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 September 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)

(313) 274-7400
(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 October 30, 2007
Common stock, par value $1.00 per share		368,800,000

 

 

MASCO CORPORATION

INDEX

						Page No.
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements:
				Condensed Consolidated Balance Sheets - September 30, 2007 and December 31, 2006			1
				Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2007 and 2006			2
				Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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 2C.		Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.		Exhibits
		Signature
Computation of Ratio of Earnings
Certification by Chief Executive Officer Required by Rule 13a-14(a) or 15d-14(a)
Certification by Chief Financial Officer Required by Rule 13a-14(a) or 15d-14(a)
Certification Required by Rule 13a-14(b) or 15(d)-14(b)

MASCO CORPORATION

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

		September 30,				December 31,
		2007				2006
ASSETS
Current assets:
Cash and cash investments		$	690			$	1,958
Accounts and notes receivable, net			1,762				1,613
Prepaid expenses and other			320				281
Inventories:
Finished goods			600				610
Raw material			450				480
Work in process			157				173
			1,207				1,263
Total current assets			3,979				5,115
Property and equipment, net			2,351				2,363
Goodwill			4,108				3,957
Other intangible assets, net			371				306
Other assets			523				584
Total assets		$	11,332			$	12,325
LIABILITIES
Current liabilities:
Notes payable		$	24			$	1,446
Accounts payable			839				815
Accrued liabilities			1,149				1,128
Total current liabilities			2,012				3,389
Long-term debt			4,043				3,533
Deferred income taxes and other			1,074				932
Total liabilities			7,129				7,854
Commitments and contingencies
SHAREHOLDERS’ EQUITY
Common shares, par value $1 per share
Authorized shares: 1,400,000,000; Issued and outstanding: 2007 - 361,260,000; 2006 - 383,890,000			361				384
Retained earnings			3,216				3,575
Accumulated other comprehensive income			626				512
Total shareholders’ equity			4,203				4,471
Total liabilities and shareholders’ equity		$	11,332			$	12,325

See notes to condensed consolidated financial statements.

MASCO CORPORATION

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Net sales		$	3,059			$	3,279			$	9,072			$	9,787
Cost of sales			2,197				2,360				6,551				7,021
Gross profit			862				919				2,521				2,766
Selling, general and administrative expenses			488				520				1,525				1,561
Impairment charge for goodwill			—				—				—				10
Operating profit			374				399				996				1,195
Other income (expense), net:
Impairment charge for investments			(12	)			(8	)			(22	)			(86	)
Interest expense			(65	)			(54	)			(197	)			(171	)
Other, net			32				18				89				84
			(45	)			(44	)			(130	)			(173	)
Income from continuing operations before income taxes, minority interest and cumulative effect of accounting change, net			329				355				866				1,022
Income taxes			109				123				302				354
Income from continuing operations before minority interest and cumulative effect of accounting change, net			220				232				564				668
Minority interest			11				7				27				21
Income from continuing operations before cumulative effect of accounting change, net			209				225				537				647
(Loss) income from discontinued operations, net			(4	)			27				—				31
Cumulative effect of accounting change, net			—				—				—				(3	)
Net income		$	205			$	252			$	537			$	675
Earnings per common share:
Basic:
Income from continuing operations before cumulative effect of accounting change, net		$	.57			$	.58			$	1.44			$	1.63
(Loss) income from discontinued operations, net			(.01	)			.07				—				.08
Cumulative effect of accounting change, net			—				—				—				(.01	)
Net income		$	.56			$	.65			$	1.44			$	1.70
Diluted:
Income from continuing operations before cumulative effect of accounting change, net		$	.57			$	.57			$	1.43			$	1.61
(Loss) income from discontinued operations, net			(.01	)			.07				—				.08
Cumulative effect of accounting change, net			—				—				—				(.01	)
Net income		$	.56			$	.64			$	1.43			$	1.68
Cash dividends per common share:
Declared		$	.23			$	.22			$	.69			$	.66
Paid		$	.23			$	.22			$	.68			$	.64

See notes to condensed consolidated financial statements.

MASCO CORPORATION

For the Nine Months Ended September 30, 2007 and 2006
(In Millions)

		Nine Months Ended
		September 30,
		2007				2006
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations		$	850			$	1,048
(Increase) in receivables			(137	)			(191	)
Decrease (increase) in inventories			67				(178	)
Increase in accounts payable and accrued liabilities, net			35				94
Net cash from operating activities			815				773
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt			2				43
Payment of debt			(34	)			(22	)
Retirement of notes			(1,425	)			(827	)
Issuance of notes, net of issuance costs			596				—
Purchase of Company common stock			(804	)			(789	)
Issuance of Company common stock			60				25
Cash dividends paid			(262	)			(262	)
Net cash (for) financing activities			(1,867	)			(1,832	)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures			(174	)			(282	)
Purchases of auction rate securities			(1,047	)			(503	)
Proceeds from disposition of auction rate securities			1,025				569
Purchases of marketable securities			—				(141	)
Proceeds from disposition of:
Marketable securities			53				151
Other financial investments, net			63				36
Businesses, net of cash disposed			11				145
Property and equipment			41				4
Acquisition of companies, net of cash acquired			(190	)			(15	)
Other, net			(25	)			(42	)
Net cash (for) investing activities			(243	)			(78	)
Effect of exchange rate changes on cash and cash investments			31				11
CASH AND CASH INVESTMENTS:
(Decrease) for the period			(1,264	)			(1,126	)
At January 1			1,958				1,870
Cash at businesses held for sale			(4	)			—
At September 30		$	690			$	744

See notes to condensed consolidated financial statements.

MASCO CORPORATION

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 at September 30, 2007 and the results of operations for the three months and nine months ended September 30, 2007 and 2006 and changes in cash flows for the nine months ended September 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 nine months ended September 30, 2007 and 2006. In the Company’s condensed consolidated statements of cash flows for the nine months ended September 30, 2007 and 2006, the 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 optional and is effective January 1, 2008. The Company has elected not to adopt SFAS No. 159.
B.		At September 30, 2007, outstanding stock-based incentives were in the form of 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								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Long-term stock awards		$	12			$	12			$	41			$	43
Stock options			11				18				36				36
Phantom stock awards and stock appreciation rights			(5	)			(1	)			(7	)			(2	)
Total		$	18			$	29			$	70			$	77
Income tax benefit		$	7			$	11			$	26			$	29

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:

		Nine Months Ended
		September 30,
		2007				2006
Unvested stock award shares, January 1			9				9
Weighted average grant date fair value		$	27			$	25
Stock award shares granted			2				2
Weighted average grant date fair value		$	31			$	29
Stock award shares vested			2				2
Weighted average grant date fair value		$	25			$	24
Stock award shares forfeited			—				—
Weighted average grant date fair value		$	28			$	26
Unvested stock award shares, September 30			9				9
Weighted average grant date fair value		$	28			$	27

		At September 30, 2007, there was $189 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 nine months ended September 30, 2007 was $47 million.
		Stock Options
		The Company granted 4,656,500 of stock option shares, including restoration stock option shares, in the first nine months of 2007 with a grant date exercise price range of $26 to $34 per share. In the first nine months of 2007, 1,847,400 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:

		Nine Months Ended
		September 30,
		2007				2006
Option shares outstanding, January 1			26				27
Weighted average exercise price		$	26			$	26
Option shares granted, including restoration options			5				4
Weighted average exercise price		$	30			$	27
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			2				1
Weighted average exercise price		$	30			$	30
Option shares outstanding, September 30			26				27
Weighted average exercise price		$	27			$	26
Weighted average remaining option term (in years)			7				6
Option shares vested and expected to vest, September 30			26				27
Weighted average exercise price		$	27			$	26
Aggregate intrinsic value (A)		$	16	million		$	67	million
Weighted average remaining option term (in years)			7				6
Option shares exercisable (vested), September 30			13				13
Weighted average exercise price		$	26			$	25
Aggregate intrinsic value (A)		$	14	million		$	51	million
Weighted average remaining option term (in years)			5				5

At September 30, 2007, there was $87 million of unrecognized compensation expense (using the Black-Scholes option pricing model at the grant date) related to unvested stock options; such options had a weighted average vesting period of three years.

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:

		Nine Months Ended
		September 30,
		2007				2006
Weighted average grant date fair value		$	9.11			$	8.31
Risk-free interest rate			4.79	%			4.90	%
Dividend yield			2.93	%			3.11	%
Volatility factor			31.85	%			34.21	%
Expected option life		7 years				7 years

C.		During the first nine months 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, headquartered in Arizona, provides pre-fabricated wall panels and millwork for residential builders in Arizona, California and Nevada. Guy Evans, Inc., headquartered in California, is an installer of millwork, doors, windows and bath hardware for residential builders in California and Nevada. These two acquisitions allow the Company to expand the products and services it offers to its customers, and had combined annual sales in 2006 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 assumed 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 net losses reflecting the anticipated sale of the 2007 discontinued operation, which offset gains related to the receipt of final purchase price payments related to discontinued operations in prior years, was as follows, in millions:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Net sales		$	19			$	33			$	54			$	100
Income from discontinued operations		$	—			$	3			$	2			$	8
(Loss) gain on disposal of discontinued operations, net			(4	)			50				(1	)			51
(Loss) income before income taxes			(4	)			53				1				59
Income tax			—				(26	)			(1	)			(28	)
(Loss) income from discontinued operations, net		$	(4	)		$	27			$	—			$	31

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

Note D – concluded:

		The assets ($67 million) and liabilities ($24 million) of the 2007 discontinued operation 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 September 30, 2007.
		During the first nine months of 2007, the Company completed the sale of two small business units for cash proceeds of $10 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 nine months ended September 30, 2007, included in other, net, in continuing operations, related to the sale of these business units.
E.		The changes in the carrying amount of goodwill for the nine months ended September 30, 2007, by segment, were as follows, in millions:

		Balance												Balance
		Dec. 31, 2006				Additions(A)				Other(B)				September 30, 2007
Cabinets and Related Products		$	288			$	—			$	5			$	293
Plumbing Products			504				41				21				566
Installation and Other Services			1,740				71				(1	)			1,810
Decorative Architectural Products			300				—				—				300
Other Specialty Products			1,125				1				13				1,139
Total		$	3,957			$	113			$	38			$	4,108

	(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 September 30, 2007 and December 31, 2006, respectively, and principally included registered trademarks. The carrying value of the Company’s definite-lived intangible assets was $114 million and $60 million at September 30, 2007 and December 31, 2006, respectively (net of accumulated amortization of $63 million and $51 million at September 30, 2007 and December 31, 2006, respectively) and principally included customer relationships and non-compete agreements.
F.		Depreciation and amortization expense was $185 million and $183 million for the nine months ended September 30, 2007 and 2006, respectively.

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

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:

		September 30,				December 31,
		2007				2006
Auction rate securities		$	19			$	—
Marketable securities			10				72
TriMas Corporation			33				30
Asahi Tec Corporation — common and preferred stock			54				—
Private equity funds			170				211
Metaldyne Corporation			—				57
Other investments			16				9
Total		$	302			$	379

The Company’s investments in available-for-sale securities at September 30, 2007 (including auction rate securities, TriMas Corporation and 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
September 30, 2007		$	118			$	4			$	(6	)		$	116
December 31, 2006		$	67			$	9			$	(4	)		$	72

Income from financial investments, net, included in other, net, within other income (expense), net, and impairment charges for financial investments were as follows, in millions:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Realized gains from marketable securities		$	2			$	—			$	9			$	12
Realized losses from marketable securities			(2	)			(1	)			(4	)			(9	)
Dividend income from marketable securities			—				1				1				2
Income from other investments, net			11				10				34				23
Dividend income from other investments			—				—				5				6
Income from financial investments, net		$	11			$	10			$	45			$	34
Impairment charges:
Private equity funds		$	(6	)		$	(8	)		$	(10	)		$	(40	)
Auction rate securities			(3	)			—				(3	)			—
Marketable securities			(3	)			—				(9	)			—
Metaldyne Corporation			—				—				—				(40	)
TriMas Corporation			—				—				—				(6	)
Impairment charges for financial investments		$	(12	)		$	(8	)		$	(22	)		$	(86	)

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

Note G – continued:

		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 nine months ended September 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 September 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 three months and nine months ended September 30, 2007, the unrealized loss of $5 million and $16 million, respectively, 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 September 30, 2007, the Company had a net investment in Asahi Tec of $57 million, including $54 million of common and preferred stock and $3 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.
		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 for the third quarter of 2007, the Company recognized a non-cash, pre-tax impairment charge of $3 million related to its investment in Asahi Tec (Tokyo Stock Exchange: 5606.T) common stock. For the nine months ended September 30, 2007, the Company recognized a non-cash, pre-tax impairment charge of $9 million related to its investments in Furniture Brands International (NYSE: FBN) and Asahi Tec common stock.
		During the quarter ended September 30, 2007, the Company determined that the decline in the estimated value of certain private equity fund investments, with an aggregate carrying value of $42 million prior to the impairment, was other-than-temporary. For the three months and nine months ended September 30, 2007, the Company recognized non-cash, pre-tax impairment charges of $6 million and $10 million, respectively.

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

Note G – concluded:

		The remaining private equity fund investments at September 30, 2007 and December 31, 2006, with an aggregate carrying value of $134 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.
		From time to time, the Company invests its excess cash in short-term financial instruments including auction rate securities. Auction rate securities are investment securities that have interest rates which are reset every 7, 28 and 35 days. During the quarter ended September 30, 2007, the Company revised the classification of investments in auction rate securities from cash and cash investments to available-for-sale securities. These securities are included in other assets on the consolidated balance sheet as of September 30, 2007. There were no investments in auction rate securities at December 31, 2006. The Company has also made corresponding adjustments to the condensed consolidated statement of cash flows for the periods ended September 30, 2007 and 2006, to reflect the gross cash purchases and sales of these securities in cash flows (for) investing activities. These changes in classification do not affect previously reported consolidated statements of income or cash flows from operating activities in any prior period. In the third quarter of 2007, the Company determined that the decline in the fair value of its auction rate securities was other-than-temporary, and recognized a non-cash, pre-tax impairment charge of $3 million related to these investments. The Company has $19 million in auction rate securities investments at September 30, 2007.
		Investments in auction rate securities were $94 million at December 31, 2005. For the years ended December 2006 and 2005, gross cash provided by and (used in) activities related to these investments was $1,129 million and $(1,035) million and $419 million and $(513) million, respectively; previously the net amounts had been included in cash and cash investments in the consolidated statements of cash flows. There was no activity related to these investments in 2004.
H.		On January 20, 2007, holders of $1.8 billion (94 percent) principal amount at maturity of the Company’s 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 was paid in 2007. Subsequent to the repurchase, there were outstanding $108 million principal amount at maturity of such Notes, with an accreted value of $52 million, which has been included in long-term debt at September 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 nine months of 2007, the Company also retired $300 million of floating-rate notes due March 9, 2007 and $300 million of 4.625% notes due August 15, 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 and August 2007 debt maturities.

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

I.

At September 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:

		Nine Months Ended				Twelve Months Ended
		September 30, 2007				December 31, 2006
Balance at January 1		$	3,575			$	4,286
Net income			537				488
Shares issued			109				56
Shares retired:
Repurchased			(775	)			(825	)
Surrendered (non-cash)			(15	)			(19	)
Cash dividends declared			(260	)			(352	)
Stock-based compensation			78				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		$	3,216			$	3,575

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Net income		$	205			$	252			$	537			$	675
Other comprehensive income (loss):
Cumulative translation adjustments, net			71				45				115				149
Unrealized (loss) on marketable securities, net			—				(1	)			(5	)			(6	)
Prior service cost and net loss, net			2				—				4				1
Total		$	278			$	296			$	651			$	819

		The unrealized (loss) on marketable securities, net, is net of income tax (benefit) of $(4) million for the nine months ended September 30, 2007, and $(4) million for the nine months ended September 30, 2006. The prior service cost and net loss, net is net of income tax of $2 million for the nine months ended September 30, 2007.
		The components of accumulated other comprehensive income were as follows, in millions:

		September 30,				December 31,
		2007				2006
Cumulative translation adjustments, net		$	742			$	627
Unrealized (loss) gain on marketable securities, net			(2	)			3
Unrecognized prior service cost and net loss, net			(114	)			(118	)
Total		$	626			$	512

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

Note I – concluded:

		The unrealized (loss) gain on marketable securities, net, is reported net of income tax (benefit) of $(2) million and $2 million at September 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 September 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 $107 million and $108 million at September 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.

K.

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

		Three Months Ended September 30,
		2007								2006
		Qualified				Non-Qualified				Qualified				Non-Qualified
Service cost		$	5			$	—			$	5			$	—
Interest cost			11				1				10				2
Expected return on plan assets			(12	)			—				(10	)			—
Amortization of prior service cost			—				1				—				—
Amortization of net loss			1				—				1				1
Net periodic pension cost		$	5			$	2			$	6			$	3

		Nine Months Ended September 30,
		2007								2006
		Qualified				Non-Qualified				Qualified				Non-Qualified
Service cost		$	14			$	2			$	15			$	2
Interest cost			34				5				32				6
Expected return on plan assets			(38	)			—				(34	)			—
Amortization of prior service cost			—				1				1				1
Amortization of net loss			4				1				4				3
Net periodic pension cost		$	14			$	9			$	18			$	12

		The Company recognized $2 million and $6 million of pre-tax net loss in net periodic pension cost from accumulated other comprehensive income for the three months and nine months ended September 30, 2007, respectively.
		In the first nine months of 2007, the Company contributed approximately $30 million to its qualified funded defined benefit pension plans.

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 September 30,																Nine Months Ended September 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		$	736			$	826			$	105			$	105			$	2,164			$	2,541			$	273			$	349
Plumbing Products			878				848				101				81				2,617				2,487				275				237
Installation and Other Services			689				814				60				89				2,026				2,432				148				279
Decorative Architectural Products			468				461				113				107				1,422				1,366				320				305
Other Specialty Products			288				330				39				69				843				961				116				178
Total		$	3,059			$	3,279			$	418			$	451			$	9,072			$	9,787			$	1,132			$	1,348
The Company’s operations by geographic area were:
North America		$	2,417			$	2,710			$	346			$	392			$	7,223			$	8,189			$	948			$	1,169
International, principally Europe			642				569				72				59				1,849				1,598				184				179
Total, as above		$	3,059			$	3,279				418				451			$	9,072			$	9,787				1,132				1,348
General corporate expense, net											(44	)			(52	)											(144	)			(153	)
Gain on sale of corporate fixed assets, net											—				—												8				—
Operating profit											374				399												996				1,195
Other income (expense), net											(45	)			(44	)											(130	)			(173	)
Income from continuing operations before income taxes, minority interest and cumulative effect of accounting change, net										$	329			$	355											$	866			$	1,022

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

M.

Other, net, which is included in other income (expense), net, included the following, in millions:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Income from cash and cash investments		$	8			$	6			$	31			$	25
Other interest income			—				—				2				2
Income from financial investments, net (Note G)			11				10				45				34
Other items, net			13				2				11				23
Total		$	32			$	18			$	89			$	84

Other items, net, for the three months and nine months ended September 30, 2007 included $8 million and $11 million, respectively, of realized currency gains. Other items, net, for the three months and nine months ended September 30, 2006 included $3 million and $14 million, respectively, of realized currency 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								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Numerator (basic and diluted):
Income from continuing operations before cumulative effect of accounting change, net		$	209			$	225			$	537			$	647
(Loss) income from discontinued operations, net			(4	)			27				—				31
Cumulative effect of accounting change, net			—				—				—				(3	)
Net income		$	205			$	252			$	537			$	675
Denominator:
Basic common shares (based on weighted average)			365				388				372				397
Add:
Contingent common shares			1				4				3				3
Stock option dilution			1				1				1				2
Diluted common shares			367				393				376				402

		Income per common share amounts for the first three quarters of 2007 and 2006 do not total to the per common share amounts for the nine months ended September 30, 2007 and 2006, respectively, due to the timing of common stock repurchases.
		For both the three months and nine months ended September 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 September 30, 2007 and 2006 did not exceed the equivalent accreted value of the Notes.

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

Note N – concluded:

		Additionally, 20 million and 19 million common shares, respectively, for the three months and nine months ended September 30, 2007, respectively and 17 million and 16 million common shares, respectively, for the three months and nine months ended September 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 balance sheet and for the calculation of earnings per common share do not include unvested stock awards (nine million common shares at September 30, 2007); shares outstanding for legal requirements include all common shares that have voting rights (including unvested stock awards).
		For the three months and nine months ended September 30, 2007, the Company repurchased and retired 7 million shares and 29 million shares, respectively, of Company common stock for cash aggregating $164 million and $804 million, respectively. In July 2007, the Company’s Board of Directors authorized the repurchase of up to 50 million shares for retirement of Company common stock in open-market transactions or otherwise, replacing the previous Board of Directors authorization established in 2006. At September 30, 2007, the Company had 43 million shares of its common stock remaining under the 2007 authorization.
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 are currently pending. 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.    A reconciliation of the Company’s warranty liability was as follows, in millions:

		Nine Months Ended				Twelve Months Ended
		September 30, 2007				December 31, 2006
Balance at January 1		$	120			$	105
Accruals for warranties issued during the period			42				69
Accruals related to pre-existing warranties			12				7
Settlements made (in cash or kind) during the period			(42	)			(62	)
Other, net (including currency translation)			(7	)			1
Balance at end of period		$	125			$	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 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 third quarter of 2007, the Company reduced its liability for unrecognized tax benefits, including interest and penalties, by approximately $14 million due primarily to the settlement and closing of certain tax audits in various jurisdictions. Of this reduction, approximately $4 million, net of any Federal tax benefit, reduced income tax expense in the third quarter of 2007.
		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 liability for unrecognized tax benefits could be reduced by approximately $10 million.

MASCO CORPORATION

Item 2.                                                              MANAGEMENT’S DISCUSSION AND ANALYSIS OF

THIRD QUARTER 2007 AND THE FIRST NINE MONTHS 2007 VERSUS
THIRD QUARTER 2006 AND THE FIRST NINE 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
		September 30,								Increase (Decrease)
		2007				2006				2007 vs. 2006
Net Sales:
Cabinets and Related Products		$	736			$	826				(11	%)
Plumbing Products			878				848				4	%
Installation and Other Services			689				814				(15	%)
Decorative Architectural Products			468				461				2	%
Other Specialty Products			288				330				(13	%)
Total		$	3,059			$	3,279				(7	%)
North America		$	2,417			$	2,710				(11	%)
International, principally Europe			642				569				13	%
Total		$	3,059			$	3,279				(7	%)

		Nine Months Ended
		September 30,
		2007				2006
Net Sales:
Cabinets and Related Products		$	2,164			$	2,541				(15	%)
Plumbing Products			2,617				2,487				5	%
Installation and Other Services			2,026				2,432				(17	%)
Decorative Architectural Products			1,422				1,366				4	%
Other Specialty Products			843				961				(12	%)
Total		$	9,072			$	9,787				(7	%)
North America		$	7,223			$	8,189				(12	%)
International, principally Europe			1,849				1,598				16	%
Total		$	9,072			$	9,787				(7	%)