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

THIRD QUARTER 2008 AND THE FIRST NINE MONTHS 2008 VERSUS THIRD QUARTER 2007 AND THE FIRST NINE MONTHS 2007 SALES AND OPERATIONS The following table sets forth the Company's net sales and operating profit margins by business segment and geographic area, dollars in millions: Three Months Ended Percent September 30, (Decrease) Increase 2008 2007 2008 vs. 2007 Net Sales: Cabinets and Related Products $ 584 $ 736 (21 %) Plumbing Products 805 865 (7 %) Installation and Other Services 492 689 (29 %) Decorative Architectural Products 446 467 (4 %) Other Specialty Products 201 248 (19 %) Total $ 2,528 $ 3,005 (16 %) North America $ 1,975 $ 2,417 (18 %) International, principally Europe 553 588 (6 %) Total $ 2,528 $ 3,005 (16 %) Nine Months Ended September 30, 2008 2007 Net Sales: Cabinets and Related Products $ 1,788 $ 2,164 (17 %) Plumbing Products 2,483 2,572 (3 %) Installation and Other Services 1,486 2,026 (27 %) Decorative Architectural Products 1,301 1,421 (8 %) Other Specialty Products 563 714 (21 %) Total $ 7,621 $ 8,897 (14 %) North America $ 5,935 $ 7,223 (18 %) International, principally Europe 1,686 1,674 1 % Total $ 7,621 $ 8,897 (14 %) Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Operating Profit Margins: (A) Cabinets and Related Products 3.9 % 14.3 % 4.9 % 12.6 % Plumbing Products 10.9 % 11.6 % 11.8 % 10.6 % Installation and Other Services 2.0 % 8.7 % .5 % 7.3 % Decorative Architectural Products 21.1 % 24.4 % 19.8 % 22.7 % Other Specialty Products 8.0 % 14.5 % 6.6 % 14.7 % North America 9.8 % 14.3 % 9.1 % 13.1 % International, principally Europe 6.9 % 11.7 % 8.4 % 10.3 % Total 9.1 % 13.8 % 9.0 % 12.6 % Total operating profit margin, as reported 7.8 % 12.3 % 7.4 % 11.1 %

(A) Before
general
corporate
expense, net,
of
$32 million
and
$110 million
for the
three-month
and
nine-month
periods ended
September 30,
2008,
respectively.
Before
general
corporate
expense, net,
of
$44 million
and
$144 million
for the
three-month
and
nine-month
periods ended
September 30,
2007,
respectively.
Before the
charge for
litigation
settlement of
$9 million
related to
the
Installation
and Other
Services
segment for
both the
three-month
and
nine-month
periods ended
September 30,
2008. Before
the income
for planned
disposition
of business
of $6 million
related to
the Plumbing
Products
segment for
the
three-month
period ended
September 30,
2008. Before
the gain from
the sale of
corporate
fixed assets
of $8 million
for the
nine-month
period ended
September 30,
2007.

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MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reports its financial results in accordance with generally accepted accounting principles ("GAAP") in the United States. However, the Company believes that certain non-GAAP performance measures and ratios, used in managing the business, may provide users of this financial information with additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures and ratios should be viewed in addition to, and not as an alternative for, the Company's reported results.

NET SALES Net sales decreased for both the three-month and nine-month periods ended September 30, 2008 from the comparable periods of 2007. Excluding results from acquisitions and the effect of currency translation, net sales decreased 17 percent for both the three-month and nine-month periods ended September 30, 2008. The following table reconciles reported net sales to net sales, excluding acquisitions and the effect of currency translation, in millions: Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Net sales, as reported $ 2,528 $ 3,005 $ 7,621 $ 8,897 Acquisitions (16 ) - (65 ) - Net sales, excluding acquisitions 2,512 3,005 7,556 8,897 Currency translation (31 ) - (156 ) - Net sales, excluding acquisitions and the effect of currency translation $ 2,481 $ 3,005 $ 7,400 $ 8,897

Net sales from North American operations decreased for both the three-month and nine-month periods ended September 30, 2008, primarily due to the continuing decline in the new home construction market, which reduced sales by 12 percent and 13 percent, respectively, for the three-month and nine-month periods ended September 30, 2008 compared to the same periods of 2007 and a continuing moderation in consumer spending, which reduced sales by six percent for both the three-month and nine-month periods ended September 30, 2008 compared to the same periods of 2007. North American net sales for the first nine months of 2008 were also negatively affected by lower sales volume in the new home construction market, lower selling prices, a continued decline in consumer spending for home improvement products and an increasingly competitive marketplace.
Net sales from International operations decreased six percent and slightly increased, respectively, for the three-month and nine-month periods ended September 30, 2008. A weaker U.S. dollar increased International net sales by five percent and nine percent, respectively, for the three-month and nine-month periods ended September 30, 2008. In local currencies, net sales from International operations decreased 11 percent and nine percent, respectively, in the third quarter and first nine months of 2008, primarily due to lower sales of cabinets and windows.

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MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales of Cabinets and Related Products decreased for both the three-month and nine-month periods ended September 30, 2008, due to lower sales volume of assembled cabinets in the new home construction market and lower sales volume of cabinets in the North American retail market, as well as a less favorable product mix, which, combined, reduced sales in this segment by 18 percent and 15 percent, respectively. A weaker U.S. dollar had a positive effect on the translation of local currencies of International operations included in this segment and increased sales by one percent and two percent, respectively, for the three-month and nine-month periods ended September 30, 2008 compared to the same periods of 2007. In local currencies, net sales of International operations reduced sales in this segment by five percent for both the three-month and nine-month periods ended September 30, 2008 compared to the same periods of 2007, primarily due to the decline in the new home construction market in the United Kingdom.
Net sales of Plumbing Products decreased for both the three-month and nine-month periods ended September 30, 2008, due to lower sales volume to North American retailers and wholesalers, which reduced sales by six percent and seven percent, respectively, for the three-month and nine-month periods ended September 30, 2008 compared to the same periods of 2007, partially offset by increased selling prices. A weaker U.S. dollar had a positive effect on the translation of local currencies of International operations included in this segment and increased sales by three percent and five percent, respectively, for the three-month and nine-month periods ended September 30, 2008 compared to the same periods of 2007. In local currencies, net sales of International operations, reflecting weakened European economies, reduced sales in this segment by three percent and two percent, respectively, for the three-month and nine-month periods ended September 30, 2008 compared to the same periods of 2007.
Net sales of Installation and Other Services decreased for both the three-month and nine-month periods ended September 30, 2008, primarily due to significantly lower sales volume related to the continued slowdown in the new home construction market, as well as lower selling prices.
Net sales of Decorative Architectural Products decreased for both the three-month and nine-month periods ended September 30, 2008, primarily due to lower retail sales volume of paints and stains and builders' hardware, which more than offset selling price increases.
Net sales of Other Specialty Products decreased for both the three-month and nine-month periods ended September 30, 2008, primarily due to lower sales volume of windows and doors related to the continued slowdown in the new home construction market, particularly in the western United States, which decreased sales in this segment by 17 percent and 18 percent, respectively, for the three-month and nine-month periods ended September 30, 2008 compared to the same periods of 2007. In local currencies, net sales of International operations weakened and reduced sales in this segment by one percent and two percent, respectively, for the three-month and nine-month periods ended September 30, 2008 compared to the same periods of 2007, due to the decline in the new home construction market in the United Kingdom.

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MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING MARGINS The Company's gross profit margins were 25.6 percent and 26.0 percent, respectively, for the three-month and nine-month periods ended September 30, 2008 compared with 28.3 percent and 27.8 percent for the comparable periods of 2007. Selling, general and administrative expenses declined to $452 million and $1,413 million, respectively, for the three-month and nine-month periods ended September 30, 2008 from $479 million and $1,493 million, respectively, in the comparable periods of 2007; however, as a percentage of sales, such expenses were 17.9 percent and 18.5 percent, respectively, for the three-month and nine-month periods ended September 30, 2008 and 15.9 percent and 16.8 percent, respectively, for the comparable periods of 2007, reflecting lower sales volume, as well as increased bad debt expense of $6 million and $14 million, respectively, for the three-month and nine-month periods ended September 30, 2008, principally related to the new home construction market. The Company's profit margins for the three-month and nine-month periods ended September 30, 2008 were negatively affected by lower sales volume of the Company's products discussed above, as well as increasing material costs.
The Company has been focused on the rationalization of its businesses, including sourcing programs, business consolidations, plant closures, headcount reductions and other initiatives. Operating profit for the three-month and nine-month periods ended September 30, 2008 includes $16 million and $40 million, respectively, of costs and charges related to the Company's business rationalizations and other initiatives. For the three-month and nine-month periods ended September 30, 2007, the Company incurred $12 million and $60 million, respectively, related to these initiatives. Based on plans currently undertaken, the Company anticipates additional costs and charges related to the Company's business rationalizations and other initiatives to approximate $30 million in the fourth quarter of 2008. The Company continues to evaluate its businesses and may implement additional rationalization programs based on changes in the Company's markets which could result in further costs and charges.
The decrease in operating profit margins for the Cabinets and Related Products segment for both the three-month and nine-month periods ended September 30, 2008 reflects lower sales volume in the new home construction and retail markets and the related under-absorption of fixed costs, a less favorable product mix, as well as lower results of International operations included in this segment.
The decrease in operating profit margin for the Plumbing Products segment for the three-month period ended September 30, 2008 is primarily due to the decline in sales volume, as well as the lower results of International Operations included in this segment, partially offset by increased selling prices. The increase in operating profit margin for the Plumbing Products segment for the nine-month period ended September 30, 2008 reflects increased selling prices, which partially offset material cost increases.
The decrease in operating margins for the Installation and Other Services segment for both the three-month and nine-month periods ended September 30, 2008 is primarily due to lower sales volume and the related under-absorption of fixed costs, as well as decreased selling prices and increased bad debt expense. During the three-month period ended September 30, 2008, the Installation and Other Services segment recorded a charge of $9 million for the preliminary settlement of employment-related litigation in the State of California. Including this charge, the operating profit margins would have been break-even for both the three-month and nine-month periods ended September 30, 2008.

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MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The decrease in operating profit margins for the Decorative Architectural Products segment for both the three-month and nine-month periods ended September 30, 2008 is primarily due to lower sales volume of paints and stains and builders' hardware, increasing material costs and program costs for builder hardware, which more than offset the effect of selling price increases.
The decrease in operating profit margins for the Other Specialty Products segment for both the three-month and nine-month periods ended September 30, 2008 reflects lower sales volume of windows and doors and the related under-absorption of fixed costs and increased material costs, as well as lower results of International operations included in this segment.
OTHER INCOME (EXPENSE), NET Other, net, for the nine-month period ended September 30, 2008 included $3 million of realized losses, net, from the sale of marketable securities and $3 million of income from other investments, net. Other items, net, for the three-month and nine-month periods ended September 30, 2008 included $4 million and $19 million, respectively, of currency losses.
For the three-month period ended September 30, 2008, the Company recognized a non-cash, pre-tax impairment charge of $1 million related to its investment in Asahi Tec common stock. For the nine-month period ended September 30, 2008, the Company recognized non-cash, pre-tax impairment charges of $30 million related to private equity funds and marketable securities.
Other, net, for the nine-month period ended September 30, 2007 included $5 million of realized gains, net, from the sale of marketable securities and $6 million of dividend income. Other, net for the three-month and nine-month periods ended September 30, 2007 included $11 million and $35 million, respectively, of income from other investments, net. Other items, net, for the three-month and nine-month periods ended September 30, 2007 included $9 million and $12 million, respectively, of currency gains.
For the three-month and nine-month periods ended September 30, 2007, the Company recognized non-cash, pre-tax impairment charges related to financial investments of $12 million and $22 million, respectively.
Interest expense for the three-month period ended September 30, 2008 decreased $6 million to $59 million, compared with interest expense of $65 million for the same period of 2007. Interest expense was $172 million and $197 million for the nine-month periods ended September 30, 2008 and 2007, respectively. The decrease in interest expense is primarily due to lower interest rates and the retirement of higher fixed-rate debt in 2007.
INCOME AND EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS Income from continuing operations for the three-month and nine-month periods ended September 30, 2008 was $36 million and $126 million, respectively, compared with $206 million and $525 million, respectively, for the comparable periods of 2007. Diluted earnings per common share from continuing operations for the three-month and nine-month periods ended September 30, 2008 were $.10 per common share and $.36 per common share, respectively, compared with $.56 per common share and $1.40 per common share, respectively, for the comparable period of 2007.

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MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's effective tax rate was 66 percent and 56 percent, respectively, for the three-month and nine-month periods ended September 30, 2008, compared with 33 percent and 35 percent, respectively, for the same periods in 2007. 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.
OTHER FINANCIAL INFORMATION The Company's current ratio was 2.0 to 1 at both September 30, 2008 and December 31, 2007.
For the nine months ended September 30, 2008, cash of $517 million was provided by operating activities. Cash used for financing activities was $455 million, and included $251 million for the payment of cash dividends and $160 million for the acquisition of Company common stock in open-market transactions. Net cash provided by investing activities was $56 million and included $52 million of net proceeds from the sale of financial investments and $179 million of proceeds from the sale of businesses, offset by $142 million for capital expenditures and $19 million for the acquisition of businesses.
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.
The Company's cash and cash investments increased to $1,030 million at September 30, 2008 from $853 million on June 30, 2008 and $922 million at December 31, 2007. On October 15, 2008, the Company utilized $100 million of these funds to retire its 5.75% Notes at their maturity. The Company has no further scheduled maturities of its long-term indebtedness until March 2010 when $300 million of its Floating Rate Notes become due.
The Company's cash and cash investments consist of overnight interest bearing money market demand and time deposit accounts, money market mutual funds and government securities. While the Company attempts to diversify these investments in a prudent manner to minimize risk, it is possible that the recent global turmoil in the financial markets could result in failures of additional financial institutions or other events and thereby affect the security or availability of these investments.
The Company has no borrowings outstanding under its $2 billion revolving credit facility expiring in 2011 and has no current plans to utilize this facility. In light of the recent financial market turmoil, the Company has confirmed with JPMorgan Chase Bank, the agent for this facility, that the obligations of Merrill Lynch and Wachovia Bank, as participating lenders under this facility, will be assumed by Bank of America and Wells Fargo Bank, respectively, upon completion of the proposed transactions to combine these entities. Both Bank of America and Wells Fargo Bank were already participating lenders under the Company's credit facility.

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MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The 5-Year Revolving Credit Agreement contains limitations on additional borrowings; at September 30, 2008, the Company had additional borrowing capacity, subject to availability, of up to $1.5 billion. The 5-Year Revolving Credit Agreement also contains a requirement for maintaining a certain level of net worth; at September 30, 2008, the Company's net worth exceeded such requirement by $900 million.
The Company is subject to lawsuits and claims pending or asserted with respect to matters generally arising in the ordinary course of business. Note N to the condensed consolidated financial statements discusses certain specific claims pending against the Company.
The Company believes that its present cash balance, cash flows from operations and, to the extent necessary, bank borrowings and future financial market activities, are sufficient to fund its working capital and other investment needs.
OUTLOOK FOR THE COMPANY Business conditions remain difficult in the Company's markets, as the Company experienced a further significant reduction in sales of its products and services late in the third quarter of 2008, which has continued into October. The Company continues to estimate that 2008 housing starts will decline to a range of 900,000 to 1,000,000 units, compared to 1.3 million units in 2007. In the first nine months of 2008, housing starts declined 31 percent from 2007. The Company anticipates that consumer spending for home improvement products and demand for certain of the Company's International products will continue to decline in the near term, more than previously anticipated.
Although the Company expects market conditions in its industry, over the next several quarters, to be very challenging, the Company is confident that the long-term fundamentals for the new home construction and home improvement products markets are positive. The Company believes that its strong financial position together with its current strategy of investing in leadership brands, innovative growth and flexible and scalable supply chains, along with a strong focus on cash flow to fund our dividend, will allow us to drive long-term growth and incremental leverage for our shareholders.
FORWARD-LOOKING STATEMENTS Certain sections of this Quarterly Report contain statements reflecting the Company's views about its future performance which may constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. These views involve risks and uncertainties that are difficult to predict and the Company's results may differ materially from the results discussed in such forward-looking statements. For further information, readers should refer to the Company's most recent Annual Report on Form 10-K ("Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections) and to any subsequent Quarterly Reports on Form 10-Q, all of which are on file with the Securities and Exchange Commission. The Company undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise.

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MASCO CORPORATION