UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

Masco Corporation

(Exact name of Registrant as Specified in Charter)

Delaware		38-1794485
(State or Other Jurisdiction of Incorporation)		(IRS Employer Identification No.)
21001 Van Born Road, Taylor, Michigan		48180
(Address of Principal Executive Offices)		(Zip Code)

(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes     o No

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

Large Accelerated þ       Accelerated o       Non Accelerated o

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

o Yes     þ No

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

Class		Shares Outstanding at July 31, 2007
Common stock, par value $1.00 per share		374,500,000

 

 

MASCO CORPORATION

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets — June 30, 2007 and December 31, 2006			1
Condensed Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2007 and 2006			2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006			3
Notes to Condensed Consolidated Financial Statements			4-18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19-25
Item 4. Controls and Procedures			26
PART II. OTHER INFORMATION			27-29
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits
Signature
Computation of Ratio of Earnings
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Section 1350 Certifications

MASCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

June 30, 2007 and December 31, 2006
(In Millions Except Share Data)

		June 30,				December 31,
		2007				2006
ASSETS
Current assets:
Cash and cash investments		$	853			$	1,958
Accounts and notes receivable, net			1,866				1,613
Prepaid expenses and other			317				281
Inventories:
Finished goods			644				610
Raw material			469				480
Work in process			156				173
			1,269				1,263
Total current assets			4,305				5,115
Property and equipment, net			2,334				2,363
Goodwill			4,086				3,957
Other intangible assets, net			375				306
Other assets			553				584
Total assets		$	11,653			$	12,325
LIABILITIES
Current liabilities:
Notes payable		$	325			$	1,446
Accounts payable			943				815
Accrued liabilities			1,140				1,128
Total current liabilities			2,408				3,389
Long-term debt			4,022				3,533
Deferred income taxes and other			1,077				932
Total liabilities			7,507				7,854
Commitments and contingencies
SHAREHOLDERS’ EQUITY
Common shares, par value $1 per share Authorized shares: 1,400,000,000; Issued and outstanding: 2007 — 367,140,000; 2006 — 383,890,000			367				384
Retained earnings			3,226				3,575
Accumulated other comprehensive income			553				512
Total shareholders’ equity			4,146				4,471
Total liabilities and shareholders’ equity		$	11,653			$	12,325

See notes to condensed consolidated financial statements.

MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

For the Three Months and Six Months Ended June 30, 2007 and 2006
(In Millions Except Per Common Share Data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Net sales		$	3,148			$	3,354			$	6,013			$	6,508
Cost of sales			2,241				2,378				4,354				4,661
Gross profit			907				976				1,659				1,847
Selling, general and administrative expenses			542				525				1,037				1,041
Impairment charge for goodwill			—				10				—				10
Operating profit			365				441				622				796
Other income (expense), net:
Impairment charge for investments			(10	)			(78	)			(10	)			(78	)
Interest expense			(69	)			(53	)			(132	)			(117	)
Other, net			15				32				57				66
			(64	)			(99	)			(85	)			(129	)
Income from continuing operations before income taxes, minority interest and cumulative effect of accounting change, net			301				342				537				667
Income taxes			108				119				193				231
Income from continuing operations before minority interest and cumulative effect of accounting change, net			193				223				344				436
Minority interest			7				8				16				14
Income from continuing operations before cumulative effect of accounting change, net			186				215				328				422
Income from discontinued operations, net			3				4				4				4
Cumulative effect of accounting change, net			—				—				—				(3	)
Net income		$	189			$	219			$	332			$	423
Earnings per common share:
Basic:
Income from continuing operations before cumulative effect of accounting change, net		$	.50			$	.54			$	.87			$	1.05
Income from discontinued operations, net			.01				.01				.01				.01
Cumulative effect of accounting change, net			—				—				—				(.01	)
Net income		$	.51			$	.55			$	.88			$	1.05
Diluted:
Income from continuing operations before cumulative effect of accounting change, net		$	.50			$	.53			$	.86			$	1.04
Income from discontinued operations, net			.01				.01				.01				.01
Cumulative effect of accounting change, net			—				—				—				(.01	)
Net income		$	.51			$	.54			$	.87			$	1.04
Cash dividends per common share:
Declared		$	.23			$	.22			$	.46			$	.44
Paid		$	.23			$	.22			$	.45			$	.42

See notes to condensed consolidated financial statements.

MASCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the Six Months Ended June 30, 2007 and 2006
(In Millions)

		Six Months Ended
		June 30,
		2007				2006
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations		$	538			$	703
(Increase) in receivables			(257	)			(306	)
(Increase) in inventories			(9	)			(178	)
Increase in accounts payable and accrued liabilities, net			109				150
Net cash from operating activities			381				369
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt			15				41
Payment of debt			(9	)			(19	)
Retirement of notes			(1,125	)			(827	)
Issuance of notes, net of issuance costs			596				—
Purchase of Company common stock			(640	)			(614	)
Issuance of Company common stock			58				21
Cash dividends paid			(175	)			(174	)
Net cash (for) financing activities			(1,280	)			(1,572	)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures			(116	)			(211	)
Purchases of marketable securities			—				(126	)
Proceeds from disposition of:
Marketable securities			37				136
Other financial investments, net			37				19
Businesses, net of cash disposed			4				50
Property and equipment			28				4
Acquisition of businesses, net of cash acquired			(190	)			(5	)
Other, net			(17	)			(29	)
Net cash (for) investing activities			(217	)			(162	)
Effect of exchange rate changes on cash and cash investments			12				7
CASH AND CASH INVESTMENTS:
(Decrease) for the period			(1,104	)			(1,358	)
At January 1			1,958				1,964
Cash at businesses held for sale			(1	)			—
At June 30		$	853			$	606

See notes to condensed consolidated financial statements.

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

A.		In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, of a normal recurring nature, necessary to present fairly its financial position as at June 30, 2007 and the results of operations for the three months and six months ended June 30, 2007 and 2006 and cash flows for the six months ended June 30, 2007 and 2006. The condensed consolidated balance sheet at December 31, 2006 was derived from audited financial statements.
		Certain prior-year amounts have been reclassified to conform to the 2007 presentation in the condensed consolidated financial statements. The results of operations related to 2007 and 2006 discontinued operations have been separately stated in the accompanying condensed consolidated statements of income for the three months and six months ended June 30, 2007 and 2006. In the Company’s condensed consolidated statements of cash flows for the six months ended June 30, 2007 and 2006, cash flows of discontinued operations are not separately classified.
		Recently Issued Accounting Pronouncements. In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of SFAS No. 115,” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The adoption of SFAS No. 159 is effective January 1, 2008. The Company is currently evaluating the impact that the provisions of SFAS No. 159 will have on its consolidated financial statements.
B.		The Company’s 2005 Long Term Stock Incentive Plan (the “2005 Plan”) replaced the 1991 Long Term Stock Incentive Plan (the “1991 Plan”) in May 2005 and provides for the issuance of stock-based incentives in various forms. At June 30, 2007, outstanding stock-based incentives were in the form of restricted long-term stock awards, stock options, phantom stock awards and stock appreciation rights. Additionally, the Company’s 1997 Non-Employee Directors Stock Plan (the “1997 Plan”) provides for the payment of part of the compensation to non-employee Directors in Company common stock. Pre-tax compensation expense (income) and the related income tax benefit for stock-based incentives were as follows, in millions:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Restricted long-term stock awards		$	13			$	13			$	29			$	31
Stock options			16				9				25				18
Phantom stock awards and stock appreciation rights			3				(3	)			(2	)			(1	)
Total		$	32			$	19			$	52			$	48
Income tax benefit		$	12			$	7			$	19			$	18

     Restricted Long-Term Stock Awards

Long-term stock awards are granted to key employees and non-employee Directors of the Company and do not cause net share dilution inasmuch as the Company continues the practice of repurchasing and retiring an equal number of shares on the open market.

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note B — continued:

The Company’s long-term stock award activity was as follows, shares in millions:

		Six Months Ended
		June 30,
		2007				2006
Unvested stock award shares, January 1			9				9
Weighted average grant date fair value		$	27			$	25
Stock award shares granted			1				1
Weighted average grant date fair value		$	32			$	30
Stock award shares vested			1				1
Weighted average grant date fair value		$	26			$	24
Stock award shares forfeited			—				—
Weighted average grant date fair value		$	28			$	26
Unvested stock award shares, June 30			9				9
Weighted average grant date fair value		$	27			$	26

At June 30, 2007, there was $193 million of unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of seven years.

The total market value (at the vesting date) of stock award shares which vested during the six months ended June 30, 2007 was $32 million.

     Stock Options

Stock options are granted to key employees and non-employee Directors of the Company. The exercise price equals the market price of the Company’s common stock at the grant date. These options generally become exercisable (vest ratably) over five years beginning on the first anniversary from the date of grant and expire no later than 10 years after the grant date. The 2005 Plan does not permit the granting of restoration stock options, except for restoration options resulting from options previously granted under the 1991 Plan. Restoration stock options become exercisable six months from the date of grant.

The Company granted 4,593,000 of stock option shares, including restoration stock option shares, in the first half of 2007 with a grant date exercise price range of $27 to $34 per share. In the first half of 2007, 1,323,000 stock option shares were forfeited (including options that expired unexercised).

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note B — continued:

The Company’s stock option activity was as follows, shares in millions:

		Six Months Ended
		June 30,
		2007				2006
Option shares outstanding, January 1			26				27
Weighted average exercise price		$	26			$	26
Option shares granted, including restoration options			5				—
Weighted average exercise price		$	30			$	31
Option shares exercised			3				3
Aggregate intrinsic value on date of exercise (A)		$26 million				$18 million
Weighted average exercise price		$	23			$	25
Option shares forfeited			1				1
Weighted average exercise price		$	30			$	31
Option shares outstanding, June 30			27				23
Weighted average exercise price		$	27			$	26
Weighted average remaining option term (in years)			6				6
Option shares vested and expected to vest, June 30			26				23
Weighted average exercise price		$	27			$	26
Aggregate intrinsic value (A)		$61 million				$98 million
Weighted average remaining option term (in years)			7				6
Option shares exercisable (vested), June 30			12				13
Weighted average exercise price		$	25			$	24
Aggregate intrinsic value (A)		$46 million				$75 million
Weighted average remaining option term (in years)			5				5

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note B — concluded:

The weighted average grant date fair value of option shares granted and the assumptions used to estimate those values using a Black-Scholes option pricing model, were as follows:

		Six Months Ended
		June 30,
		2007				2006
Weighted average grant date fair value		$	9.13			$	7.20
Risk-free interest rate			4.79	%			4.90	%
Dividend yield			2.93	%			2.62	%
Volatility factor			31.85	%			27.20	%
Expected option life		7 years				4 years

C.

During the first half of 2007, the Company acquired several relatively small installation service businesses (Installation and Other Services segment), as well as Erickson Construction Company and Guy Evans, Inc. (Installation and Other Services segment). Erickson Construction Company provides pre-fabricated wall panels and millwork for residential builders in Arizona, California and Nevada and is headquartered in Arizona. Guy Evans, Inc. is an installer of millwork, doors, windows and bath hardware for residential builders in California and Nevada and is headquartered in California. These two acquisitions allow the Company to expand the products and services it offers to its customers, and had combined annual sales of approximately $200 million. The results of these acquisitions are included in the consolidated financial statements from the respective dates of acquisition. The aggregate net purchase price for all of these acquisitions was $188 million and included cash of $183 million and debt of $5 million.

D.		During the second quarter of 2007, the Company determined that a European business unit in the Decorative Architectural Products segment was not core to the Company’s long-term growth strategy, and, accordingly, embarked on a plan of disposition. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has accounted for this business unit, as well as a business unit which was sold in 2006, as discontinued operations.
		Selected financial information for the discontinued operations during the period owned by the Company, and the gains reflecting the receipt of final purchase price payments, net of additional expenses related to discontinued operations in prior years (net gain of $2 million and $3 million, respectively, for the three months and six months ended June 30, 2007), was as follows, in millions:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Net sales		$	19			$	35			$	35			$	67
Income from discontinued operations		$	2			$	3			$	2			$	5
Gain on disposal of discontinued operations, net			2				2				3				1
Income before income taxes			4				5				5				6
Income taxes			(1	)			(1	)			(1	)			(2	)
Income from discontinued operations, net		$	3			$	4			$	4			$	4

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note D — concluded:

		In April 2007, the Company completed the sale of a small business unit for cash proceeds of $3 million, and in July 2007, the Company completed the sale of another small business unit for cash proceeds of $8 million. These small business units in the Plumbing Products segment had combined net sales and operating profit of $33 million and $3 million, respectively, for the year ended December 31, 2006 and were included in continuing operations through their respective dates of sale. The Company recognized a net loss of $6 million in the second quarter of 2007, included in other, net, in continuing operations, related to the sale of these business units.
		The assets ($73 million) and liabilities ($20 million) of the 2007 discontinued operation and the small business unit sold in July 2007 have been included in assets and liabilities held for sale included in other assets and deferred income taxes and other, respectively, in the Company’s condensed consolidated balance sheet at June 30, 2007.
E.		The changes in the carrying amount of goodwill for the six months ended June 30, 2007, by segment, were as follows, in millions:

		Balance												Balance
		Dec. 31, 2006				Additions(A)				Other(B)				June 30, 2007
Cabinets and Related Products		$	288			$	—			$	2			$	290
Plumbing Products			504				41				9				554
Installation and Other Services			1,740				72				(1	)			1,811
Decorative Architectural Products			300				—				—				300
Other Specialty Products			1,125				1				5				1,131
Total		$	3,957			$	114			$	15			$	4,086

	(A)		Additions include acquisitions.
	(B)		Other principally includes the effect of foreign currency translation and purchase price adjustments related to prior-year acquisitions.

Other indefinite-lived intangible assets were $257 million and $246 million at June 30, 2007 and December 31, 2006, respectively, and principally included registered trademarks. The carrying value of the Company’s definite-lived intangible assets was $118 million and $60 million at June 30, 2007 and December 31, 2006, respectively (net of accumulated amortization of $59 million and $51 million at June 30, 2007 and December 31, 2006, respectively) and principally included customer relationships and non-compete agreements.

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

F.		Depreciation and amortization expense was $124 million and $126 million for the six months ended June 30, 2007 and 2006, respectively.
G.		The Company has maintained investments in marketable securities and a number of private equity funds, principally as part of its tax planning strategies, as any gains enhance the utilization of any current and future tax capital losses. Financial investments included in other assets were as follows, in millions:

		June 30,				December 31,
		2007				2006
Marketable securities		$	31			$	72
Asahi Tec Corporation — common and preferred stock			51				—
TriMas Corporation			30				30
Private equity funds			189				211
Metaldyne Corporation			—				57
Other investments			17				9
Total		$	318			$	379

The Company’s investments in available-for-sale securities at June 30, 2007 (including TriMas Corporation and the Asahi Tec Corporation common and preferred stock) and December 31, 2006 were as follows, in millions:

						Pre-tax Unrealized								Recorded
		Cost Basis				Gains				Losses				Basis
June 30, 2007		$	117			$	3			$	(8	)		$	112
December 31, 2006		$	67			$	9			$	(4	)		$	72

Income from financial investments, net, included in other, net, within other income (expense), net, was as follows, in millions:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Realized gains from marketable securities		$	—			$	4			$	7			$	12
Realized losses from marketable securities			(2	)			(5	)			(2	)			(8	)
Dividend income from marketable securities			—				—				1				1
Income from other investments, net			8				12				23				13
Dividend income from other investments			1				1				5				6
Income from financial investments, net		$	7			$	12			$	34			$	24
Impairment charges:
Marketable securities		$	(6	)		$	—			$	(6	)		$	—
Private equity funds			(4	)			(32	)			(4	)			(32	)
Metaldyne Corporation			—				(40	)			—				(40	)
TriMas Corporation			—				(6	)			—				(6	)
Impairment charges		$	(10	)		$	(78	)		$	(10	)		$	(78	)

Note G — concluded:

On January 11, 2007, the acquisition of Metaldyne by Asahi Tec Corporation (“Asahi Tec”), a Japanese automotive supplier, was finalized. The combined fair value of the Asahi Tec common and preferred stock, as well as the derivative related to the conversion feature on the preferred stock, received in exchange for the Company’s investment in Metaldyne, was $72 million. The Asahi Tec common and preferred stock are restricted from sale for up to 24 months from the transaction date. The preferred stock accrues dividends at an annual rate of 3.75% pay-in-kind or 1.75% cash at the discretion of Asahi Tec; the Company has elected to record such dividends when cash proceeds are received. As a result of the transaction, the Company recognized a gain of $14 million, net of transaction fees, included in the Company’s consolidated statement of income for the six months ended June 30, 2007, in income from other investments, net. Any unrealized gains or losses related to the change in fair value of the Asahi Tec common and preferred stock at June 30, 2007 have been recognized, net of tax, through shareholders’ equity, as a component of other comprehensive income in the Company’s consolidated balance sheet. For the six months ended June 30, 2007, the unrealized loss of $11 million, related to the fair value of the derivative related to the conversion feature on the preferred stock, has been included in the Company’s consolidated statement of income, in income from other investments, net. At June 30, 2007, the Company had a net investment in Asahi Tec of $58 million, including $51 million of common and preferred stock and $7 million, included in other investments, related to the conversion derivative.

In addition, immediately prior to its sale, Metaldyne Corporation distributed shares of TriMas Corporation common stock as a dividend to the holders of Metaldyne common stock; the Company recognized $4 million included in the Company’s consolidated statement of income, in dividend income from other investments. In May 2007, TriMas Corporation made an initial public offering; subsequent to the offering, any unrealized gains or losses related to the change in fair value of the TriMas Corporation common stock have been recognized, net of tax, through shareholders’ equity, as a component of other comprehensive income in the Company’s consolidated balance sheet.

In the second quarter of 2007, the Company determined that the decline in the estimated value of a certain private equity fund investment, with a carrying value of $11 million prior to the impairment, was other-than-temporary. Accordingly, in the second quarter of 2007, the Company recognized a non-cash, pre-tax impairment charge of $4 million.

The remaining private equity fund investments at June 30, 2007 and December 31, 2006, with an aggregate carrying value of $182 million and $211 million, respectively, were not evaluated for impairment, as there were no indicators of impairment or identified events or changes in circumstances that would have a significant adverse effect on the fair value of the investments.

For its investments in marketable securities, the Company reviews industry analyst reports, key ratios and statistics, market analyses and other factors for each investment to determine if an unrealized loss is other-than-temporary. Based upon this review, in the second quarter of 2007, the Company recognized a non-cash, pre-tax impairment charge of $6 million related to its investment in Furniture Brands International (NYSE: FBN) common stock.

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

H.		On January 20, 2007, holders of $1.8 billion (94 percent) principal amount at maturity of the Zero Coupon Convertible Senior Notes (“Notes”) required the Company to repurchase their Notes at a cash value of $825 million. As a result of this repurchase, a $93 million deferred income tax liability is payable in 2007. Subsequent to the repurchase, there were outstanding $108 million principal amount at maturity of such Notes, with an accreted value of $51 million, which has been included in long-term debt at June 30, 2007, as the next put option date is July 20, 2011. The Company may at any time redeem all or part of the Notes at their then accreted value.
		In the first half of 2007, the Company also retired $300 million of floating-rate notes due March 9, 2007. On March 14, 2007, the Company issued $300 million of floating-rate notes due 2010; the interest rate is determined based upon the three-month LIBOR plus 30 basis points. On March 14, 2007, the Company also issued $300 million of fixed-rate 5.85% notes due 2017. These debt issuances provided net proceeds of $596 million and were in consideration of the March 2007 and upcoming August 2007 debt maturities.
I.		At June 30, 2007 and December 31, 2006, the Company did not have a balance in paid-in capital due to the repurchases of Company common stock. The Company’s activity in retained earnings and paid-in capital was as follows, in millions:

		Six Months Ended				Twelve Months Ended
		June 30, 2007				December 31, 2006
Balance at January 1		$	3,575			$	4,286
Net income			332				488
Shares issued			109				56
Shares retired:
Repurchased			(618	)			(825	)
Surrendered (non-cash)			(11	)			(19	)
Cash dividends declared			(175	)			(352	)
Stock-based compensation			47				117
Cumulative effect of accounting change regarding income tax uncertainties (Note Q)			(26	)			—
Other			(7	)			—
Reclassification of stock award activity			—				(176	)
Balance at end of period		$	3,226			$	3,575

     The Company’s total comprehensive income was as follows, in millions:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Net income		$	189			$	219			$	332			$	423
Other comprehensive income (loss):
Cumulative translation adjustments			32				84				44				104
Unrealized (loss) on marketable securities, net			(1	)			(7	)			(5	)			(5	)
Prior service cost and net loss, net			1				1				2				1
Total comprehensive income		$	221			$	297			$	373			$	523

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note I — concluded:

The unrealized (loss) on marketable securities, net, is net of income tax (benefit) of $(2) million for the six months ended June 30, 2007, and $(5) million and $(4) million for the three months and six months ended June 30, 2006, respectively. The prior service cost and net loss, net, is net of income tax of $1 million and $2 million for the three months and six months ended June 30, 2007, respectively.

The components of accumulated other comprehensive income were as follows, in millions:

		June 30, 2007				December 31, 2006
Cumulative translation adjustments		$	671			$	627
Unrealized (loss) gain on marketable securities, net			(2	)			3
Unrecognized prior service cost and net loss, net			(116	)			(118	)
Accumulated other comprehensive income		$	553			$	512

		The unrealized (loss) gain on marketable securities, net, is reported net of income tax (benefit) of $(2) million and $2 million at June 30, 2007 and December 31, 2006, respectively. The unrecognized prior service cost and net loss, net, is reported net of income tax benefit of $64 million and $66 million at June 30, 2007 and December 31, 2006, respectively.
J.		As part of the December 2002 agreement relating to the Company’s acquisition of an additional 37 percent equity ownership of Hansgrohe AG, in May 2007, certain minority shareholders (representing four percent of Hansgrohe outstanding shares) required the Company to purchase such shares of Hansgrohe with Company common stock. In May 2007, the Company issued two million shares of Company common stock with a value of $56 million for the additional ownership in Hansgrohe, resulting in a majority ownership of approximately 68 percent. The aggregate minority interest, net of dividends, of $97 million and $108 million at June 30, 2007 and December 31, 2006, respectively, was recorded in the caption deferred income taxes and other liabilities on the Company’s condensed consolidated balance sheets.

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

K.

Net periodic pension cost for the Company’s defined-benefit pension plans was as follows, in millions:

		Three Months Ended June 30,
		2007								2006
		Qualified				Non-Qualified				Qualified				Non-Qualified
Service cost		$	4			$	1			$	5			$	1
Interest cost			11				2				11				2
Expected return on plan assets			(13	)			—				(12	)			—
Amortization of prior service cost			—				—				1				1
Amortization of net loss			2				—				1				1
Net periodic pension cost		$	4			$	3			$	6			$	5

		Six Months Ended June 30,
		2007								2006
		Qualified				Non-Qualified				Qualified				Non-Qualified
Service cost		$	9			$	2			$	10			$	2
Interest cost			23				4				22				4
Expected return on plan assets			(26	)			—				(24	)			—
Amortization of prior service cost			—				—				1				1
Amortization of net loss			3				1				3				2
Net periodic pension cost		$	9			$	7			$	12			$	9

The Company recognized $2 million and $4 million pre-tax of net loss in net periodic pension cost from accumulated other comprehensive income for the three months and six months ended June 30, 2007, respectively.

In the first half of 2007, the Company contributed approximately $8 million to its qualified funded defined benefit pension plans; the Company expects to contribute $32 million to such plans for the full-year 2007.

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

L.

Information about the Company by segment and geographic area was as follows, in millions:

		Three Months Ended June 30,																Six Months Ended June 30,
		2007				2006				2007				2006				2007				2006				2007				2006
		Net Sales(A)								Operating Profit								Net Sales(A)								Operating Profit
The Company’s operations by segment were:
Cabinets and Related Products		$	737			$	863			$	96			$	123			$	1,428			$	1,715			$	168			$	244
Plumbing Products			886				842				97				90				1,739				1,639				174				156
Installation and Other Services			699				812				58				95				1,337				1,618				88				190
Decorative Architectural Products			534				509				114				121				954				905				207				198
Other Specialty Products			292				328				44				65				555				631				77				109
Total		$	3,148			$	3,354			$	409			$	494			$	6,013			$	6,508			$	714			$	897
The Company’s operations by geographic area were:
North America		$	2,548			$	2,829			$	360			$	431			$	4,806			$	5,479			$	602			$	777
International, principally Europe			600				525				49				63				1,207				1,029				112				120
Total		$	3,148			$	3,354				409				494			$	6,013			$	6,508				714				897
General corporate expense, net											(49	)			(53	)											(100	)			(101	)
Gain on sale of corporate fixed assets, net											5				—												8				—
Operating profit											365				441												622				796
Other income (expense), net											(64	)			(99	)											(85	)			(129	)
Income from continuing operations before income taxes, minority interest and cumulative effect of accounting change, net										$	301			$	342											$	537			$	667

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

M.

Other, net, which is included in other income (expense), net, was as follows, in millions:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Income from cash and cash investments		$	9			$	5			$	23			$	19
Other interest income			2				1				2				2
Income from financial investments, net (Note G)			7				12				34				24
Other items, net			(3	)			14				(2	)			21
Total		$	15			$	32			$	57			$	66

		Other items, net, for both the three months and six months ended June 30, 2007 included $3 million of currency transaction gains. Other items, net, for the three months and six months ended June 30, 2006 included $7 million and $11 million, respectively, of currency transaction gains.
N.		Reconciliations of the numerators and denominators used in the computations of basic and diluted earnings per common share were as follows, in millions:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Numerator (basic and diluted):
Income from continuing operations before cumulative effect of accounting change, net		$	186			$	215			$	328			$	422
Income from discontinued operations, net			3				4				4				4
Cumulative effect of accounting change, net			—				—				—				(3	)
Net income		$	189			$	219			$	332			$	423
Denominator:
Basic common shares (based upon weighted average)			370				396				376				401
Add:
Contingent common shares			3				4				4				4
Stock option dilution			1				2				1				2
Diluted common shares			374				402				381				407

Income per common share amounts for the first two quarters of 2007 and 2006 do not total to the per common share amounts for the six months ended June 30, 2007 and 2006 due to the timing of common stock repurchases.

For both the three months and six months ended June 30, 2007 and 2006, the Company did not include any common shares related to the Zero Coupon Convertible Senior Notes (“Notes”) in the calculation of diluted earnings per common share, as the price of the Company’s common stock at June 30, 2007 and 2006 did not exceed the equivalent accreted value of the Notes.

ASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

Note N — concluded:

Additionally, 20 million common shares and 19 million common shares for the three months and six months ended June 30, 2007, respectively, and 12 million common shares for both the three months and six months ended June 30, 2006, related to stock options were excluded from the computation of diluted earnings per common share due to their antidilutive effect.

Common shares outstanding included on the Company’s consolidated balance sheet and for the calculation of earnings per common share do not include unvested stock awards (nine million common shares at June 30, 2007); shares outstanding for legal requirements include all common shares that have voting rights (including unvested stock awards).

In the first half of 2007, the Company repurchased and retired 22 million shares of Company common stock for cash aggregating $640 million. At June 30, 2007, the Company had 14 million shares of its common stock remaining under the 2006 authorization. In July 2007, the Company’s Board of Directors authorized the repurchase of up to 50 million shares for retirement of the Company’s common stock in open-market transactions or otherwise, replacing the previous Board of Directors’ authorization established in May 2006.

O.

The Company is subject to lawsuits and pending or asserted claims with respect to matters generally arising in the ordinary course of business.

As previously disclosed, a lawsuit has been brought against the Company and a number of its insulation installation companies in the federal court in Atlanta, Georgia alleging that certain practices violate provisions of the federal antitrust laws; the complaint requests class action certification. Consistent with its position regarding several similar lawsuits that have been dismissed, the Company is vigorously defending this lawsuit as well as several other similar lawsuits that were recently filed. The Company believes that the conduct of the Company and its insulation installation companies, which have been the subject of these lawsuits, has not violated any antitrust laws. The Company is unable at this time to reliably estimate any potential liability which might occur from an adverse judgment but does not believe that any adverse judgment would have a material adverse effect on its businesses or the methods used by its insulation installation companies in doing business.

As previously disclosed, a lawsuit has been brought against the Company’s Milgard Manufacturing subsidiary, in the Solano County, California Superior Court, alleging design defects in certain Milgard aluminum windows. Plaintiffs are appealing the trial court’s August 2006 denial of their motion for class certification. The Company is vigorously defending the case and believes that its window products have not been manufactured with the alleged design defects. The Company believes that it will not incur material liability as a result of this lawsuit.

As previously disclosed, European governmental authorities are investigating possible anticompetitive business practices relating to the plumbing and heating industries in Europe. The investigations involve a number of European companies, including certain of the Company’s European manufacturing divisions and a number of other large businesses. The Company believes that it will not incur material liability as a result of the matters that are subject to these investigations.

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)

P.

The following is a reconciliation of the Company’s warranty liability, in millions:

		Six Months Ended				Twelve Months Ended
		June 30, 2007				December 31, 2006
Balance at January 1		$	120			$	105
Accruals for warranties issued during the period			28				69
Accruals related to pre-existing warranties			5				7
Settlements made (in cash or kind) during the period			(28	)			(62	)
Other, net			(7	)			1
Balance at end of period		$	118			$	120

Q.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109,” (“FIN No. 48”). FIN No. 48 allows the recognition of only those tax benefits that the Company estimates have a greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. FIN No. 48 also provides guidance on financial statement classification and disclosure, and the accounting for interest, penalties, interim periods and transition.

Historically, the Company has established reserves for tax contingencies in accordance with SFAS No. 5, “Accounting for Contingencies,” (“SFAS No. 5”). Under this standard, accounting reserves for tax contingencies are established when it is probable that an additional tax may be owed and the amount can be reasonably estimated. FIN No. 48 establishes a threshold for recognizing accounting reserves for income tax contingencies on uncertain tax positions lower than the threshold under SFAS No. 5. Therefore, as a result of adopting FIN No. 48, the Company has increased its accounting reserves for income tax contingencies (referred to by FIN No. 48 as “unrecognized tax benefits”) to approximately $91 million as of January 1, 2007, the date of adoption. If recognized, approximately $62 million, net of any federal tax benefit, would affect the Company’s effective tax rate. The cumulative effect of adopting FIN No. 48 resulted in a reduction to beginning retained earnings of approximately $26 million, net of any federal tax benefit, as of January 1, 2007, and the majority of the Company’s unrecognized tax benefits were reclassified from current to non-current liabilities in accordance with the provisions of FIN No. 48.

The Company files income tax returns in the U.S. Federal jurisdiction, and various local, state and foreign jurisdictions. The Internal Revenue Service (“IRS”) has completed their examination of the Company’s consolidated U.S. Federal tax returns through 2005. The proposed adjustments by the IRS are not material. Beginning with the 2006 consolidated U.S. Federal income tax return, the Company has been selected by the IRS to participate in the Compliance Assurance Program (“CAP”). CAP, a pilot program of the IRS, is a real-time audit of the Federal income tax return that allows the IRS, working in conjunction with the Company, to determine tax return compliance with the Federal tax law prior to filing the return. This program provides the Company with greater certainty about its tax liability for a given year within months, rather than years, of filing its annual tax return and greatly reduces the need for recording Federal unrecognized tax benefits. With few exceptions, the Company is no longer subject to state or foreign income tax examinations on filed returns for years before 2002.

MASCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (concluded)

Note Q — concluded:

The Company records interest and penalties on its unrecognized tax benefits in income tax expense. As of January 1, 2007, the Company had accrued approximately $19 million for interest and penalties.

During the second quarter of 2007, the Company recognized $5 million of income tax expense on various tax positions, including $1 million of interest and penalties. As a result of tax audit closings, settlements and the expiration of applicable statutes of limitations in various jurisdictions within the next 12 months, the Company anticipates that it is reasonably possible the unrecognized tax benefits could be reduced by approximately $14 million.

MASCO CORPORATION

Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SECOND QUARTER 2007 AND THE FIRST SIX MONTHS 2007 VERSUS
SECOND QUARTER 2006 AND THE FIRST SIX MONTHS 2006

SALES AND OPERATING PROFIT MARGINS

     The following table sets forth the Company’s net sales and operating profit margins by segment and geographic area, dollars in millions:

		Three Months Ended								Percent
		June 30,								(Decrease) Increase
		2007				2006				2007 vs. 2006
Net Sales:
Cabinets and Related Products		$	737			$	863				(15	%)
Plumbing Products			886				842				5	%
Installation and Other Services			699				812				(14	%)
Decorative Architectural Products			534				509				5	%
Other Specialty Products			292				328				(11	%)
Total		$	3,148			$	3,354				(6	%)
North America		$	2,548			$	2,829				(10	%)
International, principally Europe			600				525				14	%
Total		$	3,148			$	3,354				(6	%)

		Six Months Ended
		June 30,
		2007				2006
Net Sales:
Cabinets and Related Products		$	1,428			$	1,715				(17	%)
Plumbing Products			1,739				1,639				6	%
Installation and Other Services			1,337				1,618				(17	%)
Decorative Architectural Products			954				905				5	%
Other Specialty Products			555				631				(12	%)
Total		$	6,013			$	6,508				(8	%)
North America		$	4,806			$	5,479				(12	%)
International, principally Europe			1,207				1,029				17	%
Total		$	6,013			$	6,508				(8	%)