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

THIRD QUARTER 2009 AND THE FIRST NINE MONTHS 2009 VERSUS THIRD QUARTER 2008 AND THE FIRST NINE MONTHS 2008 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 2009 2008 2009 vs. 2008 Net Sales: Cabinets and Related Products $ 434 $ 584 (26%) Plumbing Products 688 788 (13%) Installation and Other Services 332 492 (33%) Decorative Architectural Products 474 446 6% Other Specialty Products 166 201 (17%) Total $ 2,094 $ 2,511 (17%) North America $ 1,630 $ 1,975 (17%) International, principally Europe 464 536 (13%) Total $ 2,094 $ 2,511 (17%) Nine Months Ended September 30, 2009 2008 Net Sales: Cabinets and Related Products $ 1,248 $ 1,788 (30%) Plumbing Products 1,922 2,422 (21%) Installation and Other Services 961 1,486 (35%) Decorative Architectural Products 1,365 1,301 5% Other Specialty Products 427 563 (24%) Total $ 5,923 $ 7,560 (22%) North America $ 4,694 $ 5,935 (21%) International, principally Europe 1,229 1,625 (24%) Total $ 5,923 $ 7,560 (22%) Three Months Ended Nine Months Ended September 30, September 30, 2009 2008 2009 2008 Operating Profit (Loss) Margins: (A) Cabinets and Related Products (3.7 %) 3.9 % (4.5 %) 4.9 % Plumbing Products 13.5 % 11.7 % 10.5 % 12.3 % Installation and Other Services (10.2 %) 2.0 % (10.8 %) .5 % Decorative Architectural Products 25.7 % 21.1 % 22.9 % 19.8 % Other Specialty Products 9.6 % 8.0 % 3.7 % 6.6 % North America 7.5 % 9.8 % 5.6 % 9.1 % International, principally Europe 12.5 % 7.8 % 8.9 % 9.0 % Total 8.6 % 9.4 % 6.2 % 9.1 % Total operating profit margin, as reported 6.6 % 7.7 % 4.2 % 7.5 %

(A) Before general
corporate
expense, net,
the accelerated
stock
compensation
expense, the
charge for the
defined-benefit
plan
curtailment,
the (loss) on
corporate fixed
assets, net,
and the charge
for litigation
settlement; see
Note L to the
condensed
consolidated
financial
statements.

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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, 2009 from the comparable periods of 2008. Excluding results from acquisitions and the effect of currency translation, net sales decreased 15 percent and 19 percent, respectively, for the three-month and nine-month periods ended September 30, 2009. 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, 2009 2008 2009 2008 Net sales, as reported $ 2,094 $ 2,511 $ 5,923 $ 7,560 Acquisitions - - (9 ) - Net sales, excluding acquisitions 2,094 2,511 5,914 7,560 Currency translation 38 - 199 - Net sales, excluding acquisitions and the effect of currency translation $ 2,132 $ 2,511 $ 6,113 $ 7,560

Net sales from North American operations decreased in 2009, primarily due to the decline in the new home construction market, which reduced sales by 11 percent and 13 percent, respectively, in the three-month and nine-month periods ended September 30, 2009 compared to the same periods of 2008 and a decline in consumer spending for home improvement products, which reduced sales by seven percent and ten percent, respectively, in the three-month and nine-month periods ended September 30, 2009 compared to the same periods of 2008. North American net sales for both the three-month and nine-month periods ended September 30, 2009 were negatively affected by lower sales volume of installation and other services, plumbing products, cabinets and windows. Such sales declines were partially offset by increased sales of paints and stains and increased selling prices for certain products in both periods.
In local currencies, net sales from International operations decreased seven percent and 13 percent, respectively, in the three-month and nine-month periods ended September 30, 2009, primarily due to lower sales volume of International plumbing products and cabinets, partially offset by selling price increases. Net sales from International operations decreased in 2009, due to a stronger U.S. dollar, which decreased International net sales by six percent and 11 percent in the three-month and nine-month periods ended September 30, 2009, respectively, compared to the same periods of 2008.

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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 in 2009, due to lower sales volume of cabinets in the new home construction and retail markets, as well as a less favorable product mix, which, combined, reduced sales in this segment by 22 percent and 26 percent, respectively, in the three-month and nine-month periods ended September 30, 2009 compared to the same periods of 2008. A stronger U.S. dollar decreased sales by two percent and three percent, respectively, in the three-month and nine-month periods ended September 30, 2009 compared to the same periods of 2008. In local currencies, net sales of International operations reduced sales in this segment by three percent and four percent, respectively, in the three-month and nine-month periods ended September 30, 2009 compared to the same periods of 2008. Segment sales declines were partially offset by selling price increases.
Net sales of Plumbing Products decreased in 2009, due to lower sales volume to North American retailers and wholesalers, which reduced sales by nine percent and 12 percent, respectively, in the three-month and nine-month periods ended September 30, 2009 compared to the same periods of 2008. A stronger U.S. dollar decreased sales by three percent and five percent, respectively, in the three-month and nine-month periods ended September 30, 2009 compared to the same periods of 2008. In local currencies, net sales of International operations reduced sales in this segment by three percent and seven percent, respectively, in the three-month and nine-month periods ended September 30, 2009 compared to the same periods of 2008. Segment sales declines were partially offset by selling price increases.
Net sales of Installation and Other Services decreased for both the three-month and nine-month periods ended September 30, 2009, primarily due to significantly lower sales volume related to the slowdown in the new home construction market, as well as selling price decreases.
Net sales of Decorative Architectural Products increased for both the three-month and nine-month periods ended September 30, 2009, primarily due to increased retail sales volume of paints and stains, which offset lower retail sales volume of builders' hardware. Sales of paints and stains benefited from new product introductions and advertising and promotional activities. The nine-month period ended September 30, 2009 also benefited from late 2008 selling price increases related to paints and stains.
Net sales of Other Specialty Products decreased in 2009, primarily due to lower sales volume of windows in the western United States, and selling price decreases which, on a combined basis, decreased sales in this segment by nine percent and 14 percent, respectively, in the three-month and nine-month periods ended September 30, 2009 compared to the same periods of 2008. Net sales in this segment also decreased due to a decline in retail sales of staple gun tackers and other fastening tools by four percent and three percent, respectively, in the three-month and nine-month periods ended September 30, 2009, compared to the same periods in 2008. A stronger U.S. dollar decreased sales by three percent and five percent, respectively, in the three-month and nine-month periods ended September 30, 2009 compared to the same periods of 2008. Sales in this segment were also negatively affected by a less favorable product mix.

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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 27.2 percent and 25.8 percent, respectively, for the three-month and nine-month periods ended September 30, 2009 compared with 25.8 percent and 26.0 percent for the comparable periods of 2008. Selling, general and administrative expenses declined to $432 million and $1,272 million, respectively, for the three-month and nine-month periods ended September 30, 2009 from $454 million and $1,398 million, respectively, in the comparable periods of 2008; however, as a percentage of sales, such expenses were 20.6 percent and 21.5 percent, respectively, for the three-month and nine-month periods ended September 30, 2009 compared with 18.1 percent and 18.5 percent for the comparable periods of 2008, reflecting lower sales volume, as well as increased plant closure and system implementation costs. Results benefited from the improved relationship between selling prices and commodity costs, as well as the benefits associated with business rationalizations and other cost savings initiatives.
The Company has been focused on the strategic rationalization of its businesses, including business consolidations, plant closures, headcount reductions, system implementations and other initiatives. Operating profit for the three-month and nine-month periods ended September 30, 2009 includes $21 million and $67 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, 2008, the Company incurred $15 million and $39 million, respectively, related to these initiatives. During the first nine months of 2009, the Company closed or sold three manufacturing facilities and reduced headcount by 4,000 employees. Based on current plans, the Company anticipates costs and charges related to the Company's business rationalizations and other initiatives to approximate $92 million in 2009. 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 operating loss in the Cabinets and Related Products segment in 2009 reflects lower sales volume in the new home construction and retail markets and the related under-absorption of fixed costs, as well as a less favorable product mix, which on a combined basis reduced operating margins by approximately ten percentage points and eight percentage points, respectively, for the three-month and nine-month periods ended September 30, 2009 compared to 2008. This segment was also negatively affected by the lower results of International operations, as well as increased severance and system implementation costs and costs to close or sell several plants in this segment. Such declines were partially offset by the improved relationship between selling prices and commodity costs as well as the benefits associated with business rationalizations and other cost savings initiatives.
The increase in operating profit margins in the Plumbing Products segment for the three-month period ended September 30, 2009 reflects a more favorable product mix, as well as the improved relationship between selling prices and commodity costs and the benefits associated with business rationalizations and other cost savings initiatives. The decrease in operating profit margins in the Plumbing Products segment for the nine-month period ended September 30, 2009 reflects lower sales volume and the related under-absorption of fixed costs, as well as a less favorable product mix of International plumbing products.
The operating loss in the Installation and Other Services segment for both the three-month and nine-month periods ended September 30, 2009 is primarily due to lower sales volume and the related under-absorption of fixed costs, as well as increased system implementation costs and selling price decreases.

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MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The increase in operating profit margins for the Decorative Architectural Products segment for the three-month and nine-month period ended September 30, 2009 is primarily due to increased sales volume of paints and stains, which more than offset lower sales volume of builders' hardware. The operating profit margins also benefited from the improved relationship between selling prices and commodity costs related to paints and stains and builders' hardware, as well as lower promotional activities related to builders' hardware.
The increase in operating profit margins in the Other Specialty Products segment for the three-month period ended September 30, 2009 reflects the increased benefits associated with business rationalizations and other cost savings initiatives. The decrease in operating profit margins for the Other Specialty Products segment for the nine-month period ended September 30, 2009 reflects lower sales volume of windows and staple gun tackers and other fastening tools and the related under-absorption of fixed costs, as well as a less favorable product mix, partially offset by the benefits associated with business rationalizations and other cost savings initiatives.
OTHER INCOME (EXPENSE), NET Other items, net, for the three-month and nine-month periods ended September 30, 2009 included $5 million and $14 million, respectively, of currency gains.
For the nine-month period ended September 30, 2009, the Company recognized non-cash, pre-tax impairment charges of $10 million related to financial investments in private equity funds.
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 $3 million and $18 million, respectively, of currency losses.
For the three-month and nine-month periods ended September 30, 2008, the Company recognized non-cash, pre-tax impairment charges of $1 million and $30 million, respectively, related to financial investments in private equity funds and marketable securities.
Interest expense decreased $3 million for both the three-month and nine-month periods ended September 30, 2009 from the comparable periods of 2008 to $56 million and $169 million, respectively.
INCOME AND EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS Income from continuing operations (attributable to Masco Corporation) for the three-month and nine-month periods ended September 30, 2009 was $51 million and $32 million, respectively, compared with $35 million and $132 million, respectively, for the comparable periods of 2008. Diluted earnings per common share from continuing operations (attributable to Masco Corporation) for the three-month and nine-month periods ended September 30, 2009 were $.14 per common share and $.09 per common share, respectively, compared with $.09 per common share and $.36 per common share, respectively, for the comparable periods of 2008.

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MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three-month and nine-month periods ended September 30, 2009, the Company reported tax expense of $26 million and $35 million, respectively. A discrete calculation was used to report tax expense rather than an estimated annual tax rate, as the estimated range of the annual income for the Company in 2009 produces significant variability and makes it difficult to reasonably estimate the annual effective tax rate. While the Company expects full-year income (loss) from continuing operations to approximate break-even, the Company expects to have tax expense for the year primarily due to income tax liabilities in certain jurisdictions and losses in other jurisdictions that provide no tax benefit. The Company's effective tax rate was 67 percent and 55 percent, respectively, for the three-month and nine-month periods ended September 30, 2008.
OTHER FINANCIAL INFORMATION The Company's current ratio was 1.9 to 1 and 2.1 to 1, respectively, at September 30, 2009 and December 31, 2008.
For the nine months ended September 30, 2009, cash of $415 million was provided by operating activities. Net cash used for financing activities was $174 million, and included $139 million for the payment of cash dividends and $11 million for the acquisition of Company common stock in open-market transactions to offset the dilutive impact of long-term stock awards granted in 2009. Net cash used for investing activities was $74 million and included $70 million for capital expenditures.
The Company's cash and cash investments increased to $1.2 billion at September 30, 2009 from $1.0 billion at December 31, 2008. 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 future changes 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.
At September 30, 2009, the Amended Five-Year Revolving Credit Agreement contains limitations on additional borrowings. Under the terms of the Amended Credit Facility, any outstanding Letters of Credit reduce the Company's borrowing capacity. At September 30, 2009, the Company had $72 million of unused Letters of Credit; accordingly, the Company's remaining borrowing capacity is approximately $1.2 billion. At September 30, 2009, the Amended Five-Year Revolving Credit Agreement also contains a requirement for maintaining a certain level of net worth; the Company's net worth exceeded such requirement by $1.1 billion.
During 2009, the Company announced the reduction of its quarterly dividend to $.075 per common share from $.235 per common share.
The Company is subject to lawsuits and claims pending or asserted with respect to matters generally arising in the ordinary course of business. Note O to the condensed consolidated financial statements discusses certain specific claims pending against the Company.

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MASCO CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. The Company continues to estimate that 2009 housing starts will decline 40 percent to approximately 550,000 units. The Company also anticipates that consumer spending for home improvement products in North American and International markets will continue at depressed levels in the near term.
Although the Company is confident that the long-term fundamentals for the new home construction and home improvement markets are positive, the Company expects that market conditions will be challenging over the near-term as global economies recover.
The Company believes that its strong financial position (including cash of $1.2 billion at September 30, 2009, its ability to generate positive cash flow during 2009 and unused bank lines) together with its current strategy of re-aligning its cost structure, investing in leadership brands, driving innovation and re-engineering its supply chains, will allow it to drive long-term growth and create value for its 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