Many groundwater-management problems are concerned with the control of one or more variables that reflect the state of a groundwater-flow system or a coupled groundwater/surface-water system. These system state variables include the distribu- tion of heads within an aquifer, streamflow rates within a hydraulically connected stream, and flow rates into or out of aquifer storage. This report documents the new State Variables Package for the Groundwater-Management Process of MODFLOW-2005 (GWM-2005). The new package provides a means to explicitly represent heads, streamflows, and changes in aquifer storage as state variables in a GWM-2005 simulation. The availability of these state variables makes it possible to include system state in the objective function and enhances existing capabilities for constructing constraint sets for a groundwater-management formu- lation. The new package can be used to address groundwater-management problems such as the determination of withdrawal strategies that meet water-supply demands while simultaneously maximizing heads or streamflows, or minimizing changes in aquifer storage. Four sample problems are provided to demonstrate use of the new package for typical groundwater-management applications.