investor Services and lower cash management processing revenue due to lower processing volumes and price compression. The decrease in operating expense reflects lower operating costs and incentives at Mellon Investor Services and lower salaries and incentive expenses in global cash management.

On a year-to-date basis, income before taxes decreased $29 million, or 19%, compared with the first nine months of 2004, as higher net interest revenue, the SourceNet acquisition and higher lockbox processing revenue were more than offset by lower ancillary services revenue at Mellon Investor Services. Operating expense increased reflecting the impact of the SourceNet acquisition and business growth in cash management.

40    Mellon Financial Corporation

Treasury Services/Other Activity

Treasury Services/Other Activity - income from continuing operations before taxes (a)

										Percent Inc/(Dec)
(in millions)		3Q05			2Q05			3Q04		3Q05 vs. 2Q05		3Q05 vs. 3Q04			Year to date			Percent Inc/ (Dec)
															2005		2004
Treasury services	$	19		$	18		$	24		3	%	(19	)%	$	54	$	90	(40	)%
Other activity:
Venture capital		10			5			12		N/M		N/M			21		1	N/M
Business exits		(7	)		19			13		N/M		N/M			14		13	N/M
Corporate activity/other		(10	)		(3	)		(7	)	N/M		N/M			169		58	N/M
Total - Treasury Services/Other Activity	$	12		$	39		$	42		(72	)%	(73	)%	$	258	$	162	60	%

(a) See the discussion below of the revenue and expense items included in this sector.

N/M - Not meaningful.

As discussed on page 33, the global cash management and Mellon Financial Markets businesses were moved from the Treasury Services sector to the PS&IS sector. Treasury Services activities now include:

• credit products for large corporations;

• insurance premium financing (AFCO);

• commercial real estate lending; and

• the activities of Mellon 1^st Business Bank, National Association, in California.

Other Activity includes:

• business exits activity, including;

• the results of large ticket leasing, which is in a runoff mode;

• several small non-strategic businesses;

• the merchant card business; and

• certain lending relationships that Mellon is in the process of exiting;

• the results of Mellon Ventures, our venture capital group;

• Corporate Treasury activities; and

• certain corporate revenue and expense that has not been fully allocated for management reporting purposes to the business sectors.

The aggregation of the current Treasury Services activities, together with business exits activity and the results of Mellon Ventures represent the results of capital driven activities that earn net interest revenue, financing-related revenue and equity investment gains.

Revenue in the Treasury Services/Other Activity sector primarily reflects:

• net interest revenue from loans;

• gains (losses) and funding costs of Mellon Ventures’ portfolio;

• gains (losses) from the sale of securities and other assets; and

• earnings on capital above amounts of economic capital allocated to the business sectors.

Operating expense includes:

• direct expenses supporting the remaining Treasury Services activities;

• various direct expenses for items not attributable to the operations of a business sector;

• a net credit for the net corporate level (income) expense amounts allocated from Other Activity to the business sectors; and

• the expenses of Mellon Ventures.

Average common equity represents capital in excess of amounts of economic capital allocated to the business sectors, as well as economic capital required to support Treasury Services lending activity and for the investments of Mellon Ventures and business exits.

Mellon Financial Corporation    41

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

Our credit strategy is to exit all credit relationships for which a broad fee-based relationship resulting from the cross-sale of our fee-based services does not exist. The loans and leases included in business exits are:

• Mellon’s large ticket lease portfolio, which was principally transaction-based; and

• loans to companies where a broad fee-based relationship does not exist.

We will not renew these credit relationships with such companies when the respective contractual commitment periods end. We may consider selling remaining commitments on a case-by-case basis as opportunities arise.

Results for Treasury Services activities in the third quarter of 2005 compared with the third quarter of 2004 reflected lower securitization gains and lower net interest revenue, partially offset by lower operating expense. Results for the third quarter of 2005 compared with the second quarter of 2005 reflected higher net interest revenue on higher loan volumes, resulting from new insurance premium finance loans no longer being securitized, and spreads. Results for the first nine months of 2005 compared with the first nine months of 2004 reflected lower net interest revenue from a lower average level of loans and lower spreads, and lower securitization gains.

Business exits results in the third quarter of 2005 include $8 million on lease residuals which were more than offset by higher credit quality expense resulting from net credit losses recorded on leases of regional aircraft to a feeder airline that, along with its parent company, filed for Chapter 11 bankruptcy protection in the third quarter of 2005 and the resultant $12 million provision for credit losses. Business exits results in the second quarter of 2005 reflect an increase in net interest revenue resulting from the cumulative effect of a client exercising its option to extend the term of an existing leveraged lease. The Treasury Services/Other Activity sector also reflects the following activity:

In the third quarter of 2005:

• $18 million of net gains from venture capital activities.

In the third quarter of 2004:

• $22 million of net gains from venture capital activities.

In the second quarter of 2005:

• $12 million of net gains from venture capital activities; and

• a $3 million provision for credit losses, related primarily to unfunded commitments.

In the second quarter of 2004:

• the $24 million initial charge for the move to the new Mellon Financial Centre in London;

• an $8 million gain from the sale of securities; and

• $8 million of net gains from venture capital activities.

In the first quarter of 2005:

• a $197 million gain from the sale of our remaining investment in Shinsei Bank;

• $16 million of net gains from venture capital activities;

• a $10 million charge associated with the early extinguishment of debt;

• $5 million of additional expenses related to charges initially recorded in 2004.

In the first quarter of 2004:

• a $93 million gain from the sale of approximately 35% of our investment in Shinsei Bank;

• a $19 million charge associated with the writedown of two small non-strategic businesses held for sale, one of which was sold in 2004; and

• a $7 million negative provision for credit losses.

42    Mellon Financial Corporation

Venture capital investments

Venture capital investment portfolio - gain (loss)

	Quarter ended									Nine months ended
(in millions)		Sept. 30, 2005			June 30, 2005			Sept. 30, 2004			Sept. 30, 2005			Sept. 30, 2004
Private and publicly held direct investments:
Realized gains (losses)	$	7		$	(3	)	$	14		$	12		$	24
Unrealized gains (losses)		3			18			(5	)		27			(11	)
Total		10			15			9			39			13
Third party indirect funds:
Realized gains		10			1			15			13			21
Unrealized gains (losses)		—			(2	)		—			—			3
Management fees		(2	)		(2	)		(2	)		(6	)		(6	)
Total		8			(3	)		13			7			18
Total venture capital equity investment revenue	$	18		$	12		$	22		$	46		$	31

Venture capital investment portfolio - activity

(in millions)		Third Quarter 2005		Life to date
Direct investments:
Carrying value at end of period (a)	$	368	$	368
Cost at end of period		392		392
Cash disbursements		13		995
Cash receipts		28		421
Unfunded commitments		—		—
Indirect investments:
Carrying value at end of period		211		211
Cost at end of period		232		232
Cash disbursements		12		515
Cash receipts		20		292
Unfunded commitments		88		—
Total active investments:
Carrying value at end of period (b)			$	579
Cost at end of period				624

(a) At Sept. 30, 2005, there were 61 actively managed investments with an average original cost basis of approximately $6 million. Direct investments include $46 million of venture capital direct mezzanine investments in the form of subordinated debt.

(b) In 2004, Mellon confirmed that Mellon Ventures will not make new direct investments except in support of the existing portfolio. Mellon Ventures will continue to provide follow-on investments with the objective of maximizing the return on the existing portfolio.

Mellon Financial Corporation    43

.Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

Capital

Capital

(dollar amounts in millions except per share amounts; common shares in thousands)		Sept. 30, 2005			June 30, 2005			Dec. 31, 2004			Sept. 30, 2004
Total shareholders’ equity	$	4,182		$	4,122		$	4,102		$	3,959
Total shareholders’ equity to assets ratio		10.79	%		11.16	%		11.05	%		11.28	%
Tangible shareholders’ equity	$	1,850		$	1,846		$	1,636		$	1,533
Tangible shareholders’ equity to assets ratio (a)		5.08	%		5.33	%		4.72	%		4.69	%
Tier I capital ratio (b)(c)		10.52	%		10.85	%		10.54	%		9.96	%
Total (Tier I plus Tier II) capital ratio (b)(c)		16.35	%		16.91	%		16.47	%		15.61	%
Leverage capital ratio (b)(c)		8.21	%		8.40	%		7.87	%		8.13	%
Total Tier I capital	$	2,914		$	2,853		$	2,618		$	2,513
Total (Tier I plus Tier II) capital	$	4,527		$	4,447		$	4,092		$	3,938
Total risk-adjusted assets	$	27,699		$	26,297		$	24,845		$	25,228
Average assets - leverage capital basis	$	35,470		$	33,953		$	33,271		$	30,889
Book value per common share	$	10.00		$	9.86		$	9.69		$	9.35
Tangible book value per common share	$	4.42		$	4.41		$	3.86		$	3.62
Closing common stock price per share	$	31.97		$	28.69		$	31.11		$	27.69
Market capitalization	$	13,367		$	11,997		$	13,171		$	11,728
Common shares outstanding		418,125			418,164			423,354			423,549

(a) Shareholders’ equity less goodwill and intangibles divided by total assets less goodwill and intangible assets. If the benefit of the deferred tax liability associated with tax deductible goodwill is deducted from goodwill as provided for in guidance from the Federal Reserve on the inclusion of trust preferred securities in Tier I capital, the tangible shareholders’ equity to asset ratio would have been 5.52%, 5.77%, 5.01% and 4.95%.

(b) The required minimum Tier I, Total and Leverage capital ratios are 4%, 8% and 3%, respectively. For a banking institution to qualify as well capitalized, its Tier I, Total and Leverage capital ratios must be at least 6%, 10% and 5%, respectively.

(c) Includes discontinued operations.

The decreases in the total and tangible shareholders’ equity to assets ratios at Sept. 30, 2005 compared with June 30, 2005, reflect a larger balance sheet and higher unrealized mark-to-market losses in the securities available for sale portfolio. The decrease in the total shareholders’ equity to assets ratio compared with Sept. 30, 2004, reflects a larger balance sheet, stock repurchases and higher unrealized mark-to-market losses in the securities available for sale portfolio, partially offset by earnings retention. The increase in the tangible shareholders’ equity to assets ratio compared with Sept. 30, 2004, reflects the factors discussed above offset by a decrease in goodwill following the adoption of discontinued operations accounting for the HR businesses sold to ACS. For a discussion of our capital management policies, see page 33 of Mellon’s 2004 Financial Annual Report.

The decrease in the risk-based capital ratios compared with June 30, 2005, resulted from an increase in risk adjusted assets primarily reflecting the Sept. 30, 2005 change by the regulatory agencies in the risk weight allocated to liquidity facilities that support asset backed commercial paper programs. Liquidity facilities that do not meet certain eligibility requirements are now treated as direct credit substitutes. This change reduced Mellon’s Tier 1 capital ratio by approximately 25 basis points and total capital ratio by approximately 40 basis points. The increase in the risk-based capital ratios compared with Sept. 30, 2004 reflects earnings retention and a lower level of goodwill partially offset by an increase in risk adjusted assets.

In March 2005, the Board of Governors of the Federal Reserve System (the Board) amended its risk-based capital standards for bank holding companies to allow the continued inclusion of trust-

44    Mellon Financial Corporation

preferred securities in the Tier I capital of bank holding companies, subject to stricter quantitative limits and qualitative standards. The Board’s final rule limits trust-preferred securities taken together with certain core capital elements to 25% of core capital elements, net of goodwill less any associated deferred tax liability, for non-internationally active banks. For internationally active bank holding companies (defined as bank holding companies with consolidated total assets of $250 billion or more, or total on-balance sheet foreign exposure of $10 billion or more) the Board further restricts the inclusion of trust-preferred securities to 15% of core capital elements, net of goodwill less any associated deferred tax liability. The quantitative limits become effective on March 31, 2009. Under the limitations discussed above, at Sept. 30, 2005, Mellon’s risk-based capital ratios would have exceeded the well capitalized guidelines.

In October 2002, Mellon’s Board of Directors authorized a share repurchase program of up to 25 million shares of common stock. During the third quarter of 2005, Mellon repurchased 1.3 million shares of its outstanding common stock. Included in the shares repurchased during the third quarter were .8 million shares acquired through a purchase agreement with a broker-dealer counterparty at a price of $30.91 per share for a total of $26 million. In September 2005, Mellon executed an accelerated share repurchase contract for 2 million shares of its outstanding common stock with a broker-dealer. This transaction closed in early October 2005 completing the October 2002 repurchase program. Purchases through broker-dealer counterparties are subject to purchase price adjustments based on the actual price paid for the shares, and other related costs, by the counterparty. The price adjustment can be settled, at Mellon’s option, in cash or shares of common stock.

In September 2005, Mellon’s Board of Directors authorized a new share repurchase program of up to 25 million shares of common stock. Since Jan. 1, 1999, Mellon’s Board of Directors has authorized seven repurchase programs for a total of 170 million shares. Following the October 2005 repurchase of 2 million shares, 23.7 million common shares are available for repurchase under the September 2005 repurchase program, which does not have an expiration date.

Share reissuances, primarily for employee benefit plan purposes, totaled 1.3 million for the third quarter of 2005.

Share repurchases during third quarter 2005

(common shares in thousands)	Total shares repurchased			Average price per share (a)	Total shares repurchased as part of a publicly announced plan
July 2005	19		$	28.80	—
August 2005	4			28.46	—
September 2005 (b)	1,316			31.28	1,316
Third quarter 2005	1,339	(c)	$	31.24	1,316

(a) Amounts include commissions paid, which were not significant. Total purchase price in the third quarter of 2005 was $42 million.

(b) Includes 841 thousand shares repurchased, at an average price of $30.91 per share, through a share purchase agreement with a broker-dealer counterparty.

(c) Includes 23 thousand shares, at a purchase price of less than $1 million, purchased from employees in connection with the employees’ payment of taxes upon the vesting of restricted stock.

Credit risk

For a discussion of credit risk and the process of controlling and monitoring credit risk, see pages 36 and 37 of Mellon’s 2004 Financial Annual Report.

Composition of loan portfolio

The total loan portfolio at Sept. 30, 2005 increased $25 million compared with June 30, 2005, $804 million compared with Dec. 31, 2004 and $533 million compared with Sept. 30, 2004. The increases in domestic loans and leases compared with Dec. 31, 2004 and Sept. 30, 2004 reflect higher levels of commercial and financial loans, primarily insurance premium finance loans, and higher personal loans. The increase in insurance premium finance loans was a result of new loans no longer being securitized. The increase in international loans and leases was primarily due to a short-term extension of credit that was repaid in early October 2005.

Mellon Financial Corporation    45

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

At Sept. 30, 2005, approximately 78% of the loans to our large corporate commercial and financial customers had an investment grade credit rating. Investment grade loans and commitments are those where the customer has:

• a Moody’s long-term rating of Baa3 or better, and/or;

• a Standard and Poor’s long-term rating of BBB- or better; or

• if unrated, an equivalent rating using our internal risk ratings.

Composition of loan portfolio

(in millions)		Sept. 30, 2005			June 30, 2005		Dec. 31, 2004		Sept. 30, 2004
Domestic loans and leases:
Commercial and financial	$	2,668		$	2,794	$	2,190	$	2,506
Commercial real estate		1,823			1,850		1,916		1,852
Personal (a)		2,108			2,139		1,993		1,941
Lease finance assets (b)		386			459		456		483
Total domestic loans and leases		6,985			7,242		6,555		6,782
International loans and leases		573			291		199		243
Total loans and leases, net of unearned discount	$	7,558	(c)	$	7,533	$	6,754	$	7,025

(a) Primarily consists of secured personal credit lines and mortgages for customers in the Private Wealth Management sector.

(b) Represents large ticket lease assets that will run-off through repayments, possible sales and no new originations.

(c) Includes $3.682 billion of loans to Private Wealth Management customers and $910 million of loans to Mellon 1^st Business Bank, National Association customers.

Off-balance-sheet financial instruments with contract amounts that represent credit risk

Off-balance-sheet financial instruments with contract amounts that represent credit risk (a)(b)

(in millions)		Sept. 30, 2005		June 30, 2005		Dec. 31, 2004		Sept. 30, 2004
Unfunded commitments to extend credit (c):
Expire within one year	$	4,481	$	4,681	$	5,507	$	6,442
Expire within one to five years		7,888		7,784		7,339		7,261
Expire over five years		295		205		125		133
Total unfunded commitments to extend credit		12,664		12,670		12,971		13,836
Commercial letters of credit (d)		6		5		5		6
Other guarantees and indemnities:
Standby letters of credit and foreign and other guarantees (e)		1,388		1,376		1,327		1,418
Custodian securities lent with indemnification against broker default of return of securities		109,802		103,105		83,934		79,311
Liquidity support provided to TRFC		1,218		894		623		397

(a) For a further discussion, see pages 101 through 104 of Mellon’s 2004 Financial Annual Report. In addition, we had outstanding commitments to fund venture capital investments of $88 million at Sept. 30, 2005, $101 million at June 30, 2005, $122 million at Dec. 31, 2004 and $133 million at Sept. 30, 2004.

(b) Total contractual amounts do not necessarily represent future cash requirements.

(c) Net of participations totaling $535 million at Sept. 30, 2005, $563 million at June 30, 2005, $412 million at Dec 31, 2004 and $398 million at Sept. 30, 2004.

(d) Net of participations and collateral totaling $6 million at Sept. 30, 2005, $14 million at June 30, 2005, $45 million at Dec. 31, 2004 and $46 million at Sept. 30, 2004.

(e) Net of participations and cash collateral totaling $186 million at Sept. 30, 2005, $197 million at June 30, 2005, $199 million at Dec. 31, 2004 and $169 million at Sept. 30, 2004. At Sept. 30, 2005, standby letters of credit and foreign and other guarantees had a weighted average maturity of approximately 1 year.

46    Mellon Financial Corporation

Unfunded commitments to extend credit

Total unfunded commitments to extend credit decreased $6 million, or less than 1%, compared with June 30, 2005, $307 million, or 2%, compared with Dec. 31, 2004 and $1.172 billion, or 8%, compared with Sept. 30, 2004. Unfunded commitments to extend credit expiring over one year increased $194 million, or 2%, compared with June 30, 2005, $719 million, or 10%, compared with Dec. 31, 2004 and $789 million, or 11%, compared with Sept. 30, 2004. The increase compared with June 30, 2005 and Sept. 30, 2004 resulted from a shift towards longer maturities of loan commitments. At Sept. 30, 2005, approximately 95% of unfunded loan commitments to our large corporate customers had an investment grade credit rating.

Other guarantees and indemnities

In the normal course of business, Mellon offers guarantees in support of certain joint ventures and subsidiaries, and certain other guarantees and indemnities.

Standby letters of credit and foreign and other guarantees irrevocably obligate Mellon for a stated period to disburse funds to a third-party beneficiary if our customer fails to perform under the terms of an agreement with the beneficiary. We must recognize, at the inception of standby letters of credit and foreign and other guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. At Sept. 30, 2005, we had a liability of $7 million related to letters of credit issued or modified since Dec. 31, 2002.

A securities lending transaction is a fully collateralized transaction in which the owner of a security agrees to lend the security through an agent (Mellon) to a borrower, usually a broker/dealer or bank, on an open, overnight or term basis, under the terms of a prearranged contract, which generally matures in less than 90 days. Securities are lent with and without indemnification against broker default. Custodian securities lent with indemnification against broker default of return of securities totaled $110 billion at Sept. 30, 2005 and were primarily collateralized by cash and U.S. government securities.

For additional information on standby letters of credit and foreign and other guarantees, and custodian securities lent with indemnification against broker default of return of securities, see pages 47, 48, 102 and 103 of Mellon’s 2004 Financial Annual Report.

Mellon Bank, N.A. and ABN AMRO Bank N.V. entered into a joint venture to provide global securities services, with operations commencing in January 2003. Each of the two partners signed a statutory declaration under Dutch law as of Dec. 31, 2002 to be jointly and severally liable with the joint venture to parties that have a provable contractual debt or damage claim. The benefit of this declaration is potentially available to all creditors and customers of the joint venture with valid legal claims if the joint venture defaults. The guarantee totaled approximately $42 billion at Sept. 30, 2005, primarily relating to securities lending activity. Agency securities lending represents approximately $39 billion of this guarantee, primarily related to the indemnification of the owner of the securities against broker default. These securities lending transactions are collateralized by approximately $39 billion, comprised of cash, OECD government securities and equities. This potential exposure also assumes that there are no capital or assets of the joint venture to satisfy such claims, and that there is no level of contribution by ABN AMRO Bank N.V.

Mellon has also provided standard representations for underwriting agreements, acquisition and divestiture agreements, sales of loans and commitments, and other similar types of arrangements and customary indemnification for claims and legal proceedings related to its provision of financial services. We have purchased insurance to mitigate certain of these risks. Mellon is a minority equity investor in, and member of, several industry clearing or settlement exchanges through which foreign exchange, securities or other transactions settle. Certain of these industry clearing or settlement exchanges require their members to guarantee their obligations and liabilities or to provide financial support in the event other partners do not honor their obligations. It is

Mellon Financial Corporation    47

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

not possible to estimate a maximum potential amount of payments that could be required with such agreements.

Mellon’s primary banking subsidiary, Mellon Bank, N.A. (the Bank) has a referral relationship with Three Rivers Funding Corp. (TRFC), a special purpose entity that issues commercial paper. TRFC is owned by an independent third party and is not a subsidiary of either the Bank or Mellon. Its financial results are not included in the financial statements of the Bank or Mellon. TRFC was formed in 1990 and can issue up to $5 billion of commercial paper to make loans secured by, and to purchase, pools of receivables. The Bank operates as a referral agent and refers transactions to TRFC as well as providing all administrative services. Loans or other assets are not transferred from the Bank to TRFC. TRFC sold subordinated notes to an unrelated third party in 2003 and as a result of that sale, Mellon is not the “primary beneficiary” of TRFC, as defined by FIN 46 Revised.

Fee revenue of less than $1 million was received from this entity in each of the third and second quarters of 2005, and third quarter of 2004, for the services and the liquidity and credit support facilities. At Sept. 30, 2005, TRFC’s receivables totaled $1.214 billion and commercial paper outstanding totaled $1.218 billion compared with $892 million and $894 million for each at June 30, 2005. A letter of credit provided by the Bank in support of TRFC’s commercial paper totaled $134 million at Sept. 30, 2005 compared with $50 million at June 30, 2005. Mellon’s maximum loss exposure related to TRFC, which is required to be disclosed under FIN 46 Revised, is the full amount of the liquidity facility, or $1.218 billion, at Sept. 30, 2005. However, the probability of this loss scenario is remote as it would mean that all of TRFC’s receivables were wholly uncollectible. The facilities that provide liquidity and credit support to TRFC are included in the Off-balance-sheet financial instruments with contract amounts that represent credit risk table on page 46. The estimated liability for losses related to these arrangements, if any, is included in the reserve for unfunded commitments. For a further discussion of our relationship with TRFC, see Note 7 of Mellon’s 2004 Financial Annual Report.

Nonperforming assets

Nonperforming assets

(dollar amounts in millions)		Sept. 30, 2005			June 30, 2005			Dec. 31, 2004			Sept. 30, 2004
Nonperforming loans and leases:
Commercial and financial	$	7		$	7		$	10		$	17
Personal		3			4			4			3
Lease finance assets		27			15			15			—
Total nonperforming loans and leases (a)		37			26			29			20
Total acquired property		—			—			—			1
Total nonperforming assets	$	37		$	26		$	29		$	21
Nonperforming loans as a percentage of total loans		.48	%		.34	%		.43	%		.30	%
Nonperforming assets as a percentage of Tier I capital plus the reserve for loan losses		1.23	%		87	%		1.08	%		.82	%

(a) Includes $20 million, $8 million, $9 million and $15 million of loans with both principal and interest less than 90 days past due but placed on nonaccrual status by management discretion.

48    Mellon Financial Corporation

The increase in nonperforming assets at Sept. 30, 2005 compared with June 30, 2005 resulted from the addition of $12 million of leases of regional aircraft to a feeder airline that, along with its parent company, filed for Chapter 11 bankruptcy protection in the third quarter of 2005. At Sept. 30, 2005, total nonperforming loans and leases were comprised of $27 million of airline leases, $5 million to a cable television operator and $5 million of various smaller loans. Additional information regarding our practices for placing assets on nonaccrual status is presented in the “Nonperforming assets” discussion and in Note 1 in our 2004 Financial Annual Report.

At Sept. 30, 2005 loans that were 30-59 days, 60-89 days and 90 days or more past due as to principal or interest totaled $15 million, $2 million and less than $1 million. Loans 90 days or more past due, that are not classified as nonaccrual loans, were either well secured and in the process of collection or were personal loans that are automatically charged off upon reaching various stages of delinquency.

Provision and reserve for credit exposure

Mellon’s accounting policy regarding the reserve for credit exposure is regarded as a critical accounting policy in that it involves significant management valuation judgements. For a further discussion of our accounting policy relating to the reserve for credit exposure, see pages 45 and 46 of our first quarter 2005 Form 10-Q.

The allocation of the reserve for credit exposure is presented below. This allocation is judgmental, and the entire reserve is available to absorb credit losses regardless of the type of loss.

Reserve for credit exposure

(in millions)		Sept. 30, 2005		June 30, 2005		Dec. 31, 2004		Sept. 30, 2004
Reserve for loan losses:
Base reserves:
Commercial and financial	$	39	$	39	$	36	$	37
Commercial real estate		5		5		9		10
Personal		4		4		5		5
Lease assets		22		34		15		16
Total domestic base reserve		70		82		65		68
International		1		1		2		2
Total base reserve		71		83		67		70
Impairment/judgmental		9		4		6		10
Unallocated		—		—		25		18
Total reserve for loan losses	$	80	$	87	$	98	$	98
Reserve for unfunded commitments:
Commitments	$	71	$	74	$	57	$	58
Letters of credit and bankers acceptances		6		7		10		13
Total reserve for unfunded commitments	$	77	$	81	$	67	$	71
Total reserve for credit exposure	$	157	$	168	$	165	$	169

Mellon Financial Corporation    49

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

Total base reserves at Sept. 30, 2005 decreased $12 million from June 30, 2005 due to the partial charge-off of leases of regional aircraft to a feeder airline that, along with its parent company, filed for Chapter 11 bankruptcy protection in the third quarter of 2005 and the remaining reserves for these leases moving into the impairment/judgmental reserves. The increase in the total base reserve and the decrease in the unallocated loan loss reserve at Sept. 30, 2005 compared with Dec. 31, 2004 was primarily driven by higher commercial and financial, and lease asset reserves due to refinement of the methodology used to determine the level of reserves, that was implemented during the first quarter of 2005. New quantitative factors have replaced the historical loss factors and take into account the credit rating, maturity, exposure size and industry. The decrease in the reserve for unfunded commitments at Sept. 30, 2005 from June 30, 2005 is primarily due to decreases in levels of certain loan commitments while the increase compared to Sept. 30, 2004 is primarily related to the shift towards longer maturities of loan commitments.

Mellon’s management concluded that, at Sept. 30, 2005, the overall reserve level was appropriate to recognize inherent losses in the loan portfolio.

The net provision for credit losses totaled $12 million in the third quarter of 2005, compared with no net provision in the third quarter of 2004 and $3 million in the second quarter of 2005. The provision in the third quarter of 2005 primarily resulted from $23 million of net credit losses on the leases of regional aircraft discussed previously.

Reserve activity Quarter ended

	Sept. 30, 2005						June 30, 2005						Sept. 30, 2004
(dollar amounts in millions)		Loan losses			Unfunded commitments			Loan losses			Unfunded commitments			Loan losses			Unfunded commitments
Reserve at beginning of period	$	87		$	81		$	87		$	77		$	96		$	73
Total credit losses		(24	)		—			—			—			(1	)		—
Total recoveries		1			—			1			—			1			—
Total net credit recoveries (losses) (a)		(23	)		—			1			—			—			—
Provision for credit losses		16			(4	)		(1	)		4			2			(2	)
Reserve at end of period	$	80		$	77		$	87		$	81		$	98		$	71
Reserve for loan losses as a percentage of total loans (b)		1.05	%		N/M			1.15	%		N/M			1.40	%		N/M
Reserve for unfunded commitments as a percentage of unfunded commitments (b)		N/M			.55	%		N/M			.58	%		N/M			.47	%
Annualized net credit losses (recoveries) to average loans		1.23	%		N/M			—	%		N/M			—	%		N/M

(a) Substantially all of the net credit losses/recoveries relate to lease assets for the quarter ended Sept. 30, 2005 and to commercial and financial loans for the quarter ended June 30, 2005 and Sept. 30, 2004.

(b) At period-end.

N/M - Not meaningful.

50    Mellon Financial Corporation

Reserve activity Nine months ended

	Sept. 30, 2005					Sept. 30, 2004
(dollar amounts in millions)		Loan losses			Unfunded commitments		Loan losses			Unfunded commitments
Reserve at beginning of period	$	98		$	67	$	103		$	75
Total credit losses		(25	)		—		(3	)		—
Total recoveries		3			—		3			—
Total net credit recoveries (losses) (a)		(22	)		—		—			—
Securitizations		—			—		(2	)		—
Provision for credit losses		4			10		(3	)		(4	)
Reserve at end of period	$	80		$	77	$	98		$	71
Annualized net credit losses (recoveries) to average loans		.41	%		N/M		—	%		N/M

(a) Substantially all of the net credit losses/recoveries relate to lease assets for the nine months ended Sept. 30, 2005 and to commercial and financial loans for the nine months ended Sept. 30, 2004.

N/M - Not meaningful.

Market and liquidity risk

For a discussion of the management of market and liquidity risk, see page 42 of Mellon’s 2004 Financial Annual Report.

Asset/liability management

Asset/liability management activities address management of assets and liabilities from an interest rate risk, currency risk and liquidity management perspective, including the use of derivatives.

Selected average balances

	Quarter ended									Nine months ended
(in millions)		Sept. 30, 2005			June 30, 2005			Sept. 30, 2004			Sept. 30, 2005			Sept. 30, 2004
Assets:
Money market investments	$	2,713		$	3,307		$	3,310		$	3,418		$	3,001
Trading account securities		309			293			229			303			284
Securities		15,967			14,444			11,780			14,717			11,481
Loans		7,421			7,339			7,047			7,216			7,341
Total interest-earning assets		26,410			25,383			22,366			25,654			22,107
Noninterest-earning assets		11,584			10,921			11,178			11,439			11,340
Reserve for loan losses		(87	)		(87	)		(97	)		(91	)		(98	)
Assets allocated to discontinued operations		—			219			—			73			—
Total assets	$	37,907		$	36,436		$	33,447		$	37,075		$	33,349
Funds supporting total assets:
Core funds	$	34,691		$	33,666		$	31,268		$	34,309		$	30,705
Purchased funds		3,216			2,770			2,179			2,766			2,644
Funds supporting total assets	$	37,907		$	36,436		$	33,447		$	37,075		$	33,349

Mellon Financial Corporation    51

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

The increase in average interest-earning assets in the third quarter of 2005 compared with the third quarter of 2004 and second quarter of 2005 primarily resulted from higher levels of securities and loans, partially offset by lower levels of money market investments. The increase in average securities, compared with both periods, was due to purchases of floating rate and other short duration mortgage-backed securities. The higher level of loans compared with the third quarter of 2004 primarily reflects an increase in insurance premium finance loans in part resulting from the new loans no longer being securitized. The proportion of average core funds to average total assets in the third quarter of 2005 was 92% compared with 93% in the third quarter of 2004. See pages 42 and 43 of Mellon’s 2004 Financial Annual Report for a definition of core and purchased funds.

Liquidity and dividends

We manage our liquidity position with the objective of maintaining the ability to fund commitments and to repay liabilities in accordance with their terms, even during periods of market or financial stress. Through active liquidity management, we seek to ensure that changes in funding requirements can be accommodated without materially impacting net income. Core demand and time deposits, gathered from our private wealth management, asset servicing and PS&IS businesses, are used in conjunction with long-term debt to provide stable sources of funding. Purchased funds, acquired from a variety of sources and customers in worldwide financial markets, are used to supplement the core sources of funding. Liquid assets, in the form of money market investments and portfolio securities held available for sale, are also utilized to meet short-term requirements for cash. Liquidity is managed on both a consolidated basis and at the Mellon Financial Corporation (Parent Corporation) level.

The Parent Corporation has access to the following principal sources of liquidity: dividend and interest payments from its subsidiaries, the commercial paper market, a revolving credit agreement with Mellon Bank, N.A., and access to the capital markets. The ability of national bank subsidiaries to pay dividends to the Parent Corporation is subject to certain regulatory limitations, as discussed in Note 24 of Mellon’s 2004 Financial Annual Report. Under the more restrictive limitation, Mellon’s national bank subsidiaries can, without prior regulatory approval, declare dividends subsequent to Sept. 30, 2005 of up to approximately $275 million, less any dividends declared and plus or minus net profits or losses, as defined, earned between Oct. 1, 2005 and the date of any such dividend declaration. To comply with regulatory guidelines, Mellon and its subsidiary banks continually evaluate the level of cash dividends in relation to their respective operating income, capital needs, asset quality and overall financial condition.

At Sept. 30, 2005, the Parent Corporation had $391 million of unencumbered liquid assets. The Parent Corporation has a $200 million revolving credit agreement with Mellon Bank, N.A., Mellon’s primary bank subsidiary, with a June 2006 expiration date. The agreement was executed at market terms. Under this agreement any borrowings are to be collateralized with eligible assets of our non-bank subsidiaries. There were no borrowings under this facility at Sept. 30, 2005. The Parent Corporation also has the ability to access the capital markets with $1.45 billion of unused capacity to issue debt, equity and junior subordinated debentures under a shelf registration statement. Access to the capital markets is partially dependent on Mellon’s and Mellon Bank, N.A.’s credit ratings, some of which are shown in the following table.

Debt ratings at Sept. 30, 2005

	Standard & Poor’s	Moody’s	Fitch
Mellon Financial Corporation:
Commercial paper	A-1	P-1	F1+
Senior debt	A+	A1	AA-
Subordinated debt	A	A2	A+
Mellon Bank, N.A.:
Long-term deposits	AA-	Aa3	AA
Subordinated debt	A+	A1	A+

Contractual maturities of Mellon’s long-term debt totaled approximately $250 million in the third quarter of 2005. There are no contractual maturities of long-term debt scheduled for the remainder of 2005. Contractual maturities will total approximately $300 million in 2006.

We paid $84 million in common stock dividends in the third quarter of 2005 compared with $77 million

52    Mellon Financial Corporation

in the third quarter of 2004. The common dividend payout ratio, on a net income basis, was 43% in the third quarter of 2005 on a dividend of $.20 per share compared with 42% in the third quarter of 2004 on a dividend of $.18 per share. Based upon shares outstanding at Sept. 30, 2005 and the current quarterly common stock dividend rate of $.20 per share, the annual common stock dividend is expected to be approximately $335 million.

As shown in the consolidated statement of cash flows, cash and due from banks decreased by $5 million during the first nine months of 2005 to $2.770 billion. The decrease resulted from $1.804 billion of net cash used in investing activities substantially offset by $1.110 billion of net cash provided by financing activities and $827 million of net cash provided by operating activities. Net cash used in investing activities primarily resulted from net purchases of securities available for sale, partially offset by a decrease in short-term investments. Net cash provided by financing activities primarily resulted from higher levels of deposits, partially offset by repayments of longer-term debt.

Interest rate sensitivity analysis

Interest rate risk is measured using net interest revenue simulation and portfolio equity simulation analyses. The following table illustrates the simulation analysis of the impact of a 50, 100 and 200 basis point shift upward or 50, 100 and 200 basis point shift downward in short-term interest rates on net interest revenue and earnings per share. Principal cash flows anticipated over the next twelve months from discretionary investments and loans in business exits (discussed on page 41) are assumed to be reinvested in short-term money market assets, while term debt maturing within the next twelve months is replaced with short-term funding. This analysis was prepared using the levels of all interest-earning assets, supporting funds and derivative instruments used for interest rate risk management at Sept. 30, 2005. The impact of the rate movements was developed by simulating the effect of rates changing in a gradual fashion over a six-month period from the Sept. 30, 2005 levels and remaining at those levels thereafter. Financial market conditions and management’s response to events may cause actual results to differ from simulated results. Additional information regarding Mellon’s interest rate risk management is presented in the “Interest rate sensitivity analysis” discussion on pages 44 through 46 in Mellon’s 2004 Financial Annual Report. Also, see page 27 of this report for a discussion of expected net interest revenue for the fourth quarter of 2005.

Interest rate simulation sensitivity analysis

	Simulated increase (decrease) in the next 12 months
	compared with last 12 months’ actual results					compared with a scenario of unchanged rates
	Net interest revenue		Earnings per share			Net interest revenue		Earnings per share
Movement in interest rates from Sept. 30, 2005 rates:
Unchanged	2.4	%	$	0.02		N/A			N/A
Up 50 bp	2.2	%	$	0.02		(0.3	)%	$	—
Up 100 bp	1.3			0.01		(1.2	)		(0.01	)
Up 200 bp	(1.0	)		(0.01	)	(3.4	)		(0.03	)
Down 50 bp	2.5	%	$	0.02		0.1	%	$	—
Down 100 bp	2.3			0.02		(0.2	)		—
Down 200 bp	0.5			—		(1.9	)		(0.02	)

Mellon Financial Corporation    53

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

The anticipated impact on net interest revenue under the various scenarios did not exceed our guidelines for assuming interest rate risk at Sept. 30, 2005, nor did it exceed our guidelines at Sept. 30, 2004.

Managing interest rate risk with derivative instruments

Derivatives are used as part of Mellon’s overall asset/liability management process to augment the management of interest rate exposure. The total notional amount of interest rate swaps used to manage interest rate risk was $3.110 billion at Sept. 30, 2005, compared with $3.084 billion at Dec. 31, 2004 and $2.778 billion at Sept. 30, 2004. The increase compared with Sept. 30, 2004, primarily resulted from entering into instruments in conjunction with long-term debt issuances in 2004. The notional value at Sept. 30, 2005 was primarily comprised of receive fixed instruments associated with long-term debt and junior subordinated debentures with a weighted average maturity of approximately 8 years and weighted average interest rates received and paid of 5.57% and 3.95%, respectively. The net interest differential between interest revenue and interest expense resulted in interest revenue of $15 million and $68 million in the third quarter and first nine months of 2005, compared with interest revenue of $34 million and $108 million in the third quarter and first nine months of 2004. Additional information regarding these contracts is presented in Note 27 in Mellon’s 2004 Financial Annual Report.

We enter into interest rate swaps designated as fair value hedges, to convert portions of our fixed rate junior subordinated debentures to floating rate debt, our fixed rate long-term debt to floating rate debt and, to a small degree, certain fixed rate certificates of deposit to variable rate certificates of deposit. The fixed rate liability instruments are changed to variable rate instruments by entering into receive fixed/pay variable swaps. No ineffectiveness was recorded for the nine months ended Sept. 30, 2005 and Sept. 30, 2004. At Sept. 30, 2005, there were no outstanding cash flow hedges.

Derivative instruments used for trading purposes

Mellon enters into various foreign exchange and interest rate derivative contracts for trading purposes. Trading activities primarily involve providing various derivative products to customers to assist them in managing foreign currency exchange risk, interest rate risk and equity price risk and for managing our risks in certain trading portfolios and as part of our proprietary trading activities. All of these instruments are carried at market value with realized and unrealized gains and losses included in foreign exchange trading revenue and other revenue. Additional information regarding these contracts is presented in Mellon’s 2004 Financial Annual Report on pages 46 and 47 and in Note 27.

Derivative instruments used for trading purposes

(notional amounts in millions)		Sept. 30, 2005		June 30, 2005		Dec. 31, 2004		Sept. 30, 2004
Commitments to purchase and sell foreign currency contracts	$	85,263	$	77,072	$	64,170	$	77,939
Foreign currency option contracts purchased		7,217		6,805		6,710		4,705
Foreign currency option contracts written		8,700		9,194		9,020		8,719
Interest rate agreements:
Interest rate swaps		13,507		12,475		10,916		10,064
Options, caps and floors purchased		647		666		799		895
Options, caps and floors written		856		765		741		734
Futures and forward contracts		7,161		10,453		8,880		13,921
Equity options		1,437		1,331		3,845		3,616
Credit default swaps		732		703		694		692
Total return swaps		34		41		33		38

54    Mellon Financial Corporation

We use a value-at-risk methodology to estimate the potential gain or loss in a portfolio of trading positions that is associated with a price movement of given probability over a specified time frame. Using our methodology, which considers such factors as changes in currency exchange rates, interest rates, spreads and related volatility, the aggregate average value-at-risk for trading activities and credit default swaps was approximately $5 million for each of the 60 business-day periods ending Sept. 30, 2005, June 30, 2005 and Sept. 30, 2004.

Critical accounting policies

Our significant accounting policies are discussed in Note 1 of Mellon’s 2004 Financial Annual Report. Our critical accounting policies are those related to valuing venture capital investments, provision and reserve for credit exposure, and accounting for pensions, as referenced below.

Critical policy	Reference
Valuing venture capital investments	Mellon’s 2004 Financial Annual Report, pages 55-56.
Provision and reserve for credit exposure	Mellon’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, pages 45-46.
Accounting for pensions	Mellon’s 2004 Financial Annual Report, page 57 and pages 93-94.

Supplemental information - income statement (unaudited) and selected data

Presented on the following three pages, as supplemental information, are the full-year 2004, 2003 and 2002 income statements (unaudited) and business sectors data reflecting:

• the adoption of discontinued operations accounting for the HR businesses sold to ACS and other discontinued operations, discussed in Note 3 of this report;

• the change in reporting classifications discussed in Note 1 of this report; and

• the change in business sectors discussed on page 33 of this report.

Mellon Financial Corporation    55

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

CONSOLIDATED INCOME STATEMENT (unaudited)

Mellon Financial Corporation (and its subsidiaries)

		Year ended Dec. 31,
(dollar amounts in millions, except per share amounts)		2004			2003			2002
Noninterest	Investment management	$	1,625		$	1,409		$	1,408
revenue	Distribution and service		269			240			233
	Institutional trust and custody		628			557			576
	Payment solutions & investor services		565			569			562
	Foreign exchange trading		186			147			146
	Financing-related		137			140			147
	Equity investment		160			(6	)		(29	)
	Other		174			170			92
	Total fee and other revenue		3,744			3,226			3,135
	Gains on sales of securities		8			62			59
	Total noninterest revenue		3,752			3,288			3,194
Net interest	Interest revenue		850			935			1,056
revenue	Interest expense		384			358			430
	Net interest revenue		466			577			626
	Provision for credit losses		(11	)		7			172
	Net interest revenue after provision for credit losses		477			570			454
Operating	Staff
expense	Compensation		972			942			959
	Incentive		393			293			316
	Employee benefits		210			172			101
	Total staff		1,575			1,407			1,376
	Professional, legal and other purchased services		386			356			319
	Distribution and servicing		319			299			288
	Net occupancy		235			216			196
	Equipment		169			170			166
	Business development		87			88			105
	Communications		84			84			85
	Amortization of intangible assets		19			17			13
	Other		186			149			117
	Total operating expense		3,060			2,786			2,665
Income	Income from continuing operations before income taxes		1,169			1,072			983
	Provision for income taxes		362			338			319
	Income from continuing operations before cumulative effect of accounting change		807			734			664
	Cumulative effect of accounting change, net of tax		—			(7	)		—
	Income from continuing operations		807			727			664
	Discontinued operations:
	Income (loss) from operations after-tax		(16	)		(58	)		6
	Net gain on disposals after-tax		5			32			12
	Income (loss) from discontinued, net of applicable tax expense (credit) of $(7), $(41) and $15	$	(11	)	$	(26	)	$	18
	Net income	$	796		$	701		$	682
Earnings per	Basic:
share (a)	Income from continuing operations before cumulative effect of accounting change	$	1.92		$	1.72		$	1.52
	Cumulative effect of accounting change		—			(.02	)		—
	Continuing operations	$	1.92		$	1.70		$	1.52
	Net income	$	1.90		$	1.64		$	1.56
	Diluted:
	Income from continuing operations before cumulative effect of accounting change	$	1.90		$	1.70		$	1.51
	Cumulative effect of accounting change		—			(.01	)		—
	Continuing operations	$	1.90		$	1.69		$	1.51
	Net income	$	1.88		$	1.63		$	1.55

(a) Calculated based on unrounded numbers.

56    Mellon Financial Corporation

Business sectors

(income statement amounts in millions, averages in billions; presented on an FTE basis)	Institutional Asset Management and Mutual Funds									Private Wealth Management									Total Asset Management
	2004			2003			2002			2004			2003			2002			2004			2003			2002
Revenue:
Noninterest revenue	$	1,651		$	1,420		$	1,393		$	325		$	308		$	320		$	1,976		$	1,728		$	1,713
Net interest revenue (expense)		(22	)		(22	)		(23	)		212			223			209			190			201			186
Total revenue		1,629			1,398			1,370			537			531			529			2,166			1,929			1,899
Credit quality expense		—			—			—			1			1			—			1			1			—
Operating expense		1,216			1,090			1,065			316			293			278			1,532			1,383			1,343
Income from continuing operations before taxes and cumulative effect of accounting change		413			308			305			220			237			251			633			545			556
Income taxes		142			108			111			75			83			92			217			191			203
Income from continuing operations before cumulative effect of accounting change		271			200			194			145			154			159			416			354			353
Cumulative effect of accounting change (a)		—			—			—			—			—			—			—			—			—
Income from continuing operations		271			200			194			145			154			159			416			354			353
Income from discontinued operations after-tax (a)		—			—			—			—			—			—			—			—			—
Net income	$	271		$	200		$	194		$	145		$	154		$	159		$	416		$	354		$	353
Average loans	$	—		$	—		$	—		$	3.4		$	2.9		$	2.7		$	3.4		$	2.9		$	2.7
Average assets (b)	$	2.0		$	2.0		$	1.9		$	6.2		$	5.5		$	5.0		$	8.2		$	7.5		$	6.9
Average deposits	$	—		$	—		$	—		$	5.3		$	4.6		$	4.4		$	5.3		$	4.6		$	4.4
Average common equity	$	0.8		$	0.7		$	0.6		$	0.5		$	0.4		$	0.2		$	1.3		$	1.1		$	0.8
Average Tier I preferred equity	$	0.4		$	0.4		$	—		$	0.2		$	0.2		$	—		$	0.6		$	0.6		$	—
Return on common equity (c)		34	%		28	%		32	%		30	%		36	%		76	%		32	%		31	%		43	%
Pre-tax operating margin (c)		25	%		22	%		22	%		41	%		45	%		48	%		29	%		28	%		29	%
Business sectors
(income statement amounts in millions, averages in billions; presented on an FTE basis)	Asset Servicing									Payment Solutions & Investor Services									Total Payments and Securities Services
	2004			2003			2002			2004			2003			2002			2004			2003			2002
Revenue:
Noninterest revenue	$	806		$	711		$	678		$	583		$	586		$	590		$	1,389		$	1,297		$	1,268
Net interest revenue (expense)		69			82			95			123			152			149			192			234			244
Total revenue		875			793			773			706			738			739			1,581			1,531			1,512
Credit quality expense		—			—			—			—			—			—			—			—			—
Operating expense		696			638			581			509			525			520			1,205			1,163			1,101
Income from continuing operations before taxes and cumulative effect of accounting change		179			155			192			197			213			219			376			368			411
Income taxes		62			55			70			67			75			79			129			130			149
Income from continuing operations before cumulative effect of accounting change		117			100			122			130			138			140			247			238			262
Cumulative effect of accounting change (a)		—			—			—			—			—			—			—			—			—
Income from continuing operations		117			100			122			130			138			140			247			238			262
Income from discontinued operations after-tax (a)		—			—			—			—			—			—			—			—			—
Net income	$	117		$	100		$	122		$	130		$	138		$	140		$	247		$	238		$	262
Average loans	$	0.1		$	—		$	—		$	0.1		$	0.1		$	0.1		$	0.2		$	0.1		$	0.1
Average assets (b)	$	7.2		$	5.9		$	4.7		$	7.1		$	8.4		$	9.0		$	14.3		$	14.3		$	13.7
Average deposits	$	5.8		$	4.2		$	3.4		$	6.4		$	7.6		$	8.1		$	12.2		$	11.8		$	11.5
Average common equity	$	0.6		$	0.6		$	0.5		$	0.3		$	0.3		$	0.2		$	0.9		$	0.9		$	0.7
Average Tier I preferred equity	$	0.1		$	0.1		$	—		$	0.1		$	0.1		$	—		$	0.2		$	0.2		$	—
Return on common equity (c)		20	%		18	%		26	%		44	%		39	%		56	%		28	%		26	%		36	%
Pre-tax operating margin (c)		20	%		20	%		25	%		28	%		29	%		30	%		24	%		24	%		27	%

(a) The cumulative effect of accounting change in 2003 and income from discontinued operations in 2004, 2003 and 2002 have not been allocated to any of Mellon’s reportable sectors.

(b) Where average deposits are greater than average loans, average assets include an allocation of investment securities equal to the difference.

(c) On a continuing operations basis.

- continued -

Mellon Financial Corporation    57

Items 2. and 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Quantitative and Qualitative Disclosures About Market Risk. (continued)

Business sectors

(income statement amounts in millions,	Treasury Services/ Other Activity								Consolidated Results
averages in billions; presented on an FTE basis)	2004			2003			2002		2004			2003			2002
Revenue:
Noninterest revenue (a)	$	429		$	305		$	255	$	3,794		$	3,330		$	3,236
Net interest revenue (expense) (b)		101			158			210		483			593			640
Total revenue		530			463			465		4,277			3,923			3,876
Credit quality expense (revenue)		(12	)		6			172		(11	)		7			172
Operating expense		323			240			221		3,060			2,786			2,665
Income from continuing operations before taxes and cumulative effect of accounting change		219			217			72		1,228			1,130			1,039
Income taxes (c)		75			75			23		421			396			375
Income from continuing operations before cumulative effect of accounting change		144			142			49		807			734			664
Cumulative effect of accounting change (d)		—			(7	)		—		—			(7	)		—
Income from continuing operations		144			135			49		807			727			664
Income (loss) from discontinued operations after-tax (d)		—			—			—		(11	)		(26	)		18
Net income	$	144		$	135		$	49	$	796		$	701		$	682
Average loans	$	3.7		$	4.7		$	6.6	$	7.3		$	7.7		$	9.4
Average assets (e)	$	10.9		$	11.1		$	11.6	$	34.0		$	33.9		$	33.7
Average deposits	$	2.9		$	3.1		$	3.1	$	20.4		$	19.5		$	19.0
Average common equity	$	1.6		$	1.5		$	1.9	$	3.8		$	3.5		$	3.4
Average Tier I preferred equity	$	0.2		$	0.2		$	1.0	$	1.0		$	1.0		$	1.0
Return on common equity (f)		N/M			N/M			N/M		21	%		21	%		20	%
Pre-tax operating margin (f)		N/M			N/M			N/M		29	%		29	%		27	%

(a) Consolidated results include FTE impact of $42 million in 2004, $42 million in 2003 and $42 million in 2002.

(b) Consolidated results include FTE impact of $17 million in 2004, $16 million in 2003 and $14 million in 2002.

(c) Consolidated results include FTE impact of $59 million in 2004, 58 million in 2003 and $56 million in 2002.

(d) The cumulative effect of accounting change in 2003 and income from discontinued operations in 2004, 2003 and 2002 have not been allocated to any of Mellon’s reportable sectors.

(e) Where average deposits are greater than average loans, average assets include an allocation of investment securities equal to the difference. Consolidated average assets include average assets of discontinued operations of $.6 billion for 2004, $1.0 billion for 2003 and $1.5 billion for 2002.

(f) On a continuing operations basis. Return on common equity is before the cumulative effect of a change in accounting principle.

N/M — Not meaningful.

58    Mellon Financial Corporation

Item 4. Controls and Procedures.

The Corporation’s management, with the participation of its principal executive officer and principal financial officer, has evaluated the effectiveness, as of Sept. 30, 2005, of the Corporation’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Corporation’s disclosure controls and procedures, as of Sept. 30, 2005, were effective to provide reasonable assurance that information required to be disclosed by the Corporation in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to provide reasonable assurance that information required to be disclosed by the Corporation in such reports is accumulated and communicated to the Corporation’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

In the ordinary course of business, the Corporation may routinely modify, upgrade and enhance its internal controls and procedures for financial reporting. However, there was no change in the Corporation’s “internal control over financial reporting” (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended Sept. 30, 2005, that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Mellon Financial Corporation    59

Cautionary Statement

This Quarterly Report on Form 10-Q contains and incorporates by reference statements relating to future results of the Corporation that are considered “forward-looking statements.” These statements, which may be expressed in a variety of ways, including the use of future or present tense language, relate to, among other things: expected cash contributions to funded defined benefit pension plans; amounts of contingent and deferred consideration payable for acquisitions; collectibility of securities; estimated amortization expense; long-term financial goals; the impact of market and demographic trends; potential future venture capital gains or losses, possible changes in the value of the portfolio and intentions as to future investments; expected fourth quarter 2005 net interest revenue; the effect of a new accounting standard related to share-based payments and expected stock option expense in 2005 and 2006; the expected tax provisioning rate and the adequacy of tax accruals; future deductibility of disallowed tax deductions; economic capital allocations; the Corporation’s intention not to renew certain credit relationships; liabilities for guarantees and indemnities; loss exposure related to Three Rivers Funding Corporation (TRFC); credit exposure reserve appropriateness; the Corporation’s liquidity management and interest rate risk management objectives; contractual maturities of long-term debt; simulation of changes in interest rates; the value-at-risk for trading activities and credit default swaps; and litigation results.

These forward-looking statements, and other forward-looking statements contained in other public disclosures of the Corporation which make reference to the cautionary factors contained in this report, are based on assumptions that involve risks and uncertainties and that are subject to change based on various important factors (some of which are beyond the Corporation’s control). Actual results may differ materially from those expressed or implied as a result of these risks and uncertainties, including, but not limited to: changes in political and economic conditions; equity and fixed-income and foreign exchange market fluctuations; changes in the mix of assets under management; the effects of the adoption of new accounting standards; customers’ sensitivity to increases in oil prices and decreasing travel; corporate and personal customers’ bankruptcies; operational risk; inflation; levels of tax-free income; technological change; success in the timely development of new products and services; competitive product and pricing pressures within Mellon’s markets; customer spending and savings habits; interest rate fluctuations; geographic sources of income; monetary fluctuations; currency rate fluctuations; acquisitions and integrations of acquired businesses; changes in law; changes in fiscal, monetary, regulatory, trade and tax policies and laws; success in gaining regulatory approvals when required; the uncertainties inherent in the litigation process; and the effects of recent and any further terrorist acts and the results of the war on terrorism; as well as other risks and uncertainties detailed elsewhere or incorporated by reference in this Quarterly Report on Form 10-Q and in subsequent reports filed by the Corporation with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934.

All statements speak only as of the date on which such statements are made, and the Corporation undertakes no obligation to update any statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

60    Mellon Financial Corporation

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

Various legal actions and proceedings are pending or are threatened against Mellon and our subsidiaries and certain former subsidiaries, some of which seek relief or damages in amounts that are substantial. These actions and proceedings arise in the ordinary course of our businesses and operations and include suits relating to our servicing, investment, mutual fund, advisory, trust, custody, shareholder services, cash management, lending, collections and other activities and operations. Certain actions and proceedings relate to businesses that have been divested.

As previously reported in Mellon’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, on March 22, 2005, the United States Attorney for the Western District of Pennsylvania announced that six former employees of a subsidiary of Mellon had been indicted by a federal grand jury in Pittsburgh, Pennsylvania on a series of charges relating to the destruction in April 2001 of approximately 80,000 United States tax returns and payments. In related public comments, the United States Attorney indicated that the investigation is continuing. Mellon is cooperating fully in this investigation.

As previously reported in a Current Report on Form 8-K dated Sept. 30, 2005, Mellon Investor Services LLC (“MIS”), the transfer agent subsidiary of Mellon Financial Corporation, has received a “Wells Notice” from the Philadelphia District Office of the Securities and Exchange Commission indicating that the staff intends to recommend that the Commission bring a civil injunctive action against MIS for violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. A Wells Notice indicates that the SEC’s staff has made a preliminary decision to recommend that the Commission authorize the staff to bring a civil action. However, a Wells Notice is not a formal allegation or proof of wrongdoing. The notice provides MIS the opportunity to respond formally to the SEC staff before the staff makes a final determination whether to recommend that the SEC initiate an action.

The staff has informed MIS that its recommendation relates to MIS’ disclosure practices to its transfer agency (issuer) clients during the period 2001 through late 2004 concerning the receipt of fees from a search firm that performs in-depth searches for “lost” shareholders. Fees received by MIS from this firm during this period aggregate to approximately $5 million. MIS believes that the SEC staff has been investigating related practices at other transfer agents. MIS has been cooperating fully with the SEC staff in its investigation and intends to make a submission explaining why it believes that its conduct was lawful.

Because of the complex nature of some of these legal actions and proceedings, it may be a number of years before such matters ultimately are resolved. After consultation with legal counsel, Mellon’s management believes that the aggregate liability, if any, resulting from such pending and threatened legal actions and proceedings will not have a material adverse effect on our financial condition, results of operations and cash flows, although there could be a material effect on results of operations for a particular period.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(c) Information regarding repurchases by the Corporation of its equity securities appears under “Capital” on page 45 of this report and is incorporated into this Item by reference.

Information regarding limitations on the payment of dividends by the Corporation’s national bank subsidiaries appears under “Liquidity and dividends” on page 52 of this report and is incorporated into this Item by reference.

Mellon Financial Corporation    61

PART II - OTHER INFORMATION (continued)

Item 6. Exhibits.

3.1	Restated Articles of Incorporation of Mellon Financial Corporation, as amended and restated as of Sept. 17, 1998, and as amended Oct. 18, 1999.
3.2	By-Laws of Mellon Financial Corporation, as amended, effective Oct. 19, 1999.
4.1	Shareholder Protection Rights Agreement, dated as of Oct. 15, 1996, between Mellon Financial Corporation and Mellon Bank, N.A., as Rights Agent, and as amended and restated as of Oct. 19, 1999.
12.1	Computation of Ratio of Earnings to Fixed Charges (Parent Corporation).
12.2	Computation of Ratio of Earnings to Fixed Charges (Mellon Financial Corporation and its subsidiaries).
31.1	Rule 13a-14(a) Certification of Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of Chief Financial Officer.
32.1	Section 1350 Certification of Chief Executive Officer.
32.2	Section 1350 Certification of Chief Financial Officer.
99.1	Pages 58 through 60, inclusive, of the Corporation’s 2004 Financial Annual Report to Shareholders.

62    Mellon Financial Corporation

SIGNATURE

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

	MELLON FINANCIAL CORPORATION
	(Registrant)
Date: November 4, 2005	By:	/s/ Michael A. Bryson
		Michael A. Bryson
		Chief Financial Officer
		(Duly Authorized Officer and
		Principal Financial Officer of the Registrant)

Mellon Financial Corporation    63

CORPORATE INFORMATION

Business of Mellon	Mellon Financial Corporation is a global financial services company, headquartered in Pittsburgh, Pennsylvania, providing a broad range of financial products and services in domestic and selected international markets. Through its five business sectors (Institutional Asset Management and Mutual Funds, Private Wealth Management, Asset Servicing, Payment Solutions & Investor Services and Treasury Services/Other Activity), Mellon serves two distinct major classes of customers—corporations and institutions and high net worth individuals. For corporations and institutions, Mellon provides investment management, trust and custody, foreign exchange, securities lending, performance analytics, fund administration, outsourcing solutions for investment managers, shareholder services, treasury management and banking services. For individuals, Mellon provides mutual funds and wealth management. Mellon’s asset management businesses, which include The Dreyfus Corporation, Founders Asset Management LLC, Standish Mellon Asset Management Company LLC and U.K.-based Newton Investment Management, as well as a number of additional subsidiaries and investment management boutiques, provide investment products in many asset classes and investment styles. Mellon’s principal executive office is located at One Mellon Center, 500 Grant Street, Pittsburgh, PA 15258 (telephone: (412) 234-5000).
Corporate Communications/ Media Relations	Members of the media should direct inquiries to media@mellon.com or (412) 234-7157.
Direct Stock Purchase and Dividend Reinvestment Plan	The Direct Stock Purchase and Dividend Reinvestment Plan provides a way to purchase shares of common stock directly from Mellon at the current market value. Nonshareholders may purchase their first shares of Mellon’s common stock through the Plan, and shareholders may increase their shareholding by reinvesting cash dividends and through optional cash investments. Plan details are in a prospectus, which may be obtained from Mellon Investor Services by e-mailing shrrelations@melloninvestor.com or by calling 1 800 205-7699.
Dividend Payments	Subject to approval of the board of directors, dividends are paid on Mellon’s common stock on or about the 15th day of February, May, August and November.
Exchange Listing	Mellon’s common stock is traded on the New York Stock Exchange under the trading symbol MEL. Our transfer agent and registrar is Mellon Investor Services, P.O. Box 3315, South Hackensack, NJ 07606. For more information, visit www.melloninvestor.com or call 1 800 205-7699.
Form 10-K and Shareholder Publications	For a free copy of Mellon’s Annual Report on Form 10-K or the quarterly earnings news release on Form 8-K, as filed with the Securities and Exchange Commission, send a written request by e-mail to mellon_10-K/8-K@mellon.com or by mail to the Secretary of Mellon, One Mellon Center, Room 4826, Pittsburgh, PA 15258-0001.
	The 2004 Summary and Financial Annual Reports, as well as Forms 10-K, 8-K and 10-Q, and quarterly earnings and other news releases can be viewed and printed at www.mellon.com.
Internet Access	Mellon: www.mellon.com
	Mellon Investor Services: www.melloninvestor.com
	Also see Internet access for Business Groups/Principal Entities in the 2004 Mellon Summary Annual Report.
Investor Relations	Visit www.mellon.com/investorrelations/ or call (412) 234-5601.
Publication Requests/Securities Transfer Agent	To request the Annual Report or quarterly information or to address issues regarding stock holdings, certificate replacement/transfer, dividends and address changes, visit www.melloninvestor.com or call 1 800 205-7699.
Stock Prices	Prices for Mellon’s common stock can be viewed at www.mellon.com.

The contents of the listed Internet sites are not incorporated into this Quarterly Report on Form 10-Q.

Mellon entities are Equal Employment Opportunity/Affirmative Action employers. Mellon is committed to providing equal employment opportunities to every employee and every applicant for employment, regardless of, but not limited to, such factors as race, color, religion, sex, national origin, age, familial or marital status, ancestry, citizenship, sexual orientation, veteran status or being a qualified individual with a disability.

64    Mellon Financial Corporation

Index to Exhibits

Exhibit No.	Description	Method of Filing
3.1	Restated Articles of Incorporation of Mellon Financial Corporation, as amended and restated as of Sept. 17, 1998, and as amended Oct. 18, 1999.	Previously filed as Exhibit 3.1 to Quarterly Report on Form 10-Q (File No. 1-7410) for the quarter ended Sept. 30, 1999, and incorporated herein by reference.
3.2	By-Laws of Mellon Financial Corporation, as amended, effective Oct. 19, 1999.	Previously filed as Exhibit 3.2 to Quarterly Report on Form 10-Q (File No. 1-7410) for the quarter ended Sept. 30, 1999, and incorporated herein by reference.
4.1	Shareholder Protection Rights Agreement, dated as of Oct. 15, 1996, between Mellon Financial Corporation and Mellon Bank, N.A., as Rights Agent, and as amended and restated as of Oct. 19, 1999.	Previously filed as Exhibit 1 to Form 8-A/A Registration Statement (File No. 1-7410) dated Oct. 19, 1999, and incorporated herein by reference.
12.1	Computation of Ratio of Earnings to Fixed Charges (Parent Corporation).	Filed herewith.
12.2	Computation of Ratio of Earnings to Fixed Charges (Mellon Financial Corporation and its subsidiaries).	Filed herewith.
31.1	Rule 13a-14(a) Certification of Chief Executive Officer.	Filed herewith.
31.2	Rule 13a-14(a) Certification of Chief Financial Officer.	Filed herewith.
32.1	Section 1350 Certification of Chief Executive Officer.	Furnished herewith.
32.2	Section 1350 Certification of Chief Financial Officer.	Furnished herewith.
99.1	Pages 58 through 60, inclusive, of the Corporation’s 2004 Financial Annual Report to Shareholders.	Previously filed as a portion of Exhibit 13.1 to Annual Report on Form 10-K (File No. 1-7410) for the year ended Dec. 31, 2004 and incorporated herein by reference.

Certain instruments, which define the rights of holders of long-term debt of the Corporation and its subsidiaries, are not filed herewith because the total amount of securities authorized under each of them does not exceed 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. The Corporation hereby agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request.

Mellon Financial Corporation    65

EX-12.1

Exhibit 12.1

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(Parent Corporation)

Mellon Financial Corporation

    (Parent Corporation) (a)

	Quarter ended						Nine months ended
(dollar amounts in millions)	Sept. 30, 2005		June 30, 2005		Sept. 30, 2004		Sept. 30, 2005		Sept. 30, 2004
Income before income taxes and equity in undistributed net income (loss) of subsidiaries	$	211	$	210	$	132	$	529	$	345
Fixed charges: interest expense and amortization of debt issuance costs		50		49		40		146		117
Total earnings (as defined)	$	261	$	259	$	172	$	675	$	462
Ratio of earnings (as defined) to fixed charges		5.21		5.29		4.29		4.63		3.96

(a) The parent corporation ratios include the accounts of Mellon Financial Corporation; Mellon Funding Corporation, a wholly owned subsidiary of Mellon that functions as a financing entity for Mellon and its subsidiaries by issuing commercial paper and other debt guaranteed by Mellon; and MIPA, LLC, a single member limited liability company wholly owned by Mellon, created to hold and administer corporate owned life insurance. Because these ratios exclude from earnings the equity in undistributed net income (loss) of subsidiaries, these ratios vary with the payment of dividends by such subsidiaries.

EX-12.2

Exhibit 12.2

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(Mellon Financial Corporation and its subsidiaries)

Mellon Financial Corporation

    (and its subsidiaries)

	Quarter ended						Nine months ended
(dollar amounts in millions)	Sept. 30, 2005		June 30, 2005		Sept. 30, 2004		Sept. 30, 2005		Sept. 30, 2004
Income from continuing operations before provision for income taxes	$	274	$	296	$	252	$	1,036	$	882
Fixed charges: interest expense (excluding interest on deposits), one-third of rental expense net of income from subleases and amortization of debt issuance costs		91		84		68		250		200
Total earnings (as defined), excluding interest on deposits		365		380		320		1,286		1,082
Interest on deposits		100		85		39		252		99
Total earnings (as defined)	$	465	$	465	$	359	$	1,538	$	1,181
Ratio of earnings (as defined) to fixed charges:
Excluding interest on deposits		4.00		4.55		4.71		5.14		5.41
Including interest on deposits		2.44		2.76		3.39		3.07		3.96

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Martin G. McGuinn, certify that:

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

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 4, 2005

/s/ Martin G. McGuinn
Name:	Martin G. McGuinn
Title:	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Michael A. Bryson, certify that:

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

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 4, 2005

/s/ Michael A. Bryson
Name:	Michael A. Bryson
Title:	Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification

Pursuant to 18 U.S.C. § 1350, the undersigned officer of Mellon Financial Corporation (the “Corporation”), hereby certifies that the Corporation’s Quarterly Report on Form 10-Q for the quarter ended Sept. 30, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

Dated: November 4, 2005	/s/ Martin G. McGuinn
	Name:	Martin G. McGuinn
	Title:	Chief Executive Officer

EX-32.2

Exhibit 32.2

Certification

Pursuant to 18 U.S.C. § 1350, the undersigned officer of Mellon Financial Corporation (the “Corporation”), hereby certifies that the Corporation’s Quarterly Report on Form 10-Q for the quarter ended Sept. 30, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

Dated: November 4, 2005	/s/ Michael A. Bryson
	Name:	Michael A. Bryson
	Title:	Chief Financial Officer