MASCO CORP /DE/ - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2003 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 30, 2003 (based on the closing sale
price of $23.85 of the Registrant's Common Stock, as reported by the New York
Stock Exchange on such date) was approximately $10,918,988,000.

Number of shares outstanding of the Registrant's Common Stock at January 31,
2004:

452,460,000 shares of Common Stock, par value $1.00 per share

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement to be filed for its 2004
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Form 10-K.

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MASCO CORPORATION
2003 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 that are based on similarities in products and
services. The following table sets forth, for the three years ended December 31,
2003, 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, 2003 is set forth in Note P to the Company's Consolidated Financial
Statements included in Item 8 of this Report.

(1) Amounts have been restated to exclude the operations of
businesses sold in 2003.

(2) Amounts are before general corporate expense.

(3) Operating profit for 2003 includes goodwill impairment charges
as follows: Cabinets and Related Products -- $51 million;
Plumbing Products -- $36 million; Decorative Architectural
Products -- $24 million and Other Specialty Products -- $31
million.

(4) Operating profit is before the litigation settlement (income)
charge, net, of $(72) million and $147 million in 2003 and
2002, respectively, pertaining to the Decorative Architectural
Products segment.

(5) Operating profit for 2002 includes a pre-tax gain of $16
million related to certain long-lived assets in the Plumbing
Products segment, which were previously written down in
December 2000 as part of a plan for disposition.

(6) Operating profit excluding goodwill amortization expense for
2001 was as follows: Cabinets and Related Products -- $270
million, Plumbing Products -- $248 million, Installation and
Other Services -- $287 million, Decorative Architectural
Products -- $274 million and Other Specialty Products -- $152
million.

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Approximately 80 percent of the Company's sales are generated by operations
in North America (primarily in the United States). International operations
comprise the balance and are located principally in Belgium, Denmark, Germany,
Holland, Italy, Spain and the United Kingdom. See Note P to the Company's
Consolidated Financial Statements included in Item 8 of this Report.

The Company reviews its business portfolio on an ongoing basis as part of
its corporate strategic planning and, in the first quarter of 2004, has
determined that several of its European businesses are not core to the Company's
long-term growth strategy and, accordingly, has embarked on a plan of
disposition. These businesses had combined 2003 net sales in excess of $350
million. Additional information is set forth in "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 kitchen
and 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 2003. 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), PEERLESS(R) and NEWPORT BRASS(R) single and double
handle faucets used in kitchen, lavatory and other sinks and in bath and shower
enclosures. DELTA, PEERLESS and NEWPORT BRASS 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 and PLUMB SHOP(R) brand names. The Company manufactures
kitchen and bath faucets and various other plumbing products for European
markets under the brand names AXOR(TM), BRISTAN(R), DAMIXA(R), GUMMERS(R),
HANSGROHE(R), MARIANI(R) and NEWTEAM(TM) and sells them through multiple
distribution channels. AXOR(TM) and HANSGROHE(R) products are also distributed
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 private label import products is also
a significant factor in the Company's markets. There are several major
competitors among the European manufacturers of faucets
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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 and major retail accounts 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 and in the United States under the brand name CHATSWORTH(R).
GLASS(TM) and PHARO(TM) acrylic bathtubs and steam shower enclosures are sold in
Europe. RECOR(TM) cast iron bathtubs are sold in Europe and the United States.

Also included in the Plumbing Products segment 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) and
BRASSTECH(R) trademarks and for the "do-it-yourself " market under the MASTER
PLUMBER(R) and PLUMB SHOP(R) trademarks and are also sold under private label.

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

INSTALLATION AND OTHER SERVICES

The Company's Installation and Other Services segment operates over 330
local installation branch offices throughout most of the United States and in
Canada that supply and install primarily insulation and, in many locations,
other building products including fireplaces, cabinetry, gutters, shelving and
windows. The Company also operates over 50 local distribution branch offices
throughout the United States that supply insulation and other products including
roofing, drywall, gutters, fireplaces and acoustical ceiling products.
Installation services are provided primarily to tract and custom home builders
in the new construction market and distribution sales are made direct to
contractors. Installation operations are conducted in local markets through such
names as Gale Industries, Cary Insulation and Davenport Insulation. The
Company's competitors in this market include several regional and numerous local
installers.

Net sales of insulation for the segment comprised 15 percent, 14 percent
and 14 percent of the Company's consolidated net sales for the years ended
December 31, 2003, 2002 and 2001, respectively. Non-insulation net sales have
increased over the last several years and represented over 30 percent of the
segment's revenues for 2003.

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) branded products, are sold in the United States and Canada
primarily to the "do-it-yourself " market through home centers and other
retailers. Net sales of architectural coatings, including paints and stains,
comprised 10 percent, 11 percent and 11 percent of the Company's consolidated
net sales for the
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years ended December 31, 2003, 2002 and 2001, 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.

During 2003, the Company established Color Solutions Centers in over 1,500
Home Depot stores throughout the United States. These centers enhance the
paint-buying experience by allowing consumers to interactively interface in the
course of product selection. Behr's PREMIUM PLUS(R) brand, its principal product
line, is sold exclusively through The Home Depot stores.

The Company manufactures and sells decorative bath and shower accessories
under the brand names FRANKLIN BRASS(R), GINGER(R) and BATH UNLIMITED(R) to home
centers, plumbing wholesalers and other retailers. Competitors in these product
lines include Moen and Globe Union. Also in the Decorative Architectural
Products segment is LIBERTY(R) cabinet, decorative door and builders' hardware,
which is manufactured for the Company and sold to home centers, other retailers,
original equipment manufacturers and wholesale markets. Key competitors in these
product lines in North America include Amerock, Belwith, National, Umbra 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.

OTHER SPECIALTY PRODUCTS

The Company manufactures and sells windows and patio doors under the
MILGARD(R) brand name direct to the new construction and home improvement
markets, principally in the western United States. The Company fabricates and
sells vinyl windows and sunrooms under the GRIFFIN(TM) and CAMBRIAN(TM) brand
names for the United Kingdom building trades. The Company extrudes and sells
vinyl frame components for windows, doors and sunrooms under the brand name
DURAFLEX(TM) for the European building trades.

The Company manufactures a complete line of manual and electric staple gun
tackers, staples and other fastening tools under the brand names ARROW(R) and
POWERSHOT(R). These products are sold through various distribution channels
including wholesalers, home centers and other retailers. SAFLOK(R) electronic
locksets are sold primarily to the hospitality market, and LAGARD(R) commercial
safe and ATM locks are manufactured and sold to commercial markets.

Commercial ventilating products are manufactured and sold by the Company in
Europe to original equipment manufacturers and wholesale markets under the
GEBHARDT(TM) brand name. The Company also manufactures residential hydronic
radiators and heat convectors under the brand names BRUGMAN(R), 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.

ADDITIONAL INFORMATION

- The consolidation of customers in the Company's major distribution
channels has increased the size and importance of individual customers
and the ability of these customers to effect significant changes in their
volume of purchases from individual vendors. The Company believes its
relationships with home centers are particularly important. Sales of the
Company's product lines to home center retailers have increased
substantially in recent years and, in 2003, sales to the Company's
largest customer, The Home Depot, were $2.5 billion (approximately 22
percent of total sales). Although builders, dealers and other retailers
represent other channels of distribution for the Company's products, the

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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
largely on performance, quality, brand reputation, style, delivery,
customer service, exclusivity and price. Competition in the markets for
the Company's services businesses is based primarily on price, customer
service and breadth of product offering. Although the relative importance
of such factors varies among product categories, price is often a primary
factor.

- 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. Results
of existing European operations have been adversely influenced in recent
years, in part due to softness in the Company's European markets,
competitive pricing pressures on certain products and the effect of a
higher percentage of lower margin sales to total European sales.

- 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, 2003, is set forth in Item 8 of this Report in
Note P to the Company's Consolidated Financial Statements.

- The peak season for home construction and remodeling generally
corresponds with the second and third calendar quarters. As a result, the
Company generally experiences stronger sales during these quarters.

- 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.

Discussion of various factors that may affect the Company's results of
operations can be found under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under Item 7 of this Report.

AVAILABLE INFORMATION

The Company's website is http://www.masco.com. The Company's periodic
reports and all amendments to those reports required to be filed or furnished
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934 are available free of charge through its website. During the period covered
by this report, the Company posted its periodic reports on Form 10-K and Form
10-Q and its current reports on Form 8-K and any amendments to those documents
to its website as soon as reasonably practicable after those reports were filed
or furnished electronically with the Securities and Exchange Commission. The
Company will continue to post to its website such reports and amendments to
those reports as soon as reasonably practicable after those reports are filed
with or furnished to the Securities and Exchange Commission. Material contained
on the Company's website is not incorporated by reference in this Report on Form
10-K.

6

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
loss of such rights that would have a material adverse effect on the Company's
present business as a whole.

EMPLOYEES

At December 31, 2003, 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 1,000,000 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 330 branch service locations and approximately 50 distribution
centers in North America, the majority of which are leased.

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

Most of these international facilities are located in Belgium, China,
Denmark, Germany, Holland, Italy, Poland, Spain and the United Kingdom. The
Company generally owns its international manufacturing facilities, none of which
is subject to significant encumbrances, 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.

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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.

As the Company reported in previous filings, late in the second half of
2002, the Company and its subsidiary, Behr Process Corporation, agreed to two
settlements to resolve all class action lawsuits pending in the United States
involving certain exterior wood coating products formerly manufactured by Behr.
More information about these settlements is set forth in Note T 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 THE REGISTRANT
(PURSUANT TO INSTRUCTION 3 TO ITEM 401(B) OF REGULATION S-K).

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 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. Mr. Barry
was elected to his present position in April 2003. He had served as a Group
President of the Company since 1996.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.

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, 2004 there were approximately 6,500 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.

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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.

(1) Amounts have been restated to exclude the operations of businesses sold in
2003.

(2) The year 2003 includes a non-cash goodwill impairment charge of $118 million
after-tax ($142 million pre-tax) and income of $45 million after-tax ($72
million pre-tax) related to the litigation settlement.

(3) The year 2002 includes a $92 million after-tax ($147 million pre-tax), net
charge for the Behr litigation settlement, including $19 million of pre-tax
income recorded for reimbursements from liability insurers.

(4) Operating profit for 1999-2001 includes goodwill amortization expense as
follows: 2001 -- $93 million, 2000 -- $66 million, 1999 -- $45 million.

(5) The year 2002 includes a $92 million after-tax ($117 million pre-tax),
non-cash goodwill impairment charge recognized as a cumulative effect of a
change in accounting principle.

(6) 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.

(7) 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, results of operations and cash flows. 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

10

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 "Executive Level 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.

EXECUTIVE LEVEL 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, builders, 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 Great Britain pound),
the importance of and the Company's relationships with home centers (including
The Home Depot, which represented approximately 22 percent of the Company's
sales in 2003) as distributors of home improvement and building products and the
Company's ability to 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, 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 net
realizable value with expense estimates made for obsolescence or unsaleable
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

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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 $517 million, and a number of private equity funds,
which aggregated $332 million, at December 31, 2003. 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
effect, in other comprehensive income (loss). 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. In the fourth quarter of 2003, 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 goodwill
related to certain European businesses was impaired. The Company recognized a
non-cash, pre-tax impairment charge of $137 million ($113 million after-tax) in
the fourth quarter of 2003. In the third quarter of 2003, the Company also
recognized a non-cash impairment charge of $5 million related to a business unit
in the United Kingdom, as discussed in Business Segment Results. Intangible
assets with finite useful lives are amortized over their estimated 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 generally 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 2003, the Company estimated that future discounted
cash flows projected for most of its 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.

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

12

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 2003, the Company decreased its discount rate for obligations to 6.25
percent from 6.75 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 Company's underfunded amount for the difference between the projected
benefit obligation and plan assets decreased to $137 million from $183 million
in 2002. This is primarily the result of asset returns above projections and
Company contributions. The plan assets in 2003 had a net gain of approximately
23 percent as compared with an increase of 21 percent for the largest 1,000 Plan
Benchmark.

The Company's projected benefit obligation relating to the unfunded
non-qualified supplemental pension plans was $110 million for 2003 compared with
$82 million for 2002. The Company's underfunded amount for the difference
between the projected benefit obligation and plan assets for its foreign pension
plans was $42 million for 2003 compared with $22 million for 2002.

The Company expects pension expense for its defined-benefit plans to
decrease by approximately $7 million in 2004, principally due to higher asset
returns achieved in 2003 compared with the projection. If the Company assumed
that the future return on plan assets was 8 percent instead of 8.5 percent, the
pension expense for 2004 would increase by approximately $2 million.

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, 2003, particularly
related to its after-tax capital loss carryforward of $62 million. 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 lifetime, under certain
circumstances, of the original purchaser. At the time of the sale, the Company
accrues a warranty liability for estimated costs to provide products, parts or
services 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 expectations of future conditions. To the extent 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
(including income taxes) 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.

The Company used estimates for the number of claims expected and the
average cost per claim to determine the liability related to the Behr litigation
settlement in 2002. In 2003, the Company received a fraction of the claims
originally estimated and reduced its accrual for litigation settlement by $58
million.
13

CORPORATE DEVELOPMENT STRATEGY

Acquisitions over the last several years have enabled the Company to build
a unique critical mass that has given the Company a strong position in the
markets it serves and has increased the Company's importance to its customers.
The Company is now intensifying its focus on leveraging the critical mass to
build greater value for its shareholders. Going forward, the Company will have a
more balanced growth strategy of internal growth, share repurchases and fewer
acquisitions with increased emphasis on cash flow and return on invested
capital. As part of its strategic planning, the Company continues to review all
of its businesses to determine which businesses are core to continuing
operations.

The Company reviews its business portfolio on an ongoing basis as part of
its corporate strategic planning and, in the first quarter of 2004, has
determined that several European businesses are not core to the Company's
long-term growth strategy and, accordingly, has embarked on a plan of
disposition. These businesses had combined 2003 net sales in excess of $350
million and an approximate net book value of $330 million. The Company expects
net proceeds from the dispositions to exceed $300 million. The dispositions are
expected to be completed within the next twelve months and the Company expects
to recognize a modest net loss upon the disposition of all of these businesses.
First quarter 2004 results will include a charge to reflect those businesses
that are expected to be divested at a loss. Any gains resulting from the
disposition of individual businesses will be recognized as such transactions are
completed.

During 2003, the Company acquired PowerShot Tool Company, Inc. (Other
Specialty Products segment), and several relatively small installation service
companies (Installation and Other Services segment). PowerShot Tool Company is a
manufacturer of fastening products, including staple guns, glue guns, hammer
tackers and riveting products, headquartered in New Jersey. The results of these
acquisitions are included in the consolidated financial statements from the
respective dates of acquisition. The aggregate net purchase price of these
acquisitions was $63 million, and included cash of $57 million and debt of $6
million. The Company also paid an additional $182 million of acquisition-related
consideration, including amounts to satisfy share price guarantees, contingent
consideration and other purchase price adjustments, in 2003, relating to
previously acquired companies.

These acquisitions provide the Company with opportunities to broaden its
product and service offerings and enter new markets, and contributed
approximately $50 million in net sales for the year ended December 31, 2003. See
Note C to the consolidated financial statements for additional information
regarding acquisitions.

On September 30, 2003, the Company completed the sale of its Baldwin
Hardware and Weiser Lock businesses. Baldwin and Weiser were included in the
Decorative Architectural Products segment and manufacture a wide range of
architectural and decorative products, including builders' hardware and
locksets. In a separate transaction on September 30, 2003, the Company also
completed the sale of the Marvel Group. Marvel manufactures office workstations
and machine stands, and was included in the Other Specialty Products segment.
The sale of these businesses reflects the Company's continuing commitment to
deploy the Company's assets in businesses that support its operating strategies
and provide the greatest opportunities to create value for the Company's
shareholders. Total proceeds from the sale of these companies were $289 million,
including cash of $286 million and notes receivable of $3 million.

The sales and results of operations of the businesses sold in 2003 are
included in the Company's results from discontinued operations through the date
of disposition. These businesses contributed net sales of $198 million, $271
million and $269 million in 2003, 2002 and 2001, respectively, and income (loss)
before income taxes of $21 million, $29 million and $(4) million in 2003, 2002
and 2001, respectively.

14

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 issuances 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, 2003
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 2004. These agreements allow for borrowings
denominated in U.S. dollars or European euros. The previous 364-day revolving
credit agreement expired in November 2003. There were no borrowings under either
agreement during 2003. Interest is payable on borrowings under these agreements
based on various floating rate options as selected by the Company.

Certain debt agreements contain limitations on additional borrowings; at
December 31, 2003, the Company had additional borrowing capacity, subject to
availability, of up to $2.5 billion. Certain debt agreements also contain a
requirement for maintaining a certain level of net worth; at December 31, 2003,
the Company's net worth exceeded such requirement by approximately $2 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 of $795 million at December 31,
2003 as a result of strong cash flows from operations and the disposition of
certain businesses in 2003.

During 2003, the Company increased its quarterly common stock dividend 14
percent to $.16 per common share. This marks the 45th 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 43 percent at December 31, 2003 from 47 percent at
December 31, 2002. The Company's working capital ratio was 1.8 to 1 and 2.0 to 1
at December 31, 2003 and 2002, respectively.

The Company has limited involvement with derivative financial instruments
and does not use derivatives for trading purposes. The derivatives used by the
Company for the year ended December 31, 2003 consist of interest rate swaps
entered into late in 2003, for the purpose of effectively converting a portion
of fixed-rate debt to floating-rate debt which is expected to reduce interest
expense, given current interest rates. Certain of the Company's European
operations also entered into foreign exchange forward contracts for the purpose
of managing exposure to currency fluctuations related to the United States
dollar and the Great Britain pound. Generally, under interest rate swaps, the
Company agrees with a counterparty to exchange the difference between fixed-rate
and floating-rate interest amounts calculated by reference to an agreed notional
principal amount. The derivative contracts are with two major creditworthy
institutions, thereby minimizing the risk of credit loss. The interest rate
swaps are considered a fair-value hedge and the interest rate differential on
interest rate swaps used to hedge existing debt is recognized as an adjustment
to interest expense or income over the term of the agreement. For fair-value
hedge transactions, changes in the fair value of the derivative and changes in
the fair value of the item hedged are recorded in determining earnings.
15

The average variable interest rates are based on the London Interbank
Offered Rate ("LIBOR") plus a fixed adjustment factor. The average effective
rate on the interest rate swaps is 2.25%. The interest rate swap agreements
cover a notional amount of $850 million of the Company's fixed-rate debt due
July 15, 2012 at an interest rate of 5.875%. The hedge is considered 100 percent
effective because all of the critical terms of the derivative financial
instruments match those of the hedged item. Accordingly, no gain or loss on the
value of the hedge was recognized in the Company's statement of income for the
year ended December 31, 2003. The amount recognized as an adjustment (reduction)
of interest expense was approximately $3 million for the year ended December 31,
2003.

CASH FLOWS

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

The Company's cash and cash investments decreased $272 million to $795
million at December 31, 2003, from $1,067 million at December 31, 2002.

Net cash provided by operations in 2003 of $1.4 billion consisted primarily
of net income adjusted for non-cash items, including depreciation and
amortization of $244 million, income of $72 million related to the litigation
settlement, a $142 million charge (including $5 million recorded in the third
quarter of 2003) related to goodwill impairment, a $19 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
decreased by approximately $36 million.

The Company expects cash flows from operations to continue to increase due
to improvements in inventory and working capital management as well as
continuing strong business trends. Days sales in accounts receivable at December
31, 2003 were comparable to 2002 levels, days sales in inventory decreased to 47
days at December 31, 2003 from 56 days at December 31, 2002, and accounts
payable days increased to 36 days at December 31, 2003 compared with 33 days at
December 31, 2002, primarily due to the Company's working capital improvement
initiatives.

16

Cash used for financing activities in 2003 was $1.6 billion, and included
cash outflows of $286 million for cash dividends paid, $452 million for the
retirement of notes (including interest expense and loss on early retirement),
$779 million for the acquisition and retirement of Company common stock in
open-market transactions, $48 million for the acquisition of Company common
stock for the Company's long-term stock incentive award plan, $89 million
principally for the net payment of other debt and $37 million from the issuance
of Company common stock for the exercise of stock options.

At December 31, 2003, the Company had remaining Board of Directors'
authorization to repurchase up to an additional 48 million shares of its common
stock in open-market transactions or otherwise. In January 2004, the Company
repurchased an additional five million shares of Company common stock.

Cash used for investing activities was $128 million in 2003 and included
$271 million for capital expenditures, $239 million for acquisitions and
additional acquisition-related consideration relating to previously acquired
companies and $32 million for other net cash outflows. Cash provided by
investing activities in 2003 included $284 million of proceeds from the
disposition of businesses, $55 million from the net sales of marketable equity
securities, bond funds and other investments and $75 million from the sale of
the equity investment in Emco.

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 2003 were $271 million,
compared with $285 million for 2002 and $274 million for 2001; for 2004, capital
expenditures, excluding those of any potential 2004 acquisitions or
divestitures, are expected to approximate $350 million. Depreciation and
amortization expense for 2003 totaled $244 million, compared with $220 million
for 2002 and $269 million for 2001; for 2004, depreciation and amortization
expense, excluding any potential 2004 acquisitions or divestitures, is expected
to approximate $270 million. Amortization expense totaled $32 million, $39
million and $106 million in 2003, 2002 and 2001, respectively, including
goodwill amortization of $93 million in 2001.

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

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

SALES AND OPERATIONS

Net sales for 2003 were $10.9 billion, representing an increase of 20
percent over 2002. Excluding results from acquisitions and divestitures, net
sales increased nine percent (including a two percent increase relating to the
effect of currency translation) compared with 2002.

17

The increase in net sales in 2003 is principally due to higher unit sales volume
of certain products, particularly assembled cabinets, architectural coatings,
installation services, vinyl windows and faucets. The following table reconciles
reported net sales to net sales excluding acquisitions and divestitures, in
millions:

(A) Refers to divestitures completed prior to January 1, 2003. Divestitures
completed subsequent to January 1, 2003 are considered discontinued
operations in accordance with SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." Sales related to discontinued operations
are not included in the Company's net sales, as reported, for any period
presented.

The Company's gross profit margins were 30.6 percent, 31.6 percent and 30.3
percent for the years ended December 31, 2003, 2002 and 2001, respectively. The
decline in the 2003 gross profit margins reflects increased sales in segments
with somewhat lower margins, relatively higher International sales (which have
lower gross profit margins), new product launch costs as well as increased
energy costs which impacted material, freight and other operating costs.

Selling, general and administrative expenses excluding general corporate
expense as a percent of sales were 15.9 percent in 2003 compared with 14.9
percent in both 2002 and 2001, with the 2003 increase reflecting increased
advertising and promotion costs as well as increased insurance and pension
costs.

Operating profit margins, as reported, were 13.0 percent, 14.2 percent and
13.0 percent in 2003, 2002 and 2001, respectively. Operating profit margins
excluding general corporate expense, the income/charge for litigation settlement
(2003 and 2002), the goodwill impairment charge (2003), income related to the
planned disposition of businesses (2002) and goodwill amortization expense
(2001) were 14.7 percent, 16.7 percent and 15.4 percent in 2003, 2002 and 2001,
respectively. The overall decline in the 2003 operating profit margins is
primarily due to increased energy, insurance, pension, advertising and promotion
costs as well as adjustments as discussed in the Business Segment Results
related to certain United Kingdom business units.

OTHER INCOME (EXPENSE), NET

In 2003 and 2002, the Company recorded $19 million and $24 million,
respectively, of pre-tax, non-cash charges for the write-down of certain private
equity funds and other financial investments.

Other, net in 2003 include $23 million of realized gains, net from the sale
of marketable equity securities, dividend income of $25 million and $17 million
of income, net regarding private equity funds. Other, net in 2003 also include a
$5 million gain from the sale of the Company's equity investment in Emco, $7
million of losses on the early retirement of debt, realized foreign currency
exchange losses of $5 million and other miscellaneous expenses.

Other, net in 2002 include $39 million of realized losses, net from the
sale of marketable equity securities and dividend income of $17 million. In
addition, the Company incurred $14 million of losses related to interest
ratelock transactions entered into in anticipation of the

18

Company issuing fixed-rate debt in 2002. Other items, net in 2002 include
realized foreign currency exchange losses of $4 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 includes $29 million from the 12%
pay-in-kind junior debt securities of FII.

Other, net in 2001 include $13 million of realized gains, net from the sale
of marketable equity securities, dividend income of $8 million and $4 million of
income, net regarding private equity funds. Other items, net in 2001 also
include realized foreign currency exchange losses of $7 million and other
miscellaneous expenses.

Interest expense was $262 million, $237 million and $239 million in 2003,
2002 and 2001, respectively. The increase in interest expense in 2003 is
primarily due to increased fixed-rate borrowings in the last half of 2002.

INCOME AND EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS

Income from continuing operations and diluted earnings per common share for
2003 were $740 million and $1.51 per common share. Income from continuing
operations for 2003 includes a pre-tax, non-cash goodwill impairment charge of
$142 million ($118 million or $.24 per common share, after-tax). Income from
continuing operations and diluted earnings per common share for 2002 were $664
million and $1.29 per common share. Income from continuing operations in 2002
was negatively affected by a $147 million pre-tax charge for a litigation
settlement ($92 million or $.18 per common share, after-tax). Income from
continuing operations and diluted earnings per common share for 2001 were $203
million and $.43 per common share. Income from continuing operations for 2001
included a $530 million pre-tax ($344 million or $.72 per common share,
after-tax), non-cash charge for the write-down of certain investments.

The Company's effective tax rate for income from continuing operations was
38 percent in 2003 compared with 34 percent in 2002 and 33 percent in 2001. The
increase in 2003 was due principally to a lower tax benefit related to the
goodwill impairment charge as well as an increase in domestic earnings (relative
to total earnings), which are taxed at a higher rate than earnings from the
Company's foreign operations. The Company estimates that its effective tax rate
should approximate 36 percent for 2004.

OUTLOOK FOR THE COMPANY

Favorable sales performance has continued in early 2004 and, based on
current business trends, the Company believes that it will achieve record sales
and earnings for the full year 2004 from continuing operations, excluding any
disposition charge. The Company expects certain operating expenses will continue
to increase in 2004, including such items as energy, insurance and certain
material and freight costs.

The Company has embarked on a plan of disposition for several of its
European businesses which are not core to the Company's long-term growth
strategy. The dispositions are expected to be completed within the next twelve
months and the Company expects to recognize a modest net loss upon the
disposition of all of these businesses.

19

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) Before: general corporate expense; accelerated benefit expense related to
the unexpected passing of the Company's President and Chief Operating
Officer in 2003; and income (charge) regarding the Behr litigation
settlement (related to the Decorative Architectural Products segment) in
2003 and 2002.

(B) Excluding goodwill impairment charge. The 2003 goodwill impairment charge
was as follows: Cabinets and Related Products -- $51 million; Plumbing
Products -- $36 million; Decorative Architectural Products -- $24 million
and Other Specialty Products -- $31 million.

(C) Excluding goodwill amortization.

(D) Including goodwill amortization.

20

BUSINESS SEGMENT RESULTS DISCUSSION

Changes in operating profit margins in the following Business Segment and
Geographic Area Results discussion exclude general corporate expense, the
income/charge for the litigation settlement, net, the goodwill impairment charge
in 2003 and goodwill amortization expense in 2001.

CABINETS AND RELATED PRODUCTS

Net sales of Cabinets and Related Products increased 9 percent in 2003
compared with 2002 due primarily to increased sales volume of assembled cabinets
largely through North American retail distribution channels at major home
centers and through the new construction market in the United States, as well as
a more favorable product mix. Net sales of Cabinets and Related Products
increased 9 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. This
segment was favorably influenced by a weaker U.S. dollar in 2003 and 2002, which
affected the translation of local currencies of European operations included in
this segment.

Operating profit margins were 14.6 percent, 13.5 percent and 10.5 percent
for the years ended December 31, 2003, 2002 and 2001, respectively. Operating
profit margins in 2003 reflect the positive effect of higher sales volume as
well as lower fixed costs resulting from the rationalization of existing
manufacturing capacity. 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. 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 operations.

PLUMBING PRODUCTS

Net sales of Plumbing Products increased 30 percent in 2003 compared with
2002 primarily due to acquisitions (principally the acquisition of the majority
interest in Hansgrohe in December 2002) as well as the effect of a weaker U.S.
dollar which had a favorable impact on the translation of local currencies of
European operations included in this segment. Net sales of Plumbing Products
increased 17 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.

Operating profit margins were 13.3 percent, 16.4 percent and 14.2 percent
for the years ended December 31, 2003, 2002 and 2001, respectively. Operating
profit margins in 2003 include the effect of a recently acquired company that
has lower margins than the segment average as well as inventory adjustments and
a decline in operating margins of certain European operations, including a
non-cash, pre-tax charge of approximately $4 million relating to a United
Kingdom business unit as discussed below. Operating profit margins in 2002
include the favorable effect of a $16 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 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 2001 were negatively
affected by competitive pricing pressures and the lower results of European
companies.

During 2003, the Company detected that an employee at a United Kingdom
business unit in the Plumbing Products segment had circumvented internal
controls and overstated operating
21

results by approximately $4 million in 2002. This overstatement was corrected in
the third quarter of 2003. The Company made the appropriate personnel changes
and completed its review of the business unit in the fourth quarter of 2003 and
determined that no further adjustment was necessary.

INSTALLATION AND OTHER SERVICES

Net sales of Installation and Other Services increased 31 percent in 2003
compared with 2002 and 9 percent in 2002 compared with 2001. The increase in net
sales for this segment in 2003 and 2002 was principally attributable to
acquisitions (principally the acquisition of Service Partners in September 2002)
and a stronger new-housing market as well as increased sales of non-insulation
products. Operating profit margins were 15.3 percent, 16.5 percent and 17.0
percent for the years ended December 31, 2003, 2002 and 2001, respectively. The
decline in operating profit margins in 2003 is primarily attributable to adverse
weather conditions (which reduced sales) experienced in the first half of 2003
as well as increased sales of generally lower-margin non-insulation products.

DECORATIVE ARCHITECTURAL PRODUCTS

Net sales of Decorative Architectural Products increased 12 percent in 2003
compared with 2002. Net sales of Decorative Architectural Products increased 10
percent in 2002 compared with 2001. The increases in net sales in 2003 and 2002
are primarily due to higher unit sales volume of paints, stains and decorative
hardware through North American retail distribution channels.

Operating profit margins were 14.4 percent, 22.9 percent and 22.3 percent
for the years ended December 31, 2003, 2002 and 2001, respectively. Operating
profit margins for this segment in 2003 were impacted by increased advertising
costs, including additional costs associated with new in-store paint display
centers, and fixed asset and inventory adjustments reflecting excess, obsolete
and resourced products related to decorative hardware. Operating profit margins
for 2003 also include the effect of a non-cash, pre-tax charge of approximately
$55 million related to a United Kingdom business unit discussed below.

During 2003, the Company recorded a non-cash, pre-tax charge which reduced
operating profit by approximately $35 million with respect to a United Kingdom
business unit in the Decorative Architectural Products segment. The charge
relates primarily to a business system implementation failure which allowed
former management to circumvent internal controls and artificially inflate the
unit's operating profit in years prior to 2003. The Company also determined that
goodwill was impaired and recorded a $5 million charge in the third quarter of
2003.

Finally, the Company determined that the strategic plan for this business
unit, relative to certain product offerings and customer focus, should be
changed. This revision in operating strategy resulted in 2003 charges
aggregating approximately $15 million principally related to inventories and
receivables.

The Company is implementing changes to its operational and financial
structure in Europe which include: reorganizing its European business operations
into product groups; the addition of group operating and financial personnel;
training and evaluation related to internal controls; and the expansion of both
external and internal audit involvement.

OTHER SPECIALTY PRODUCTS

Net sales of Other Specialty Products increased 16 percent in 2003 compared
with 2002, principally due to acquisitions as well as increased sales of vinyl
windows. Net sales of Other Specialty Products increased 42 percent in 2002
compared with 2001, principally due to acquisitions as well as increased sales
of vinyl windows. A weaker U.S. dollar in 2003 also had a

22

favorable effect on the translation of local currencies of European operations
included in this segment.

Operating profit margins were 18.1 percent, 19.5 percent and 19.4 percent
for the years ended December 31, 2003, 2002 and 2001, respectively. The
operating margin decline in this segment is primarily due to increased material
and insurance costs as well as lower results of European operations. The
improvement in operating profit margins in 2002 was primarily due to 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.

GEOGRAPHIC AREA RESULTS DISCUSSION

NORTH AMERICA

Net sales from North American operations increased 14 percent in 2003 over
2002, primarily due to acquisitions as well as increased unit sales volume of
assembled cabinets, installed sales of non-insulation products, paints and
stains, and vinyl windows. Net sales from North American operations increased 14
percent in 2002 over 2001, primarily due to acquisitions as well as increased
sales of certain products, including cabinets, paints and stains, vinyl windows
and faucets.

Operating profit margins were 16.4 percent, 17.5 percent and 16.0 percent
for the years ended December 31, 2003, 2002 and 2001, respectively. The decline
in operating profit margins for 2003 principally reflects increased sales in
segments that have somewhat lower operating profit margins, increased energy
costs as well as increased advertising and promotion costs. 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.

INTERNATIONAL, PRINCIPALLY EUROPE

Net sales of the Company's International operations increased 49 percent in
2003 compared with 2002, primarily due to acquisitions as well as a weaker U.S.
dollar which had a favorable influence on the translation of International sales
in 2003. A weaker U.S. dollar had a positive effect on the translation of
European results in 2003 compared with 2002, increasing European net sales in
2003 by approximately 17 percent. Net sales of the Company's International
operations increased 15 percent in 2002 compared with 2001 primarily due to
acquisitions as well as the favorable impact of foreign exchange rates.

Operating profit margins were 8.7 percent, 13.6 percent and 11.9 percent
for the years ended December 31, 2003, 2002 and 2001, respectively. Operating
profit margins for International operations for 2003 were adversely affected by
the non-cash, pre-tax charges relating to accounting irregularities discussed
previously, as well as lower margins of recently acquired companies. Operating
profit margins for International operations for 2002 benefited from profit
improvement initiatives. Operating profit margins for 2001 include the effect of
plant start-up and system implementation costs.

23

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 T
to the consolidated financial statements discusses the settlements in 2002 of
claims pending in the United States against the Company and its subsidiary, Behr
Process Corporation, with respect to several exterior wood coating products
previously manufactured by Behr.

Other Commitments

With respect to the Company's investments in private equity funds, the
Company, at December 31, 2003, has, under certain circumstances, commitments to
contribute additional capital to such funds of up to $88 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 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. The
Company has guaranteed repayment of the loans, for which the aggregate amount
outstanding was approximately $160 million at December 31, 2003, 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.

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 expectations of 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 T 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

24

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 business 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 T 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 $40 million contingent on the
operating performance of the acquired businesses.

CONTRACTUAL OBLIGATIONS

The following table provides payment obligations related to current
contracts for the year ended December 31, 2003, in millions:

(A) Does not include contracts that do not require volume
commitments or open or pending purchase orders.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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 adoption of certain provisions of FIN 46, relating to
variable interest entities formed prior to February 2003, has been extended to
2004. The Company believes that FIN 46 will not have a material impact on the
Company's consolidated financial statements.

In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The revisions to SFAS No. 132
require enhanced disclosures regarding pensions and other postretirement
benefits. Most of the enhanced disclosure requirements were effective for the
year ended December 31, 2003; certain disclosure provisions are effective
beginning in 2004.

25

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 is exposed to the impact of changes in interest rates and
foreign currency exchange rates in the normal course of business and to market
price fluctuations related to its marketable equity securities, bond funds and
other investments. The Company has limited involvement with derivative financial
instruments and uses such instruments only to the extent necessary to manage
exposure to fluctuations in interest rates and foreign currency fluctuations.
The Company does not use derivatives for trading purposes. See Note G to the
consolidated financial statements for additional information regarding the
Company's derivative instruments.

The derivatives used by the Company for the year ended December 31, 2003
consist of interest rate swaps entered into late in 2003, for the purpose of
effectively converting a portion of fixed-rate debt to floating-rate debt which
is expected to reduce interest expense, given current interest rates. Certain of
the Company's European operations also entered into foreign exchange forward
contracts for the purpose of managing exposure to currency fluctuations related
to the United States dollar and the Great Britain pound.

At December 31, 2003, the Company performed sensitivity analyses to assess
the potential loss in the fair values of market risk sensitive instruments
resulting from a hypothetical change 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. Based on the
analyses performed, such changes would not be expected to materially affect the
Company's financial position, results of operations or cash flows.

26

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

REPORT OF INDEPENDENT AUDITORS

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,
2003 and 2002, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2003 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 18, 2004

27

MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AT DECEMBER 31, 2003 AND 2002

See notes to consolidated financial statements.

28

MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

See notes to consolidated financial statements.

29

MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

See notes to consolidated financial statements.

30

MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

See notes to consolidated financial statements.

31

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. The Company generally recognizes customer
program costs, including cooperative advertising and customer incentives, as a
reduction to net sales. Amounts billed for shipping and handling are included in
net sales, while costs incurred for shipping and handling are included in cost
of sales.

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. Allowances are estimated based upon specific customer balances where a
risk of default has been identified and also include a provision for
non-customer specific defaults based upon historical collection, return and
write-off activity. A separate allowance is maintained for customer incentive
rebates and is generally based upon sales activity. Accounts and notes
receivable are presented net of certain allowances (including allowances for
doubtful accounts) of $84 million and $69 million at December 31, 2003 and 2002,
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.

Customer Promotion Costs. The Company records estimated reductions to
revenue for customer programs and incentive offerings, including special pricing
arrangements, promotions and other volume-based incentives. In-store displays
that are owned by the Company and used to market the Company's products are
included in other assets in the consolidated balance

32

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

A. ACCOUNTING POLICIES -- (CONTINUED)

sheets and are amortized over the expected useful life of three years; related
amortization expense is classified in selling expense in the consolidated
statements of income.

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 $206 million, $175
million and $155 million in 2003, 2002 and 2001, 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
share for the twelve months ended December 31, 2001 in Note I to the
consolidated financial statements. The Company performs impairment testing of
goodwill and other indefinite-lived intangible assets in the fourth quarter of
each year or as an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount.
The Company compares fair value of the reporting units to the carrying value of
the reporting units. Fair value is determined using a discounted cash flow
method. Intangible assets with finite useful lives are amortized using the
straight-line method over their estimated useful lives.

Fair Value of Financial Instruments and Derivative 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 is 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, 2003
was approximately $956 million and $4,129 million, as compared with the
aggregate carrying value of $980 million and $3,849 million, respectively, and
at December 31, 2002 such aggregate market value was approximately $875 million
and $4,572 million, as compared with the aggregate carrying value of $963
million and $4,316 million, respectively.

The Company has limited involvement with derivative financial instruments
and does not use derivatives for trading purposes. The Company may use
derivative financial instruments to manage exposures to fluctuations in earnings
and cash flows resulting from changes in foreign currency exchange rates and
interest rates. Derivative financial instruments are recorded in the
consolidated balance sheet as either an asset or liability measured at fair
value. For each derivative instrument that is designated and qualifies as a fair
value hedge, the gain or loss on the derivative instrument as well as the
offsetting loss or gain on the hedged item attributable to the hedged risk are
recognized in determining current earnings during the period of the change in
fair values. For derivative instruments not designated as hedging instruments,
the gain or loss is recognized in determining current earnings during the period
of change.

33

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

A. ACCOUNTING POLICIES -- (CONTINUED)

Stock Options and Awards. The Company elected to change its method of
accounting for stock-based compensation and implemented the fair value method
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," effective
January 1, 2003. The Company is using the prospective method, as defined by SFAS
No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure -- an amendment to SFAS No. 123," for determining stock-based
compensation expense. Accordingly, options granted, modified or settled
subsequent to January 1, 2003 are accounted for using the fair value method and
options granted prior to January 1, 2003 continue to be accounted for using the
intrinsic value method. In 2003, 5,121,800 option shares, including restoration
option shares, net of cancellations, were awarded and the related expense of $3
million was included in the Company's consolidated statement of income for the
year ended December 31, 2003. 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 previously issued stock options, in millions, except per
common share amounts:

For SFAS No. 123 calculation purposes, the weighted average grant date fair
values of option shares, including restoration options, granted in 2003, 2002
and 2001, were $8.89, $6.66 and $7.94, 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 2003, 2002 and 2001, respectively:
risk-free interest rate -- 3.3%, 3.8% and 5.2%; dividend yield -- 2.3%, 2.7% and
2.1%; volatility factor -- 37%, 37% and 36%; and expected option life -- 7
years, 6 years and 6 years.

Reclassifications. Certain prior-year amounts have been reclassified to
conform to the 2003 presentation in the consolidated financial statements. The
results of operations related to 2003 dispositions of businesses have been
reclassified in the consolidated statements of income for 2003, 2002 and 2001.
The assets and liabilities of these discontinued operations as of December 31,
2002 have not been reclassified in the accompanying consolidated balance sheet
and related notes. In the Company's consolidated statements of cash flows, the
cash flows from discontinued operations are not separately classified.

34

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

A. ACCOUNTING POLICIES -- (CONCLUDED)

Recently Issued Accounting Pronouncements. In January 2003, the Financial
Accounting Standards Board ("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 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 adoption of certain provisions of FIN 46, relating to
variable interest entities formed prior to February 2003, has been extended to
2004. The Company believes that FIN 46 will not have a material impact on the
Company's consolidated financial statements.

In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The revisions to SFAS No. 132
require enhanced disclosures regarding pensions and other postretirement
benefits. Most of the enhanced disclosure requirements were effective for the
year ended December 31, 2003; certain disclosure provisions are effective
beginning in 2004.

B. DISCONTINUED OPERATIONS

On September 30, 2003, the Company completed the sale of its Baldwin
Hardware and Weiser Lock businesses. Baldwin and Weiser were included in the
Decorative Architectural Products segment and manufacture a wide range of
architectural and decorative products, including builders' hardware and
locksets. In a separate transaction on September 30, 2003, the Company also
completed the sale of the Marvel Group. Marvel manufactures office workstations
and machine stands, and was included in the Other Specialty Products segment.
The sale of these businesses reflects the Company's continuing commitment to
deploy the Company's assets in businesses that support its operating strategies
and provide the greatest opportunities to create value for the Company's
shareholders. Total proceeds from the sale of these companies were $289 million,
including cash of $286 million and notes receivable of $3 million.

On January 1, 2002, SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," became effective. This statement addresses the
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 broadens the presentation of discontinued operations to include a
component of the Company, which comprises operations and cash flows, that can be
clearly distinguished from the rest of the Company. Based on SFAS No. 144, the
Company has accounted for the 2003 dispositions of businesses as discontinued
operations.

Selected financial information for these discontinued operations is as
follows for the years ended December 31, 2003 (prior to disposition), 2002 and
2001, in millions:

35

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

B. DISCONTINUED OPERATIONS -- (CONCLUDED)

Income taxes in the table above include income taxes on the gain on
disposal of discontinued operations of $37 million in the year ended December
31, 2003. Total assets of discontinued operations sold in September 2003
consisted primarily of accounts receivable of $44 million, inventories of $41
million, property and equipment, net of $114 million and other assets of $18
million (including goodwill of $16 million). Total liabilities of discontinued
operations consisted primarily of accounts payable of $12 million, accrued
salaries, wages and related benefits of $5 million and other accrued expenses of
$3 million.

C. ACQUISITIONS

During 2003, the Company acquired PowerShot Tool Company, Inc. (Other
Specialty Products segment), and several relatively small installation service
companies (Installation and Other Services segment). PowerShot Tool Company is a
manufacturer of fastening products, including staple guns, glue guns, hammer
tackers and riveting products, headquartered in New Jersey. The results of these
acquisitions are included in the consolidated financial statements from the
respective dates of acquisition. The aggregate net purchase price of these
acquisitions was $63 million, and included cash of $57 million and debt of $6
million.

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, 2003 have been included in the computation of diluted
earnings per common share for 2003. The Company also paid an additional $182
million of acquisition-related consideration, including amounts to satisfy share
price guarantees, contingent consideration and other purchase price adjustments,
in 2003, relating to previously acquired companies.

During 2002, the Company acquired several businesses. The aggregate net
purchase price of these 2002 acquisitions was $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, represented acquired goodwill.

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 and 2002, 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
millions, except per common share amounts:

36

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

C. 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.

As a result of recent acquisition agreements, the Company leases operating
facilities from certain related parties, primarily former owners (and current
General Managers) of companies acquired.

D. EUROPEAN CHARGES

During 2003, the Company recorded a non-cash, pre-tax charge which reduced
operating profit by approximately $35 million with respect to a United Kingdom
business unit in the Decorative Architectural Products segment. The charge
relates primarily to a business system implementation failure which allowed
former management of the business unit to circumvent internal controls and
artificially inflate the unit's operating profit in years prior to 2003. The
Company also determined that goodwill related to this business unit was impaired
and recorded an additional $5 million charge in the third quarter of 2003.

Finally, the Company determined that the strategic plan for this business
unit, relative to certain product offerings and customer focus, should be
changed. This revision in operating strategy resulted in 2003 charges
aggregating approximately $15 million related principally to inventories and
receivables.

During 2003, the Company also detected that an employee at a United Kingdom
business unit in the Plumbing Products segment had circumvented internal
controls and overstated operating results by approximately $4 million in 2002.
The Company completed its review of the business unit in the fourth quarter of
2003 and determined that no further adjustment was necessary.

The Company is implementing changes to its operational and financial
structure in Europe which include: reorganizing its European business operations
into product groups; the addition of group operating and financial personnel;
training and evaluation related to internal controls; and the expansion of both
external and internal audit involvement.

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.

37

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

F. INVESTMENTS

EQUITY INVESTMENTS

In April 2003, the Company completed the sale of its 42 percent equity
investment in Emco Limited, a Canadian distributor of plumbing and related
products with approximate 2002 sales of $860 million, for cash proceeds of $75
million. The sale resulted in a pre-tax gain of $5 million.

In December 2002, the Company acquired an additional 37 percent ownership
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, 2003 and 2002. For the year ended December
31, 2002, the Company recorded equity earnings from Hansgrohe AG; the Company
began consolidating the majority interest in the operating results of Hansgrohe
AG in January 2003.

FINANCIAL INVESTMENTS

The Company maintains investments in marketable securities (including
marketable equity securities and 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 millions:

In November 2000, the Company reduced its common equity ownership in
Metaldyne Corporation (formerly MascoTech, Inc.) through a recapitalization
merger with an affiliate of Heartland Industrial Partners, L.P. The Company
currently owns 6 percent of the common equity of Metaldyne. The Company also
holds preferred stock of Metaldyne, which accrues dividends at the rate of 15
percent per year. In June 2002, Metaldyne sold approximately 66 percent of the
fully diluted common equity of its TriMas Corporation subsidiary to Heartland
Industrial Partners, L.P. The Company exercised its right to its proportionate
share and acquired approximately 6 percent of TriMas Corporation for $25
million.

38

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

F. INVESTMENTS -- (CONTINUED)

The Company's investments in marketable equity securities and bond funds at
December 31, 2003 and 2002 were as follows, in millions:

The following table summarizes the gross unrealized losses and fair value
of the Company's investments in marketable securities, aggregated by investment
category and length of time that the individual securities have been in a
continuous unrealized loss position, at December 31, 2003, in millions:

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 (that are deemed to be temporary)
are recognized, net of tax effects, through shareholders' equity, as a component
of other comprehensive income (loss). 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 has
investments in over 100 different equity securities and bond funds at December
31, 2003; the unrealized loss is primarily related to one marketable equity
security, Furniture Brands International common stock, which was received in
June 2002 from the Company's investment in Furnishings International Inc. debt.
The Company reviews industry analyst reports, key ratios and statistics, market
analyses and other factors for each investment to determine if an unrealized
loss is other than temporary. The unrealized loss related to this security is
three percent of the market value of this investment and one percent of the
total market value of the Company's investments in marketable equity securities.
Based on the Company's review, the Company considers the unrealized loss related
to this investment to be temporary.

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, including the maturity of the fund, indicate an impairment
may exist. At December 31, 2003, the

39

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

F. INVESTMENTS -- (CONCLUDED)

carrying value of the Company's investments in private equity funds exceeded the
estimated market value, as determined by the fund managers, by approximately $24
million.

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

During 2003, the Company recognized impairment charges aggregating $19
million related to investments in an equity security and private equity funds.
In the fourth quarter of 2002, the Company recognized impairment charges of $24
million principally related to certain of its investments in private equity
funds and other financial investments. During 2001, the Company recognized
impairment charges of $70 million related to principally technology-related
marketable equity securities.

G. DERIVATIVES

During 2003, the Company entered into interest rate swaps for the purpose
of reducing interest expense related to certain fixed-rate debt. The derivative
contracts are with two major creditworthy institutions, thereby minimizing the
risk of credit loss. The interest rate swaps are designated a fair-value hedge
and the interest rate differential on interest rate swaps used to hedge existing
debt is recognized as an adjustment to interest expense or income over the term
of the agreement.

The average variable rates are based on the London Interbank Offered Rate
("LIBOR") plus a fixed adjustment factor. The average effective rate on the
interest rate swaps is 2.25%. At December 31, 2003, the interest rate swap
agreements covered a notional amount of $850 million of the Company's fixed rate
debt due July 15, 2012 with an interest rate of 5.875%. The amount recognized as
a reduction of interest expense was approximately $3 million for the year ended
December 31, 2003. The interest rate swaps are considered 100 percent effective;
therefore, the favorable market valuation adjustment of $7 million is recorded
in other assets with a corresponding increase in long-term debt in the Company's
consolidated balance sheet at December 31, 2003.

At December 31, 2003, certain of the Company's European operations had
entered into foreign currency forward contracts with notional amounts of $10
million and $7 million to manage exposure to currency fluctuations in the United
States dollar and Great Britain pound, respectively. Based on year-end market
prices, no asset or liability was recorded, as the forward

40

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

G. DERIVATIVES -- (CONCLUDED)

price is substantially the same as the contract price. The counterparties to the
Company's forward contracts are major financial institutions. In the unlikely
event that the counterparties fail to meet the terms of a foreign currency
contract, the Company's exposure is limited to the foreign currency rate
differential.

H. PROPERTY AND EQUIPMENT

The Company leases certain equipment and plant facilities under
noncancellable operating leases. Rental expense, recorded in the consolidated
statements of income, for the Company totaled approximately $129 million, $137
million and $122 million during 2003, 2002 and 2001, respectively. Future
minimum lease payments at December 31, 2003 were approximately as follows:
2004 -- $95 million; 2005 -- $72 million; 2006 -- $52 million; 2007 -- $38
million; and 2008 and beyond -- $115 million.

I. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the years ended December
31, 2003 and 2002, by segment, are as follows, in millions:

41

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

I. GOODWILL AND OTHER INTANGIBLE ASSETS -- (CONTINUED)

(A) Additions principally include acquisitions and contingent consideration for
prior acquisitions of $45 million and $123 million, respectively, for 2003
and $1,016 million and $43 million, respectively, for 2002.

(B) Other principally includes foreign currency translation adjustments,
reclassifications and other purchase price adjustments related to the
finalization of certain purchase price allocations.

The Company completed the annual impairment testing of goodwill and other
indefinite-lived intangible assets in the fourth quarter of 2003. This test
indicated that other indefinite-lived intangible assets were not impaired;
however, goodwill recorded for certain of the Company's European businesses was
impaired principally due to the continuing weakness in certain European markets.
The Company recognized a non-cash, pre-tax impairment charge of $137 million
($113 million after-tax). The Company also recorded a non-cash goodwill
impairment charge of $5 million related to a European business, as discussed in
Note D.

The Company completed the transitional goodwill and other indefinite-lived
intangible assets impairment testing in 2002. This evaluation indicated that
other indefinite-lived intangible assets were not impaired; however, goodwill
recorded for certain of the Company's businesses, principally in Europe, was
impaired. Certain of the Company's European businesses had been affected by weak
market and economic conditions. On adoption of SFAS No. 142, a non-cash, pre-tax
impairment charge of $117 million ($92 million, net of income tax credit of $25
million), was recognized as a cumulative effect of change in accounting
principle, effective January 1, 2002.

The income tax credit for 2003 and 2002 was reduced due to a portion of the
impaired goodwill being non-deductible for tax purposes.

Other indefinite-lived intangible assets of $255 million at December 31,
2003 primarily include registered trademarks. The carrying value of the
Company's definite-lived intangible assets is $89 million at December 31, 2003
(net of accumulated amortization of $53 million) and principally includes
customer relationships and non-compete agreements, with a weighted average
amortization period of nine years. Amortization expense related to the
definite-lived intangible assets was $26 million in both 2003 and 2002.

At December 31, 2003, amortization expense related to the definite-lived
intangible assets during each of the next five years was approximately as
follows: 2004 -- $20 million; 2005 -- $15 million; 2006 -- $11 million;
2007 -- $8 million; and 2008 -- $6 million.

42

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

I. GOODWILL AND OTHER INTANGIBLE ASSETS -- (CONCLUDED)

The following table illustrates 2001 net income and earnings per common
share assuming goodwill was not subject to amortization during 2001, in
millions, except per share data:

Net income as reported...................................... $199
Goodwill amortization, net of tax........................... 78
----
Net income as adjusted...................................... $277
====
Earnings per common share:
Basic as reported......................................... $.43
Goodwill amortization, net of tax......................... .17
----
Basic as adjusted......................................... $.60
====
Diluted as reported....................................... $.42
Goodwill amortization, net of tax......................... .16
----
Diluted as adjusted....................................... $.58
====

J. OTHER ASSETS

K. ACCRUED LIABILITIES

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

43

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

L. 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.

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 1/3%, declining by 1/3% each year hereafter, of the accreted value of a Note
($426 per $1,000 principal amount at maturity as of December 31, 2003) divided
by the conversion rate of 12.7243 shares for each $1,000 principal amount at
maturity of the Note or $39.94 per common share at December 31, 2003. 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.

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.

In addition, holders of the Notes have the option to require that the Notes
be repurchased by the Company on January 20, 2005 and 2007; July 20, 2011; and
every five years thereafter. The Company at its option can satisfy any such
repurchase with Company common stock or cash. If the Notes were to be put back
to the Company, the Company expects to settle the Notes for cash,

44

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

L. LONG-TERM DEBT -- (CONCLUDED)

and accordingly, the Notes are not included in the calculation of diluted
earnings per common share. The Company currently 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.

Debt issuance costs related to the Notes totaled $15 million and were
amortized using the straight-line method through July 20, 2002.

At December 31, 2003, 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 2004. These
agreements allow for borrowings denominated in U.S. dollars or European euros.
There were no borrowings under either agreement during 2003. Interest is payable
on borrowings under these agreements based on various floating rate options as
selected by the Company (approximately 2.4 percent for the year ended December
31, 2002).

Certain debt agreements contain limitations on additional borrowings; at
December 31, 2003, the Company had additional borrowing capacity, subject to
availability, of up to $2.5 billion. Certain debt agreements also contain a
requirement for maintaining a certain level of net worth; at December 31, 2003,
the Company's net worth exceeded such requirement by approximately $2 billion.

At December 31, 2003, the maturities of long-term debt during each of the
next five years (assuming the Company will finance the put option, if exercised,
related to the Zero Coupon Notes with the 5-year Revolver) were approximately as
follows: 2004 -- $334 million; 2005 -- $842 million; 2006 -- $813 million;
2007 -- $307 million; and 2008 -- $105 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 $282 million, $204 million and $246 million
in 2003, 2002 and 2001, respectively.

M. SHAREHOLDERS' EQUITY

In December 2003, the Company's Board of Directors authorized the
repurchase of up to 50 million shares of the Company's common stock in
open-market transactions or otherwise, replacing a previous Board of Directors
authorization established in 2002. At December 31, 2003, the Company had
remaining authorization to repurchase up to 48 million shares of its common
stock in open-market transactions or otherwise. Approximately 35 million, 8
million and 3 million common shares were repurchased and retired in 2003, 2002
and 2001, respectively, at a cost aggregating approximately $779 million, $166
million and $67 million in 2003, 2002 and 2001, respectively.

45

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

M. SHAREHOLDERS' EQUITY -- (CONTINUED)

On the basis of amounts paid (declared), cash dividends per common share
were $.58 ($.60) in 2003, $.54 1/2 ($.55) in 2002 and $.52 1/2 ($.53) in 2001,
respectively. In 2003, the Company increased its quarterly cash dividend by 14
percent (a larger percentage than in recent years) to $.16 per common share from
$.14 per common share.

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 million (net of
issuance costs of $14 million).

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 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
millions:

The unrealized gain (loss) on marketable equity securities and bond funds
is net of income tax (credit) of $31 million and $(9) million for the years
ended December 31, 2003 and 2002, respectively. The minimum pension liability is
net of income tax (credit) of $(1) million and $(34) million for the years ended
December 31, 2003 and 2002, respectively.

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

Unrealized loss on marketable equity securities and bond funds is reported
net of income tax (credit) of $15 million and $(16) million at December 31, 2003
and 2002, respectively.

46

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

M. SHAREHOLDERS' EQUITY -- (CONCLUDED)

The minimum pension liability is reported net of tax credit of $35 million
and $34 million at December 31, 2003 and 2002, respectively.

Realized gains (losses) on marketable securities of $13 million and $(30)
million, net of tax effect, for 2003 and 2002, respectively, were included in
determining net income and were reclassified from accumulated other
comprehensive income.

N. 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, 2003,
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 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
2,153,000 shares, 1,315,000 shares and 2,582,000 shares of Company common stock
during 2003, 2002 and 2001, 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 2003, 2002 and 2001 was $19, $23 and $23,
respectively. Compensation expense for the annual vesting of long-term stock
awards was $50 million (including $15 million of accelerated expense due to the
unexpected passing of the Company's President and Chief Operating Officer), $29
million and $26 million in 2003, 2002 and 2001, respectively. The unvested stock
awards, aggregating approximately $165 million (10 million common shares) and
$164 million (10 million common shares) at December 31, 2003 and 2002,
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 2003 and 2002, the Company issued stock appreciation rights ("SARs") to
foreign employees with cash compensation linked to the value of 287,800 shares
and 332,000 shares, respectively, of Company common stock. The Company also
issued phantom stock awards linked to the value of 160,500 shares, 25,700 shares
and 64,600 shares of Company common stock for the years ended December 31, 2003,
2002 and 2001, respectively. Compensation expense related to SARs and phantom
stock awards for 2003, 2002 and 2001 was $12 million, $3 million and $5 million,
respectively.

STOCK OPTIONS

Fixed stock options are granted to key employees and non-employee Directors
of the Company. The exercise price equals the market price of Company common
stock on the date of grant. These options generally become exercisable in
installments beginning on the first or second anniversary from the date of grant
and expire no later than 10 years after the grant date.

47

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

N. STOCK OPTIONS AND AWARDS -- (CONCLUDED)

During 2003, the Company granted stock options for 4,509,100 shares of
Company common stock and restoration stock options for 567,200 shares with grant
date exercise prices ranging from $23 to $28 (the market prices on the grant
dates). 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). The Company also granted stock options for 48,000 shares,
48,000 shares and 128,000 shares of Company common stock in 2003, 2002 and 2001,
respectively, to non-employee Directors of the Company with exercise prices of
$23, $27 and $22, respectively (the market prices on the grant dates). The
Company recorded $3 million of stock option expense in the consolidated
statement of income for the year ended December 31, 2003, for stock options
granted, modified or settled subsequent to January 1, 2003.

A summary of the status of the Company's fixed stock options for the three
years ended December 31, 2003 is presented below, shares in millions:

The following table summarizes information for option shares outstanding
and exercisable at December 31, 2003, shares in millions:

At December 31, 2003, a total of 10,167,000 shares and 503,000 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.

48

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

O. 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 $106 million in 2003, $74 million in 2002 and $64
million in 2001.

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

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 millions:

49

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

O. EMPLOYEE RETIREMENT PLANS -- (CONTINUED)

The following represents amounts recognized in the Company's consolidated
balance sheets at December 31, in millions:

Information for domestic qualified defined-benefit pension plans with an
accumulated benefit obligation in excess of plan assets is as follows at
December 31, in millions:

PLAN ASSETS

Following is a summary of the Company's domestic qualified defined-benefit
pension plan weighted average asset allocation at December 31:

The investment objectives of the Company's domestic qualified
defined-benefit pension plans are: 1) to invest the portfolio to earn a return,
net of fees, greater than or equal to the long-term rate of return used by the
Plan's actuary; and 2) to maintain liquidity sufficient to meet Plan
obligations. Target allocations are: equity securities (84%), debt securities
(10%) and other investments (6%).

Plan assets include approximately 1.4 million shares of Company common
stock valued at $39 million at December 31, 2003 and 629,000 shares of Company
common stock valued at $13 million at December 31, 2002.

50

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

O. EMPLOYEE RETIREMENT PLANS -- (CONCLUDED)

CASH FLOWS

The Company expects to contribute approximately $54 million to its domestic
qualified defined-benefit pension plans in 2004. The Company also expects to
contribute $3 million to its non-qualified supplemental defined-benefit pension
plans in 2004.

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

The Company determined the expected long-term rate of return on plan assets
by reviewing an analysis of expected and historical rates of return of various
asset classes based on the current asset allocation of the trust assets. The
measurement date used to determine the defined-benefit pension expense is
January 1.

OTHER

The Company also sponsors qualified defined-benefit pension plans for
certain of its foreign employees. Net periodic pension cost for these plans was
approximately $5 million in 2003 and $2 million in 2002. The projected benefit
obligation and fair value of plan assets was approximately $101 million and $59
million at December 31, 2003 and $59 million and $37 million at December 31,
2002, respectively. The projected benefit obligation exceeded the plan assets by
approximately $42 million at December 31, 2003 and a net liability of
approximately $16 million was recognized. 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.

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 $105 million and $110 million at December 31,
2003 and $74 million and $82 million at December 31, 2002, respectively. Net
periodic pension cost for these plans was $13 million, $10 million and $9
million in 2003, 2002 and 2001, 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 at both December 31, 2003 and 2002.

51

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

P. 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; 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, builders, 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. Income and expense related to the
Behr litigation has also been excluded from the evaluation of segment operating
profit.

52

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

P. SEGMENT INFORMATION -- (CONTINUED)

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

53

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

P. SEGMENT INFORMATION -- (CONCLUDED)

(1) Included in net sales in 2003, 2002 and 2001 were export sales from the
U.S. of $184 million, $153 million and $151 million, respectively.

(2) Intra-company sales between segments represented less than one percent of
consolidated net sales in 2003, 2002 and 2001.

(3) Includes net sales to one customer in 2003, 2002 and 2001 of $2,457
million, $2,277 million and $2,039 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 $8,561 million,
$7,479 million and $6,613 million in 2003, 2002 and 2001, respectively.

(5) Net sales, operating profit and depreciation and amortization for 2003,
2002 and 2001 exclude the results of businesses sold in 2003.

(6) Long-lived assets of the Company's operations in the U.S. and Europe were
$4,859 million and $2,130 million, $4,875 million and $1,848 million and
$3,999 million and $1,335 million at December 31, 2003, 2002 and 2001,
respectively.

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

(8) The income (charge) for litigation settlement relates to litigation
discussed in Note T regarding the Company's subsidiary, Behr Process
Corporation, which is included in the Decorative Architectural Products
segment.

(9) Included in segment operating profit for 2003 are goodwill impairment
charges as follows: Cabinets and Related Products -- $51 million, Plumbing
Products -- $36 million, Decorative Architectural Products -- $24 million
and Other Specialty Products -- $31 million. The goodwill impairment
charges were related to the Company's European businesses.

(10) Assets at December 31, 2002 and 2001 include the assets of businesses sold
in 2003.

(11) Operating profit excluding goodwill amortization expense for 2001 was as
follows: Cabinets and Related Products -- $270 million, Plumbing Products
-- $248 million, Installation and Other Services -- $287 million,
Decorative Architectural Products -- $274 million and Other Specialty
Products -- $152 million.

Q. OTHER INCOME (EXPENSE), NET

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

54

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

Q. OTHER INCOME (EXPENSE), NET -- (CONCLUDED)

Other items, net in 2003, 2002 and 2001 include realized foreign currency
exchange transaction losses of $5 million, $4 million and $7 million,
respectively, as well as other miscellaneous expenses.

Other interest income for 2001 includes $29 million from the 12%
pay-in-kind junior debt securities of FII.

R. INCOME TAXES

State and local taxes were lower in 2001 due principally to an $8 million
($5 million, net of federal tax) favorable settlement of contested liabilities.

At December 31, 2003 and 2002, net deferred tax liability consisted of net
short-term deferred tax assets included in prepaid expenses and other of $181
million and $171 million,

55

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

R. INCOME TAXES -- (CONCLUDED)

respectively, and net long-term deferred tax liabilities of $410 million and
$186 million, respectively.

During 2001, the Company recorded a 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
capital loss carryforward for tax purposes of $109 million ($311 million
pre-tax) at December 31, 2002. Principally as a result of the gain from the sale
of certain operating assets in 2003, this capital loss carryforward decreased to
$62 million ($176 million pre-tax) at December 31, 2003. The Company believes
that the capital loss carryforward will be utilized before its expiration on
December 31, 2007, 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, 2003 or 2002.

The following is a reconciliation of the U.S. Federal statutory rate to the
provision for income taxes on income from continuing operations before minority
interest:

Income taxes paid were approximately $328 million, $302 million and $193
million in 2003, 2002 and 2001, 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, 2003 for U.S. or additional foreign withholding
taxes on approximately $739 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.

56

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

S. 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 millions:

The 16,667 shares of outstanding preferred stock, which are convertible
into 16,667,000 shares of Company common stock and carry substantially the same
attributes as Company common stock, including voting rights and dividends, have
been treated as if converted in the computation of basic and diluted common
shares.

Approximately 24 million common shares for 2003, 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, 2003,
2002 and 2001, they were not convertible according to their terms. Additionally,
7.9 million common shares, 3.5 million common shares and 2.4 million common
shares for 2003, 2002 and 2001, 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 average common stock price during the period.

T. OTHER COMMITMENTS AND CONTINGENCIES

LITIGATION

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

As the Company reported in previous filings, late in the second half of
2002, the Company and its subsidiary, Behr Process Corporation, agreed to two
Settlements (the National Settlement and the Washington Settlement) to resolve
all class action lawsuits pending in the United States involving certain
exterior wood coating products formerly manufactured by Behr. As a result, in
the third quarter of 2002, the Company took a litigation charge of approximately
$68 million for the estimated cost of the Washington Settlement. This charge did
not reflect any offsets for amounts the Company expected to receive from Behr's
insurers. The charge included $55 million for the payment of claims, notice,
claims administration and plaintiff's litigation costs, and $13 million for
Class Counsel fees. In the first quarter of 2003, the Company recorded income of
approximately $14 million, principally to reflect an agreement with Behr's
insurers to fund a portion of the Class Counsel fees, notice and claims
administration costs and plaintiff's litigation

57

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

T. OTHER COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

costs. Pursuant to the terms of the Washington Settlement and orders entered by
the trial court in October and December 2003, the Company and Behr's insurers
made partial payments totaling $2 million on 412 claims that had been
recommended for payment by the claims administrator. The deadline for claims in
the Washington Settlement was January 17, 2004. Until all claims are processed,
the Company has determined that no further adjustment of its original estimate
would be appropriate. The Company expects that the evaluation, processing and
payment of claims will be completed by September 30, 2004. The total amount of
the insurers' contribution related to these claims will not be reasonably
estimable until the claims process is completed. The remaining accrual for
claims and administration costs is approximately $53 million, reflecting the
receipt of approximately $14 million in 2003 from Behr's insurers.

In the third quarter of 2002, the Company also took a litigation charge of
$96 million for the estimated cost of the National Settlement, which included
$66 million for the payment of claims, $25 million for Class Counsel fees and $5
million for notice and claims administration costs. As with the Washington
Settlement, the charge did not reflect any offsets for amounts the Company
expected to receive from Behr's insurers. In the fourth quarter of 2002, the
Company recorded income of $19 million to reflect an agreement with Behr's
insurers to fund a portion of the Class Counsel fees, and notice and claims
administration costs. The filing deadline for claims in the National Settlement
was September 2, 2003 and the Company received approximately 3,700 claims, which
was a fraction of the number originally projected. The Company estimated the
average cost per claim received and, as a result, estimated that the total cost
of claims related to the National Settlement will approximate $8 million
compared with the $66 million recorded in the third quarter of 2002.
Accordingly, the Company reduced the litigation accrual by $58 million in the
third quarter of 2003. The total amount of the insurers' contribution related to
these claims will not be reasonably estimable until the claims process is
completed. The remaining accrual at December 31, 2003 related to claims and
administrative costs is approximately $10 million. The Company expects to
complete the processing, evaluation and payment of such claims by June 30, 2004.

In addition, the Company recorded $2 million in 2002 for additional legal
costs; the $2 million was paid by the Company in 2003.

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 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 expectations of 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.

58

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

T. OTHER COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

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

ACQUISITION-RELATED COMMITMENTS

The Company, as part of certain recent acquisition agreements, 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 business and the price of the Company's common
stock.

STOCK PRICE GUARANTEES

Stock price guarantees as of December 31, 2003 are summarized as follows,
in millions, except per share data:

(A) Amounts computed based on the ten-day average of the high and low Company
common stock prices ending December 31, 2003 of $27.50. Shares contingently
issuable under these guarantees are included in the calculation of diluted
earnings per common share.

CONTINGENT PURCHASE PRICE

As part of certain recent acquisition agreements, the Company has
additional consideration payable in cash of approximately $40 million contingent
on the operating performance of the acquired businesses.

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, 2003, would have approximated $21 million; if the option were
settled in stock, the common shares to be issued at December 31, 2003 would have
approximated 824,000.

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 a 2001
divestiture (through June 2004). The liability for this guarantee, which
approximated $20 million and $30 million at December 31, 2003 and 2002,
respectively, has been recorded in accrued liabilities and is marked to market
each reporting period.

59

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

T. OTHER COMMITMENTS AND CONTINGENCIES -- (CONCLUDED)

INVESTMENTS

With respect to the Company's investments in private equity funds, the
Company, at December 31, 2003, has, under certain circumstances, commitments to
contribute additional capital to such funds of up to $88 million.

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 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 $160 million at December 31,
2003, 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
primarily related to certain of the Company's trucks and other vehicles, 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, assuming the fair value at lease termination is zero,
is approximately $76 million at December 31, 2003.

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 generally 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.

60

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

U. PLANNED DISPOSITION OF BUSINESSES -- 2000

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. A non-cash, pre-tax charge of $90 million was recorded in December
2000. During 2002 and 2001, the Company completed the sale of its StarMark
Cabinetry, Inc., Inrecon and American Metal Products businesses for cash
proceeds of $247 million, which approximated their combined book values.

In the fourth quarter of 2002, the Company recognized a pre-tax gain of $16
million related to certain long-lived assets which were written down in December
2000 as part of the Company's plan for disposition.

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 and $237
million in 2002 and 2001, respectively, and operating (loss) profit of $(.4)
million and $13 million in 2002 and 2001, respectively; the changes in sales and
operating (loss) profit include the effect of dispositions completed in 2002 and
2001.

V. SECURITIES OF FURNISHINGS INTERNATIONAL INC.

During 2001, management of Furnishings International Inc. ("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 2002, FII substantially completed the disposition of its
operations. The fair value of the remaining net assets of FII represented
proceeds for the Company's investment in securities of FII. 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.

W. SUBSEQUENT EVENT (UNAUDITED)

The Company reviews its business portfolio on an ongoing basis as part of
its corporate strategic planning and, in the first quarter of 2004, has
determined that several European businesses are not core to the Company's
long-term growth strategy and, accordingly, has embarked on a plan of
disposition. These businesses had combined 2003 net sales in excess of $350
million and an approximate net book value of $330 million. The Company expects
net proceeds from the dispositions to exceed $300 million. The dispositions are
expected to be completed within the next twelve months and the Company expects
to recognize a modest net loss upon the disposition of all of these businesses.
First quarter 2004 results will include a charge to reflect those businesses
that are expected to be divested at a loss. Any gains resulting from the
disposition of individual businesses will be recognized as such transactions are
completed.

61

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

X. INTERIM FINANCIAL INFORMATION (UNAUDITED)

Income per common share amounts for the four quarters of 2003 and 2002 do
not total to the per common share amounts for the years ended December 31, 2003
and 2002 due to the timing of common stock repurchases and the effect of
contingently issuable common shares.

Fourth quarter 2003 net income includes a $113 million after-tax ($137
million pre-tax), non-cash goodwill impairment charge. Third quarter 2003 net
income includes a $54 million after-tax ($91 million pre-tax) gain from the
disposition of certain businesses. Third quarter 2003 also includes adjustments
of $59 million related to European accounting charges including a $5 million
non-cash goodwill impairment charge.

First quarter 2002 net income includes a $92 million after-tax ($117
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 million after-tax ($166 million pre-tax) charge for the
Behr litigation settlement. Fourth quarter 2002 net income includes a $12
million after-tax ($19 million pre-tax) insurance recovery relating to the Behr
litigation settlement.

62

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

Not applicable

ITEM 9A. CONTROLS AND PROCEDURES.

The Company's Chief Executive Officer and Chief Financial Officer have
conducted an evaluation of the Company's disclosure controls and procedures as
required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15 as of the end
of the period covered by this report. Based upon that evaluation:

a. they have concluded that the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) or
15d-15(e)) 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; and

b. they have identified no change in the Company's internal control
over financial reporting that occurred during the fourth fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting. Reference is made in this regard to the discussion in
Management's Discussion and Analysis regarding United Kingdom
businesses in the Decorative Architectural Products segment and the
Plumbing Products segment, although such officers do not believe
that the matters described in that discussion are reasonably likely
to materially affect the Company's internal controls over financial
reporting.

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
2004 Annual Meeting of Stockholders, to be filed on or before April 29, 2004,
and such information is incorporated herein by reference.

The Company's Code of Business Ethics, which applies to all employees,
officers and directors including the Principal Executive Officer, Principal
Financial Officer and Principal Accounting Officer, is posted on the Company's
website at http://www.masco.com. The Code of Business Ethics is compliant with
Item 406 of Regulation S-K as required by the SEC and the New York Stock
Exchange corporate governance rules. Any change to the Code of Business Ethics
that affects the provisions required by Item 406 of Regulation S-K will also be
disclosed on our website within five business days following such amendment. Any
waivers of the Code of Business Ethics for our executive officers or senior
financial officers must be approved by the Company's Audit Committee or by the
Board of Directors and any waivers for directors must be approved by the
Corporate Governance and Nominating Committee or by the Board of Directors.
Those waivers, if any were ever granted, would be disclosed on our website
within five business days following such waiver.

The Board of Directors has adopted Corporate Governance Guidelines and
charters for its Audit Committee, Corporate Governance and Nominating Committee
and Organization and Compensation Committee, each of which are posted on the
Company's website. Investors may obtain a free copy of the Code of Business
Ethics, the Corporate Governance Guidelines or the
63

committee charters by contacting the Investor Relations Department at 21001 Van
Born Road, Taylor, Michigan 48180, Att: Samuel Cypert or by telephoning (313)
274-7400.

ITEM 11. EXECUTIVE COMPENSATION.

Information required by this Item will be contained in the Company's
definitive Proxy Statement for its 2004 Annual Meeting of Stockholders, to be
filed on or before April 29, 2004, 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, 2003 concerning the
Company's two equity compensation plans, both of which were approved by
stockholders. The Company does not have any equity compensation plans that are
not approved by stockholders.

The remaining information required by this Item will be contained in the
Company's definitive Proxy Statement for its 2004 Annual Meeting of
Stockholders, to be filed on or before April 29, 2004, 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 2004 Annual Meeting of Stockholders, to be
filed on or before April 29, 2004, and such information is incorporated herein
by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Information required by this Item will be contained in the Company's
definitive Proxy Statement for its 2004 Annual Meeting of Stockholders, to be
filed on or before April 29, 2004, and such information is incorporated herein
by reference.

64

PART IV

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, 2003 and 2002,
and for the years ended December 31, 2003, 2002 and 2001, 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, 2003, 2002 and 2001,
consists of the following:

II. Valuation and Qualifying Accounts

(3)Exhibits.

3.i Restated Certificate of Incorporation of Masco Corporation
and amendments thereto (7).
3.ii Bylaws of Masco Corporation, as amended December 5, 2001
(7).
4.ai Indenture dated as of December 1, 1982 between Masco
Corporation and Morgan Guaranty Trust Company of New York,
as Trustee (5), and Directors' resolutions establishing
Masco Corporation's: (i) 7 1/8% Debentures Due August 15,
2013 (filed herewith); (ii) 6.625% Debentures Due April 15,
2018 (filed herewith); (iii) 5.75% Notes Due October 15,
2008 (filed herewith); and (iv) 7 3/4% Debentures Due August
1, 2029 (1).
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 (1).
4.a.iii Supplemental Indenture dated as of July 26, 1994 between
Masco Corporation and The First National Bank of Chicago
(1).
4.bi Indenture dated as of February 12, 2001 between Masco
Corporation and J.P. Morgan Trust Company, National
Association (successor in interest to Bank One, National
Association), as Trustee (3), and Directors' Resolutions
establishing Masco Corporation's: (i) 6 3/4% Notes Due March
15, 2006 (3); (ii) 6% Notes Due May 3, 2004 (4); (iii)
5 7/8% Notes Due July 15, 2012 (7); (iv) 4 5/8% Notes Due
August 15, 2007 (7); and (v) 6 1/2% Notes Due August 15,
2032 (7).
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 J.P. Morgan Trust Company, National
Association (successor in interest to Bank One, National
Association), as Trustee, relating to the Company's Zero
Coupon Convertible Senior Notes Due July 20, 2031 (4), and
Amendment No. 1 dated as of July 19, 2002 (6).

66

31.a Certification by Chief Executive Officer required by Rule
13a-14(a)/ 15d-14(a) (filed herewith).
31.b Certification by Chief Financial Officer required by Rule
13a-14(a)/ 15d-14(a) (filed herewith).
32 Certifications required by Rule 13a-14(b) or Rule 15d-14(b)
and Section 1350 of Chapter 63 of the United States Code
(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, 1999.

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

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

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

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

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

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

No reports on Form 8-K were filed by the Company during the fourth quarter
of the year ended December 31, 2003.

67

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
Senior Vice President and Chief
Financial Officer

February 27, 2004

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
Richard A. Manoogian

PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:

/s/ TIMOTHY WADHAMS Senior 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 February 27, 2004
- --------------------------------------
Anthony F. Earley, Jr.

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

/s/ DAVID L. JOHNSTON Director
- --------------------------------------
David L. Johnston

/s/ J. MICHAEL LOSH Director
- --------------------------------------
J. Michael Losh

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

/s/ MARY ANN VAN LOKEREN Director
- --------------------------------------
Mary Ann Van Lokeren

68

MASCO CORPORATION
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

(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.

69

EXHIBIT INDEX

3.i Restated Certificate of Incorporation of Masco Corporation
and amendments thereto (7).
3.ii Bylaws of Masco Corporation, as amended December 5, 2001
(7).
4.ai Indenture dated as of December 1, 1982 between Masco
Corporation and Morgan Guaranty Trust Company of New York,
as Trustee (5), and Directors' resolutions establishing
Masco Corporation's: (i) 7 1/8% Debentures Due August 15,
2013 (filed herewith); (ii) 6.625% Debentures Due April 15,
2018 (filed herewith); (iii) 5.75% Notes Due October 15,
2008 (filed herewith); and (iv) 7 3/4% Debentures Due August
1, 2029 (1).
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 (1).
4.a.iii Supplemental Indenture dated as of July 26, 1994 between
Masco Corporation and The First National Bank of Chicago
(1).
4.bi Indenture dated as of February 12, 2001 between Masco
Corporation and J.P. Morgan Trust Company, National
Association (as successor in interest to Bank One, National
Association), as Trustee (3), and Directors' Resolutions
establishing Masco Corporation's: (i) 6 3/4% Notes Due March
15, 2006 (3); (ii) 6% Notes Due May 3, 2004 (4); (iii)
5 7/8% Notes Due July 15, 2012 (7); (iv) 4 5/8% Notes Due
August 15, 2007 (7); and (v) 6 1/2% Notes Due August 15,
2032 (7).
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 J.P. Morgan Trust Company, National
Association (as successor in interest to Bank One, National
Association), as Trustee, relating to the Company's Zero
Coupon Convertible Senior Notes Due July 20, 2031 (4), and
Amendment No. 1 dated as of July 19, 2002 (6).
4.c Rights Agreement dated as of December 6, 1995, between Masco
Corporation and The Bank of New York, as Rights Agent (3);
and Amendment No. 1 dated September 23, 1998 (3).
4.d U.S. $750,000,000 364-day Revolving Credit Agreement dated
as of November 7, 2003 among Masco Corporation and Masco
Europe S.A.R.L., as borrowers, the banks party thereto, as
lenders, Commerzbank AG, Barclays Bank PLC and Keybank,
National Association, 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 (7).
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 (3).

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 February 10, 2004) (filed herewith).
10.c Masco Corporation Supplemental Executive Retirement and
Disability Plan, dated October 21, 2000, as amended November
18, 2002 (7) and December 5, 2003 (filed herewith).
10.d Masco Corporation 2002 Annual Incentive Compensation Plan
(7).
10.e Masco Corporation 1997 Non-Employee Directors Stock Plan (as
amended February 10, 2004) (filed herewith).
10.f Description of the Masco Corporation Program for Estate,
Financial Planning and Tax Assistance (7).
10.g Masco Corporation Executive Stock Purchase Program (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).
31.a Certification by Chief Executive Officer required by Rule
13a-14(a)/15d-14(a) (filed herewith).
31.b Certification by Chief Financial Officer required by Rule
13a-14(a)/15d-14(a) (filed herewith).
32 Certifications required by Rule 13a-14(b) or Rule 15d-14(b)
and Section 1350 of Chapter 63 of the United States Code
(filed herewith).