MASCO CORP /DE/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 COMMISSION FILE NUMBER 1-5794

MASCO CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 38-1794485
(State of Incorporation) (I.R.S. Employer Identification No.)

21001 VAN BORN ROAD, TAYLOR, MICHIGAN 48180
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: 313-274-7400

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act:

None

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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant on June 28, 2002 (based on the closing sale
price of $27.11 of the Registrant's Common Stock, as reported by the New York
Stock Exchange on such date) was approximately $12,775,174,000.

Number of shares outstanding of the Registrant's Common Stock at January 31,
2003:

488,273,000 shares of Common Stock, par value $1.00 per share

Portions of the Registrant's definitive Proxy Statement to be filed for its 2003
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Form 10-K.
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MASCO CORPORATION
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS.

Masco Corporation manufactures, sells and installs home improvement and
building products, with emphasis on brand name products and services holding
leadership positions in their markets. The Company is among the largest
manufacturers in North America of brand name consumer products designed for the
home improvement and new construction markets. The Company's operations consist
of five business segments, which are based on similarities in products and
services. The following table sets forth, for the three years ended December 31,
2002, the contribution of the Company's segments to net sales and operating
profit. Additional financial information concerning the Company's operations by
segment as well as general corporate expense as of and for the three years ended
December 31, 2002 is set forth in Note N to the Company's Consolidated Financial
Statements included in Item 8 of this Report.

(1) Includes the reclassification of cooperative advertising
expense from selling expense to a reduction of sales to
conform to the 2002 presentation. This reclassification did
not result in a change in net income or earnings per common
share.

(2) Amounts are before general corporate expense of $98 million,
$96 million and $99 million in 2002, 2001 and 2000,
respectively.

(3) Operating profit for 2002 includes a pre-tax gain of $15.6
million related to certain long-lived assets in the Plumbing
Products segment, which were previously written down in
December 2000 as part of the plan for the disposition of
certain businesses.

(4) Operating profit for 2002 is before the litigation settlement
charge, net of $146.8 million (pertaining to the Decorative
Architectural Products segment).

(5) Operating profit excluding goodwill amortization expense for
2001 and 2000, respectively, was as follows: Cabinets and
Related Products -- $270 million and $336 million, Plumbing
Products -- $248 million and $287 million, Installation and
Other Services -- $287 million and $144 million, Decorative

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Architectural Products -- $282 million and $260 million and
Other Specialty Products -- $142 million and $98 million.

Approximately 85 percent of the Company's sales are generated by operations
in North America (primarily in the United States). International operations
(primarily in Europe) comprise the balance and are located principally in
Belgium, Denmark, Germany, Holland, Italy, Spain and the United Kingdom. See
Note N to the Company's Consolidated Financial Statements included in Item 8 of
this Report.

Acquisitions have been a key factor in the Company's growth. During 2002,
the Company acquired several businesses with aggregate annual sales of
approximately $1 billion. The most significant acquisition during 2002 was that
of Service Partners LLC, a distributor and installer of insulation and other
building products. More information about this transaction is set forth in the
following discussion and under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7 of this
Report. Except as the context otherwise indicates, the terms "Masco" and the
"Company" refer to Masco Corporation and its consolidated subsidiaries.

CABINETS AND RELATED PRODUCTS

In North America, the Company manufactures and sells economy, stock,
semi-custom, assembled and ready-to-assemble cabinetry for kitchen, bath,
storage, home office and home entertainment applications in a broad range of
styles and price points. These products are sold under a number of trademarks,
including KRAFTMAID(R), MERILLAT(R), MILL'S PRIDE(R) and QUALITY CABINETS(R), to
distributors, home centers and dealers and direct to builders for both the home
improvement and new construction markets. The Company also manufactures bath
storage products under the brand name ZENITH(R). In Europe, the Company
manufactures assembled and ready-to-assemble kitchen, bath, storage, home office
and home entertainment cabinetry and other products under brand names including
ALMA KUCHEN(TM), ALVIC(TM), ARAN(TM), BLUESTONE(TM), FAARUP(TM), GRUMAL(TM),
MOORES(TM), SCANBIRK(TM), SYSTEMA(TM), TVILUM-SCANBIRK(TM), VESTERGAARD(TM) and
XEY(TM). Sales in Europe are made through distribution channels that parallel
North American distribution.

The cabinet manufacturing industry in the United States and Europe is
highly competitive, with several large and hundreds of smaller competitors. The
Company believes that it is the largest manufacturer of kitchen and bath
cabinetry in North America based on sales revenue for 2001. Significant North
American competitors include American Woodmark, Aristokraft, Omega and Schrock.

PLUMBING PRODUCTS

In North America, the Company manufactures and sells a wide variety of
faucet and showering devices under several brand names. The most widely known of
these are the DELTA(R) and PEERLESS(R) single and double handle faucets used in
kitchen, lavatory and other sinks and in bath and shower enclosures. Both
DELTA(R) and PEERLESS(R) faucets are sold by manufacturers' representatives and
Company sales personnel to major retail accounts and to distributors who sell
the faucets to plumbers, building contractors, remodelers, smaller retailers and
others. Showerheads, handheld showers and valves are sold under ALSONS(R),
DELTA(R), MIXET(R) and PLUMB SHOP(R) brand names. The Company manufactures
faucets and various other plumbing products for the European markets under the
brand names DAMIXA(R), GUMMERS(R), MARIANI(TM) and NEWTEAM(TM) and sells them
through multiple distribution channels.

During 2002, the Company acquired Brasstech, Inc. and Newport Metal
Finishing, Inc., both California-based, related manufacturers of premium
price-point plumbing products, including faucets, plumbing specialties and bath
accessories, and Bristan Ltd., a provider of kitchen and

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bath faucets and shower and bath accessories, based in the United Kingdom. In
late December 2002, the Company increased its 27% ownership in Hansgrohe AG, a
German manufacturer of kitchen and bath faucets, hand-held and fixed
showerheads, luxury shower systems and steam showers, and currently owns 64% of
the outstanding voting equity. HANSGROHE(R) products are sold throughout most of
Europe through plumbers and wholesalers and in North America primarily through
retailers.

Masco believes that its faucet operations hold a leadership position in the
North American market, with American Standard, Kohler, Moen and Price Pfister as
major brand competitors. Competition from import products is also a significant
factor in the Company's markets. There are several major competitors among the
European manufacturers of faucets and accessories, primarily in Germany and
Italy, and hundreds of smaller competitors throughout Europe and Asia.

Other plumbing products manufactured and sold by the Company include AQUA
GLASS(R) and MIROLIN(R) acrylic and gelcoat bath and shower units, which are
sold primarily to wholesale plumbing distributors for the home improvement and
new home construction markets. Bath and shower enclosure units, shower trays and
laundry tubs are manufactured and sold under the brand names AMERICAN SHOWER &
BATH(TM), PLASKOLITE(TM) and TRAYCO(TM). These products are sold to home
centers, hardware stores and mass merchandisers for the "do-it-yourself" market.
The Company's spas and hot tubs are manufactured and sold under brand names HOT
SPRING(R), CALDERA(R) and other trademarks directly to retailers. Other plumbing
products for the international market include HUPPE(R) luxury bath and shower
enclosures sold by the Company through wholesale channels primarily in Germany.
HERITAGE(TM) ceramic and acrylic bath fixtures and faucets are principally sold
in the United Kingdom directly to selected retailers. GLASS(TM) acrylic bathtubs
and steam shower enclosures are sold in Italy and other European countries.
RECOR(TM) cast iron bathtubs are sold in Europe and the United States.

Also included in plumbing products are brass and copper plumbing system
components and other plumbing specialties, which are sold to plumbing, heating
and hardware wholesalers and to home centers, hardware stores, building supply
outlets and other mass merchandisers. These products are marketed in North
America for the wholesale trade under the BRASSCRAFT(R) trademark and for the
"do-it-yourself" market under the MASTER PLUMBER(R) and PLUMB SHOP(R) trademarks
and are also sold under private label.

INSTALLATION AND OTHER SERVICES

Masco Contractor Services, Inc., which operates over 375 local branch
offices throughout most of the United States, supplies and installs primarily
insulation and, in certain locations, other building products including
fireplaces, gutters, cabinetry, shelving and windows. Installation services are
provided primarily to tract and custom home builders in the new construction
market. Masco Contractor Services does business in local markets through such
names as Gale Industries, The Cary Group and Davenport Insulation. Net sales of
insulation installation comprised 14 percent, 14 percent and 8 percent of the
Company's consolidated net sales for the years ended December 31, 2002, 2001 and
2000, respectively. The Company's competitors in this market include several
regional and numerous local installers.

The Company expanded its installation operations in September 2002 with the
acquisition of Service Partners LLC, a Virginia-based distributor and installer
of insulation and other building products including roofing, drywall, gutters,
fireplaces and acoustical ceiling products. Other 2002 acquisitions in the
United States include SCE Unlimited, Inc., an installer of a broad variety of
products including siding, closet shelving, gutters and other building products,
and IDI Group, an installer of insulation and other building products such as
fireplaces, gutters and garage doors.

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DECORATIVE ARCHITECTURAL PRODUCTS

The Company manufactures architectural coatings including paints, specialty
paint products, stains, varnishes and waterproofings. BEHR(R) paint and stain
products, such as PREMIUM PLUS(R), and MASTERCHEM(R) specialty paint products,
including KILZ(R) brand primers, are sold in the United States and Canada
primarily to the "do-it-yourself" market through home centers. Net sales of
architectural coatings, including paints and stains, comprised 11 percent, 11
percent and 10 percent of the Company's consolidated net sales for the years
ended December 31, 2002, 2001 and 2000, respectively. Competitors in the
architectural coatings market include large multinational companies such as ICI
Paints, PPG Industries, Inc., Sherwin-Williams and Valspar as well as many
smaller regional and national companies.

The Company manufactures and sells decorative bath and shower accessories
under the brand names BALDWIN(R), FRANKLIN BRASS(R), GINGER(R) and BATH
UNLIMITED(TM). Also in the Decorative Architectural Products segment are premium
BALDWIN(R) quality brass trim and mortise lock sets, knobs and other builders'
hardware, which are manufactured and sold for the home improvement and new home
construction markets. LIBERTY(R) cabinet, decorative door and builders' hardware
is sold to home centers, other retailers, original equipment manufacturers and
wholesale markets. WEISER(R) lock sets and related hardware are manufactured and
sold through contractor supply outlets, hardware distributors and home centers.
Key competitors for these products in North America include Amerock, Belwith,
Kwikset, National, Schlage and Stanley. Imported products are also a significant
factor in this market.

AVOCET(TM) builders' hardware products, including locks and door and window
hardware, are manufactured and sold to home centers and other retailers,
builders and original equipment door and window manufacturers primarily in the
United Kingdom.

The Company features a durable coating on many of its decorative faucets
and other products that offers tarnish protection and scratch resistance under
the trademarks BRILLIANCE(R) and THE LIFETIME FINISH FROM BALDWIN(R). This
finish is currently available on many of the Company's kitchen and bath products
and door hardware.

OTHER SPECIALTY PRODUCTS

The Company manufactures a complete line of manual and electric staple gun
tackers, staples and other fastening tools under the brand name ARROW(R). These
products are sold through various distribution channels including wholesalers,
home centers and other retailers. SAFLOK(R) electronic lock sets and WINFIELD(R)
mechanical lock sets are sold primarily to the hospitality market.

Commercial ventilating products are manufactured and sold by the Company in
Europe under the GEBHARDT(TM) brand name. The Company also manufactures
residential hydronic radiators and heat convectors under the brand names
BRUGMAN(TM), SUPERIA(TM), THERMIC(TM) and VASCO(R), which are sold to the
European wholesale market from operations in Belgium, Holland and Poland.
JUNG(TM) water pumps are manufactured and sold by the Company primarily in
Germany.

The Company entered into the market for windows and patio doors during
2001, with manufacturing and sale under the MILGARD(R) brand name to the new
construction and home improvement markets, principally in the western United
States, and fabrication and sale of vinyl windows and sunrooms under the
GRIFFIN(TM) brand name for the European building trades. During 2002, the
Company expanded its European window-related operations with the acquisition of
three companies headquartered in the United Kingdom: Cambrian Windows Ltd., a
fabricator of vinyl window frames, Duraflex Ltd., an extruder of vinyl frame
components for windows, doors and sunrooms, and Premier Manufacturing Ltd., a
fabricator of vinyl window and door frames.

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ADDITIONAL INFORMATION

- Direct sales of the Company's product lines to home center retailers have
increased substantially in recent years and, in 2002, sales to the
Company's largest customer, The Home Depot, were $2.3 billion
(approximately 25 percent of total sales). Although builders, dealers and
other retailers represent other channels of distribution for the
Company's products, the Company believes that the loss of a substantial
portion of its sales to The Home Depot would have a material adverse
impact on the Company.

- The major markets for the Company's products and services are highly
competitive. Competition in all of the Company's product lines is based
primarily on performance, quality, style, delivery, customer service and
price, with the relative importance of such factors varying among product
categories. Competition in the markets for the Company's services
businesses is based primarily on price, customer service and breadth of
product offering.

- The Company's international operations are subject to political,
monetary, economic and other risks attendant generally to international
businesses. These risks generally vary from country to country.

- Financial information concerning the Company's export sales and foreign
and United States operations, including the net sales, operating profit
and assets attributable to the Company's segments and to the Company's
North American and International operations, as of and for the three
years ended December 31, 2002, is set forth in Item 8 of this Report in
Note N to the Company's Consolidated Financial Statements.

- The peak season for home construction and remodeling corresponds with the
second and third calendar quarters. As a result, the Decorative
Architectural Products segment and the Installation and Other Services
segment may experience stronger sales during these quarters. Otherwise,
no material portion of the Company's business is seasonally impacted.

- The Company does not consider backlog orders to be material.

- Compliance with federal, state and local regulations relating to the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, is not expected to result in material
capital expenditures by the Company or to have a material adverse effect
on the Company's earnings or competitive position.

- In general, raw materials required by the Company are obtainable from
various sources and in the quantities desired, although from time to time
certain operations of the Company may encounter shortages or unusual
price changes.

- The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K and any amendments to such reports filed
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 are posted on the Company's web site at http://www.masco.com as
soon as practicable after they are filed with the Securities and Exchange
Commission and are available free of charge. Material contained on the
Company's web site is not incorporated by reference in this Report on
Form 10-K.

PATENTS AND TRADEMARKS

The Company holds United States and foreign patents covering its vapor
deposition finish and various design features and valve constructions used in
certain of its faucets and holds numerous other patents and patent applications,
licenses, trademarks and trade names. As a manufacturer of brand name consumer
products, the Company views its trademarks and other proprietary rights as
important, but does not believe that there is any reasonable likelihood of a
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loss of such rights that would have a material adverse effect on the Company's
present business as a whole.

EMPLOYEES

At December 31, 2002, the Company employed approximately 61,000 people.
Satisfactory relations have generally prevailed between the Company and its
employees.

ITEM 2. PROPERTIES.

The table below lists the Company's principal North American properties by
segment.

Most of the Company's North American manufacturing facilities range in size
from single buildings of approximately 10,000 square feet to complexes that
exceed 750,000 square feet. The Company owns or has options to acquire most of
its North American manufacturing facilities, none of which is subject to
significant encumbrances. A substantial number of its warehouse and distribution
facilities are leased.

In addition, the Company's Installation and Other Services segment operates
approximately 375 branch locations in North America, the majority of which are
leased.

The table below lists the Company's principal properties outside North
America by segment.

Most of these international facilities are located in Belgium, Denmark,
Germany, Holland, Italy, Spain and the United Kingdom. The Company generally
owns its international manufacturing facilities and leases its warehouse and
distribution facilities.

The Company's corporate headquarters are located in Taylor, Michigan and
are owned by the Company. The Company owns an additional building near its
corporate headquarters that is used by its corporate research and development
department.

Each of the Company's operating divisions assesses the manufacturing,
distribution and other facilities needed to meet its operating requirements. The
Company's buildings, machinery and equipment have been generally well maintained
and are in good operating condition. The Company believes that its facilities
have sufficient capacity and are adequate for its production and distribution
requirements.

ITEM 3. LEGAL PROCEEDINGS.

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

7

The Company and its Behr Process Corporation subsidiary are defendants in
several class action lawsuits relating to certain of Behr's previously
manufactured exterior wood coating products. None of the complaints sets forth
any specific amounts of damage. The Company and Behr have entered into
settlement agreements to resolve all of these class actions pending in the
United States under which all claims relating to the products would be dismissed
without any admission of liability or wrongdoing following final court approval
of the settlements. More information about these lawsuits and settlement
agreements is set forth in Note S to the Company's Consolidated Financial
Statements included in Item 8 of this Report.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF REGISTRANT
(PURSUANT TO INSTRUCTION 3 TO ITEM 401(B) OF REGULATION S-K).

* Raymond F. Kennedy, the Company's President and Chief Operating Officer,
passed away unexpectedly on February 4, 2003. Mr. Manoogian, who previously
served in these capacities, was appointed to assume these responsibilities on
an interim basis.

Executive officers, who are elected by the Board of Directors, serve for a
term of one year or less. Each elected executive officer has been employed in a
managerial capacity with the Company for over five years except for Mr. Wadhams.
Mr. Wadhams was employed by the Company from 1976 to 1984. From 1984 until he
rejoined the Company in 2001, he was an executive of Metaldyne Corporation
(formerly MascoTech, Inc.), most recently serving as its Executive Vice
President -- Finance and Administration and Chief Financial Officer.

8

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The New York Stock Exchange is the principal market on which the Company's
Common Stock is traded. The following table indicates the high and low sales
prices of the Company's Common Stock as reported by the New York Stock Exchange
and the cash dividends declared per common share for the periods indicated:

On January 31, 2003 there were approximately 6,000 holders of record of the
Company's Common Stock.

The Company expects that its practice of paying quarterly dividends on its
Common Stock will continue, although the payment of future dividends is at the
discretion of the Company's Board of Directors and will continue to depend upon
the Company's earnings, capital requirements, financial condition and other
factors.

ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth summary consolidated financial information
for the Company's continuing operations, for the years and dates indicated.
Information for 1998 has been restated for 1999 poolings of interests, except
for dividends.

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(1) Includes the reclassification of cooperative advertising expense from
selling expense to a reduction of sales to conform to the 2002 presentation.
This reclassification did not result in a change in net income or earnings
per common share.

(2) The year 2002 includes a $92.3 million after-tax ($146.8 million pre-tax),
net charge for the Behr litigation settlement.

(3) Operating profit for 1998-2001 includes goodwill amortization as follows:
2001 -- $93.2 million, 2000 -- $66.2 million, 1999 -- $45.4 million and
1998 -- $29.0 million.

(4) The year 2002 includes a $92.4 million after-tax ($116.8 million pre-tax),
non-cash goodwill impairment charge recognized as a cumulative effect of a
change in accounting principle in the first half of 2002.

(5) The year 2001 includes a $344 million after-tax ($530 million pre-tax),
non-cash charge for the write-down of certain investments, principally
securities of Furnishings International Inc.

(6) The year 2000 includes a $94 million after-tax ($145 million pre-tax),
non-cash charge for the planned disposition of businesses and the write-down
of certain investments.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The financial and business analysis below provides information which the
Company believes is relevant to an assessment and understanding of the Company's
consolidated financial position and results of operations. This financial and
business analysis should be read in conjunction with the consolidated financial
statements and related notes.

The following discussion and certain other sections of this Report contain
statements reflecting the Company's views about its future performance and
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, accordingly, the Company's actual results may differ
materially from the results discussed in such forward-looking statements.
Readers should consider that various factors, including changes in general
economic conditions and competitive market conditions; pricing pressures;
relationships with key customers; industry consolidation of retailers,
wholesalers and builders; shifts in distribution; the influence of e-commerce;
and other factors discussed in the "Overview," "Critical Accounting Policies and
Estimates" and "Outlook for the Company" sections, may affect the Company's
performance. The Company undertakes no obligation to update publicly any
forward-looking statements as a result of new information, future events or
otherwise.

OVERVIEW

The Company is engaged principally in the manufacture and sale of home
improvement and building products. These products are sold to the home
improvement and home construction markets through mass merchandisers, hardware
stores, home centers, distributors and other outlets for consumers and
contractors. The Company also supplies and installs insulation and other
building products for builders in the new construction market.

Factors that affect the Company's results of operations include the levels
of home improvement and residential construction activity principally in North
America and Europe (including repair and remodeling and new construction), the
Company's ability to effectively manage its overall cost structure, fluctuations
in European currencies (primarily the European euro and British pound), the
importance of and the Company's relationships with home centers (including The
Home Depot, which represented approximately 25 percent of the Company's sales in
2002) as distributors of home improvement and building products and the
Company's ability to

10

maintain its leadership positions in its markets in the face of increasing
global competition. Historically, the Company has been able to largely offset
the impact on its revenues of cyclical declines in new construction and home
improvement markets through new product introductions and acquisitions as well
as market share gains.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's discussion and analysis of its financial condition and
results of operations are based on the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of any contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The Company regularly reviews its estimates and assumptions,
which are based on historical experience and on various other factors and
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of certain assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates and assumptions.

The Company believes that the following critical accounting policies are
affected by significant judgments and estimates used in the preparation of its
consolidated financial statements.

The Company records estimated reductions to revenue for customer programs
and incentive offerings, including special pricing arrangements, promotions and
other volume-based incentives. Allowances for doubtful accounts receivable are
maintained for estimated losses resulting from the inability of customers to
make required payments. Inventories are recorded at the lower of cost or market
with expense estimates made for obsolescence or unmarketable inventory equal to
the difference between the recorded cost of inventories and their estimated
market value based on assumptions about future demand and market conditions. On
an on-going basis, the Company monitors these estimates and records adjustments
for differences between estimates and actual experience. Historically, actual
results have not significantly deviated from those determined using these
estimates.

The Company maintains investments in marketable equity securities and bond
funds, which aggregated $446 million, and a number of private equity funds,
which aggregated $448 million, at December 31, 2002. The investments in private
equity funds are carried at cost and are evaluated for impairment at each
reporting period, or when circumstances indicate an impairment may exist, using
information made available by the fund managers and other assumptions. The
investments in marketable equity securities and bond funds are carried at fair
value, and unrealized gains and unrealized losses (that are deemed to be
temporary) are recorded as a component of shareholders' equity, net of tax, in
other comprehensive income. The Company records an impairment charge to earnings
when an investment has experienced a decline in value that is deemed to be
other-than-temporary. Future changes in market conditions, the performance of
underlying investments or new information provided by private equity fund
managers could affect the recorded values of such investments and the amounts
realized upon liquidation.

The Company records the excess of purchase cost over the fair value of net
tangible assets of acquired companies as goodwill or other identifiable
intangible assets. On January 1, 2002, Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," became
effective. In accordance with SFAS No. 142, the Company is no longer recording
amortization expense related to goodwill and other indefinite-lived intangible
assets. The Company completed the transitional goodwill and other
indefinite-lived intangible assets impairment testing in 2002 and recorded a
non-cash goodwill impairment charge of $92.4 million, net of income tax credit
of $24.4 million, as a cumulative effect of change in accounting principle
effective January 1, 2002. See "Cumulative Effect of Accounting Change" for
additional discussion

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of the adoption of this standard. In the fourth quarter of 2002, the Company
completed the annual impairment testing of goodwill and other indefinite-lived
intangible assets utilizing a discounted cash flow method. This test indicated
that no additional impairment of such assets occurred in 2002. Intangible assets
with finite useful lives are amortized over their estimated useful lives. The
Company evaluates the remaining useful lives of amortizable intangible assets at
each reporting period to determine whether events and circumstances warrant a
revision to the remaining periods of amortization.

Determining market values using a discounted cash flow method requires the
Company to make significant estimates and assumptions, including long-term
projections of cash flows, market conditions and appropriate discount rates. The
Company's judgments are based on historical experience, current market trends
and other information. While the Company believes that the estimates and
assumptions underlying the valuation methodology are reasonable, different
assumptions could result in a different outcome. In estimating future cash
flows, the Company relies on internally generated five-year forecasts for sales
and operating profits, including capital expenditures and a three percent
long-term assumed growth rate of cash flows for periods after the five-year
forecast. The Company generally develops these forecasts based on recent sales
data for existing products, planned timing of new product launches, housing
starts and repair and remodeling estimates for existing homes.

In the fourth quarter of 2002, the Company estimated that future discounted
cash flows projected for individual business units were greater than the
carrying values related to business units with goodwill and other
indefinite-lived intangible assets. Any increases in estimated discounted cash
flows would have no impact on the reported value of goodwill. In contrast, if
the current estimate of future discounted cash flows had been 20 percent lower,
the Company would have been required to recognize a pre-tax impairment loss of
approximately $43 million.

Accounting for defined-benefit pension plans involves estimating the cost
of benefits to be provided in the future, based on vested years of service, and
attributing those costs over the time period each employee works. Pension costs
and obligations of the Company are developed from actuarial valuations. Inherent
in these valuations are key assumptions regarding inflation, expected return on
plan assets, mortality rates, compensation increases and discount rates for
obligations. The Company considers current market conditions, including changes
in interest rates, in selecting these assumptions. The Company selects these
assumptions with assistance from outside advisors such as consultants, lawyers
and actuaries. Changes in assumptions used could result in changes to the
related pension costs and obligations within the Company's consolidated
financial statements in any given period.

In 2002, the Company decreased its discount rate to 6.75 percent from 7.5
percent, which reflects the decline in long-term interest rates. The assumed
asset return is 8.5 percent, reflecting the expected long-term return on plan
assets. The plan assets were invested in equities (85 percent), bonds (8
percent) and cash (7 percent) at December 31, 2002.

The Company's underfunded amount for the difference between the projected
benefit obligation and plan assets increased to $182 million from $59 million in
2001. This is the result of the change in the discount rate, plan amendments,
asset returns below projections and the inclusion of the Furnishings
International Inc. pension obligation of approximately $83 million at December
31, 2002 (see Note D to the consolidated financial statements). The plan assets
in 2002 had a loss of approximately 15 percent as compared with declines of 17
percent and 23 percent for the Dow Jones Industrial Average and the Standard &
Poor's 500, respectively.

The Company expects pension expense for its defined benefit plans to
increase by approximately $10 million in 2003, principally as a result of lower
asset returns. If the Company assumed that the future return on plan assets was
8 percent instead of 8.5 percent, the impact on pension expense for 2003 would
be an increase of approximately $1 million.

12

The Company has considered future income and gains from investments and
other identified tax planning strategies, including the potential sale of
certain operating assets, in assessing the need for establishing a valuation
allowance against its deferred tax assets at December 31, 2002. Should the
Company determine that it would not be able to realize all or part of its
deferred tax assets in the future, a valuation allowance would be recorded in
the period such determination is made.

Certain of the Company's products and product finishes and services are
generally covered by a warranty to be free from defects in material and
workmanship for periods ranging from one year to the lifetime, under certain
circumstances, of the original purchaser. At the time of sale, the Company
accrues a warranty liability for estimated costs to provide products, parts or
service to repair or replace products in satisfaction of warranty obligations.
The Company's estimate of costs to service its warranty obligations is based on
historical experience and expected future conditions. To the extent that the
Company experiences any changes in warranty claim activity or costs associated
with servicing those claims, its warranty liability is adjusted accordingly.

The Company is subject to lawsuits and pending or asserted claims with
respect to matters generally arising in the ordinary course of business.
Liabilities and costs associated with these matters require estimates and
judgments based on the professional knowledge and experience of management and
its legal counsel. When estimates of the Company's exposure for lawsuits and
pending or asserted claims meet the criteria of SFAS No. 5, "Accounting for
Contingencies," amounts are recorded as charges to earnings. The ultimate
resolution of any such exposure to the Company may differ due to subsequent
developments.

CORPORATE DEVELOPMENT

Mergers and acquisitions have historically contributed significantly to
Masco's growth. Generally, the earnings benefit to Masco arises from the
subsequent growth of merged and acquired businesses, since incremental sales are
not impacted by the initial transaction-related costs and expenses such as
interest and added depreciation and amortization.

During 2002, the Company completed the acquisition of several home
improvement products and service companies including Brasstech, Inc. and Bristan
Ltd. (Plumbing Products segment), Cambrian Windows Ltd., Duraflex Ltd. and
Premier Manufacturing Ltd. (Other Specialty Products segment), SCE Unlimited,
IDI Group, Service Partners LLC and several relatively small installation
service companies (Installation and Other Services segment), and Diversified
Cabinet Distributors (Cabinets and Related Products segment). Brasstech, Inc. is
a United States (U.S.) company headquartered in California and is a manufacturer
of premium price-point plumbing products, including faucets, plumbing
specialties and bath accessories. Bristan Ltd. is a provider of kitchen and bath
faucets and shower and bath accessories. Cambrian Windows Ltd. is a fabricator
of vinyl window frames and Duraflex Ltd. is an extruder of vinyl frame
components for windows, doors and sunrooms. Premier Manufacturing Ltd. is a
fabricator of vinyl window and door frames. Bristan Ltd., Cambrian Windows Ltd.,
Duraflex Ltd. and Premier Manufacturing Ltd. are headquartered in the United
Kingdom. SCE Unlimited is an installer of a broad variety of products and is
located in the U.S., and IDI Group is an installer of insulation and other
building products and is also located in the U.S. Diversified Cabinet
Distributors is a distributor and installer of cabinets and countertops and is
located in the U.S. Service Partners is a distributor and installer of
insulation and other building products in the U.S. The Company also increased
its ownership of Hansgrohe AG, a German manufacturer of kitchen and bath
faucets, hand-held and fixed showerheads, luxury shower systems and steam
showers, from approximately 27 percent to 64 percent. Accordingly, the assets
and liabilities of Hansgrohe AG have been included in the Company's consolidated
financial statements at December 31, 2002. For the year ended December 31, 2002,
the Company recorded equity earnings from Hansgrohe

13

AG; the Company will begin consolidating the majority interest in the operating
results of Hansgrohe AG in 2003.

These acquisitions provide the Company with opportunities to broaden its
product and service offerings and enter new markets, and contributed
approximately $370 million in net sales for the year ended December 31, 2002.

The aggregate net purchase price of these 2002 acquisitions was
approximately $1.2 billion, including cash of $699 million, assumed debt of $81
million and Company common stock valued at $399 million. At December 31, 2002,
Hansgrohe AG had $45 million of bank and other debt. The excess of net purchase
price over the fair value of net tangible assets acquired was approximately $1
billion. Of this amount, $42 million, based primarily on independent appraisals,
was allocated to other identifiable intangible assets including $19 million to
registered trademarks that are not subject to amortization and approximately $23
million to other definite-lived intangible assets. The remaining excess purchase
price of approximately $1 billion represented acquired goodwill. Of the goodwill
and other identifiable intangible assets, the Company estimates that
approximately $270 million will be deductible for income tax purposes.

The results of these 2002 acquisitions are included in the consolidated
financial statements from the respective dates of acquisition. Had these
companies been acquired effective January 1, 2001, pro forma unaudited
consolidated net sales and net income would have approximated $10.3 billion and
$636 million for 2002 and $9.4 billion and $259 million for 2001, respectively.
In addition to earnings from 2002 acquisitions already included in the
consolidated statements of income, pro forma unaudited consolidated diluted
earnings per common share would have increased by approximately $.06 and $.11
for 2002 and 2001, respectively, from these 2002 acquisitions. See Note B to the
consolidated financial statements for additional information regarding
acquisitions.

PLANNED DISPOSITION OF BUSINESSES

In December 2000, the Company adopted a plan to dispose of several
businesses that the Company believed were not core to its long-term growth
strategies. Management estimated the expected proceeds from these planned
dispositions based on various analyses, including valuations by certain
specialists. For certain of these businesses, the related carrying value
exceeded expected proceeds. Accordingly, a non-cash, pre-tax charge of $90
million was recorded in December 2000 with adjustments to goodwill of $60
million and other long-lived assets of $30 million.

During 2002, the Company completed the sale of its StarMark Cabinetry, Inc.
business for cash proceeds of approximately $15 million, which approximated book
value. During 2001, the Company completed the sale of its Inrecon and American
Metal Products businesses for cash proceeds of approximately $232 million, which
approximated their combined book values. In addition, the Company continues to
guarantee the value of 1.6 million shares of Company common stock at a stock
price of $40 per share related to the Inrecon transaction (through June 2004).
The liability for this guarantee, which approximated $30 million at both
December 31, 2002 and 2001, has been recorded in accrued liabilities and is
marked to market each reporting period. StarMark was included in the Cabinets
and Related Products segment, Inrecon was included in the Installation and Other
Services segment and American Metal Products was included in the Other Specialty
Products segment. The Company anticipated the remaining dispositions to be
substantially completed by the end of 2002. However, due to various factors,
including the weakened economic environment and uncertainty in the financial
markets, the remaining businesses are no longer held for sale.

In the fourth quarter of 2002, the Company recognized a pre-tax gain of
$15.6 million related to certain long-lived assets which were written down in
December 2000 as part of the Company's plan for disposition. The gain resulted
from an adjustment of the assets to the lower
14

of original carrying value or current market value, principally based on a
change in the relationship with a major customer for one of the businesses.

The sales and results of operations of the businesses sold in 2002 and 2001
are included in the Company's results of continuing operations through the date
of disposition. These businesses contributed sales of $11 million, $237 million
and $301 million in 2002, 2001 and 2000, respectively, and operating (loss)
profit of $(.4) million, $13 million and $(8) million in 2002, 2001 and 2000,
respectively; the changes in sales and operating (loss) profit include the
effect of dispositions completed in 2002 and 2001.

SECURITIES OF FURNISHINGS INTERNATIONAL INC.

During 1996, the Company completed the sale of its home furnishings
products segment to Furnishings International Inc. ("FII"). Proceeds to the
Company from the sale totaled $1,050 million, consisting of cash of $708
million, junior debt securities and equity securities. The Company's aggregate
investment in FII at December 31, 2000 was $553.7 million including securities
and other short-term advances. During 2001, the Company recorded $28.9 million
of interest income from the 12% pay-in-kind junior debt securities of FII and
loaned $10 million to FII in the form of an additional pay-in-kind senior note.

The U.S. furniture industry was adversely affected by the ongoing economic
weakness in its markets in 2001, by the bankruptcies of a number of major
retailers and by increased import competition. In the third quarter of 2001,
management of FII advised the Company that it was pursuing the disposition of
all of its businesses and that the expected consideration from the sale of such
businesses would not be sufficient to pay amounts due to the Company in
accordance with the terms of the junior debt securities. Accordingly, the
Company reevaluated the carrying value of its securities of FII and, in the
third quarter of 2001, recorded a $460 million pre-tax, non-cash charge to write
down this investment to approximately $133 million, which represented the
approximate fair value of the consideration ultimately expected to be received
from FII for the repayment of the indebtedness. During the second quarter of
2002, FII substantially completed the disposition of its operations. Certain
non-Masco shareholders of FII contributed their FII shares back to FII resulting
in Masco becoming the majority shareholder. Accordingly, the remaining assets
and liabilities of FII have been included in the Company's consolidated
financial statements. The fair value of the remaining net assets of FII
represented proceeds for the Company's investment in securities of Furnishings
International Inc. The remaining net assets were primarily comprised of notes
receivable and other assets of $75 million, four million shares of Furniture
Brands International common stock valued at $121 million (which was the market
value at June 28, 2002), net of pension obligations of approximately $75 million
and other accrued liabilities of $12 million.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company has largely funded its growth through cash
provided by a combination of its operations, long-term bank debt and other
borrowings, and by the issuance of Company common stock including for certain
mergers and acquisitions.

Bank credit lines are maintained to ensure the availability of funds. The
credit lines with banks syndicated in the United States at December 31, 2002
include a $1.25 billion Amended and Restated 5-year Revolving Credit Agreement
due and payable in November 2005 and a $750 million 364-day Revolving Credit
Agreement that expires in November 2003. These agreements allow for borrowings
denominated in U.S. dollars or European euros. The previous 364-day revolving
credit agreement expired in November 2002 and was decreased from $1.0 billion to
$750 million at the request of the Company based on its strong cash position and
expected cash flows in 2003. There were no borrowings under either agreement at
December 31, 2002.

15

Interest is payable on borrowings under these agreements based on various
floating rate options as selected by the Company (approximately 2.4 percent
during 2002).

In 2001, the Company also had notes payable to banks syndicated in Europe.
At December 31, 2001, approximately $181 million of European bank debt related
to a term loan facility expiring in July 2002, and approximately $189 million
represented borrowings under lines of credit primarily expiring in 2003. During
2002, these borrowings were repaid and the European credit facilities were
terminated at the Company's request.

Certain debt agreements contain limitations on additional borrowings; at
December 31, 2002, the Company had additional borrowing capacity of up to $1.8
billion. Certain debt agreements also contain a requirement for maintaining a
certain level of net worth; at December 31, 2002, the Company's net worth
exceeded such requirement by approximately $1.6 billion.

In December 2002, the Company replenished the amount of debt and equity
securities issuable under its unallocated shelf registration statement with the
Securities and Exchange Commission pursuant to which the Company is able to
issue up to a combined $2 billion of debt and equity securities. In addition,
the Company increased its shelf registration related to common stock that can be
issued in connection with acquisitions to 50 million shares.

The Company had cash and cash investments in excess of $1.0 billion at
December 31, 2002 as a result of the strong cash flow from operations and debt
and equity financings undertaken in 2002. The Company issued $1.4 billion of
debt (net of issuance costs) in 2002 in order to take advantage of historically
low long-term interest rates. The proceeds were utilized to retire debt
aggregating $804 million with the remainder used for general corporate purposes,
including investments in marketable equity securities, bond funds and other
investments. The Company has $700 million of debt coming due in the next 18
months and the Company believes that it has effectively, in part, prefunded
these obligations at favorable interest rates. In addition, the holders of the
Company's Zero Coupon Convertible Notes, at their option, can cause the Company
to repurchase the notes for approximately $800 million in April 2004.

During 2002, the Company increased its quarterly common stock dividend four
percent to $.14 per share. This marks the 44th consecutive year in which
dividends have been increased. Although the Company is aware of the greater
interest in yield by many investors and has maintained an increased dividend
payout in recent years, the Company continues to believe that its shareholders'
long-term interests are best served by investing a significant portion of its
earnings in the future growth of the Company.

Maintaining high levels of liquidity and cash flow are among the Company's
financial strategies. The Company's total debt as a percent of total
capitalization decreased to 47 percent at December 31, 2002 from 49 percent at
December 31, 2001. The Company's working capital ratio was 2.0 to 1 and 2.1 to 1
at December 31, 2002 and 2001, respectively.

16

CASH FLOWS

Significant sources and (uses) of cash in the past three years are
summarized as follows, in thousands:

The Company's cash and cash investments increased $754.6 million to
$1,066.6 million at December 31, 2002, from $312.0 million at December 31, 2001.

Net cash provided by operations in 2002 of approximately $1.2 billion
consisted primarily of net income adjusted for non-cash items, including
depreciation and amortization of $220.3 million, a $146.8 million charge, net
related to the litigation settlement, $92.4 million after-tax charge related to
the cumulative effect of accounting change, net, $24.1 million charge for the
impairment of certain investments and other non-cash items. Excluding working
capital of acquired companies at the time of acquisition, net working capital
increased by approximately $13 million. Days sales in accounts receivable at
December 31, 2002 decreased modestly compared to 2001 levels and days sales in
inventory decreased to 76 days at December 31, 2002 from 88 days at December 31,
2001, primarily due to the Company's working capital improvement initiatives.

Cash provided by financing activities in 2002 was $767.4 million, and
included cash outflows of $267.9 million for cash dividends paid, $166.2 million
for the acquisition and retirement of Company common stock in open-market
transactions and $31.3 million for the acquisition of Company common stock for
the Company's long-term stock incentive award plan. Offsetting these cash
outflows were cash inflows of $598.3 million from the issuance of Company common
stock and $634.5 million from a net increase in debt.

At December 31, 2002, the Company had remaining authorization to repurchase
up to an additional 48.3 million shares of its common stock in open-market
transactions or otherwise.

In 2002, the Company issued $300 million of 4.625% notes due 2007; $850
million of 5.875% notes due 2012; and $300 million of 6.5% notes due 2032.
Proceeds from these debt issuances, net of issuance costs, aggregated
approximately $1.4 billion and were used to retire $803.7 million principally of
bank debt and other notes; the remaining proceeds of $634.5 million were used
for general corporate purposes and other investing activities.

17

Cash used for investing activities was approximately $1.3 billion in 2002
and included $736.0 million for 2002 acquisitions (Note B to the consolidated
financial statements sets forth additional information regarding the non-cash
portion of acquisition costs), $284.7 million for capital expenditures and
$326.9 million for the net purchases of marketable equity securities, bond funds
and other investments. Cash provided by investing activities in 2002 included
$20.9 million of proceeds from the disposition of businesses and $30.5 million
from other cash inflows.

The Company continues to invest in automating its manufacturing operations
and increasing its productivity, in order to be a more efficient producer and to
improve customer service. Capital expenditures for 2002 were $284.7 million,
compared with $274.4 million for 2001 and $388.0 million for 2000; for 2003,
capital expenditures, excluding those of any potential 2003 acquisitions, are
expected to approximate $300 million. Capital expenditure levels in 2000 were
increased for additional facilities related to anticipated increased demand for
certain existing products as well as for new products. Depreciation and
amortization expense for 2002 totaled $220.3 million, compared with $269.5
million for 2001 and $215.9 million for 2000; for 2003, depreciation and
amortization expense, excluding any potential 2003 acquisitions, is expected to
approximate $245 million. The decrease in depreciation and amortization expense
for 2002 results from the implementation of SFAS No. 142, "Goodwill and Other
Intangible Assets," whereby the Company is no longer amortizing goodwill and
other indefinite-lived intangible assets. Amortization expense totaled $38.7
million, $105.7 million and $70.4 million in 2002, 2001 and 2000, respectively,
including goodwill amortization of $93.2 million and $66.2 million in 2001 and
2000, respectively. The increase in non-goodwill amortization expense is due to
the amortization of definite-lived intangible assets relating to recent
acquisitions.

Costs of environmental responsibilities and compliance with existing
environmental laws and regulations have not had, nor in the opinion of the
Company are they expected to have, a material effect on the Company's capital
expenditures, financial position or results of operations.

The Company believes that its present cash balance and cash flows from
operations are sufficient to fund its near-term working capital and other
investment needs. The Company believes that its longer-term working capital and
other general corporate requirements will be satisfied through cash flows from
operations and, to the extent necessary, from bank borrowings, future financial
market activities and proceeds from asset sales.

CONSOLIDATED RESULTS OF OPERATIONS

SALES AND OPERATIONS

Net sales for 2002 were $9.4 billion, representing an increase of 14
percent over 2001. Excluding results from acquisitions and divestitures, net
sales increased 8 percent compared with 2001. The increase in net sales in 2002
is principally due to relatively favorable economic and business conditions in
certain of the Company's markets, which contributed to higher unit sales volume
of certain products, particularly cabinets, architectural coatings, decorative
hardware, vinyl windows and faucets.

Net sales for 2001 were $8.3 billion, representing an increase of 15
percent over 2000. Excluding acquisitions and divestitures, net sales were flat
in 2001 compared with 2000. The Company continued to experience weak economic
and business conditions in its markets in 2001 including a softness in sales of
home improvement products in North America and Europe, customer inventory
reduction programs, competitive market conditions and pricing pressures and, to
a lesser extent, the continued effect of a strong U.S. dollar.

Cost of sales as a percentage of sales for 2002 was 68.5 percent as
compared with 70.1 percent for 2001 and 68.3 percent for 2000. The decrease in
cost of sales as a percentage of sales for

18

2002 reflects sales volume increases in all of the Company's business segments
as well as the favorable influence of the Company's profit improvement
initiatives. The increase in cost of sales as a percentage of sales for 2001
compared with 2000 reflects the under-absorption of fixed overhead costs, in
part related to the higher level of capital expenditures in recent years,
competitive pricing pressures, plant shutdown costs and asset write-downs,
higher energy costs and a less favorable product mix.

Selling, general and administrative expenses before the charge for
litigation settlement, net in 2002, and after general corporate expense and
excluding amortization of acquired goodwill ($93.2 million and $66.2 million in
2001 and 2000, respectively), as a percent of sales were 16.0 percent in 2002
compared with 16.2 percent in 2001 and 16.1 percent in 2000.

Operating profit margins, before both the charge for litigation settlement,
net and the income related to the planned disposition of businesses in 2002, the
charge for the planned disposition of businesses in 2000, after general
corporate expense and excluding goodwill amortization expense in 2001 and 2000,
was 15.5 percent, 13.7 percent and 15.6 percent for 2002, 2001 and 2000,
respectively.

Operating profit margins, before both the charge for litigation settlement,
net and the income related to the planned disposition of businesses in 2002, the
charge for the planned disposition of businesses in 2000, before general
corporate expense and excluding goodwill amortization in 2001 and 2000, was 16.6
percent, 14.8 percent and 16.9 percent in 2002, 2001 and 2000, respectively. The
Company's operating profit margins decreased in 2001 due principally to the
items discussed above and in the "Business Segment and Geographic Area Results"
section.

OTHER INCOME (EXPENSE), NET

In 2002, the Company recorded a $24.1 million pre-tax, non-cash charge for
the write-down of certain investments, including private equity funds and other
financial investments.

Other items, net in 2002 include $38.3 million of realized losses, net from
the sale of marketable equity securities, dividend income of $17.4 million and
$.8 million of expenses, net regarding other investments. In addition, the
Company incurred $13.8 million of losses related to interest ratelock
transactions entered into in anticipation of the Company issuing fixed rate debt
in the third quarter of 2002. Other items, net in 2002 also include realized
foreign currency exchange losses of $4.2 million and other miscellaneous
expenses.

In 2001, the Company recorded an aggregate $530 million pre-tax, non-cash
charge for the write-down of certain investments, including $460 million for the
securities of Furnishings International Inc. ("FII") held by the Company and $70
million for an other-than-temporary decline in the fair value of principally
technology-related marketable equity securities investments.

Other interest income for 2001 and 2000 includes $28.9 million and $52.4
million, respectively, from the 12% pay-in-kind junior debt securities of FII.
In the third quarter of 2001, as a result of the impairment of the Company's
investment in FII, the Company discontinued recording interest income from FII.

Other items, net in 2001 include $13.0 million of realized gains, net from
the sale of marketable equity securities, dividend income of $7.8 million and
$3.9 million of income, net regarding other investments. Other items, net in
2001 also include realized foreign currency exchange losses of $6.5 million and
other miscellaneous expenses.

During 2000, the Company recorded a $55 million pre-tax, non-cash charge,
including $20 million for the write-down of certain marketable equity securities
and other investments and $35 million related to its investment in Emco Limited.
During November 2000, the

19

Company participated in a transaction in which an affiliate of Heartland
Industrial Partners L.P. acquired a majority interest in MascoTech, Inc. In
exchange for a portion of its ownership in MascoTech, Inc. (subsequently renamed
Metaldyne Corporation), the Company received proceeds aggregating $90 million,
including cash and preferred stock of $57 million and $33 million, respectively.
The Company recognized a $27.9 million pre-tax gain from its participation in
this transaction.

Other items, net in 2000 include $1.3 million of realized losses, net from
the sale of marketable equity securities, dividend income of $3.3 million and
$47.0 million of income, net regarding other investments. Other items, net in
2000 also include realized foreign currency exchange gains of $22.0 million,
income from the early retirement of debentures of $19.0 million and other
miscellaneous expenses.

Interest expense was $236.9 million, $239.3 million and $191.4 million in
2002, 2001 and 2000, respectively.

NET INCOME AND EARNINGS PER COMMON SHARE

Net income for 2002 was $589.7 million compared with $198.5 million for
2001 and $591.7 million for 2000. Diluted earnings per common share for 2002
were $1.15 compared with $.42 for 2001 and $1.31 for 2000. Net income in 2002
was negatively affected by a $92.3 million after-tax charge for the litigation
settlement ($166.0 million pre-tax), net of an insurance recovery ($19.2 million
pre-tax) as well as a $92.4 million after-tax ($116.8 million pre-tax) non-cash
goodwill impairment charge recognized as a cumulative effect of change in
accounting principle in the first half of 2002. Net income for 2001 included a
$344 million after-tax ($530 million pre-tax), non-cash charge for the
write-down of certain investments. Net income for 2000 was negatively affected
by an aggregate $94 million after-tax ($145 million pre-tax), non-cash charge
for the planned disposition of businesses and the write-down of certain
investments.

The Company's effective tax rate on income before the cumulative effect of
accounting change, net was 33.8 percent in 2002 compared with 34.0 percent in
2001 and 33.8 percent in 2000. The decrease in 2002 was due principally to
continued lower taxes on foreign earnings. The Company estimates that its
effective tax rate should approximate 35 percent for 2003.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

On January 1, 2002, Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," became effective. In accordance
with SFAS No. 142, the Company is no longer recording amortization expense
related to goodwill and other indefinite-lived intangible assets. The Company
adopted a new critical accounting policy regarding goodwill and other
indefinite-lived intangible assets. See Note A to the consolidated financial
statements.

The Company completed the two-step transitional goodwill and other
indefinite-lived intangible assets impairment testing in 2002. The first step of
the test was to perform an assessment of whether there was an indication that
such assets were impaired. To the extent that an indication of impairment
existed, the Company performed a second test to measure the amount of the
impairment. The Company tested for impairment of its reporting units by
comparing fair value of the reporting units to carrying value of the reporting
units. Fair value was determined using a discounted cash flow method. This
evaluation indicated that other indefinite-lived intangible assets were not
impaired, however, goodwill recorded for certain of the Company's reporting
units, principally in Europe, was impaired. Certain of the Company's European
businesses have been affected by continued weak market and economic conditions.
On adoption of SFAS No. 142, a non-cash goodwill impairment charge of $92.4
million, net of income tax credit of $24.4 million, was recognized as a
cumulative effect of change in accounting principle, effective January 1, 2002.
20

OUTLOOK FOR THE COMPANY

Given the unsettled world political situation and related uncertain
economic environment, which could result in a possible downturn in housing
starts, increased energy costs and a moderation in consumer spending, the
Company is cautious about its business prospects for 2003. The Company expects
that operating expenses will increase in 2003, particularly for such items as
energy, insurance and pension costs. A major new product launch and certain
other items and the accelerated vesting of deferred compensation programs due to
the recent untimely passing of Masco's President, Raymond F. Kennedy will reduce
earnings in the first quarter, seasonally the Company's lowest quarter of the
year.

The Company continues to face challenges in the marketplace, including
pricing pressures, shifts in distribution, customer consolidations and foreign
competition. The Company is committed to improving future performance, and has
implemented a number of cost containment, growth and profit improvement
initiatives. Additionally, the Company is continuing to review all phases of its
operations for potential improvements, and believes that these efforts and
contributions from acquisitions should have a positive effect on results for the
full year 2003.

21

BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS

The following table sets forth the Company's net sales and operating profit
information by business segment and geographic area, dollars in millions.

(A) Percentage change in sales excluding acquisitions and divestitures.

(B) Before general corporate expense and the charge for the litigation
settlement, net.

(C) Included in determining operating profit for 2000 was a $90 million non-cash
charge for the planned disposition of certain businesses for the following
segments: Cabinets and Related Products -- $20 million; Plumbing
Products -- $40 million; Decorative Architectural Products -- $20 million;
and Other Specialty Products -- $10 million.

(D) Excluding goodwill amortization.

(E) Including goodwill amortization.

22

BUSINESS SEGMENT RESULTS DISCUSSION

Changes in net sales in the following Segment and Geographic Area
discussion exclude the impact of acquisitions and divestitures. Changes in
operating profit margins in the following Segment and Geographic Area discussion
exclude goodwill amortization expense and the charge for the litigation
settlement, net.

CABINETS AND RELATED PRODUCTS

Net sales of Cabinets and Related Products increased 10 percent in 2002
compared with 2001 due to increased sales volume of cabinets largely through
expansion of North American retail distribution channels at major home centers
as well as new product introductions. Net sales of Cabinets and Related Products
decreased 1 percent in 2001 compared with 2000 primarily due to competitive
pricing pressures to maintain market share in a flat new construction market, a
reduction in sales of ready-to-assemble products to a certain customer, reduced
renovation and remodeling activity and lost sales to certain retail customers
who declared bankruptcy in 2000. This segment was also negatively influenced by
a stronger U.S. dollar in 2001 and 2000, which affected the translation of local
currencies of European operations included in this segment.

Operating profit margins were 13.5 percent, 10.5 percent and 13.2 percent
for the years ended December 31, 2002, 2001 and 2000, respectively. Operating
profit margins in 2002 were positively influenced by increased unit sales
volume, profit improvement initiatives and the reduction of both plant shutdown
costs and other asset write-downs, offset in part by costs related to a
discontinued product line. In addition to the influence of pricing pressures,
operating profit margins in 2001 were negatively influenced by plant shutdown
costs, the under-absorption of fixed costs, higher energy costs, increased bad
debt expense and the lower results of European cabinet companies. Operating
profit margins in 2001 also include the effect of plant start-up and system
implementation costs related to a European cabinet company.

PLUMBING PRODUCTS

Net sales of Plumbing Products increased 11 percent in 2002 compared with
2001 due to the favorable influence of new product introductions, which
contributed to higher unit sales volume of faucets to retailers in 2002 as well
as increased growth in the wholesale distribution channels. The increase in
sales of Plumbing Products in 2002 also includes the influence of inventory
reduction programs of certain key customers in the first six months of 2001,
which reduced sales in 2001 and favorably influenced the 2002 versus 2001
comparisons. Net sales of Plumbing Products decreased 5 percent in 2001 compared
with 2000 due principally to lower unit sales volume related to a weaker economy
and customer inventory reduction programs, competitive pricing pressures and, to
a lesser extent, a stronger U.S. dollar.

Operating profit margins were 16.4 percent, 14.2 percent and 15.7 percent
for the years ended December 31, 2002, 2001 and 2000, respectively. Operating
profit margins in 2002 were favorably affected by the leveraging of fixed costs
over increased unit sales volume as well as the Company's profit improvement
initiatives. Operating profit margins in 2002 also include the favorable effect
of a $15.6 million pre-tax gain relating to the reclassification of certain
assets to held and used in accordance with SFAS No. 144. Operating profit
margins in 2001 were negatively affected by competitive pricing pressures, the
lower results of European companies, higher energy costs and product mix,
including an increased percentage of lower margin faucet units. Initiatives in
2001 including investments in new product and systems development, and the
re-pricing of certain of the Company's faucet units also contributed to the
decline in 2001 operating profit margins. Operating profit margins in 2000 were
negatively affected by

23

competitive pricing pressures, higher energy costs and the $40 million charge
for the planned disposition of businesses.

INSTALLATION AND OTHER SERVICES

Net sales of Installation and Other Services increased 3 percent in 2002
compared with 2001 and 10 percent in 2001 compared with 2000. The increase in
net sales for this segment in 2002 was principally attributable to increases in
sales of non-insulation installed products which offset lower market pricing
related to lower insulation material purchase costs. As a result of integration
activities related to a significant acquisition in early 2001, geographic market
penetration activities at existing operations were not as significant in 2001.
Operating profit margins were 16.5 percent, 17.0 percent and 16.8 percent for
the years ended December 31, 2002, 2001 and 2000, respectively.

DECORATIVE ARCHITECTURAL PRODUCTS

Net sales of Decorative Architectural Products increased 9 percent in 2002
compared with 2001 due largely to higher unit sales volume of paints, stains and
decorative hardware through North American retail distribution channels. Net
sales of Decorative Architectural Products increased 4 percent in 2001 compared
with 2000 due to higher unit sales volume of paints and stains, offset in part
by a reduction in decorative lock and hardware sales.

Operating profit margins were 21.1 percent, 19.2 percent and 19.1 percent
for the years ended December 31, 2002, 2001 and 2000, respectively. The
improvement in operating profit margins for this segment reflect the leveraging
of fixed costs over higher unit sales volume, the absence of plant start-up and
relocation costs that contributed to lower operating margins in 2001 and lower
levels of bad debt expense and certain asset write-downs in 2002 compared with
2001.

OTHER SPECIALTY PRODUCTS

Net sales of Other Specialty Products increased 2 percent in 2002 compared
with 2001, principally due to increased sales of vinyl windows. A weaker U.S.
dollar also had a favorable effect on the translation of local currencies of
European operations included in this segment. Net sales of Other Specialty
Products decreased 8 percent in 2001 compared with 2000 due to continued
economic weakness and inventory reduction programs with certain customers. A
strong U.S. dollar in 2001 and 2000 had a negative effect on the translation of
local currencies of European operations included in this segment.

Operating profit margins were 19.3 percent, 17.4 percent and 16.3 percent
for the years ended December 31, 2002, 2001 and 2000, respectively. The
improvement in operating profit margins in 2002 was positively influenced by
recent acquisitions, which in the aggregate have higher operating profit margins
than the segment average, as well as lower levels of bad debt expense and asset
write-downs in 2002 compared with 2001. The operating profit margins in 2001
were also negatively affected by the lower results of European operations.

Operating profit margin in 2000 was negatively affected by a $10 million
charge for the planned disposition of businesses and by the lower margins of
certain European operations included in this segment.

GEOGRAPHIC AREA RESULTS DISCUSSION

NORTH AMERICA

Net sales from North American operations increased 9 percent in 2002 over
2001, due to increased sales of certain products, including cabinets,
architectural coatings, vinyl windows and faucets. North American net sales in
2001 increased 1 percent over 2000. Strength in sales of
24

paints and stains and insulation installation sales in 2001 was almost entirely
offset by weakness in sales for many of the Company's other North American
product offerings. This weakness included the influence of a softened economy,
customer inventory reduction programs, competitive market conditions and pricing
pressures.

Operating profit margins were 17.3 percent, 15.4 percent and 16.3 percent
for the years ended December 31, 2002, 2001 and 2000, respectively. The
improvement in operating profit margins for 2002 principally reflects the
leveraging of fixed costs over increased sales volume, product mix and the
influence of the Company's profit improvement initiatives. The decline in
operating profit margins in 2001 included the effects of the under-absorption of
fixed costs, competitive pricing pressures, product mix and higher energy costs.
In addition, operating profit margin in 2001 was negatively influenced by plant
shutdown charges and asset write-downs as well as by increased bad debt expense.
Operating profit margin in 2000 was negatively affected by a $70 million charge
for the planned disposition of certain businesses.

INTERNATIONAL, PRINCIPALLY EUROPE

Net sales of the Company's International operations increased 5 percent in
2002 compared with 2001 due to the impact of foreign exchange rates. A weaker
U.S. dollar had a positive effect on the translation of European results in 2002
compared with 2001, increasing European net sales in 2002 by approximately 5
percent. International operations' net sales decreased 8 percent in 2001
compared with 2000. In 2001, a stronger U.S. dollar had a negative effect on the
translation of European results, lowering European net sales by approximately 4
percent in 2001 compared with 2000. Operating profit margins were 13.6 percent,
11.9 percent and 13.0 percent for the years ended December 31, 2002, 2001 and
2000, respectively. Operating profit margins for International operations for
2002 benefited from profit improvement initiatives as well as the positive
influence of recent acquisitions, which in the aggregate have higher operating
profit margins than the International operations' average. Operating profit
margins for 2001 include the effect of plant start-up and system implementation
costs. Operating results of certain European operations have been adversely
influenced over the past several years, in part due to weakness in the European
markets, competitive pricing pressures on certain products and the effect of a
higher percentage of lower margin sales to total sales. Operating profit margin
in 2000 was negatively affected by a $20 million charge for the planned
disposition of certain businesses; excluding such charge, operating profit
margin was 14.5 percent in 2000.

OTHER MATTERS

COMMITMENTS AND CONTINGENCIES

Litigation

The Company is subject to lawsuits and pending or asserted claims with
respect to matters generally arising in the ordinary course of business. Note S
to the consolidated financial statements discusses certain specific claims
pending against the Company and its subsidiary, Behr Process Corporation, with
respect to several exterior wood coating products previously manufactured by
Behr.

Other Commitments

Metaldyne Corporation (formerly MascoTech, Inc.) held an option expiring in
October 2003 to require the Company to purchase up to $100 million aggregate
amount of subordinated debt securities of Metaldyne. During 2002, Metaldyne
canceled this option.

25

With respect to the Company's investments in private equity funds, the
Company, at December 31, 2002, has under certain circumstances, commitments to
contribute additional capital to such funds of up to $105 million.

During 2000, approximately 300 of the Company's key employees purchased
from the Company 8.4 million shares of Company common stock for cash totaling
$156.0 million under an Executive Stock Purchase Program ("Program"). The stock
was purchased at $18.50 per share, the approximate market price of the common
stock at the time of purchase. Participants in the Program financed their
purchases with five-year full recourse personal loans, at a market interest
rate, from a bank syndicate. Each participant is fully responsible at all times
for repaying their bank loans when they become due and is personally responsible
for 100 percent of any loss in the market value of the purchased stock except
that in the event of death, if the participant is in a loss position, the
participant's estate may transfer the purchased stock to the Company and require
the Company to assume responsibility for the loan. The Company has guaranteed
repayment of the loans, for which the aggregate amount outstanding was
approximately $170 million at December 31, 2002, in the event of a default by a
participant. The Company believes that the likelihood of any significant
defaults by participants on payment of these loans is remote.

The Company enters into contracts, which include reasonable and customary
indemnifications that are standard for the industries in which it operates. Such
indemnifications include claims against builders for issues relating to the
Company's products and workmanship. In conjunction with divestitures and other
transactions, the Company occasionally provides reasonable and customary
indemnifications relating to various items including: the enforceability of
trademarks; legal and environmental issues; provisions for sales returns; and
asset valuations. The Company has never had to pay a material amount related to
these indemnifications and evaluates the probability that amounts may be
incurred and appropriately records an estimated liability when probable.

Guarantees

On November 25, 2002, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," an interpretation of FASB Statements No. 5, 57, and 107
and Rescission of FASB Interpretation No. 34. This new interpretation clarifies
that a guarantor is required to disclose (a) the nature of the guarantee,
including the approximate term of the guarantee, how the guarantee arose, and
the events or circumstances that would require the guarantor to perform under
the guarantee; (b) the maximum potential amount of future payments under the
guarantee; (c) the carrying amount of the liability, if any, for the guarantor's
obligations under the guarantee; and (d) the nature and extent of any recourse
provisions or available collateral that would enable the guarantor to recover
the amounts paid under the guarantee. Regarding product warranties, FIN 45
specifies that instead of disclosing the maximum potential amount of future
payments, companies should disclose the guarantor's accounting policy and
methodology used in determining their liability along with a tabular
reconciliation of changes in the guarantor's product warranty liability for the
reporting period.

Warranty

Certain of the Company's products and product finishes and services are
generally covered by a warranty to be free from defects in material and
workmanship for periods ranging from one year to the lifetime, under certain
circumstances, of the original purchaser. At the time of sale, the Company
accrues a warranty liability for estimated costs to provide products, parts or
service to repair or replace products in satisfaction of warranty obligations.
The Company's

26

estimate of costs to service its warranty obligations is based on historical
experience and expected future conditions. To the extent that the Company
experiences any changes in warranty claim activity or costs associated with
servicing those claims, its warranty liability is adjusted accordingly. See Note
S to the consolidated financial statements for the tabular disclosure.

A significant portion of the Company's business is at the consumer retail
level through home centers and major retailers. A consumer may return a product
to a retail outlet that is a warranty return. However, certain retail outlets do
not distinguish between warranty and other types of returns when they claim a
return deduction from the Company. The Company's revenue recognition policy
takes into account this type of return when recognizing income, and deductions
are recorded at the time of sale.

Acquisition-Related Commitments

The Company, as part of recent purchase agreements for certain companies
acquired, provides for the payment of additional consideration in either cash or
Company common stock, contingent upon whether certain conditions are met,
including the operating performance of the acquired businesses and the price of
the Company's common stock. Shares that are contingently issuable under these
guarantees are included in the calculation of diluted earnings per common share.
See Note S to the consolidated financial statements for additional information.

As part of other recent acquisition agreements, the Company has additional
consideration payable in cash of approximately $85 million contingent on the
operating performance of the acquired businesses.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On January 1, 2002, Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
became effective. This statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. The adoption of SFAS No.
144 did not have a material effect on the Company's consolidated financial
statements.

Emerging Issues Task Force ("EITF") Issue No. 01-9, "Accounting for
Consideration Given by a Vendor to a Customer," became effective for the Company
in the first quarter of 2002. EITF No. 01-9 requires that certain expenses,
including cooperative advertising expense and other customer-related incentives,
be recorded as a reduction of sales unless certain conditions are met. The
adoption of EITF No. 01-9 resulted in the reclassification of $74 million and
$65 million of cooperative advertising expense from selling expense to a
reduction of sales for 2001 and 2000, respectively. This reclassification did
not result in a change in net income or earnings per common share.

In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "Accounting for Costs from Exit or Disposal Activities," which
requires, among other things, that a liability for costs associated with an exit
or disposal activity be recognized when the liability is incurred. The adoption
of SFAS No. 146 is effective for all exit or disposal activities subsequent to
December 31, 2002, and is not expected to have a material effect on the
Company's consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the
requirements of SFAS No. 5, "Accounting for Contingencies" relating to a
guarantor's accounting for and disclosure of the issuance of certain types of
guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor
must recognize a liability for the fair value of the obligation it assumes. FIN
45 also expands the

27

disclosure requirements for guarantees and product warranties. The disclosure
provisions of FIN 45 are effective for 2002 (see Note S to the consolidated
financial statements); the initial recognition and measurement provisions of FIN
45 are effective for guarantees issued or modified after December 31, 2002. The
Company is currently evaluating the impact that the recognition and measurement
provisions of FIN 45 will have on its consolidated financial statements.

In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of SFAS No. 123,"
became effective. This statement provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. The Company has elected to change its method of
accounting for stock-based compensation and will implement SFAS No. 123,
"Accounting for Stock-Based Compensation," effective January 1, 2003, using the
prospective method as defined by SFAS No. 148.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN
46 requires that a Company that has a controlling financial interest in a
variable interest entity consolidate the assets, liabilities and results of
operations of the variable interest entity in the Company's consolidated
financial statements. The Company believes that FIN 46 will not have a material
impact on the Company's consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company has considered the provisions of Financial Reporting Release
No. 48, "Disclosure of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments, and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity Instruments."
The Company had no significant holdings of derivative financial or
commodity-based instruments at December 31, 2002. A review of the Company's
other financial instruments and risk exposures at that date revealed that the
Company had exposure to interest rate and foreign currency exchange rate risks.
The Company also had market price risk related to its marketable equity
securities, bond funds and other investments. At December 31, 2002, the Company
performed sensitivity analyses to assess these risks and concluded that the
effects of hypothetical changes of 200 basis points in average interest rates, a
10 percent change in foreign currency exchange rates or a 10 percent decline in
the market value of the Company's long-term investments would not be expected to
materially affect the Company's financial position, results of operations or
cash flows.

28

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of Masco Corporation:

In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Masco Corporation and its subsidiaries at December 31,
2002 and 2001, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note A of the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill and
other intangible assets.

PRICEWATERHOUSECOOPERS LLP

Detroit, Michigan
February 21, 2003

29

MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

AT DECEMBER 31, 2002 AND 2001

See notes to consolidated financial statements.

30

MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See notes to consolidated financial statements.

31

MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See notes to consolidated financial statements.

32

MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See notes to consolidated financial statements.

33

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. ACCOUNTING POLICIES

Principles of Consolidation. The consolidated financial statements include
the accounts of Masco Corporation and all majority-owned subsidiaries. All
significant intercompany transactions have been eliminated. Corporations that
are 20 to 50 percent owned are accounted for using the equity method of
accounting. Corporations that are less than 20 percent owned are accounted for
using the cost method of accounting unless the Company exercises significant
influence over the investee.

Use of Estimates and Assumptions in the Preparation of Financial
Statements. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of any contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results may differ
from these estimates and assumptions.

Revenue Recognition. The Company recognizes revenue as title to products is
transferred to customers or services are rendered, net of applicable provisions
for discounts, returns and allowances.

Foreign Currency. The financial statements of the Company's foreign
subsidiaries are measured using the local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at exchange rates as
of the balance sheet date. Revenues and expenses are translated at average
exchange rates in effect during the year. The resulting cumulative translation
adjustments have been recorded in other comprehensive income. Realized foreign
currency transaction gains and losses are included in the consolidated
statements of income.

Cash and Cash Investments. The Company considers all highly liquid
investments with an initial maturity of three months or less to be cash and cash
investments.

Receivables. The Company does significant business with a number of
individual customers, including certain home centers. The Company monitors its
exposure for credit losses and maintains related allowances for doubtful
accounts. At December 31, 2002 and 2001, accounts and notes receivable are
presented net of allowances of $69.4 million and $56.2 million, respectively.

Property and Equipment. Property and equipment, including significant
betterments to existing facilities, are recorded at cost. Upon retirement or
disposal, the cost and accumulated depreciation are removed from the accounts
and any gain or loss is included in the consolidated statements of income.
Maintenance and repair costs are charged against earnings as incurred.

Depreciation. Depreciation is computed principally using the straight-line
method over the estimated useful lives of the assets. Annual depreciation rates
are as follows: buildings and land improvements, 2 to 10 percent, and machinery
and equipment, 5 to 33 percent. Depreciation expense was $184.2 million, $163.8
million and $145.5 million in 2002, 2001 and 2000, respectively.

Goodwill and Other Intangible Assets. On January 1, 2002, Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," became effective. In accordance with SFAS No. 142, the Company is no
longer recording amortization expense related to goodwill and other
indefinite-lived intangible assets. The Company has provided a supplemental
disclosure of adjusted net income and basic and diluted earnings per common

34

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A. ACCOUNTING POLICIES -- (CONTINUED)

share for the twelve months ended December 31, 2001 and 2000 on the consolidated
statements of income to exclude goodwill amortization expense.

The Company completed the transitional goodwill and other indefinite-lived
intangible assets impairment testing in 2002 by comparing fair value of the
reporting units to carrying value of the reporting units. Fair value was
determined using a discounted cash flow method. This evaluation indicated that
other indefinite-lived intangible assets were not impaired, however, goodwill
recorded for certain of the Company's reporting units, principally in Europe,
was impaired. Certain of the Company's European businesses have been affected by
continued weak market and economic conditions. On adoption of SFAS No. 142, a
non-cash goodwill impairment charge of $92.4 million, net of income tax credit
of $24.4 million, was recognized as a cumulative effect of change in accounting
principle, effective January 1, 2002. The income tax credit was reduced due to a
portion of the impaired goodwill being non-deductible for tax purposes.

The Company completed the annual impairment testing of goodwill and other
indefinite-lived intangible assets utilizing a discounted cash flow method in
the fourth quarter of 2002. This test indicated that no additional impairment of
such assets occurred in 2002. Intangible assets with finite useful lives are
amortized over their estimated useful lives.

Stock Options and Awards. The Company has elected to continue to apply, in
2002, the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and accordingly, the Company's stock options do
not constitute compensation expense in the determination of net income in the
consolidated statements of income. The following table illustrates the pro forma
effect on net income and earnings per common share as if the fair value method
were applied to all outstanding and unvested stock options for the years ended
December 31, 2002, 2001 and 2000, in thousands, except per common share amounts:

35

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A. ACCOUNTING POLICIES -- (CONCLUDED)

For SFAS No. 123 calculation purposes, the weighted average grant date fair
values of option shares, including restoration options, granted in 2002, 2001
and 2000, were $6.66, $7.94 and $7.16, respectively. The fair values of these
options were estimated at the grant dates using a Black-Scholes option pricing
model with the following assumptions for 2002, 2001 and 2000, respectively:
risk-free interest rate -- 3.8%, 5.2% and 6.7%; dividend yield -- 2.7%, 2.1% and
1.9%; volatility factor -- 37%, 36% and 28%; and expected option life -- 6
years, 6 years and 7 years.

The Company has elected to change its method of accounting for stock-based
compensation and will implement the accounting prescribed by SFAS No. 123
"Accounting for Stock-Based Compensation" effective January 1, 2003. The Company
will use the prospective method, as defined by SFAS No. 148, for determining
stock-based compensation expense. This may result in approximately $14 million
of additional pre-tax expense in 2003 related to options issued if the same
number of options are issued in 2003 as have generally been issued in the past.

Shipping and Handling Costs. The Company classifies shipping and handling
costs in cost of sales.

Fair Value of Financial Instruments. The carrying value of financial
instruments reported in the consolidated balance sheets for current assets,
current liabilities and long-term variable-rate debt approximates fair value.
The fair value of financial instruments that are carried as non-current
investments (other than those accounted for using the equity method of
accounting) is based principally on information from investment fund managers
and other assumptions, on quoted market prices for those or similar investments,
by estimating the fair value of consideration to be received or by discounting
future cash flows using a discount rate that reflects the risk of the underlying
investments. The fair value of the Company's long-term fixed-rate debt
instruments was based principally on quoted market prices for the same or
similar issues or the current rates available to the Company for debt with
similar terms and remaining maturities. The aggregate market value of
non-current investments and long-term debt at December 31, 2002 was
approximately $875 million and $4,572 million, as compared with the aggregate
carrying value of $963 million and $4,316 million, respectively, and at December
31, 2001 such aggregate market value was approximately $624 million and $3,579
million, as compared with the aggregate carrying value of $638 million and
$3,628 million, respectively.

Reclassifications. Certain prior-year amounts have been reclassified to
conform to the 2002 presentation in the consolidated financial statements.

B. ACQUISITIONS

During 2002, the Company completed the acquisition of several home
improvement products and service companies including Brasstech, Inc. and Bristan
Ltd. (Plumbing Products segment), Cambrian Windows Ltd., Duraflex Ltd. and
Premier Manufacturing Ltd. (Other Specialty Products segment), SCE Unlimited,
IDI Group and several relatively small installation service companies
(Installation and Other Services segment), and Diversified Cabinet Distributors
(Cabinets and Related Products segment). The results of these acquisitions are
included in the consolidated financial statements from the respective dates of
acquisition. Brasstech, Inc. is a United States (U.S.) company headquartered in
California and is a manufacturer of premium price-point plumbing products,
including faucets, plumbing specialties and bath accessories. Bristan Ltd. is a
provider of kitchen and bath faucets and shower and bath accessories.

36

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

B. ACQUISITIONS -- (CONTINUED)

Cambrian Windows Ltd. is a fabricator of vinyl window frames and Duraflex Ltd.
is an extruder of vinyl frame components for windows, doors and sunrooms.
Premier Manufacturing Ltd. is a fabricator of vinyl window and door frames.
Bristan Ltd., Cambrian Windows Ltd., Duraflex Ltd. and Premier Manufacturing
Ltd. are headquartered in the United Kingdom. SCE Unlimited is an installer of a
broad variety of products and is located in the U.S., and IDI Group is an
installer of insulation and other building products and is also located in the
U.S. Diversified Cabinet Distributors is a distributor and installer of cabinets
and countertops and is located in the U.S. These acquisitions provide the
Company with opportunities to broaden its product and service offerings. The
aggregate net purchase price of these acquisitions was $332 million, including
cash of $210 million, 1.7 million shares of Company common stock valued at $45
million (the market value of Company common stock at the date of acquisition)
and assumed debt of $77 million.

In the third quarter of 2002, the Company also acquired Service Partners
LLC, a distributor and installer of insulation and other building products in
the U.S. (Installation and Other Services segment). The aggregate net purchase
price was $735 million, including $411 million of cash, 11.6 million shares of
Company common stock valued at $320 million (approximately $27.52 per common
share, the guaranteed share price) and assumed debt of $4 million. The
acquisition of Service Partners allows the Company to accelerate its growth in
the Installation and Other Services segment by adding to the Company's strategy
of offering value-added services to major customers, particularly homebuilders,
and to expand sales of certain of the Company's existing products through
Service Partners' distribution network.

The Company also acquired an additional 37 percent of Hansgrohe AG, a
German manufacturer of kitchen and bath faucets, hand-held and fixed
showerheads, luxury shower systems and steam showers (Plumbing Products
segment), resulting in a majority ownership of approximately 64 percent.
Accordingly, the assets and liabilities (and the minority interest of 36
percent) of Hansgrohe AG have been included in the Company's consolidated
financial statements at December 31, 2002. For the year ended December 31, 2002,
the Company recorded equity earnings from Hansgrohe AG; the Company will begin
consolidating the majority interest in the operating results of Hansgrohe AG in
2003. The net purchase price for the additional ownership was $112 million
including cash of $78 million and 1.6 million shares of Company common stock
valued at $34 million, which was the market value at the date of acquisition. At
December 31, 2002, Hansgrohe AG had $45 million of bank and other debt.

The aggregate net purchase price of these 2002 acquisitions was
approximately $1.2 billion, including cash of $699 million, assumed debt of $81
million and Company common stock valued at $399 million. The excess of the
aggregate acquisition costs for these purchase acquisitions over the fair value
of identifiable net assets acquired, totaling approximately $1 billion,
represents acquired goodwill.

37

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

B. ACQUISITIONS -- (CONTINUED)

The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed, pertaining to the 2002 acquisitions, at the
acquisition dates, in thousands:

Of the goodwill and other identifiable intangible assets above, the Company
estimates that approximately $270 million will be deductible for income tax
purposes. The Company is in the process of obtaining third-party valuations of
certain assets; accordingly, certain purchase price allocations are subject to
refinement.

The results of these 2002 acquisitions are included in the consolidated
financial statements from the respective dates of acquisition. Had these
companies been acquired effective January 1, 2001, pro forma unaudited
consolidated net sales, income before cumulative effect of accounting change,
net income and diluted earnings per common share would have been as follows, in
thousands, except per common share amounts:

Certain recent purchase agreements provide for the payment of additional
consideration in either cash or common stock, contingent upon whether certain
conditions are met, including the operating performance of the acquired business
and the price of the Company's common stock. Common shares that are contingently
issuable at December 31, 2002 have been included in the computation of diluted
earnings per common share for 2002. Additional consideration, totaling
approximately $40 million (including 765,400 shares of Company common stock
valued at approximately $22 million, which was the market value at the date of
payment), became payable during 2002 and has been recorded as additional
goodwill.

38

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

B. ACQUISITIONS -- (CONCLUDED)

During 2001, the Company acquired several businesses through purchase
acquisitions. The aggregate net purchase price of these acquisitions was $1.7
billion, including cash of $560 million, assumed debt of $312 million and
Company capital stock valued at $785 million. The excess of the aggregate costs
for these acquisitions over the fair value of identifiable net assets acquired,
totaling approximately $1.2 billion, represented acquired goodwill.

In 2000, the Company acquired several businesses through purchase
acquisitions. The aggregate net purchase price of these acquisitions was
approximately $730 million, including four million shares of Company common
stock valued at approximately $90 million and assumed debt. The excess of the
aggregate costs for these purchase acquisitions over the fair value of
identifiable net assets acquired, totaling approximately $530 million,
represented acquired goodwill.

C. PLANNED DISPOSITION OF BUSINESSES

In December 2000, the Company adopted a plan to dispose of several
businesses that the Company believed were not core to its long-term growth
strategies. Management estimated the expected proceeds from these planned
dispositions based on various analyses, including valuations by certain
specialists. For certain of these businesses, the related carrying value
exceeded expected proceeds. Accordingly, a non-cash, pre-tax charge of $90
million was recorded in December 2000 with adjustments to goodwill of $60
million and other long-lived assets of $30 million.

During 2002, the Company completed the sale of its StarMark Cabinetry, Inc.
business for cash proceeds of approximately $15 million, which approximated book
value. During 2001, the Company completed the sale of its Inrecon and American
Metal Products businesses for cash proceeds of approximately $232 million, which
approximated their combined book values. In addition, the Company continues to
guarantee the value of 1.6 million shares of Company common stock at a stock
price of $40 per share related to the Inrecon transaction (through June 2004).
The liability for this guarantee, which approximated $30 million at both
December 31, 2002 and 2001, has been recorded in accrued liabilities and is
marked to market each reporting period. StarMark was included in the Cabinets
and Related Products segment, Inrecon was included in the Installation and Other
Services segment and American Metal Products was included in the Other Specialty
Products segment. The Company anticipated the remaining dispositions to be
substantially completed by the end of 2002. However, due to various factors,
including the weakened economic environment and uncertainty in the financial
markets, the remaining businesses are no longer held for sale.

In the fourth quarter of 2002, the Company recognized a pre-tax gain of
$15.6 million related to certain long-lived assets which were written down in
December 2000 as part of the Company's plan for disposition. The gain resulted
from an adjustment of the assets to the lower of original carrying value or
current market value, principally based on a change in the relationship with a
major customer for one of the businesses.

The sales and results of operations of the businesses sold in 2002 and 2001
are included in the Company's results of continuing operations through the date
of disposition. These businesses contributed sales of $11 million, $237 million
and $301 million in 2002, 2001 and 2000, respectively, and operating (loss)
profit of $(.4) million, $13 million and $(8) million in 2002, 2001 and 2000,
respectively; the changes in sales and operating (loss) profit include the
effect of dispositions completed in 2002 and 2001.

39

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

D. SECURITIES OF FURNISHINGS INTERNATIONAL INC.

During 1996, the Company completed the sale of its home furnishings
products segment to Furnishings International Inc. ("FII"). Proceeds to the
Company from the sale totaled $1,050 million, consisting of cash of $708
million, junior debt securities and equity securities. The Company's aggregate
investment in FII at December 31, 2000 was $553.7 million including securities
and other short-term advances. During 2001, the Company recorded $28.9 million
of interest income from the 12% pay-in-kind junior debt securities of FII and
loaned $10 million to FII in the form of an additional pay-in-kind senior note.

The U.S. furniture industry was adversely affected by the ongoing economic
weakness in its markets in 2001, by the bankruptcies of a number of major
retailers and by increased import competition. In the third quarter of 2001,
management of FII advised the Company that it was pursuing the disposition of
all of its businesses and that the expected consideration from the sale of such
businesses would not be sufficient to pay amounts due to the Company in
accordance with the terms of the junior debt securities. Accordingly, the
Company reevaluated the carrying value of its securities of FII and, in the
third quarter of 2001, recorded a $460 million pre-tax, non-cash charge to write
down this investment to approximately $133 million, which represented the
approximate fair value of the consideration ultimately expected to be received
from FII for the repayment of the indebtedness. During the second quarter of
2002, FII substantially completed the disposition of its operations. Certain
non-Masco shareholders of FII contributed their FII shares back to FII resulting
in Masco becoming the majority shareholder. Accordingly, the remaining assets
and liabilities of FII have been included in the Company's consolidated
financial statements. The fair value of the remaining net assets of FII
represented proceeds for the Company's investment in securities of Furnishings
International Inc. The remaining net assets were primarily comprised of notes
receivable and other assets of $75 million, four million shares of Furniture
Brands International common stock valued at $121 million (which was the market
value at June 28, 2002), net of pension obligations of approximately $75 million
and other accrued liabilities of $12 million.

E. INVENTORIES

Inventories are stated at the lower of cost or net realizable value, with
cost determined principally by use of the first-in, first-out method. Cost in
inventory includes purchased parts, materials, direct labor and applied
manufacturing overhead.

F. INVESTMENTS

EQUITY INVESTMENTS IN AFFILIATES

At December 31, 2002, investments accounted for under the equity method of
accounting principally include a 42 percent interest in Emco Limited, a Canadian
distributor of plumbing and related products with approximate 2002 sales of $860
million. In December 2002, the

40

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

F. INVESTMENTS -- (CONTINUED)

Company acquired an additional 37 percent of Hansgrohe AG, a German manufacturer
of plumbing-related products, resulting in a majority ownership of approximately
64 percent. Accordingly, the assets and liabilities of Hansgrohe AG have been
included in the Company's consolidated financial statements at December 31,
2002. For the year ended December 31, 2002, the Company recorded equity earnings
from Hansgrohe AG; the Company will begin consolidating the majority interest in
the operating results of Hansgrohe AG in 2003.

The market value of the Company's investment in Emco Limited at December
31, 2002 (which may differ from the amount that could then have been realized
upon disposition), based on quoted market prices at that date, was $51 million,
as compared with the Company's related carrying value of $66 million (see Note T
for additional information). In 2000, the Company recorded a non-cash, pre-tax
charge of $35 million for an other-than-temporary decline in the fair value of
its investment in Emco Limited. The Company believes that the current difference
between its carrying value and the market value of Emco Limited is temporary,
and that no further adjustment to the carrying value is necessary at December
31, 2002. The Company's carrying value of its investment in Emco Limited
exceeded its equity in the underlying net book value by approximately $21
million at December 31, 2002. This excess has been amortized through December
31, 2001; in accordance with SFAS No. 142, such goodwill is no longer being
amortized.

During November 2000, the Company participated in a transaction in which an
affiliate of Heartland Industrial Partners L.P. acquired a majority interest in
MascoTech, Inc. In exchange for a portion of its ownership in MascoTech, Inc.,
the Company received proceeds aggregating $90 million, including cash and
preferred stock of $57 million and $33 million, respectively. The Company
recognized a $27.9 million pre-tax gain from its participation in this
transaction, which is included in other income and expense together with $17.3
million of equity earnings for 2000. Subsequent to the transaction, MascoTech,
Inc. was renamed Metaldyne Corporation. The Company is accounting for its
investment in Metaldyne, which totaled $67.8 million (including unpaid
cumulative preferred stock dividends) and $58.9 million at December 31, 2002 and
2001, respectively, under the cost method of accounting and includes the
investment in other assets. The Company's common equity ownership in Metaldyne
was 6 percent at December 31, 2002.

FINANCIAL INVESTMENTS

The Company maintains investments in marketable equity securities, bond
funds and a number of private equity funds principally as part of its tax
planning strategies, as any gains enhance the utilization of tax capital loss
carryforwards. Included in other long-term assets are the following financial
investments, in thousands:

41

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

F. INVESTMENTS -- (CONCLUDED)

The Company's investments in marketable equity securities and bond funds at
December 31, 2002 and 2001 were as follows, in thousands:

Investments in marketable equity securities and bond funds are accounted
for as available-for-sale. Accordingly, the Company records these investments at
fair value, and unrealized gains and losses are recognized, net of tax effect,
through shareholders' equity, as a component of other comprehensive income.
Realized gains and losses and charges for other-than-temporary impairments are
included in determining net income, with related purchase costs based on
specific identification. The Company's investments in private equity funds and
other investments are carried at cost and are evaluated for impairment at each
reporting period or when circumstances indicate an impairment may exist. In the
fourth quarter of 2002, the Company recognized an impairment charge of $24.1
million principally related to certain of its investments in private equity
funds and other financial investments. At December 31, 2002, the carrying value
of the Company's investments in private equity funds exceeded the estimated
market value, as determined by the fund managers, by approximately $45 million;
however, most funds have lives of 10 years or more and changes in estimated fair
value are considered in relation to the investment term.

Income (loss) from financial investments is included in other, net within
other income (expense), net, and is summarized as follows, in thousands:

42

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

G. PROPERTY AND EQUIPMENT

H. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the twelve months ended
December 31, 2002, by segment, are as follows, in thousands:

(A) Additions to the carrying amount of goodwill include acquisitions and other
purchase price adjustments. In 2002, additions principally include
acquisitions of approximately $1 billion, the recording of approximately $40
million of additional consideration for prior years' acquisitions and other
adjustments related to the finalization of certain purchase price
allocations.

(B) Other changes to the carrying amount of goodwill principally include foreign
currency translation adjustments.

Other indefinite-lived intangible assets of $251.1 million at December 31,
2002 primarily include registered trademarks. The carrying value of the
Company's definite-lived intangible assets is $102.8 million at December 31,
2002 (net of accumulated amortization of $55.6 million) and principally includes
customer relationships and non-compete agreements, with a weighted average
amortization period of 10 years. Amortization expense related to the
definite-lived intangible assets was $25.6 million in 2002.

At December 31, 2002, amortization expense related to the definite-lived
intangible assets during each of the next five years were approximately as
follows: 2003 -- $18.6 million; 2004 -- $16.9 million; 2005 -- $12.4 million;
2006 -- $8.8 million; and 2007 -- $6.7 million.

43

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

I. ACCRUED LIABILITIES

The Company's accrued liabilities were primarily comprised as follows, in
thousands:

J. LONG-TERM DEBT

All of the notes and debentures above are senior indebtedness and, other
than bank notes and Zero Coupon Convertible Senior Notes, are nonredeemable.

On June 24, 2002, the Company issued $500 million of 5.875% notes due 2012,
resulting in net proceeds of $490.8 million. On August 20, 2002, the Company
issued $300 million of 4.625% notes due 2007, resulting in net proceeds of
$296.7 million. On August 20, 2002, the Company
44

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

J. LONG-TERM DEBT -- (CONTINUED)

also issued $300 million of 6.5% notes due 2032, resulting in net proceeds of
$294.6 million. These proceeds are net of aggregate debt issuance costs of $17.9
million, which are being amortized as the related notes mature. On October 16,
2002, the Company issued $350 million of 5.875% notes due 2012, resulting in net
proceeds of $356.1 million, including a premium of $8.3 million and debt
issuance costs of $2.3 million, which are being amortized through 2012. The
Company used the proceeds from the debt issuances to reduce bank indebtedness
and for other general corporate purposes, including investments in marketable
equity securities, bond funds, private equity funds and other investments.

In July 2001, the Company issued Zero Coupon Convertible Senior Notes due
2031 ("Notes"), resulting in gross proceeds of approximately $750 million. If
the Notes were outstanding in July 2031, the accreted value would be $1.9
billion. The issue price per Note was $394.45 per $1,000 principal amount which
represents a yield to maturity of 3 1/8% compounded semi-annually. The Company
will not pay cash interest on the Notes prior to maturity except in certain
circumstances, including possible contingent interest payments that are not
expected to be material. Holders of the Notes in the aggregate can convert the
Notes into approximately 24 million shares of Company common stock if the
average price of Company common stock for a period of 20 trading days exceeds
119 2/3%, declining by 1/3% each year thereafter, of the accreted value of a
Note ($413 per $1,000 principal amount at maturity as of December 31, 2002)
divided by the conversion rate of 12.7243 shares for each $1,000 principal
amount at maturity of the Note or $38.82 per common share at December 31, 2002.
The Notes also become convertible if the Company's credit rating is reduced to
below investment grade, or if certain actions are taken by the Company.

Holders of the Notes had the option to require the Company to repurchase
their Notes on July 20, 2002; holders can also require that the Notes be
repurchased by the Company on January 20, 2005 and 2007; July 20, 2011; and
every 5 years thereafter. The Company at its option can satisfy any such
repurchase with Company common stock or cash. The Company has the ability to
refinance any such repurchase with other long-term debt.

Before July 20, 2002, the Company could not redeem the Notes. From July 20,
2002 to January 25, 2007, the Company may redeem all, but not part, of the Notes
at their accreted value subject to the Company's stock price achieving the
conversion price as noted above. The Company may, at any time on or after
January 25, 2007, redeem all or part of the Notes at their accreted value.

In 2002, the Company amended the terms of the Notes to permit an additional
date, April 20, 2004, on which holders, at their option, can cause the Company
to repurchase the Notes, at the then accreted value of $429.57 per Note, payable
by the Company in cash on April 26, 2004. Under the original terms of the Notes,
holders of $26.4 million of Notes required the Company to repurchase, for $10.7
million cash, the accreted value of such Notes in July 2002.

Debt issuance costs related to the Notes totaled $15.3 million and were
amortized using the straight-line method through July 20, 2002.

At December 31, 2002, debt agreements with banks syndicated in the United
States relate to a $1.25 billion Amended and Restated 5-year Revolving Credit
Agreement with a group of banks due and payable in November 2005 and a $750
million 364-day Revolving Credit Agreement that expires in November 2003. These
agreements allow for borrowings denominated in U.S. dollars or European euros.
There were no borrowings under either agreement at December 31, 2002. Interest
is payable on borrowings under these agreements based on various floating rate
options
45

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

J. LONG-TERM DEBT -- (CONCLUDED)

as selected by the Company (approximately 2.4 percent and 4.8 percent for the
year ended December 31, 2002 and 2001, respectively).

In 2001, the Company also had notes payable to banks syndicated in Europe
that related to borrowings principally for European acquisitions and expansion.
At December 31, 2001, approximately $181 million of European bank debt related
to a term loan facility expiring in July 2002, and approximately $189 million
represented borrowings under lines of credit primarily expiring in 2003. During
2002, these borrowings were repaid and the European credit facilities were
terminated at the Company's request.

Certain debt agreements contain limitations on additional borrowings; at
December 31, 2002, the Company had additional borrowing capacity of up to $1.8
billion. Certain debt agreements also contain a requirement for maintaining a
certain level of net worth; at December 31, 2002, the Company's net worth
exceeded such requirement by approximately $1.6 billion.

At December 31, 2002, the maturities of long-term debt during each of the
next five years were approximately as follows: 2003 -- $321.2 million;
2004 -- $527.3 million; 2005 -- $17.9 million; 2006 -- $812.5 million; and
2007 -- $307.2 million.

In December 2002, the Company replenished the amount of debt and equity
securities issuable under its unallocated shelf registration statement with the
Securities and Exchange Commission pursuant to which the Company is able to
issue up to a combined $2 billion of debt and equity securities. In addition,
the Company increased its shelf registration related to common stock that can be
issued in connection with acquisitions to 50 million shares.

Interest paid was approximately $204 million, $246 million and $203 million
in 2002, 2001 and 2000, respectively.

K. SHAREHOLDERS' EQUITY

In May 2002, the Company sold 22 million shares of Company common stock in
a public offering, resulting in proceeds to the Company of $598.3 million (net
of issuance costs of $14.4 million).

During 2000, approximately 300 of the Company's key employees purchased
from the Company 8.4 million shares of Company common stock for cash totaling
$156.0 million under an Executive Stock Purchase Program. The stock was
purchased at $18.50 per share, the approximate market price of the common stock
at the time of purchase.

In December 2002, the Company's Board of Directors authorized the
repurchase of up to 50 million shares of its common stock in open-market
transactions or otherwise, replacing a previous Board of Directors authorization
established in 2000. At December 31, 2002, the Company had remaining
authorization to repurchase up to 48.3 million shares of its common stock in
open-market transactions or otherwise. Approximately 8.3 million, 3.1 million
and 12.6 million common shares were repurchased and retired in 2002, 2001 and
2000, respectively, at a cost aggregating approximately $166 million, $67
million and $220 million in 2002, 2001 and 2000, respectively.

On the basis of amounts paid (declared), cash dividends per common share
were $.54 1/2 ($.55) in 2002, $.52 1/2 ($.53) in 2001 and $.49 ($.50) in 2000,
respectively.

In 1995, the Company's Board of Directors announced the approval of a
Shareholder Rights Plan. The Rights were designed to enhance the Board's ability
to protect the Company's
46

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

K. SHAREHOLDERS' EQUITY -- (CONCLUDED)

shareholders against, among other things, unsolicited attempts to acquire
control of the Company that do not offer an adequate price to all shareholders
or are otherwise not in the best interests of the shareholders. The Rights were
issued to shareholders of record in December 1995 and will expire in December
2005.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The Company's total comprehensive income (loss) was as follows, in
thousands:

The unrealized (loss) gain on marketable equity securities and bond funds
is net of income tax (credit) of $(8.6) million and $16.4 million for the years
ended December 31, 2002 and 2001, respectively.

The components of accumulated other comprehensive income (loss) were as
follows, in thousands:

Unrealized loss on marketable equity securities and bond funds is reported
net of income tax credit of $16.1 million and $7.5 million at December 31, 2002
and 2001, respectively.

The minimum pension liability is reported net of income tax credit of $34.0
million at December 31, 2002.

Realized losses on marketable securities of $29.6 million and $35.9
million, net of income tax credit, for 2002 and 2001, respectively, were
included in determining net income and were reclassified from accumulated other
comprehensive income.

L. STOCK OPTIONS AND AWARDS

The Company's 1991 Long Term Stock Incentive Plan (the "Plan") provides for
the issuance of stock-based incentives in various forms. At December 31, 2002,
outstanding stock-based incentives were primarily in the form of restricted
long-term stock awards, stock appreciation rights, phantom stock awards and
stock options. Additionally, the Company's 1997

47

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

L. STOCK OPTIONS AND AWARDS -- (CONTINUED)

Non-Employee Directors Stock Plan (the "1997 Plan") provides for the payment of
compensation to non-employee Directors partially in Company common stock.

RESTRICTED LONG-TERM STOCK AWARDS

The Company granted long-term stock awards, net of cancellations, for
1,315,000 shares, 2,582,000 shares and 2,662,000 shares of Company common stock
during 2002, 2001 and 2000, respectively, to key employees and non-employee
Directors of the Company. These long-term stock awards do not cause net share
dilution inasmuch as the Company reacquires an equal number of shares on the
open market. The weighted average grant date fair value per share of long-term
stock awards granted during 2002, 2001 and 2000 was $23, $23 and $20,
respectively. Compensation expense for the annual vesting of long-term stock
awards was $29 million, $26 million and $22 million in 2002, 2001 and 2000,
respectively. The unvested stock awards, aggregating approximately $164 million
and $162 million at December 31, 2002 and 2001, respectively, are included in
shareholders' equity and are being expensed over the respective vesting periods,
principally 10 years.

STOCK APPRECIATION RIGHTS AND PHANTOM STOCK AWARDS

In 2002 and 2000, the Company issued stock appreciation rights ("SARs") to
foreign employees with cash compensation linked to the value of 332,000 shares
(2002) and 724,000 shares (2000) of Company common stock. The Company also
issued phantom stock awards linked to the value of 25,700, 64,600 and 26,900
shares of Company common stock for the years ended December 31, 2002, 2001 and
2000, respectively. Compensation expense related to SARs and phantom stock
awards for 2002, 2001 and 2000 was $3.1 million, $5.3 million and $5.7 million,
respectively.

STOCK OPTIONS

Fixed stock options are granted to key employees and non-employee Directors
of the Company and generally have a maximum term of 10 years. The exercise price
equals the market price of Company common stock on the date of grant. These
options generally become exercisable in installments beginning in the third year
and extending through the eighth year after grant, beginning in the second year
and extending through the sixth year after grant, or beginning in the first year
and extending through the fifth year after grant.

During 2002, the Company granted stock options for 4,980,600 shares of
Company common stock and restoration stock options for 1,051,400 shares with
grant date exercise prices ranging from $20 to $29 (the market prices on the
grant dates). During 2001, the Company granted stock options for 3,251,000
shares of Company common stock and restoration stock options for 717,600 shares
with grant date exercise prices ranging from $21 to $26 (the market prices on
the grant dates). During 2000, the Company granted stock options for 9,696,000
shares of Company common stock and restoration stock options for 102,000 shares
with grant date exercise prices ranging from $19 to $24 (the market prices on
the grant dates). The Company also granted stock options for 48,000 shares,
128,000 shares and 320,000 shares of Company common stock in 2002, 2001 and
2000, respectively, to non-employee Directors of the Company with exercise
prices of $27, $22 and $21, respectively (the market prices on the grant dates).

48

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

L. STOCK OPTIONS AND AWARDS -- (CONCLUDED)

A summary of the status of the Company's fixed stock options for the three
years ended December 31, 2002 is presented below, shares in thousands:

The following table summarizes information for option shares outstanding
and exercisable at December 31, 2002, shares in thousands:

At December 31, 2002, a total of 12,499,000 shares and 565,000 shares of
Company common stock were available under the Plan and the 1997 Plan,
respectively, for the granting of stock options or restricted long-term stock
awards.

M. EMPLOYEE RETIREMENT PLANS

The Company sponsors defined-benefit and defined-contribution pension plans
for most of its employees. In addition, substantially all salaried employees
participate in non-contributory profit-sharing plans, to which payments are
determined annually by the Compensation Committee of the Board of Directors.
Aggregate charges to earnings under the Company's pension, retirement and
profit-sharing plans were $73.7 million in 2002, $63.8 million in 2001 and $53.7
million in 2000.

49

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

M. EMPLOYEE RETIREMENT PLANS -- (CONTINUED)

Net periodic pension cost for the Company's qualified defined-benefit
pension plans includes the following components, in thousands:

The following table provides a reconciliation of changes in the projected
benefit obligation, fair value of plan assets and funded status of the Company's
domestic qualified defined-benefit pension plans at December 31, in thousands:

50

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

M. EMPLOYEE RETIREMENT PLANS -- (CONCLUDED)

The major assumptions used in accounting for the Company's domestic pension
plans are as follows:

The Company also sponsors qualified defined-benefit pension plans for
certain of its foreign employees. Net periodic pension cost for these plans was
approximately $2 million in 2002. The projected benefit obligation and fair
value of plan assets was approximately $59 million and $37 million at December
31, 2002 and $50 million and $42 million at December 31, 2001, respectively. The
projected benefit obligation exceeded the plan assets by approximately $22
million at December 31, 2002 and a net liability of approximately $1 million was
recognized. Certain comparative information for the prior periods is not
included within this report as it is considered immaterial and obtaining such
information was impractical.

In addition to the Company's qualified defined-benefit pension and
retirement plans, the Company has non-qualified unfunded supplemental pension
plans covering certain employees, which provide for benefits in addition to
those provided by the qualified pension plans. The actuarial present value of
accumulated benefit obligations and projected benefit obligations related to
these non-qualified plans totaled $73.9 million and $81.8 million at December
31, 2002 and $57.2 million and $64.6 million at December 31, 2001, respectively.
Net periodic pension cost for these plans was $10.1 million, $9.4 million and
$8.2 million in 2002, 2001 and 2000, respectively.

The Company sponsors certain post-retirement benefit plans that provide
medical, dental and life insurance coverage for eligible retirees and dependents
in the United States based on age and length of service. The aggregate present
value of the unfunded accumulated post-retirement benefit obligation
approximated $5 million and $3.6 million at December 31, 2002 and 2001,
respectively.

51

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

N. SEGMENT INFORMATION

The Company's reportable segments were as follows:

Cabinets and Related Products -- principally includes assembled and
ready-to-assemble kitchen and bath cabinets; home office workstations;
entertainment centers; storage products; bookcases; and kitchen utility
products.

Plumbing Products -- principally includes faucets; plumbing fittings and
valves; bathtubs and shower enclosures; and spas.

Installation and Other Services -- principally includes the sale,
installation and distribution of insulation and other building products.

Decorative Architectural Products -- principally includes paints and
stains; mechanical and electronic lock sets; and door, window and other
hardware.

Other Specialty Products -- principally includes windows, window frame
components and patio doors; staple gun tackers, staples and other
fastening tools; hydronic radiators and heat convectors; pumps; and
venting and ventilation systems.

The above products and services are sold and provided to the home
improvement and home construction markets through mass merchandisers, hardware
stores, home centers, distributors and other outlets for consumers and
contractors.

The Company's operations are principally located in North America and
Europe. The Company's country of domicile is the United States of America.

Corporate assets consist primarily of real property, equipment, cash and
cash investments and other investments.

The Company's segments are based on similarities in products and services
and represent the aggregation of operating units for which financial information
is regularly evaluated by the Company's corporate operating executives in
determining resource allocation and assessing performance and is periodically
reviewed by the Board of Directors. Accounting policies for the segments are the
same as those for the Company. The Company primarily evaluates performance based
on operating profit and, other than general corporate expense, allocates
specific corporate overhead to each segment. The 2002 Behr litigation charge,
net has also been excluded from the evaluation of segment operating profit.

52

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

N. SEGMENT INFORMATION -- (CONTINUED)

The following table presents information about the Company by segment and
geographic area, in thousands:

53

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

N. SEGMENT INFORMATION -- (CONCLUDED)

(1) Included in net sales in 2002, 2001 and 2000 were export sales from the
U.S. of $161 million, $159 million and $162 million, respectively.

(2) Intra-company sales between segments represented less than one percent of
consolidated net sales in 2002, 2001 and 2000.

(3) Includes net sales to one customer in 2002, 2001 and 2000 of $2,329
million, $2,093 million and $1,866 million, respectively. Such net sales
were included in the following segments: Cabinets and Related Products,
Plumbing Products, Decorative Architectural Products and Other Specialty
Products.

(4) Net sales from the Company's operations in the U.S. were $7,707 million,
$6,844 million and $5,740 million in 2002, 2001 and 2000, respectively.

(5) Long-lived assets of the Company's operations in the U.S. and Europe were
$4,875 million and $1,848 million, $3,999 million and $1,335 million and
$2,626 million and $1,246 million at December 31, 2002, 2001 and 2000,
respectively.

(6) General corporate expense includes those expenses not specifically
attributable to the Company's business segments.

(7) The charge for litigation settlement relates to litigation discussed in
Note S regarding the Company's subsidiary, Behr Process Corporation, which
is included in the Decorative Architectural Products segment.

(8) Income before income taxes and cumulative effect of accounting change, net
and net income pertaining to non-U.S. operations were $178 million and $132
million, $99 million and $66 million and $108 million and $67 million for
2002, 2001 and 2000, respectively.

(9) Included in operating profit for 2000 was a $90 million non-cash charge for
the planned disposition of businesses for the following segments: Cabinets
and Related Products -- $20 million, Plumbing Products -- $40 million,
Decorative Architectural Products -- $20 million and Other Specialty
Products -- $10 million. In accordance with SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," as a result of
reclassifying certain businesses to held and used, the Company recognized a
pre-tax gain in 2002 of $15.6 million related to certain long-lived assets
in the Plumbing Products segment, which were previously written down in
December 2000 as part of the plan for disposition.

(10) Operating profit excluding goodwill amortization expense for 2001 and 2000,
respectively, was as follows: Cabinets and Related Products -- $270 million
and $336 million, Plumbing Products -- $248 million and $287 million,
Installation and Other Services -- $287 million and $144 million,
Decorative Architectural Products -- $282 million and $260 million and
Other Specialty Products -- $142 million and $98 million.

(11) Effective January 1, 2002, the Company recognized a non-cash goodwill
impairment charge as a cumulative effect of an accounting change in
accordance with the implementation of SFAS No. 142. The pre-tax impairment
charge is allocated as follows: Cabinets and Related Products -- $18.8
million, Plumbing Products -- $7.5 million, Decorative Architectural
Products -- $31.2 million and Other Specialty Products -- $59.3 million.

54

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

O. OTHER INCOME (EXPENSE), NET

In 2002, the Company recorded a $24.1 million pre-tax, non-cash charge for
the write-down of certain investments, including private equity funds and other
financial investments. In 2001, the Company recorded an aggregate $530 million
pre-tax, non-cash charge for the write-down of certain investments, including
$460 million for the securities of Furnishings International Inc. ("FII") held
by the Company and $70 million for an other-than-temporary decline in the fair
value of principally technology-related marketable equity securities
investments. During 2000, the Company recorded a $55 million pre-tax, non-cash
charge, including $20 million for the write-down of certain marketable equity
securities and other investments and $35 million related to its investment in
Emco Limited.

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

Other interest income for 2001 and 2000 includes $28.9 million and $52.4
million, respectively, from the 12% pay-in-kind junior debt securities of FII.
In the third quarter of 2001, as a result of the impairment of the Company's
investment in FII, the Company discontinued recording interest income from FII.

Other items, net in 2002 and 2001 also include realized foreign currency
exchange losses of $4.2 million and $6.5 million, respectively, as well as other
miscellaneous expenses.

Other items, net in 2000 also include realized foreign currency exchange
gains of $22.0 million, income from the early retirement of debentures of $19.0
million and other miscellaneous expenses.

55

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

P. INCOME TAXES

State and local taxes were lower in 2001 due principally to an $8 million
($5.2 million net of federal tax) favorable settlement of contested liabilities.

At December 31, 2002 and 2001, net deferred tax liability consisted of net
short-term deferred tax assets of $171.4 million and $83.4 million,
respectively, and net long-term deferred tax liabilities of $186.2 million and
$130.0 million, respectively.

During 2001, the Company recorded an aggregate $530 million pre-tax,
non-cash charge for the write-down of certain investments, including securities
of Furnishings International Inc. and principally technology-related marketable
equity securities that created a deferred tax asset of approximately $110
million at December 31, 2001, which was included in principally non-operating
investments above. In 2002, approximately $220 million of this pre-tax
write-down, along with losses realized from marketable equity securities and
other tax losses, generated a $108.9 million capital loss carryforward benefit
at December 31, 2002. The Company believes that the capital loss carryforward
will be utilized before its expiration on December 31, 2007,

56

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

P. INCOME TAXES -- (CONCLUDED)

principally through future income and gains from investments and other
identified tax-planning strategies, including the potential sale of certain
operating assets. As a result, a valuation allowance was not recorded at
December 31, 2002 or 2001.

The following is a reconciliation of the U.S. Federal statutory rate to the
provision for income taxes on income before cumulative effect of accounting
change, net:

(A) In addition, because of the utilization of a capital loss
carryforward prior to its expiration on December 31, 2001, the
Company did not have to record or pay tax on approximately $83
million of otherwise taxable capital gain in excess of the
financial statement gain resulting from the disposition of a
business during 2001.

Income taxes paid were approximately $302 million, $193 million and $314
million in 2002, 2001 and 2000, respectively.

Earnings of non-U.S. subsidiaries generally become subject to U.S. tax upon
the remittance of dividends and under certain other circumstances. Provision has
not been made at December 31, 2002 for U.S. or additional foreign withholding
taxes on approximately $530 million of remaining undistributed net income of
non-U.S. subsidiaries, as such income is intended to be permanently reinvested;
it is not practical to estimate the amount of deferred tax liability on such
income.

57

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Q. EARNINGS PER COMMON SHARE

The following are reconciliations of the numerators and denominators used
in the computations of basic and diluted earnings per common share, in
thousands:

The outstanding preferred stock, which is convertible into 16,667,000
shares of Company common stock and carries substantially the same attributes as
Company common stock, has been treated as if converted in the computation of
basic and diluted common shares.

Approximately 24 million common shares for both 2002 and 2001, related to
the Zero Coupon Convertible Senior Notes due 2031, were not included in the
computation of diluted earnings per common share since, at December 31, 2002 and
2001, they were not convertible according to their terms. Additionally, 3.5
million common shares, 2.4 million common shares and 4.2 million common shares
for 2002, 2001 and 2000, respectively, related to stock options were excluded
from the computation of diluted earnings per common share due to their anti-
dilutive effect since the option exercise price was greater than the Company's
common stock price at each year-end.

R. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On January 1, 2002, Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
became effective. This statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. The adoption of SFAS No.
144 did not have a material effect on the Company's consolidated financial
statements.

Emerging Issues Task Force ("EITF") Issue No. 01-9, "Accounting for
Consideration Given by a Vendor to a Customer," became effective for the Company
in the first quarter of 2002. EITF No. 01-9 requires that certain expenses,
including cooperative advertising expense and other customer-related incentives,
be recorded as a reduction of sales unless certain conditions are met. The
adoption of EITF No. 01-9 resulted in the reclassification of $74 million and
$65 million of cooperative advertising expense from selling expense to a
reduction of sales for 2001 and 2000, respectively. This reclassification did
not result in a change in net income or earnings per common share.

58

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

R. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- (CONCLUDED)

In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "Accounting for Costs from Exit or Disposal Activities," which
requires, among other things, that a liability for costs associated with an exit
or disposal activity be recognized when the liability is incurred. The adoption
of SFAS No. 146 is effective for all exit or disposal activities subsequent to
December 31, 2002, and is not expected to have a material effect on the
Company's consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the
requirements of SFAS No. 5, "Accounting for Contingencies" relating to a
guarantor's accounting for and disclosure of the issuance of certain types of
guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor
must recognize a liability for the fair value of the obligation it assumes. FIN
45 also expands the disclosure requirements for guarantees and product
warranties. The disclosure provisions of FIN 45 are effective for 2002 (see Note
S); the initial recognition and measurement provisions of FIN 45 are effective
for guarantees issued or modified after December 31, 2002. The Company is
currently evaluating the impact that the recognition and measurement provisions
of FIN 45 will have on its consolidated financial statements.

In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of SFAS No. 123,"
became effective. This statement provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. The Company has elected to change its method of
accounting for stock-based compensation and will implement SFAS No. 123,
"Accounting for Stock-Based Compensation," effective January 1, 2003, using the
prospective method as defined by SFAS No. 148.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN
46 requires that a Company that has a controlling financial interest in a
variable interest entity consolidate the assets, liabilities and results of
operations of the variable interest entity in the Company's consolidated
financial statements. The Company believes that FIN 46 will not have a material
impact on the Company's consolidated financial statements.

S. OTHER COMMITMENTS AND CONTINGENCIES

LITIGATION

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

In May 1998, a civil suit was filed in the Grays Harbor County, Washington
Superior Court against Behr Process Corporation, a subsidiary of the Company.
The case involves four exterior wood coating products, which represent a
relatively small part of Behr's total sales. The plaintiffs allege, among other
things, that after applying these products, the wood surfaces suffered excessive
mildewing in the very humid climate of western Washington. The trial court
certified the case as a class action, including all purchasers of the products
who reside in nineteen counties in western Washington. Behr denies the
allegations. In May 2000, the court entered a default against Behr as a
discovery sanction. Thereafter, the jury returned a verdict awarding damages to
the named plaintiffs. The damages awarded for the eight homeowner claims

59

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

S. OTHER COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

(excluding one award to the owners of a vacation resort) ranged individually
from $14,500 to $38,000. The awards were calculated using a formula based on the
product used, the nature and square footage of wood surface and certain other
allowances. In addition, the court granted the plaintiffs' motion for attorneys'
fees. Behr appealed the trial court judgment to the Court of Appeals of
Washington. On September 13, 2002, the Court of Appeals issued its opinion,
ruling in favor of the plaintiffs on substantially all issues. The opinion was
unexpected in light of the unprecedented and disproportionate extent of the
default sanction ordered by the trial court and the belief by the Company and
its outside legal counsel that the rulings by the trial court had errors that
would be reversed by the appellate review. Following the trial court judgment in
the Washington case, Behr and the Company were served with 21 complaints filed
by consumers in state courts in Alabama, Alaska, California, Illinois, New
Jersey, New York, Oregon, and Washington, and in British Columbia, Canada and
Ontario, Canada. The complaints allege that certain of Behr's exterior wood
coating products fail to perform as warranted, resulting in damage to the
plaintiffs' wood surfaces. Trial courts in Washington and Illinois certified
their cases as national class actions. A trial court in Oregon certified its
case as a statewide class action. In addition, the Company has been advised that
one state is conducting an investigation into the effectiveness of certain of
these products.

On October 29, 2002, the Company announced settlements to resolve all of
these other class actions in the United States. Behr and attorneys representing
class members agreed to a settlement of the nineteen-county Washington lawsuit
(the "Washington Settlement"), to which the trial court granted preliminary
approval on December 13, 2002. A fairness hearing has been scheduled for March
17, 2003, at which time the parties will request that the court grant final
approval of the Washington Settlement. Under the terms of the Washington
Settlement, eligible class members who successfully complete the claims process
will receive a cash award based on the product used, the type and square footage
of wood surface and certain other allowances. The awards will be calculated
using the damage formulas in the judgment entered by the trial court. The
Company will pay cash awards to class members, the costs of notice to the class,
the costs to administer the claims process and certain other expenses, up to an
aggregate maximum of $55 million. In addition, the Company will pay class
counsel fees awarded by the trial court up to a maximum of $12.5 million. Based
upon the sales volume of the related products during the class period, the
damage formulas ordered by trial court, the expected class size, the estimated
number of claims that would be filed on a timely basis, the estimated average
cost per claim, and the experience of the Company's legal counsel with class
action settlements, the Company estimates that the total cost of the Washington
Settlement will approximate the maximum, $67.5 million, excluding amounts that
the Company expects to recover from liability insurers and other third parties.

The Company also reached a settlement that management expects will resolve
all other class actions pending in the U.S. (the "National Settlement"). The
National Settlement received preliminary court approval on October 29, 2002. A
fairness hearing was held on March 6, 2003, at which the court heard arguments
in support of the named plaintiffs' request for final approval of the settlement
and arguments of 15 class members who filed objections to the settlement. At the
conclusion of the hearing the court took the named plaintiffs' request for final
approval under submission. Class members who objected to the settlement would
have the right to file an appeal within 60 days following entry of a judgment of
final approval.

The National Settlement requires the dismissal of all other related
litigation pending in the United States. The National Settlement provides that
eligible class members who successfully

60

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

S. OTHER COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

complete the claims process can elect to receive either a merchandise
certificate for a discount on the purchase of Behr products, or a cash award
based on the product used, the square footage of wood surface, proof of
purchase, the interval of time between product application and the appearance of
mildew, and the extent of mildew damage. The Company will pay a settlement
amount of up to $107.5 million, which will include total cash payments to
eligible class members, the cost of notice to the class, the cost to administer
the claims process, and the face value of merchandise certificates issued to
eligible claimants up to $7.5 million. If the aggregate face value of
merchandise certificates issued exceeds $7.5 million, the excess will not be
credited against the $107.5 million settlement amount but will be settled by
issuance of additional merchandise certificates. The National Settlement also
provides that the Company will pay class counsel fees awarded by the trial
court, up to a maximum of $25 million. Based upon the sales volume of the
related products during the class period, the expected class size, the estimated
number of claims that would be filed on a timely basis, the estimated size and
mix of claims (merchandise certificate versus cash), the estimated average cost
per claim and the experience of the Company's legal counsel with class action
settlements, the Company estimates that the cost of the National Settlement will
range from $96 million to $136 million (including adjustments due to the $107.5
million limit), excluding amounts that the Company expects to recover from
liability insurers. This estimate includes costs (for notice and claims
administration) of $5 to $6 million, attorney fees of $25 million, merchandise
certificate costs ranging from $5 to $11 million, and cash awards ranging from
$61 to $102 million.

Management believes, based on the advice of outside counsel, that these
settlements described above will receive final approval without substantial
changes, although there can be no assurance in that regard. The Company
estimates that the combined cost of both settlements and the Company's
additional legal costs (estimated at $2 million) will range from $166 million to
$206 million. The Company concluded that no amount within that range is more
likely than any other, and therefore reflected $166 million as a liability in
the third quarter 2002 consolidated financial statements in accordance with
accounting principles generally accepted in the United States. Following court
approval, the Company expects that payment of the settlements will commence in
the second quarter of 2003 and will be completed by the first quarter of 2004.

In November 2002, Behr and two of its liability insurers reached an
agreement regarding the insurers' contribution to fund the National Settlement.
Subject to the limits of Behr's liability policies, the insurers will pay 80% of
the notice costs, claims administration costs and attorney fees awarded to the
plaintiffs. The Company recorded income of $19.2 million in the fourth quarter
of 2002 to reflect the insurers' agreement to fund these costs. Subject to
policy limits, the insurers will also fund varying percentages of any claims
paid, depending on the type of claim (merchandise certificate or cash) and
policy years in which the products were applied. The amount of the insurers'
contribution related to claims will not be reasonably estimable until the claims
process is implemented following final court approval.

In February 2003, Behr and the insurers also reached agreement on funding
the Washington Settlement, with terms similar to those of the funding agreement
for the National Settlement. Subject to policy limits, the insurers will pay 80%
of the notice costs, claims administration costs and attorney fees awarded to
the plaintiffs, and a varying percentage of claims paid depending on the policy
year of product application.

61

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

S. OTHER COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

WARRANTY

Certain of the Company's products and product finishes and services are
generally covered by a warranty to be free from defects in material and
workmanship for periods ranging from one year to the lifetime, under certain
circumstances, of the original purchaser. At the time of sale, the Company
accrues a warranty liability for estimated costs to provide products, parts or
service to repair or replace products in satisfaction of warranty obligations.
The Company's estimate of costs to service its warranty obligations is based on
historical experience and expected future conditions. To the extent that the
Company experiences any changes in warranty claim activity or costs associated
with servicing those claims, its warranty liability is adjusted accordingly.

The following is a reconciliation of the Company's warranty liability, in
thousands:

Balance at December 31, 2001................................ $ 56,390
Accruals for warranties issued during 2002.................. 30,100
Accruals related to pre-existing warranties................. 140
Settlements made (in cash or kind) during 2002.............. (22,870)
Other (foreign exchange impact)............................. 880
--------
Balance at December 31, 2002................................ $ 64,640
========

A provision for estimated future costs relating to warranty expense is
recorded when the product is sold.

ACQUISITION-RELATED COMMITMENTS

The Company, as part of certain recent purchase agreements for certain
companies acquired, provides for the payment of additional consideration in
either cash or Company common stock, contingent upon whether certain conditions
are met, including the operating performance of the acquired businesses and the
price of the Company's common stock.

STOCK PRICE GUARANTEES

Stock price guarantees as of December 31, 2002 are summarized as follows
(in thousands, except per share data):

(A) Amounts computed based on a year-end stock price for Masco common stock of
$21.05. Shares contingently issuable under these guarantees are included in
the calculation of diluted earnings per common share.

62

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

S. OTHER COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

(B) The Company anticipates that this consideration will be paid in cash from
available funds during the first half of 2003.

CONTINGENT PURCHASE PRICE

As part of other recent acquisition agreements, the Company has additional
consideration payable in cash of approximately $85 million contingent on the
operating performance of the acquired businesses.

INVESTMENTS

With respect to the Company's investments in private equity funds, the
Company, at December 31, 2002, has under certain circumstances, commitments to
contribute additional capital to such funds of up to $105 million.

As part of the acquisition agreement, certain minority shareholders of
Hansgrohe AG hold an option expiring in December 2007 to require the Company to
purchase additional shares in Hansgrohe either with cash or common stock. The
option value is based on Hansgrohe's operating results and, if exercised at
December 31, 2002, would have approximated $16 million; if the option were
settled in stock, the common shares to be issued at December 31, 2002 would have
approximated 900,000.

SHAREHOLDERS' EQUITY

During 2000, approximately 300 of the Company's key employees purchased
from the Company 8.4 million shares of Company common stock for cash totaling
$156.0 million under an Executive Stock Purchase Program ("Program"). The stock
was purchased at $18.50 per share, the approximate market price of the common
stock at the time of purchase.

Participants in the Program financed their purchases with five-year full
recourse personal loans, at a market interest rate, from a bank syndicate. Each
participant is fully responsible at all times for repaying their bank loans when
they become due and is personally responsible for 100 percent of any loss in the
market value of the purchased stock except that in the event of death, if the
participant is in a loss position, the participant's estate may transfer the
purchased stock to the Company and require the Company to assume responsibility
for the loan. The Company has guaranteed repayment of the loans, for which the
aggregate amount outstanding was approximately $170 million at December 31,
2002, only in the event of a default by a participant. As a further inducement
for continued employment beyond the end of this five-year Program, each
participant received, as part of the Program, a restricted stock award vesting
over a ten-year period. All of these key employees, in order to participate in
this Program, were also required to sign a one-year post-employment
non-competition agreement with the Company businesses that employ them.

RESIDUAL VALUE GUARANTEES

The Company has residual value guarantees resulting from operating leases
related to certain of the Company's trucks, primarily in the Installation and
Other Services segment. The operating leases are generally for a minimum term of
12 months and are renewable monthly after the first 12 months. At the end of the
first 12 months, if the Company cancels the leases, the Company must pay the
lessor the difference between the guaranteed residual value and the fair market
value of the related trucks. The aggregate value of the residual value
guarantees,
63

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RESIDUAL VALUE GUARANTEES -- (CONCLUDED)

assuming the fair value at lease termination is zero, is approximately $23
million at December 31, 2002.

OTHER MATTERS

The Company enters into contracts, which include reasonable and customary
indemnifications that are standard for the industries in which it operates. Such
indemnifications include claims against builders for issues relating to the
Company's products and workmanship. In conjunction with divestitures and other
transactions, the Company occasionally provides reasonable and customary
indemnifications relating to various items including: the enforceability of
trademarks; legal and environmental issues; provisions for sales returns; and
asset valuations. The Company has never had to pay a material amount related to
these indemnifications and evaluates the probability that amounts may be
incurred and appropriately records an estimated liability when probable.

T. SUBSEQUENT EVENTS (UNAUDITED)

In February 2003, Emco Limited, of which the Company owns a 42 percent
equity interest, announced that it had entered into a support agreement with
Blackfriars Corp. The support agreement includes a provision for Blackfriars
Corp. to purchase all of the issued and outstanding shares of Emco Limited for
approximately $11 per share (16.60 in Canadian dollars), subject to shareholder
approval. The Company has agreed to tender its shares to Blackfriars Corp. The
agreement is expected to be completed in the second quarter of 2003 and may
result in a modest gain to the Company.

On February 4, 2003, the Company's President and Chief Operating Officer,
Raymond F. Kennedy, passed away unexpectedly from a heart attack. The untimely
passing of Mr. Kennedy will result in certain benefit payments becoming payable
to his estate, including the accelerated vesting of his stock awards in the
first quarter of 2003, which would typically vest over a ten-year period.

64

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

U. INTERIM FINANCIAL INFORMATION (UNAUDITED)

First quarter 2002 net income includes a $92.4 million after-tax ($116.8
million pre-tax), non-cash goodwill impairment charge recognized as a cumulative
effect of accounting change effective January 1, 2002. Third quarter 2002 net
income includes a $104.4 million after-tax ($166 million pre-tax) charge for the
Behr litigation settlement. Fourth quarter 2002 net income includes a $12.1
million after-tax ($19.2 million pre-tax) insurance recovery relating to the
Behr litigation settlement.

Third quarter 2001 net loss includes a $344 million after-tax ($530 million
pre-tax), non-cash charge for the write-down of certain investments, principally
securities of Furnishings International Inc.

Net sales for 2001 have been reduced to include cooperative advertising
expense due to the adoption of EITF Issue No. 01-9, "Accounting for
Consideration Given by a Vendor to a Customer." These expenses were previously
classified as selling expense and were $15 million, $21 million, $20 million and
$18 million in the first, second, third and fourth quarters of 2001,

65

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)

U. INTERIM FINANCIAL INFORMATION (UNAUDITED) -- (CONCLUDED)

respectively. This reclassification did not result in a change in net income
(loss) or earnings (loss) per common share.

Income (loss) per common share amounts for the four quarters of 2002 and
2001 do not total to the per common share amounts for the years ended December
31, 2002 and 2001 due to the timing of capital stock issuances and the effect of
contingently issuable common shares.

66

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not applicable

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Certain information regarding executive officers required by this Item is
set forth as a Supplementary Item at the end of Part I hereof (pursuant to
Instruction 3 to Item 401(b) of Regulation S-K). Other information required by
this Item will be contained in the Company's definitive Proxy Statement for its
2003 Annual Meeting of Stockholders, to be filed on or before April 30, 2003,
and such information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

Information required by this Item will be contained in the Company's
definitive Proxy Statement for its 2003 Annual Meeting of Stockholders, to be
filed on or before April 30, 2003, and such information is incorporated herein
by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

EQUITY COMPENSATION PLAN INFORMATION

The Company has two equity based compensation plans, the 1991 Long Term
Stock Incentive Plan and the 1997 Non-Employee Directors Stock Plan. The
following table sets forth information as of December 31, 2002 concerning the
Company's two equity compensation plans, both of which were approved by security
holders. The Company does not have any equity compensation plans that are not
approved by security holders.

The remaining information required by this Item will be contained in the
Company's definitive Proxy Statement for its 2003 Annual Meeting of
Stockholders, to be filed on or before April 30, 2003, and such information is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information required by this Item will be contained in the Company's
definitive Proxy Statement for its 2003 Annual Meeting of Stockholders, to be
filed on or before April 30, 2003, and such information is incorporated herein
by reference.

67

ITEM 14. CONTROLS AND PROCEDURES.

A. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Based on their evaluation of the Company's disclosure controls and
procedures conducted within 90 days of the date of filing this Report on Form
10-K, the Company's Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of
1934) are designed to be and are adequate to ensure that information required to
be disclosed by the Company in the reports it files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission.

B. CHANGES IN INTERNAL CONTROLS

There were no significant changes in the Company's internal controls or, to
the knowledge of the Company's Chief Executive Officer and Chief Financial
Officer, in other factors that could significantly affect these controls
subsequent to the date of the evaluation by these persons conducted within 90
days of the date of this Report on Form 10-K.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(A) LISTING OF DOCUMENTS.

(1)Financial Statements. The Company's Consolidated Financial Statements
included in Item 8 hereof, as required at December 31, 2002 and 2001,
and for the years ended December 31, 2002, 2001 and 2000, consist of
the following:

Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements

(2)Financial Statement Schedules.

(i) Financial Statement Schedule of the Company appended hereto, as
required for the years ended December 31, 2002, 2001 and 2000,
consists of the following:

II. Valuation and Qualifying Accounts

(3) Exhibits.

3.i Restated Certificate of Incorporation of Masco Corporation
and amendments thereto (filed herewith).
3.ii Bylaws of Masco Corporation, as amended December 5, 2001
(filed herewith).
4.ai Indenture dated as of December 1, 1982 between Masco
Corporation and Morgan Guaranty Trust Company of New York,
as Trustee (7), and Directors' resolutions establishing
Masco Corporation's: (i) 6 1/8% Notes Due September 15, 2003
(1); (ii) 7 1/8% Debentures Due August 15, 2013 (1); (iii)
6.625% Debentures Due April 15, 2018 (1); (iv) 5.75% Notes
Due October 15, 2008 (1); and (v) 7 3/4% Debentures Due
August 1, 2029 (3).

68

4.a.ii Agreement of Appointment and Acceptance of Successor Trustee dated as of July 25, 1994
among Masco Corporation, Morgan Guaranty Trust Company of New York and The First National
Bank of Chicago (3).
4.a.iii Supplemental Indenture dated as of July 26, 1994 between Masco Corporation and The First
National Bank of Chicago (3).
4.bi Indenture dated as of February 12, 2001 between Masco Corporation and Bank One Trust
Company, National Association, as Trustee (5), and Directors' Resolutions establishing
Masco Corporation's: (i) 6 3/4% Notes Due March 15, 2006 (5); (ii) 6% Notes Due May 3,
2004 (6); (iii) 5 7/8% Notes Due July 15, 2012 (filed herewith); (iv) 4 5/8% Notes Due
August 15, 2007 (filed herewith); and (v) 6 1/2% Notes Due August 15, 2032 (filed
herewith).
4.b.ii First Supplemental Indenture dated as of July 20, 2001 to the Indenture dated February 12,
2001 by and among Masco Corporation and Bank One Trust Company, National Association as
Trustee relating to the Company's Zero Coupon Convertible Senior Notes Due July 20, 2031
(6), and Amendment No. 1 dated as of July 19, 2002 (8).
4.c Rights Agreement dated as of December 6, 1995, between Masco Corporation and The Bank of
New York, as Rights Agent (5); and Amendment No. 1 dated September 23, 1998 (5).
4.d U.S. $750,000,000 364-day Revolving Credit Agreement dated as of November 8, 2002 among
Masco Corporation and Masco Europe S.A.R.L., as borrowers, the banks party thereto, as
lenders, Barclays Bank PLC and Comerica Bank, as Documentation Agents, Citibank, N.A., as
Syndication Agent, and Bank One, NA, as Administrative Agent (filed herewith).
4.e U.S. $1.25 billion 5-Year Revolving Credit Agreement dated as of November 8, 2002 among
Masco Corporation and Masco Europe S.A.R.L., as borrowers, the banks party thereto,
Commerzbank AG, New York and Grand Cayman Branches, and Citibank, N.A., as Syndication
Agents, BNP Paribas, as Documentation Agent, and Bank One, NA, as Administrative Agent
(filed herewith).
NOTE: Other instruments, notes or extracts from agreements defining the rights of holders of
long-term debt of Masco Corporation or its subsidiaries have not been filed since (i) in
each case the total amount of long-term debt permitted thereunder does not exceed 10
percent of Masco Corporation's consolidated assets, and (ii) such instruments, notes and
extracts will be furnished by Masco Corporation to the Securities and Exchange Commission
upon request.
10.a Shareholders Agreement by and among Heartland Industrial Partners, L.P., MascoTech, Inc.
(now known as Metaldyne Corporation), Masco Corporation, Richard Manoogian, certain of
their respective affiliates and other co-investors as party thereto, dated as of November
28, 2000 (5).
NOTE: Exhibits 10.b through 10.g constitute the management contracts and executive compensatory
plans or arrangements in which certain of the Directors and executive officers of the
Company participate.
10.b Masco Corporation 1991 Long Term Stock Incentive Plan (as amended and restated September
13, 2000) (5).

69

10.c Masco Corporation Supplemental Executive Retirement and
Disability Plan, dated October 21, 2000, as amended November
18, 2002 (filed herewith).
10.d Masco Corporation 2002 Annual Incentive Compensation Plan
(filed herewith).
10.e Masco Corporation 1997 Non-Employee Directors Stock Plan (as
amended October 9, 2001) (7).
10.f Description of the Masco Corporation Program for Estate,
Financial Planning and Tax Assistance (filed herewith).
10.g Masco Corporation Executive Stock Purchase Program (4).
10.h Registration Rights Agreement among Masco Corporation and
the Investors listed therein dated as of August 31, 1999
(2).
12 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends (filed herewith).
21 List of Subsidiaries (filed herewith).
23 Consent of PricewaterhouseCoopers LLP relating to Masco
Corporation's Consolidated Financial Statements and
Financial Statement Schedule (filed herewith).

(1) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1998.

(2) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.

(3) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 1999.

(4) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

(5) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 2000.

(6) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.

(7) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 2001.

(8) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.

THE COMPANY WILL FURNISH TO ITS STOCKHOLDERS A COPY OF ANY OF THE ABOVE
EXHIBITS NOT INCLUDED HEREIN UPON THE WRITTEN REQUEST OF SUCH STOCKHOLDER AND
THE PAYMENT TO THE COMPANY OF THE REASONABLE EXPENSES INCURRED BY THE COMPANY IN
FURNISHING SUCH COPY OR COPIES.

(B) REPORTS ON FORM 8-K.

On October 4, 2002, the Company filed a Current Report on Form 8-K, item 5,
updating information previously filed on Form 8-K, including a statement of the
Company's current analysis of its potential financial exposure regarding the
civil suit filed in May 1998 in Washington State Superior trial court and
related actions against the Company's Behr Process Corporation subsidiary.

70

On October 16, 2002, the Company filed a Current Report on Form 8-K, item
5, attaching the opinion of its General Counsel for incorporation by reference
into the Company's Registration Statements on Form S-3 (Nos. 333-73802 and
333-100506).

On October 29, 2002, the Company filed a Current Report on Form 8-K, item
5, announcing preliminary settlement of certain previously reported class action
litigation relating to products formerly manufactured by the Company's Behr
Process Corporation subsidiary, reaffirming third quarter earnings guidance and
announcing its third quarter 2002 conference call.

71

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

MASCO CORPORATION

BY /s/ TIMOTHY WADHAMS
------------------------------------
TIMOTHY WADHAMS
Vice President and Chief Financial
Officer

March 14, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.

PRINCIPAL EXECUTIVE OFFICER:

/s/ RICHARD A. MANOOGIAN Chairman of the Board, Chief
- --------------------------------------------- Executive Officer, President and
RICHARD A. MANOOGIAN Chief Operating Officer

PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:

/s/ TIMOTHY WADHAMS Vice President and Chief Financial
- --------------------------------------------- Officer
TIMOTHY WADHAMS

/s/ THOMAS G. DENOMME Director
- ---------------------------------------------
THOMAS G. DENOMME
/s/ PETER A. DOW Director
- ---------------------------------------------
PETER A. DOW

/s/ ANTHONY F. EARLEY, JR. Director
- ---------------------------------------------
ANTHONY F. EARLEY, JR.

/s/ VERNE G. ISTOCK Director
- ---------------------------------------------
VERNE G. ISTOCK

/s/ WAYNE B. LYON Director
- ---------------------------------------------
WAYNE B. LYON

/s/ MARY ANN VAN LOKEREN Director
- ---------------------------------------------
MARY ANN VAN LOKEREN

March 14, 2003

72

MASCO CORPORATION
CERTIFICATIONS

I, Richard A. Manoogian, certify that:

1. I have reviewed this annual report on Form 10-K of Masco
Corporation;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 14, 2003 By: /s/ Richard A. Manoogian
------------------------------------
Richard A. Manoogian
Chief Executive Officer

73

MASCO CORPORATION
CERTIFICATIONS

I, Timothy Wadhams, certify that:

1. I have reviewed this annual report on Form 10-K of Masco
Corporation;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 14, 2003 By: /s/ Timothy Wadhams
------------------------------------
Timothy Wadhams
Vice President and
Chief Financial Officer

74

MASCO CORPORATION
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

(A) Allowance of companies acquired and companies disposed of, net.

(B) Deductions, representing uncollectible accounts written off, less recoveries
of accounts written off in prior years.

75

EXHIBIT INDEX

3.i Restated Certificate of Incorporation of Masco Corporation
and amendments thereto (filed herewith).
3.ii Bylaws of Masco Corporation, as amended December 5, 2001
(filed herewith).
4.ai Indenture dated as of December 1, 1982 between Masco
Corporation and Morgan Guaranty Trust Company of New York,
as Trustee (7), and Directors' resolutions establishing
Masco Corporation's: (i) 6 1/8% Notes Due September 15, 2003
(1); (ii) 7 1/8% Debentures Due August 15, 2013 (1); (iii)
6.625% Debentures Due April 15, 2018 (1); (iv) 5.75% Notes
Due October 15, 2008 (1); and (v) 7 3/4% Debentures Due
August 1, 2029 (3).
4.a.ii Agreement of Appointment and Acceptance of Successor Trustee
dated as of July 25, 1994 among Masco Corporation, Morgan
Guaranty Trust Company of New York and The First National
Bank of Chicago (3).
4.a.iii Supplemental Indenture dated as of July 26, 1994 between
Masco Corporation and The First National Bank of Chicago
(3).
4.bi Indenture dated as of February 12, 2001 between Masco
Corporation and Bank One Trust Company, National
Association, as Trustee (5), and Directors' Resolutions
establishing Masco Corporation's: (i) 6 3/4% Notes Due March
15, 2006 (5); (ii) 6% Notes Due May 3, 2004 (6); (iii)
5 7/8% Notes Due July 15, 2012 (filed herewith); (iv) 4 5/8%
Notes Due August 15, 2007 (filed herewith); and (v) 6 1/2%
Notes Due August 15, 2032 (filed herewith).
4.b.ii First Supplemental Indenture dated as of July 20, 2001 to
the Indenture dated February 12, 2001 by and among Masco
Corporation and Bank One Trust Company, National Association
as Trustee relating to the Company's Zero Coupon Convertible
Senior Notes Due July 20, 2031 (6), and Amendment No. 1
dated as of July 19, 2002 (8).
4.c Rights Agreement dated as of December 6, 1995, between Masco
Corporation and The Bank of New York, as Rights Agent (5);
and Amendment No. 1 dated September 23, 1998 (5).
4.d U.S. $750,000,000 364-day Revolving Credit Agreement dated
as of November 8, 2002 among Masco Corporation and Masco
Europe S.A.R.L., as borrowers, the banks party thereto, as
lenders, Barclays Bank PLC and Comerica Bank, as
Documentation Agents, Citibank, N.A., as Syndication Agent,
and Bank One, NA, as Administrative Agent (filed herewith).
4.e U.S. $1.25 billion 5-Year Revolving Credit Agreement dated
as of November 8, 2002 among Masco Corporation and Masco
Europe S.A.R.L., as borrowers, the banks party thereto,
Commerzbank AG, New York and Grand Cayman Branches, and
Citibank, N.A., as Syndication Agents, BNP Paribas, as
Documentation Agent, and Bank One, NA, as Administrative
Agent (filed herewith).
NOTE: Other instruments, notes or extracts from agreements
defining the rights of holders of long-term debt of Masco
Corporation or its subsidiaries have not been filed since
(i) in each case the total amount of long-term debt
permitted thereunder does not exceed 10 percent of Masco
Corporation's consolidated assets, and (ii) such
instruments, notes and extracts will be furnished by Masco
Corporation to the Securities and Exchange Commission upon
request.
10.a Shareholders Agreement by and among Heartland Industrial
Partners, L.P., MascoTech, Inc. (now known as Metaldyne
Corporation), Masco Corporation, Richard Manoogian, certain
of their respective affiliates and other co-investors as
party thereto, dated as of November 28, 2000 (5).

NOTE: Exhibits 10.b through 10.g constitute the management
contracts and executive compensatory plans or arrangements
in which certain of the Directors and executive officers of
the Company participate.
10.b Masco Corporation 1991 Long Term Stock Incentive Plan (as
amended and restated September 13, 2000) (5).
10.c Masco Corporation Supplemental Executive Retirement and
Disability Plan, dated October 21, 2000, as amended November
18, 2002 (filed herewith).
10.d Masco Corporation 2002 Annual Incentive Compensation Plan
(filed herewith).
10.e Masco Corporation 1997 Non-Employee Directors Stock Plan (as
amended October 9, 2001) (7).
10.f Description of the Masco Corporation Program for Estate,
Financial Planning and Tax Assistance (filed herewith).
10.g Masco Corporation Executive Stock Purchase Program (4).
10.h Registration Rights Agreement among Masco Corporation and
the Investors listed therein dated as of August 31, 1999
(2).
12 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends (filed herewith).
21 List of Subsidiaries (filed herewith).
23 Consent of PricewaterhouseCoopers LLP relating to Masco
Corporation's Consolidated Financial Statements and
Financial Statement Schedule (filed herewith).