##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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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                     



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##### Table of Contents

MELLON FINANCIAL CORPORATION

THIRD QUARTER 2005 FORM 10-Q

TABLE OF CONTENTS AND 10-Q CROSS-REFERENCE INDEX



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|                                                                                                                                                                   |  |         
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------
|                                                                                                                                                                   |  | 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      



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##### Table of Contents

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



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##### Table of Contents

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



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##### Table of Contents

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



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##### Table of Contents

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



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##### Table of Contents

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



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##### Table of Contents

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



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##### Table of Contents

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



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---



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



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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 302005 |   |  |   | March 31,2005 |   |  |   | Year-to-DateSept. 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



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##### Table of Contents

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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)                                    |  | Amortizedcost  |        | 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



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##### Table of Contents

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)                 |  | InstitutionalAssetManagement andMutual Funds (a) |       |   | PrivateWealthManagement |   | AssetServicing |  | HR&IS |     |  | PS&IS |      | TreasuryServices/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



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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



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##### Table of Contents

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



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##### Table of Contents

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



---

##### Table of Contents

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



---

##### Table of Contents

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



---

##### Table of Contents

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)                                          |  |                   | ReportedAmounts |                |   | Adjustments |      |  |   | AdjustedAmounts |  |   | ReportedAmounts |   |  |   | Adjustments |         |  |   | AdjustedAmounts |  
|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



---

##### Table of Contents

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              |   |  | 3Q05vs.2Q05 (c) |   |  | 3Q05vs.3Q04 |   |  |   | Year to date |      |  | PercentInc/(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



---

##### Table of Contents

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



---

##### Table of Contents

---



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 AssetManagement andMutual Funds (a) |     | PrivateWealthManagement |   | AssetServicing |  | 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 AssetManagement andMutual Funds (a) |     |     | PrivateWealthManagement |   | AssetServicing |  | 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



---

##### Table of Contents

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



---

##### Table of Contents

---



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



---

##### Table of Contents

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



---

##### Table of Contents

---



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



---

##### Table of Contents

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



---

##### Table of Contents

---



Net interest revenue



---



Selected net interest revenue data



|                                     |  |      |      |   |      |   |      |      |  |   |                  |   |  |         |    |  |              |   |  |         |      |   |      |   |      |   |  |    |  
|------------------------------------ |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---------------- | - |  | ------- | -- |  | ------------ | - |  | ------- | ---- | - | ---- | - | ---- | - |  | -- | -
|                                     |  |      |      |   |      |   |      |      |  |   | Percent Inc/Dec. |   |  |         |    |  |              |   |  |         |     
|                                     |  |      |      |   |      |   |      |      |  |   | 3Q05 vs.         |   |  | 3Q05vs. |    |  | 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



---

##### Table of Contents

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)                                             |  | Averagebalance |        |   | Averageyields/rates |      |     | Averagebalance |   |        | Averageyields/rates |  |      | Averagebalance |  |   | Averageyields/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



---

##### Table of Contents

---



CONSOLIDATED BALANCE SHEET  AVERAGE BALANCES AND INTEREST YIELDS/RATES



|                                                                         |  |                   |        |   |                      |      |     |                |   |        |                     |  |      |  
|------------------------------------------------------------------------ |  | ----------------- | ------ | - | -------------------- | ---- | --- | -------------- | - | ------ | ------------------- |  | ---- | -
|                                                                         |  | Nine months ended |       
|                                                                         |  | Sept. 30, 2005    |        |   | Sept. 30, 2004       |     
|(dollar amounts in millions)                                             |  | Averagebalance    |        |   | Average yields/rates |      |     | Averagebalance |   |        | Averageyields/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



---

##### Table of Contents

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 |   |  | PercentInc/ |      
|(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



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##### Table of Contents

---



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



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##### Table of Contents

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



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##### Table of Contents

---



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



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##### Table of Contents

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



---

##### Table of Contents

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|                                                                                                                            |  |                                                 |       |                           |   |                        |  |      |     |      |   |      |  |   |       |  |   |      
|--------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ----- | ------------------------- | - | ---------------------- |  | ---- | --- | ---- | - | ---- |  | - | ----- |  | - | -----
|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



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##### Table of Contents

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         |  |      |     |   |      |   |     |      |  |   | 3Q05vs.           |   |  | 3Q05vs. |   |  | 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



---

##### Table of Contents

---



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



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##### Table of Contents

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                |  |      |     |   |      |   |     |      |  |   | 3Q05vs.           |   |  | 3Q05vs. |    |  | Year to date |   |  | PercentInc/ |    
|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



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##### Table of Contents

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Asset Servicing



|                                              |  |      |       |     |      |   |       |      |  |   |                   |   |  |         |    |  |              |   |  |             |     |   |       |   |     |   |  |     |  
|--------------------------------------------- |  | ---- | ----- | --- | ---- | - | ----- | ---- |  | - | ----------------- | - |  | ------- | -- |  | ------------ | - |  | ----------- | --- | - | ----- | - | --- | - |  | --- | -
|                                              |  |      |       |     |      |   |       |      |  |   | Percent Inc/(Dec) |   |  |         |    |  |              |   |  |             |    
|(income statement dollar amounts in           |  |      |       |     |      |   |       |      |  |   | 3Q05vs.           |   |  | 3Q05vs. |    |  | Year to date |   |  | PercentInc/ |    
|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



---

##### Table of Contents

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              |   |  | 3Q05vs.2Q05 |    |  | 3Q05vs.3Q04 |    |  |   | Year to date |   |  | PercentInc/(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



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##### Table of Contents

---



Treasury Services/Other Activity



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

|                                         |  |   |      |   |  |   |      |   |  |      |                   |   |  |             |    |  |             |    |  |   |              |  |                  |     |  |     |   
|---------------------------------------- |  | - | ---- | - |  | - | ---- | - |  | ---- | ----------------- | - |  | ----------- | -- |  | ----------- | -- |  | - | ------------ |  | ---------------- | --- |  | --- | --
|                                         |  |   |      |   |  |   |      |   |  |      | Percent Inc/(Dec) |   |  |             |    |  |             |    | 
|(in millions)                            |  |   | 3Q05 |   |  |   | 2Q05 |   |  |      | 3Q04              |   |  | 3Q05vs.2Q05 |    |  | 3Q05vs.3Q04 |    |  |   | Year to date |  | PercentInc/(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 1stBusiness 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



---

##### Table of Contents

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



---

##### Table of Contents

---



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 Quarter2005 |  |   | Life todate
|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



---

##### Table of Contents

.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



---

##### Table of Contents

---



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 sharesrepurchased |     |  |   | Averageprice per share (a) |  | Total shares repurchasedas part of a
publiclyannounced 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



---

##### Table of Contents

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 1stBusiness 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 Dec31, 2004and $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



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##### Table of Contents

---



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



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##### Table of Contents

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



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##### Table of Contents

---



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



---

##### Table of Contents

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)                                                 |  |                | Loanlosses |   |               |   | Unfundedcommitments |                |  |   | Loanlosses |   |  |   | Unfundedcommitments |   |  |   | Loanlosses |   |  |   | Unfundedcommitments |  
|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



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##### Table of Contents

---



Reserve activity Nine months ended



|                                                           |  |                |            |                |  |   |                     |  |   |            |   |  |   |                     |  
|---------------------------------------------------------- |  | -------------- | ---------- | -------------- |  | - | ------------------- |  | - | ---------- | - |  | - | ------------------- | -
|                                                           |  | Sept. 30, 2005 |            | Sept. 30, 2004 | 
|(dollar amounts in millions)                               |  |                | Loanlosses |                |  |   | Unfundedcommitments |  |   | Loanlosses |   |  |   | Unfundedcommitments |  
|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



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##### Table of Contents

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



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##### Table of Contents

---



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



---

##### Table of Contents

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



---

##### Table of Contents

---



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



---

##### Table of Contents

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



---

##### Table of Contents

---



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



---

##### Table of Contents

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



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##### Table of Contents

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



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##### Table of Contents

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



---

##### Table of Contents

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



---

##### Table of Contents

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



---

##### Table of Contents

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



---

##### Table of Contents

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



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##### Table of Contents

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