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, 2008

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

      Large accelerated filer þ               Accelerated filer o                         Non-accelerated filer o                         Smaller reporting company o

                                        (Do not check if a smaller reporting company)

     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 28, 2008
Common stock, par value $1.00 per share		359,900,000

 

 

MASCO CORPORATION

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets — September 30, 2008 and December 31, 2007			1
Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2008 and 2007			2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007			3
Notes to Condensed Consolidated Financial Statements			4-20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21-27
Item 4. Controls and Procedures			28
PART II. OTHER INFORMATION			29-30
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2C. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signature
EX-12
EX-31.A
EX-31.B
EX-32

MASCO CORPORATION

September 30, 2008 and December 31, 2007
(In Millions, Except Share Data)

		September 30,				December 31,
		2008				2007
ASSETS
Current assets:
Cash and cash investments		$	1,030			$	922
Receivables			1,442				1,405
Prepaid expenses and other			284				355
Inventories:
Finished goods			556				552
Raw material			390				418
Work in process			134				156
			1,080				1,126
Total current assets			3,836				3,808
Property and equipment, net			2,194				2,367
Goodwill			3,888				3,938
Other intangible assets, net			316				323
Other assets			403				471
Total assets		$	10,637			$	10,907
LIABILITIES
Current liabilities:
Notes payable		$	115			$	122
Accounts payable			717				714
Accrued liabilities			1,068				1,072
Total current liabilities			1,900				1,908
Long-term debt			3,961				3,966
Deferred income taxes and other			1,026				1,008
Total liabilities			6,887				6,882
Commitments and contingencies
SHAREHOLDERS’ EQUITY
Common shares, par value $1 per share Authorized shares: 1,400,000,000; issued and outstanding: 2008 - 351,400,000; 2007 - 358,900,000			351				359
Preferred shares authorized: 1,000,000; issued and outstanding: 2008 - None; 2007 - None			—				—
Retained earnings			2,737				2,969
Accumulated other comprehensive income			662				697
Total shareholders’ equity			3,750				4,025
Total liabilities and shareholders’ equity		$	10,637			$	10,907

See notes to condensed consolidated financial statements.

MASCO CORPORATION

For the Three Months and Nine Months Ended September 30, 2008 and 2007
(In Millions Except Per Common Share Data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Net sales		$	2,528			$	3,005			$	7,621			$	8,897
Cost of sales			1,880				2,155				5,643				6,420
Gross profit			648				850				1,978				2,477
Selling, general and administrative expenses			452				479				1,413				1,493
Operating profit			196				371				565				984
Other income (expense), net:
Interest expense			(59	)			(65	)			(172	)			(197	)
Impairment charges for financial investments			(1	)			(12	)			(30	)			(22	)
Other, net			3				32				5				89
			(57	)			(45	)			(197	)			(130	)
Income from continuing operations before income taxes and minority interest			139				326				368				854
Income taxes			92				109				207				302
Income from continuing operations before minority interest			47				217				161				552
Minority interest			11				11				35				27
Income from continuing operations			36				206				126				525
(Loss) income from discontinued operations, net			(3	)			(1	)			(9	)			12
Net income		$	33			$	205			$	117			$	537
Earnings per common share:
Basic:
Income from continuing operations		$	.10			$	.56			$	.36			$	1.41
(Loss) income from discontinued operations, net			(.01	)			—				(.03	)			.03
Net income		$	.09			$	.56			$	.33			$	1.44
Diluted:
Income from continuing operations		$	.10			$	.56			$	.36			$	1.40
(Loss) income from discontinued operations, net			(.01	)			—				(.03	)			.03
Net income		$	.09			$	.56			$	.33			$	1.43
Cash dividends per common share:
Declared		$	.235			$	.23			$	.695			$	.69
Paid		$	.23			$	.23			$	.69			$	.68

See notes to condensed consolidated financial statements.

MASCO CORPORATION

For the Nine Months Ended September 30, 2008 and 2007
(In Millions)

		Nine Months Ended
		September 30,
		2008				2007
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Cash provided by operations		$	528			$	850
(Increase) in receivables			(104	)			(137	)
(Increase) decrease in inventories			(5	)			67
Increase in accounts payable and accrued liabilities, net			98				35
Net cash from operating activities			517				815
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Increase in debt			—				2
Payment of debt			(22	)			(34	)
Retirement of notes			—				(1,425	)
Issuance of notes, net of issuance costs			—				596
Purchase of Company common stock			(160	)			(804	)
Issuance of Company common stock			—				60
Dividends paid to minority interest			(22	)			(13	)
Cash dividends paid			(251	)			(262	)
Net cash (for) financing activities			(455	)			(1,880	)
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Capital expenditures			(142	)			(174	)
Purchases of auction rate securities			—				(1,047	)
Proceeds from disposition of auction rate securities			—				1,025
Proceeds from disposition of:
Marketable securities			10				53
Other financial investments, net			42				63
Businesses, net of cash disposed			179				11
Property and equipment			5				41
Acquisition of businesses, net of cash acquired			(19	)			(190	)
Other, net			(19	)			(12	)
Net cash from (for) investing activities			56				(230	)
Effect of exchange rate changes on cash and cash investments			(10	)			31
CASH AND CASH INVESTMENTS:
Increase (decrease) for the period			108				(1,264	)
Cash at businesses held for sale			—				(4	)
At January 1			922				1,958
At September 30		$	1,030			$	690

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, 2008 and the results of operations for the three months and nine months ended September 30, 2008 and 2007 and cash flows for the nine months ended September 30, 2008 and 2007. The condensed consolidated balance sheet at December 31, 2007 was derived from audited financial statements.
		Certain prior-year amounts have been reclassified to conform to the 2008 presentation in the condensed consolidated financial statements. The results of operations related to 2008 and 2007 discontinued operations have been separately stated in the accompanying condensed consolidated statements of income for the three months and nine months ended September 30, 2008 and 2007. In the Company’s condensed consolidated statements of cash flows for the nine months ended September 30, 2008 and 2007, cash flows of discontinued operations are not separately classified.
		Recently Issued Accounting Pronouncements. In March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” (“SFAS No. 161”). SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. The adoption of SFAS No. 161 is effective January 1, 2009 and the Company does not anticipate that this pronouncement will have a significant effect on its consolidated financial statements.
		In May 2008, the FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement),” (“FSP APB 14-1”). FSP APB 14-1 requires that issuers of convertible debt instruments that permit or require the issuer to pay cash upon conversion to separately account for the liability and equity components. The adoption of FSP APB 14-1 is effective January 1, 2009 and retrospective application is required. The Company has not determined what impact, if any, the adoption of FSP APB 14-1 will have on its consolidated financial statements.
		In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities,” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 requires that unvested share-based payment awards containing non-forfeited rights to dividends be included in the computation of earnings per common share. The adoption of FSP EITF 03-6-1 is effective January 1, 2009 and retrospective application is required. The Company has not determined what impact, if any, the adoption of FSP EITF 03-6-1 will have on its consolidated financial statements.
		In October 2008, the FASB issued FASB staff position No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active,” (“FSP No. 157-3”). FSP No. 157-3 clarifies the application of SFAS No. 157 to financial assets in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The adoption of FSP No. 157-3 is effective and did not have a significant impact on the condensed consolidated financial statements.

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

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 September 30, 2008, 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. The 1997 Plan expired in May 2007; subsequently, compensation to non-employee Directors in Company common stock will be made from the 2005 Plan. Pre-tax compensation expense (income) and the related income tax benefit, for these stock-based incentives, were as follows, in millions:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Long-term stock awards		$	10			$	12			$	33			$	41
Stock options			10				11				28				36
Phantom stock awards and stock appreciation rights			1				(5	)			(2	)			(7	)
Total		$	21			$	18			$	59			$	70
Income tax benefit		$	8			$	7			$	22			$	26

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

		Nine Months Ended
		September 30,
		2008				2007
Unvested stock award shares at January 1			9				9
Weighted average grant date fair value		$	28			$	27
Stock award shares granted			2				2
Weighted average grant date fair value		$	21			$	31
Stock award shares vested			2				2
Weighted average grant date fair value		$	26			$	25
Stock award shares forfeited			—				—
Weighted average grant date fair value		$	28			$	28
Unvested stock award shares at September 30			9				9
Weighted average grant date fair value		$	26			$	28

At September 30, 2008 and 2007, there was $172 million and $189 million, respectively, of total unrecognized compensation expense related to unvested stock awards; such awards had a weighted average remaining vesting period of seven years in both years.

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

Note B — continued:

		The total market value (at the vesting date) of stock award shares which vested during the nine months ended September 30, 2008 and 2007 was $29 million and $47 million, respectively.
		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 6,491,900 of stock option shares, including restoration stock option shares, in the nine months ended September 30, 2008 with a grant date exercise price approximating $19 per share. In the first nine months of 2008 813,530 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,
		2008				2007
Option shares outstanding, January 1			26				26
Weighted average exercise price		$	27			$	26
Option shares granted, including restoration options			6				5
Weighted average exercise price		$	19			$	30
Option shares exercised			—				3
Aggregate intrinsic value on date of exercise (A)		$	—	million		$	26	million
Weighted average exercise price		$	20			$	23
Option shares forfeited			1				2
Weighted average exercise price		$	27			$	30
Option shares outstanding, September 30			31				26
Weighted average exercise price		$	25			$	27
Weighted average remaining option term (in years)			7				7
Option shares vested and expected to vest, September 30			31				26
Weighted average exercise price		$	25			$	27
Aggregate intrinsic value (A)		$	—	million		$	16	million
Weighted average remaining option term (in years)			7				7
Option shares exercisable (vested), September 30			17				13
Weighted average exercise price		$	26			$	26
Aggregate intrinsic value (A)		$	—	million		$	14	million
Weighted average remaining option term (in years)			5				5

At September 30, 2008 and 2007, there was $68 million and $87 million, respectively, of unrecognized compensation expense (using the Black-Scholes option pricing model) related to unvested stock options; such options had a weighted average vesting period of three years in 2008 and three years in 2007.

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,
		2008				2007
Weighted average grant date fair value		$	3.72			$	9.11
Risk-free interest rate			3.25	%			4.79	%
Dividend yield			4.96	%			2.93	%
Volatility factor			32.00	%			31.85	%
Expected option life			6	years			7	years

C.		During the second quarter of 2008, the Company acquired a relatively small countertop business (Cabinet and Related Products segment). This business, which allows the Company to expand the products and services it offers to its customers, had annual sales of over $40 million. The results of this acquisition are included in the condensed consolidated financial statements from the date of acquisition. The aggregate net purchase price for this acquisition was $20 million and included cash of $18 million and future cash payments of $2 million.
D.		During the first quarter of 2008, the Company determined that several European business units were not core to the Company’s long-term growth strategy and, accordingly, embarked on a plan of disposition; the dispositions were completed in August 2008. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”), the Company has accounted for a 2007 disposition and the 2008 dispositions as discontinued operations.
		In the first quarter of 2008, the Company recognized a charge for those business units that were expected to be divested at a loss, which included estimated expenses for fees expected to be incurred. In the second quarter of 2008, the Company completed the sale of its European-based The Heating Group business unit for net proceeds of $146 million. Also, in the second quarter of 2008, the Company reduced its estimate of expenses for transaction fees associated with the discontinued operations by $5 million, which is included in the (loss) gain on disposal of discontinued operations, since the reduction in fees related to the sale of The Heating Group. In the third quarter of 2008, in separate transactions, the Company completed the sale of its European-based Glass Idromassaggio and Alfred Reinecke business units for combined net proceeds of $28 million. The impairment of assets related to the discontinued operations primarily includes the write-down of goodwill of $24 million and other assets of $21 million.

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

Note D — concluded:

		In the third quarter of 2008, the Company determined that one of its business units previously included in its plan for disposition would not be sold. Accordingly, the Company has reclassified the results of operations and the previously recorded impairment charge to continuing operations in the condensed consolidated statement of income. The related assets and liabilities were also reclassified out of assets and liabilities held for sale. In addition, the Company recognized pre-tax income of $6 million for the three months ended September 30, 2008 related to the reversal of the previously recorded impairment charge. The income resulted from an adjustment of the assets to the lower of the carrying value, prior to inclusion in assets held for sale, adjusted for depreciation expense, or current market value.
		Selected financial information for these discontinued operations was as follows, in millions:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Net sales		$	7			$	73			$	100			$	229
Income from discontinued operations		$	1			$	3			$	13			$	14
(Loss) gain on disposal of discontinued operations			(4	)			(4	)			3				(1	)
Impairment of assets held for sale			—				—				(45	)			—
(Loss)income before income tax			(3	)			(1	)			(29	)			13
Income tax benefit (expense)			—				—				20				(1	)
(Loss) income from discontinued operations, net		$	(3	)		$	(1	)		$	(9	)		$	12

		The after-tax charge for the impairment of assets held for sale was $24 million or $.07 per common share for the nine months ended September 30, 2008. The unusual relationship between income taxes and income (loss) before income taxes (excluding the impairment charge for assets held for sale) resulted primarily from certain losses providing no current tax benefit and from certain gains and income not being subject to income taxes. During the third quarter of 2008, the Company recorded other net expenses of $5 million included in (loss) gain on disposal of discontinued operations, reflecting the adjustment of certain liabilities related to businesses disposed in 2004.
		The 2008 discontinued operations were previously included in the Plumbing Products segment and the Other Specialty Products segment.

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

E.

The changes in the carrying amount of goodwill for the nine months ended September 30, 2008, by segment, were as follows, in millions:

										Deductions (B)
		At								Discontinued								At
		Dec. 31, 2007				Additions (A)				Operations				Other(C)				Sept. 30, 2008
Cabinets and Related Products		$	293			$	4			$	—			$	(5	)		$	292
Plumbing Products			499				—				—				(11	)			488
Installation and Other Services			1,816				1				—				1				1,818
Decorative Architectural Products			300				—				—				(6	)			294
Other Specialty Products			1,030				—				(24	)			(10	)			996
Total		$	3,938			$	5			$	(24	)		$	(31	)		$	3,888

		Other indefinite-lived intangible assets were $208 million at both September 30, 2008 and December 31, 2007, and principally included registered trademarks. The carrying value of the Company’s definite-lived intangible assets was $108 million (net of accumulated amortization of $68 million) at September 30, 2008 and $115 million (net of accumulated amortization of $67 million) at December 31, 2007, and principally included customer relationships and non-compete agreements.
F.		Depreciation and amortization expense was $179 million and $185 million for the nine months ended September 30, 2008 and 2007, respectively.
G.		The Company has maintained investments in available-for-sale 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,
		2008				2007
Asahi Tec Corporation — common and preferred stock		$	61			$	57
TriMas Corporation			16				26
Auction rate securities			22				22
Marketable securities			—				9
Private equity funds			153				173
Other investments			13				28
Total		$	265			$	315

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

Note G — continued:

The Company’s investments in available-for-sale securities at September 30, 2008 and December 31, 2007 (including marketable securities, auction rate securities, Asahi Tec Corporation common and preferred stock and TriMas Corporation) were as follows, in millions:

						Pre-tax
						Unrealized				Unrealized				Recorded
		Cost Basis				Gains				Losses				Basis
September 30, 2008		$	81			$	18			$	—			$	99
December 31, 2007		$	117			$	9			$	(12	)		$	114

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,
		2008				2007				2008				2007
Realized gains from marketable securities		$	—			$	2			$	—			$	9
Realized losses from marketable securities			—				(2	)			(3	)			(4	)
Dividend income from marketable securities			—				—				—				1
Income from other investments, net			—				11				3				35
Dividend income from other investments							—				—				5
Income from financial investments, net		$	—			$	11			$	—			$	46
Impairment charges:
Marketable securities		$	(1	)		$	(3	)		$	(1	)		$	(9	)
Private equity funds			—				(6	)			(7	)			(10	)
Auction rate securities			—				(3	)			—				(3	)
TriMas Corporation			—				—				(22	)			—
Impairment charges		$	(1	)		$	(12	)		$	(30	)		$	(22	)

For its investments in available-for-sale 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, during the first quarter of 2008, the Company determined that the decline in the value of its investment in TriMas Corporation common stock was other-than-temporary and, accordingly, recognized a non-cash, pre-tax impairment charge of $22 million. Based upon its review, during the third quarter of 2008, the Company determined that the decline in the value of its investment in Asahi Tec common stock was other-than-temporary and, accordingly, recognized a non-cash, pre-tax impairment charge of $1 million.

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

Note G — concluded:

		The Company’s investments in private equity funds and other private investments are carried at cost and are evaluated for potential impairment when impairment indicators are present, or when an event or change in circumstances has occurred, that may have a significant adverse effect on the fair value of the investment. Impairment indicators the Company considers include the following: a significant deterioration in earnings performance, asset quality or business prospects; a significant adverse change in the regulatory, economic or technological environment; a significant adverse change in the general market condition or geographic area in which the investment operates; and any bona fide offers to purchase the investment for less than the carrying value. Since there is no active trading market for these investments, they are for the most part illiquid. The Company determined that the decline in the estimated value of a private equity fund investment (with a carrying value of $15 million prior to the impairment) that also holds an investment in TriMas Corporation common stock was other-than-temporary and, accordingly, recognized a non-cash, pre-tax impairment charge of $4 million for the first quarter of 2008. During the second quarter of 2008, the Company also determined that the decline in the estimated value of a private equity fund investment (with a carrying value of $8 million prior to the impairment) was other-than-temporary and, accordingly, recognized a non-cash, pre-tax impairment charge of $3 million.
		The remaining private equity investments at September 30, 2008 and December 31, 2007, with an aggregate carrying value of $137 million and $119 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.
H.		At September 30, 2008 and December 31, 2007, 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, 2008				December 31, 2007
Balance at January 1		$	2,969			$	3,575
Net income			117				386
Shares issued			—				109
Shares retired:
Repurchased			(151	)			(826	)
Surrendered (non-cash)			(7	)			(14	)
Cash dividends declared			(252	)			(346	)
Stock-based compensation			61				118
Cumulative effect of accounting change regarding income tax uncertainties			—				(26	)
Other			—				(7	)
Balance at end of period		$	2,737			$	2,969

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

Note H — concluded:

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Net income		$	33			$	205			$	117			$	537
Other comprehensive (loss) income:
Cumulative translation adjustments			(158	)			71				(47	)			115
Unrealized gain (loss) on marketable securities, net			2				—				10				(5	)
Prior service cost and net loss, net			—				2				2				4
Total comprehensive (loss) income		$	(123	)		$	278			$	82			$	651

		The unrealized gain (loss) on marketable securities, net, is net of income tax (benefit) of $1 million and $6 million for the three months and nine months ended September 30, 2008, respectively, and $(4) million for the nine months ended September 30, 2007. The prior service cost and net loss, net, is net of income tax of $1 million and $2 million, respectively, for the nine months ended September 30, 2008 and 2007.
		The components of accumulated other comprehensive income were as follows, in millions:

		September 30,				December 31,
		2008				2007
Cumulative translation adjustments		$	723			$	770
Unrealized gain (loss) on marketable securities, net			6				(4	)
Unrecognized prior service cost and net loss, net			(67	)			(69	)
Accumulated other comprehensive income		$	662			$	697

		The unrealized gain (loss) on marketable securities, net, is reported net of income tax (benefit) of $3 million and $(3) million at September 30, 2008 and December 31, 2007, respectively. The unrecognized prior service cost and net loss, net, is reported net of income tax benefit of $38 million and $39 million at September 30, 2008 and December 31, 2007, respectively.
I.		The Company owns 68 percent of Hansgrohe AG. The aggregate minority interest, net of dividends, of $132 million and $117 million at September 30, 2008 and December 31, 2007, 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)

J.

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

		Three Months Ended September 30,
		2008								2007
		Qualified				Non-Qualified				Qualified				Non-Qualified
Service cost		$	4			$	—			$	5			$	—
Interest cost			12				3				11				1
Expected return on plan assets			(13	)			—				(12	)			—
Amortization of prior service cost			—				—				—				1
Amortization of net loss			—				—				1				—
Net periodic pension cost		$	3			$	3			$	5			$	2

		Nine Months Ended September 30,
		2008								2007
		Qualified				Non-Qualified				Qualified				Non-Qualified
Service cost		$	13			$	1			$	14			$	2
Interest cost			40				7				34				5
Expected return on plan assets			(43	)			—				(38	)			—
Amortization of prior service cost			—				—				—				1
Amortization of net loss			1				1				4				1
Net periodic pension cost		$	11			$	9			$	14			$	9

The Company recognized $2 million pre-tax net loss in net periodic pension cost from accumulated other comprehensive income for the nine months ended September 30, 2008. The Company recognized $2 million and $6 million 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.

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

K.

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

		Three Months Ended September 30,																Nine Months Ended September 30,
		2008				2007				2008				2007				2008				2007				2008				2007
		Net Sales(A)								Operating Profit								Net Sales(A)								Operating Profit
The Company’s operations by segment were:
Cabinets and Related Products		$	584			$	736			$	23			$	105			$	1,788			$	2,164			$	88			$	273
Plumbing Products			805				865				88				100				2,483				2,572				294				272
Installation and Other Services			492				689				10				60				1,486				2,026				8				148
Decorative Architectural Products			446				467				94				114				1,301				1,421				257				322
Other Specialty Products			201				248				16				36				563				714				37				105
Total		$	2,528			$	3,005			$	231			$	415			$	7,621			$	8,897			$	684			$	1,120
The Company’s operations by geographic area were:
North America		$	1,975			$	2,417			$	193			$	346			$	5,935			$	7,223			$	542			$	948
International, principally Europe			553				588				38				69				1,686				1,674				142				172
Total		$	2,528			$	3,005				231				415			$	7,621			$	8,897				684				1,120
General corporate expense, net											(32	)			(44	)											(110	)			(144	)
Gain on sale of corporate fixed assets, net											—				—												—				8
Charge for litigation settlement (B)											(9	)			—												(9	)			—
Income (charge) for planned disposition of business (C)											6				—												—				—
Operating profit											196				371												565				984
Other income (expense), net											(57	)			(45	)											(197	)			(130	)
Income from continuing operations before income taxes and minority interest										$	139			$	326											$	368			$	854

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

L.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Income from cash and cash investments		$	6			$	7			$	17			$	29
Other interest income			1				1				1				2
Income from financial investments, net (Note G)			—				11				—				46
Other items, net			(4	)			13				(13	)			12
Total		$	3			$	32			$	5			$	89

		Other items, net, included $4 million and $19 million of currency losses for the three months and nine months ended September 30, 2008, respectively. Other items, net, included $9 million and $12 million of currency gains for the three months and nine months ended September 30, 2007, respectively.
M.		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,
		2008				2007				2008				2007
Numerator (basic and diluted):
Income from continuing operations		$	36			$	206			$	126			$	525
(Loss) income from discontinued operations, net			(3	)			(1	)			(9	)			12
Net income		$	33			$	205			$	117			$	537
Denominator:
Basic common shares (based upon weighted average)			352				365				354				372
Add:
Contingent common shares			—				1				—				3
Stock option dilution			—				1				—				1
Diluted common shares			352				367				354				376

		Income per common share amounts for the first three quarters of 2008 do not total to the per common share amounts for the nine months ended September 30, 2008 due to the timing of common stock repurchases.
		For both the three months and nine months ended September 30, 2008 and 2007, 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, 2008 and 2007 did not exceed the equivalent accreted value of the Notes.
		Additionally, 32 million common shares for both the three months and nine months ended September 30, 2008, respectively, and 20 million and 19 million for the three months and nine months ended September 30, 2007, respectively, related to stock options were excluded from the computation of diluted earnings per common share due to their antidilutive effect.

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

Note M — concluded:

		In the first nine months of 2008, the Company repurchased and retired approximately nine million shares of Company common stock, for cash aggregating $160 million. At September 30, 2008, the Company had 32 million shares of its common stock remaining under the July 2007 Board of Directors repurchase authorization.
N.		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 one other similar lawsuit that is 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 alleging design defects in certain Milgard aluminum windows. The Company is vigorously defending the case and believes that its window products have not been manufactured with the alleged design defects. In May 2008, the California Court of Appeals affirmed the trial court’s denial of Plaintiffs’ motion for class certification, and the plaintiffs did not pursue an appeal to the California Supreme Court. The case has been remanded to the trial court and will be limited to the claims of the ten individual homeowner plaintiffs. 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.
		Several California-based installation subsidiaries of the Company were named as defendants in an alleged employment-related class action lawsuit arising under state law. The subsidiaries recently reached an agreement with the plaintiffs to settle this litigation for approximately $9 million, and the Company anticipates that a hearing will be conducted by the end of 2008 to obtain preliminary court approval of the settlement terms.

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

O.

Changes in the Company’s warranty liability were as follows, in millions:

		Nine Months Ended				Twelve Months Ended
		September 30, 2008				December 31, 2007
Balance at January 1		$	133			$	120
Accruals for warranties issued during the period			35				56
Accruals related to pre-existing warranties			5				16
Settlements made (in cash or kind) during the period			(41	)			(57	)
Discontinued operations			(1	)			—
Other, net			(7	)			(2	)
Balance at end of period		$	124			$	133

P.		During the first nine months of 2008, the Company recognized $4 million of income tax expense on various unrecognized tax benefits, including $2 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 liability for unrecognized tax benefits could be reduced by approximately $9 million.
		The increase in the effective tax rate for the first nine months of 2008 reflects the U.S. tax on anticipated dividend distributions from certain low-taxed foreign subsidiaries to utilize the Company’s foreign tax credit carryforward, combined with a decrease in the Company’s 2008 pre-tax income from continuing operations. The Company estimates that its effective tax rate should approximate 56 to 57 percent for the full-year 2008.
Q.		On January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” (“SFAS No. 157”) for its financial assets and liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” SFAS No. 157 further defines a fair value hierarchy, as follows: Level 1 inputs as quoted prices in active markets for identical assets or liabilities; Level 2 inputs as observable inputs other than Level 1 prices, such as quoted market prices for similar assets or liabilities or other inputs that are observable or can be corroborated by market data; and Level 3 inputs as unobservable inputs that are supported by little or no market activity and that are financial instruments whose value is determined using pricing models or instruments for which the determination of fair value requires significant management judgment or estimation.

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

Note Q — continued:

Financial assets and (liabilities) measured at fair value on a recurring basis during the period and the amounts for each level within the fair value hierarchy established by SFAS No. 157, were as follows, in millions:

						Fair Value Measurements Using
										Significant
						Quoted				Other				Significant
						Market				Observable				Unobservable
		Sept. 30,				Prices				Inputs				Inputs
		2008				(Level 1)				(Level 2)				(Level 3)
Asahi Tec Corporation:
Preferred stock		$	60			$	—			$	—			$	60
Common stock			1				1				—				—
Interest rate swaps			—				—				—				—
Foreign currency exchange contract			(18	)			—				(18	)			—
Auction rate securities			22				—				—				22
TriMas Corporation			16				16				—				—
Other investments			11				—				11				—
Total		$	92			$	17			$	(7	)		$	82

		The foreign currency exchange contracts are entered into to hedge currency fluctuations related to intercompany loans denominated in non-functional currencies. The loss on the foreign currency exchange contracts are more than offset by gains related to the translation of loans and accounts denominated in non-functional currencies.
		The preferred stock of Asahi Tec Corporation has been valued primarily using a discounted cash flow model, because there are currently no observable prices in an active market for the same or similar securities.
		The fair values of the auction rate securities held by the Company have been estimated based on a discounted cash flow model.
		The Company also has investments in private equity funds and other private investments which are carried at cost and are evaluated for potential impairment when impairment indicators are present, or when an event or change in circumstances has occurred, that may have a significant adverse effect on the fair value of the investment. There is no active trading market for these investments and they are for the most part illiquid. Due to the significant unobservable inputs, the fair value measurements used to evaluate impairment are a Level 3 input.

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

Note Q — concluded:

Financial investments measured at fair value on a non-recurring basis during the period and the amounts for each level within the fair value hierarchy established by SFAS No. 157, were as follows, in millions:

						Fair Value Measurements Using
										Significant
						Quoted				Other				Significant
						Market				Observable				Unobservable				Total
		Sept. 30,				Prices				Inputs				Inputs				Gains
		2008				(Level 1)				(Level 2)				(Level 3)				(Losses)
Private equity funds		$	153			$	—			$	—			$	153			$	(7	)
Other private investments			11				—				—				11				—
		$	164			$	—			$	—			$	164			$	(7	)