MASCO CORP /DE/ - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 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, 2004 (based on the closing sale
price of $31.18 of the Registrant's Common Stock, as reported by the New York
Stock Exchange on such date) was approximately $13,202,337,000.

Number of shares outstanding of the Registrant's Common Stock at January 31,
2005:

445,200,000 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 2005
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Form 10-K.

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MASCO CORPORATION
2004 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,
2004, 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, 2004 is set forth in Note P to the Company's Consolidated Financial
Statements included in Item 8 of this Report.

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(1) Amounts have been restated to exclude the operations of businesses
sold in 2004 and 2003, and those held for sale at December 31, 2004.

(2) Operating profit is before general corporate expense, gains on sale
of corporate fixed assets, net, and accelerated benefit expense
related to the unexpected passing of the Company's President and
Chief Operating Officer in 2003.

(3) Operating profit is before the Behr litigation settlement (income)
charge, net, of $(30) million, $(72) million and $147 million in
2004, 2003 and 2002, respectively, pertaining to the Decorative
Architectural Products segment.

(4) Operating profit includes goodwill impairment charges as follows:
For 2004 - Cabinets and Related Products - $56 million; Plumbing
Products - $25 million; Decorative Architectural Products - $62
million; and Other Specialty Products - $25 million. For 2003 -
Plumbing Products - $17 million; Decorative Architectural
Products - $5 million; and Other Specialty Products - $31 million.

(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.

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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,
Italy, The Netherlands 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. In the first quarter of 2004, the Company
determined that several European businesses were not core to the Company's
long-term growth strategy and, accordingly, 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. In Europe, the Company manufactures assembled and
ready-to-assemble kitchen, bath, storage, home office and home entertainment
cabinetry and other products. These products are sold under a number of
trademarks including KRAFTMAID(R), MILL'S PRIDE(R) and TVILUM-SCANBIRK(TM)
primarily to dealers and home centers, and under the names ARAN(R),
BLUESTONE(TM), MERILLAT(R), MOORES(TM), NEWFORM(TM) and QUALITY CABINETS(R),
primarily to distributors and direct to builders for both the home improvement
and new construction markets.

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 2004. Significant North
American competitors include American Woodmark, Aristokraft, Omega and Schrock.

In order to respond to an increased demand for the Company's cabinet
products and to maintain desired delivery times, the Company is implementing
significant capacity additions to its North American cabinet operations.
Construction is anticipated to commence in 2005 and to be completed in late
2006.

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
applications. 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 the 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(TM), DAMIXA(R), GUMMERS(TM), HANSGROHE(R), MARIANI(R) and NEWTEAM(TM)
and sells them through multiple distribution channels. AXOR and HANSGROHE
products are also distributed in North America through retailers and
distributors.

Masco believes that its faucet operations are among the leaders in the
North American market, with American Standard, Kohler, Moen and Price Pfister as
major brand competitors. The Company also faces significant competition from
private label and import producers, including Friedrich Grohe

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and Globe Union. There are several major competitors among the European
manufacturers of faucets and accessories, primarily in Germany and Italy, and
hundreds of smaller competitors throughout Europe and Asia.

Other plumbing products manufactured and sold by the Company include AQUA
GLASS(R) and MIROLIN(R) acrylic and gelcoat bath and shower units, which are
sold primarily to wholesale plumbing distributors 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 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.

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 300
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 cabinetry, fireplaces, gutters, bath
accessories, garage doors and windows. The Company also operates 60 local
distribution branch offices throughout the United States that supply insulation
and other products including insulation accessories, cabinetry, roofing,
gutters, fireplaces and drywall. Installation services are provided primarily to
production home builders and custom home builders in the new construction market
and distribution sales are made directly 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
Item 7 of this Report for additional information regarding the availability of
insulation and price changes for this material.

Net sales of insulation comprised 15 percent, 16 percent and 15 percent of
the Company's consolidated net sales for the years ended December 31, 2004, 2003
and 2002, respectively. Non-insulation products net sales have increased over
the last several years and represented approximately 34 percent of the segment's
revenues for 2004.

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.
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Net sales of architectural coatings, including paints and stains, comprised
approximately 10 percent, 11 percent and 12 percent of the Company's
consolidated net sales for the years ended December 31, 2004, 2003 and 2002,
respectively. Competitors in the architectural coatings market include large
multinational companies such as ICI Paints, PPG Industries, Inc.,
Sherwin-Williams and Valspar as well as many smaller regional and national
companies.

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

The Company manufactures and sells decorative bath hardware and shower
accessories under the brand names FRANKLIN BRASS(R) and BATH UNLIMITED(R) to
distributors, home centers 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.

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, The Netherlands and Poland.

ADDITIONAL INFORMATION

- The consolidation of customers in the Company's major distribution
channels has increased the size and importance of individual customers.
Larger customers are able to effect significant changes in their volume
of purchases from individual vendors. These same customers, in expanding
their markets and targeted customers, at times have also become
competitors of the Company. The Company believes that its relationships
with home centers are particularly important. Sales of the Company's
product lines to home center retailers are substantial. In 2004, sales to
the Company's largest customer, The Home Depot, were $2.6 billion
(approximately 22 percent of total sales). Although builders, dealers and
other retailers represent other channels of distribution for the
Company's products, the Company believes that the loss of a substantial
portion of its sales to The Home Depot would have a material adverse
impact on the Company.

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- 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, 2004, 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, such as the Installation and Other
Services segment, 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 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 into this Report on
Form 10-K.

PATENTS AND TRADEMARKS

The Company holds United States and foreign patents covering its vapor
deposition finish and various design features and valve constructions used in
certain of its faucets and holds numerous other patents and patent applications,
licenses, trademarks and trade names. As a manufacturer of brand

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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, 2004, the Company employed approximately 62,000 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 for
segments other than Installation and Other Services.

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
over 300 branch service locations and 60 distribution centers in North America,
the majority of which are leased.

The table below lists the Company's principal properties outside of North
America excluding properties of businesses held for sale.

Most of these international facilities are located in Belgium, China,
Denmark, Germany, Italy, The Netherlands, Poland 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.

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. As noted, the Company is implementing
significant capacity additions to its cabinet operations, but otherwise,
generally,

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the Company believes that its facilities have sufficient capacity and are
adequate for its production and distribution requirements.

ITEM 3. LEGAL PROCEEDINGS.

Information regarding legal proceedings involving the Company 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 March 11, 2005 there were approximately 6,300 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 depend upon the
Company's earnings, capital requirements, financial condition and other factors.

In December 2003, the Company's Board of Directors authorized the purchase
of up to 50 million shares of the Company's common stock in open-market
transactions or otherwise. The following table provides information regarding
the Company's purchase of Company common stock for the three months ended
December 31, 2004, in millions except average price paid per common share data:

For information regarding securities authorized for issuance under the
Company's equity compensation plans, see Part III, Item 12 of this Report.

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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.

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(1) Data have been restated to exclude discontinued operations.

(2) The year 2004 includes a non-cash goodwill impairment charge of $141 million
after tax ($168 million pre-tax) and income of $19 million after tax ($30
million pre-tax) related to the Behr litigation settlement. See Note T to
the Consolidated Financial Statements.

(3) The year 2003 includes a non-cash goodwill impairment charge of $47 million
after tax ($53 million pre-tax) and income of $45 million after tax ($72
million pre-tax) related to the Behr litigation settlement. See Note T to
the Consolidated Financial Statements.

(4) The year 2002 includes a $92 million after tax ($147 million pre-tax), net
charge for the Behr litigation settlement and pre-tax income of $16 million
for the planned disposition of a business.

(5) Operating profit for 2001 and 2000 includes goodwill amortization of $87
million and $60 million, respectively.

(6) 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.

(7) 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.

(8) 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

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difficult to predict and, accordingly, the Company's actual results may differ
materially from the results discussed in such forward-looking statements.
Readers should consider that various factors, including changes in general
economic conditions and competitive market conditions; pricing pressures;
relationships with key customers; industry consolidation of retailers,
wholesalers and builders; shifts in distribution; the influence of e-commerce;
and other factors discussed in the "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 residential 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 2004) 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 the 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.

RECEIVABLES AND INVENTORIES

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 differences between estimates and actual experience.

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Historically, actual results have not significantly deviated from those
determined using these estimates.

FINANCIAL INVESTMENTS

The Company maintains investments in marketable securities, which
aggregated $263 million, and a number of private equity funds, which aggregated
$308 million, at December 31, 2004. 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 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.

In the fourth quarter of 2004, the Company recognized an impairment charge
of $21 million related to the Company's investment in Furniture Brands
International (NYSE: FBN). The FBN common stock was received in June 2002 from
the Company's investment in Furnishings International Inc. debt. Based on its
review, the Company considers the decline in market value related to this
investment to be other-than-temporary and recorded a pre-tax impairment charge
of $21 million to reduce the cost basis from $30.25 per share to $25.05 per
share; at December 31, 2004, the aggregate carrying value after the adjustment
was $100 million.

GOODWILL AND OTHER INTANGIBLE ASSETS

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. In accordance with SFAS No. 142 "Goodwill and Other
Intangible Assets," the Company is no longer recording amortization expense
related to 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 completes the impairment testing of goodwill and
other indefinite-lived intangible assets utilizing a discounted cash flow
method. This test for 2004 indicated that goodwill related to certain European
businesses was impaired. The Company recognized a non-cash, pre-tax impairment
charge of $168 million ($141 million, after tax) in the fourth quarter of 2004.
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,
consultations with external valuation specialists 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.

12

In the fourth quarter of 2004, the Company estimated that future discounted
cash flows projected for most of its business units were greater than the
carrying values. Any increases in estimated discounted cash flows would have no
impact on the reported value of goodwill.

EMPLOYEE RETIREMENT PLANS

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

In 2004, the Company decreased its discount rate for obligations to 5.75
percent from 6.25 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 $193 million from $217 million
in 2003. This is primarily the result of asset returns above projections and
Company contributions. Qualified domestic pension plan assets in 2004 had a net
gain of approximately 12 percent as compared with average returns of 10 percent
for the largest 1,000 Plan Benchmark.

The Company's projected benefit obligation relating to the unfunded
non-qualified supplemental defined-benefit pension plans was $125 million at
December 31, 2004 compared with $115 million at December 31, 2003.

The Company expects pension expense for its qualified defined-benefit
pension plans in 2005 to approximate such expense in 2004. If the Company
assumed that the future return on plan assets was 8 percent instead of 8.5
percent, the pension expense for 2005 would increase by approximately $2
million.

INCOME TAXES

The Company has considered future income and gains from investments and
other identified tax-planning strategies, including the potential sale of
certain operating assets, and identified potential sources of future foreign
taxable income in assessing the need for establishing a valuation allowance
against its deferred tax assets at December 31, 2004, particularly related to
its after-tax capital loss carryforward of $21 million and its after-tax foreign
tax credit carryforward of $50 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.

Changes to the U.S. tax law enacted in the fourth quarter of 2004
significantly impacted the taxation of foreign earnings distributions. As a
result, the Company made a dividend distribution of accumulated earnings from
certain of its foreign subsidiaries of approximately $500 million in the fourth
quarter of 2004. Such earnings had been permanently reinvested, pursuant to the
provisions of Accounting Principles Board Opinion No. 23, prior to the fourth
quarter of 2004 under the Company's previous tax planning strategy to invest
such earnings in operating and non-operating foreign investments.

This dividend generated significant foreign tax credits that were used to
offset the majority of the U.S. tax on the 2004 dividend and created a $50
million foreign tax credit carryforward at December 31, 2004. The Company
believes that the foreign tax credit carryforward will be utilized before the
newly
13

enacted 10-year carryforward period expires on December 31, 2014, principally
with identified potential sources of future income taxed in foreign
jurisdictions at rates less than the present U.S. rate of 35 percent. Therefore,
a valuation allowance was not recorded at December 31, 2004.

Because the Company changed its position with respect to the repatriation
of foreign earnings, the Company recorded a $38 million deferred tax liability
in the fourth quarter of 2004, primarily related to the excess of its book basis
over the tax basis of investments in foreign subsidiaries.

OTHER COMMITMENTS AND CONTINGENCIES

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 life of the product. 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 that the Company experiences any changes in
warranty claim activity or costs associated with servicing those claims, its
warranty liability is adjusted accordingly.

The Company is subject to lawsuits and pending or asserted claims
(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 for
recognition under 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. See Note T to the
Company's consolidated financial statements for information regarding legal
proceedings involving the Company.

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 2004, the Company estimated that the remaining unpaid
claims and administration costs related to the Washington State Settlement would
be less than originally estimated and reduced the related accrual (recognizing
income) for litigation settlement by $20 million.

INTERNAL CONTROLS AND PROCEDURES

The Company's operations are highly decentralized and financial and
transaction processing and control systems are distributed across the Company's
multiple business units. The Company maintains monitoring controls through its
group oversight function, a Company-wide accounting policy manual and a
well-resourced internal audit function that works closely with an international
accounting firm, which is not the Company's external auditor. Additionally, the
Company believes it fosters an effective control environment through a strong
corporate governance structure driven by the membership and activities of its
Board of Directors and Audit Committee, its Code of Business Ethics and various
Company-wide programs related to legal and ethical compliance.

In 2004, the Company conducted and concluded its first comprehensive
evaluation of internal control over financial reporting under the new
requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act").
During the course of this process, the Company determined that there was a lapse
in controls associated with a business integration involving two of the
Company's business units. Management concluded that the lapse in controls was a
material weakness based on the potential for possible error and impact of such
potential error on the Company's consolidated financial statements. Accordingly,
based on the requirements of the Act, the Company concluded that its internal
control over financial reporting did not operate effectively as of December 31,
2004. After extensive review and additional testing procedures that the Company
considered appropriate under the circumstances, the Company determined that this
material weakness condition did not result in a material misstatement in the
Company's consolidated financial statements as of, and for the year ended,
December 31, 2004.
14

Management has taken a number of remediation steps and is in the process of
taking additional steps associated with this matter as disclosed in Management's
Remediation Plan in Item 8 of this Report.

In addition to the incremental external costs and expenses of approximately
$34 million (primarily professional fees) associated with complying with Section
404 of the Act, the Company has also invested significantly in training and
additional infrastructure, including additional human resources, technological
enhancements and process improvements. The Company believes it has incurred a
disproportionate level of expense related to this initiative, relative to other
companies of comparable size, due to its disaggregated business model. While the
Company's decentralized operating structure and the number of autonomous
business units serve to disperse risk, these factors also resulted in a more
time-consuming and costly environment for the Company to implement the
requirements of the Act. The Company, with senior management actively involved,
began its Section 404 implementation process in early 2003. The Company's
compliance with the Section 404 requirements was highly complex and involved,
given the continuing refinement of guidance related to the Act's requirements
and the Company's decentralized operating structure, including disparate
business systems, its relatively smaller foreign business units with different
languages and cultures, and its installation services businesses with
approximately 360 small branch locations.

Nevertheless, the Company expects to continue to benefit from the
implementation of the Act's requirements and is committed to a continuous
improvement model of internal control, as evidenced through its significant
investment of resources and its historic strong "tone at the top" philosophy of
internal control.

CORPORATE DEVELOPMENT STRATEGY

Acquisitions in past years have enabled the Company to build a 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. The Company's focus includes additional cost reduction
initiatives as well as increased utilization of synergies among the Company's
business units. The Company expects to maintain 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 not 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, determined
that several European businesses were not core to the Company's long-term growth
strategy and, accordingly, 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 originally estimated expected proceeds
from the sale of these businesses to approximate $300 million. The Company
reduced its estimate of expected proceeds during 2004 (recognizing pre-tax
charges of $139 million ($151 million, after tax) for those businesses expected
to be divested at a loss) for these operations as a result of
lower-than-expected operating results as well as a weaker-than-expected demand
for the businesses that the Company planned to divest. Any gains resulting from
the dispositions are recognized as such transactions are completed. The Company
expects aggregate net proceeds to approximate $250 million upon completion of
the dispositions, of which $172 million was received in 2004.

During 2004, in separate transactions, the Company completed the sale of
its Jung Pumpen, The Alvic Group, Alma Kuchen, E. Missel and SKS Group
businesses in Europe. Jung Pumpen manufactures a wide variety of submersible and
drainage pumps, The Alvic Group and Alma Kuchen manufacture kitchen cabinets, E.
Missel manufactures acoustic insulation for baths and showers and SKS Group
manufactures rolling shutters and ventilation systems; all of these businesses
were included in discontinued operations. Total gross proceeds from the sale of
these companies were $199 million, including cash of $193 million and notes
receivable of $6 million. The Company recognized a pre-tax,

15

net gain (principally related to the sale of Jung Pumpen) on the disposition of
these businesses of $106 million.

In 2003, the Company completed the sale of its Baldwin Hardware, Weiser
Lock and Marvel Group businesses.

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," the Company has accounted for the businesses held for
sale at December 31, 2004 as well as businesses which were sold in 2004 and 2003
as discontinued operations. The sales and results of operations of the
businesses sold in 2004 and 2003 and those held for sale at December 31, 2004
are included in the Company's results from discontinued operations through the
date of disposition. During the time the Company owned these businesses, they
had net sales of $357 million, $563 million and $589 million in 2004, 2003 and
2002, respectively, and income (loss) from discontinued operations before income
taxes of $29 million, $(43) million and $64 million in 2004, 2003 and 2002,
respectively.

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. At
December 31, 2004, debt agreements with banks syndicated in the United States
relate to a $2.0 billion 5-year Revolving Credit Agreement due and payable in
November 2009. This agreement allows for borrowings denominated in U.S. dollars
or European euros. Interest is payable on borrowings under this agreement based
on various floating-rate options as selected by the Company. The previous
364-day revolving credit agreement expired in November 2004.

Certain debt agreements contain limitations on additional borrowings; at
December 31, 2004, the Company had additional borrowing capacity, subject to
availability, of up to $3.9 billion. Certain debt agreements also contain a
requirement for maintaining a certain level of net worth; at December 31, 2004,
the Company's net worth exceeded such requirement by approximately $1.7 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 was able to
issue up to a combined $2 billion of debt and equity securities.

The Company had cash and cash investments of $1,256 million at December 31,
2004 as a result of strong cash flows from operations and proceeds from the
disposition of certain businesses and financial investments. In the fourth
quarter of 2004, the Company repatriated cash related to accumulated earnings
from certain of its foreign subsidiaries to the United States of approximately
$500 million.

During 2004, the Company increased its quarterly common stock dividend 12.5
percent to $.18 per common share. This marks the 46th 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 increased to 44 percent at December 31, 2004 from 43 percent at
December 31, 2003. Repurchases and retirement of Company common stock
contributed to the increase in the total debt to total capitalization ratio. The
Company's working capital ratio was 2.1 to 1 and 1.7 to 1 at December 31, 2004
and 2003, respectively.

The Company has limited involvement with derivative financial instruments
and does not use derivatives for trading purposes. The derivatives used by the
Company during the year ended
16

December 31, 2004 consist of interest rate swaps entered into in 2004, for the
purpose of effectively converting a portion of fixed-rate debt to variable-rate
debt, which is expected to reduce interest expense, given current interest
rates. Generally, under interest rate swap agreements, the Company agrees with a
counter party 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 swap agreements are
designated as fair-value hedges, and the interest rate differential on interest
rate swaps used to hedge existing debt is recognized as an adjustment to
interest expense 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 recognized in determining earnings.

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 3.302%. At December 31, 2004, 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 hedges are
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 hedges was recognized in the Company's
consolidated statements of income for the years ended December 31, 2004 and
2003. The amount recognized as a reduction of interest expense was $22 million
for the year ended December 31, 2004.

Certain of the Company's European operations also entered into foreign
currency forward contracts for the purpose of managing exposure to currency
fluctuations primarily related to the United States dollar and the Great Britain
pound.

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 increased $461 million (net of cash
at businesses held for sale) to $1,256 million at December 31, 2004, from $795
million at December 31, 2003.

Net cash provided by operations in 2004 of $1.5 billion consisted primarily
of net income adjusted for non-cash items, including depreciation and
amortization of $237 million, income of $30 million related to the Behr
litigation settlement, a $168 million charge related to goodwill impairment, a

17

$21 million charge for the impairment of an investment and other items. Net
working capital increased by approximately $10 million.

The Company continues to emphasize balance sheet management, including
working capital management and cash flow generation. Days sales in accounts
receivable decreased to 49 days at December 31, 2004 from 53 days at December
31, 2003, and accounts payable days increased to 36 days at December 31, 2004
compared with 35 days at December 31, 2003, primarily due to the Company's
working capital improvement initiatives. Days sales in inventories increased
slightly to 49 days at December 31, 2004 from 48 days at December 31, 2003.

Cash used for financing activities in 2004 was $1.1 billion, and included
cash outflows of $302 million for cash dividends paid, $266 million for the
retirement of notes, $903 million for the acquisition and retirement of Company
common stock in open-market transactions, $40 million for the acquisition of
Company common stock for the Company's long-term stock incentive award plan and
$40 million principally for the net payment of other debt. Cash provided by
financing activities included $293 million from the issuance of notes (net of
issuance costs), $58 million from the issuance of Company common stock,
primarily from the exercise of stock options and $55 million from interest rate
swap transactions.

At December 31, 2004, the Company had remaining Board of Directors'
authorization to repurchase up to an additional 17 million shares of its common
stock in open-market transactions or otherwise. In January and February 2005,
the Company repurchased an additional six million shares of Company common stock
(including approximately two million shares which were subsequently reissued for
the long-term stock incentive award plan) and expects to continue its Company
common share repurchase program throughout 2005.

Cash provided by investing activities was $161 million in 2004 and included
$172 million of net proceeds from the disposition of businesses and $330 million
from the net sale of financial investments. Cash used for investing activities
included $310 million for capital expenditures, $16 million for acquisitions and
additional acquisition-related consideration relating to previously acquired
companies and $15 million for other net cash outflows. The Company expects to
continue to monetize the marketable securities portfolio over the next several
quarters.

The Company continues to invest in automating its manufacturing operations
and increasing its capacity and its productivity, in order to be a more
efficient producer and to improve customer service. Capital expenditures for
2004 were $310 million, compared with $271 million for 2003 and $285 million for
2002; for 2005, capital expenditures, excluding those of any potential 2005
acquisitions, are expected to approximate $400 million. Capital expenditures for
2005 include significant capacity additions to the Company's North American
cabinet operations for which construction is anticipated to commence in 2005 and
to be completed in 2006. Depreciation and amortization expense for 2004 totaled
$237 million, compared with $244 million for 2003 and $220 million for 2002; for
2005, depreciation and amortization expense, excluding any potential 2005
acquisitions, is expected to approximate $240 million. Amortization expense
totaled $26 million, $32 million and $39 million in 2004, 2003 and 2002,
respectively.

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.

18

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 performance 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 2004 were $12.1 billion, representing an increase of 14
percent over 2003. Excluding results from acquisitions, net sales also increased
14 percent (including a two percent increase relating to the effect of currency
translation) compared with 2003. The increase in net sales in 2004 is
principally due to higher unit sales volumes of assembled cabinets,
architectural coatings, installation services, vinyl and fiberglass windows and
patio doors, and faucets. The following table reconciles reported net sales to
net sales excluding acquisitions and the effect of currency translation, in
millions:

The Company's gross profit margins were 30.8 percent, 30.7 percent and 31.6
percent for the years ended December 31, 2004, 2003 and 2002, respectively. The
increase in the 2004 gross profit margins reflects increased sales volume and
increased selling prices, offset in part by increased commodity costs as well as
sales in segments with somewhat lower gross margins. In addition, operating
results for the year ended December 31, 2003 were reduced by non-cash, pre-tax
charges of $59 million relating to two United Kingdom business units, one in the
Decorative Architectural Products segment and the other in the Plumbing Products
segment. Offsetting the charges related to these United Kingdom business units,
operating profit for the year ended December 31, 2003 also benefited from $72
million of Behr litigation income. Operating profit for the year ended December
31, 2004 includes $30 million of Behr litigation income.

Selling, general and administrative expenses, excluding general corporate
expense, as a percent of sales were 15.0 percent in 2004 compared with 15.7
percent in 2003 and 14.6 percent in 2002. Selling, general and administrative
expenses for the year ended December 31, 2004 include the effect of lower
promotion and advertising costs as a percent of sales, compared with 2003. This
reduction was partially offset by increased costs and expenses associated with
complying with the new requirements of the Sarbanes-Oxley Legislation as well as
increased expenses associated with stock options. Selling, general and
administrative expenses for the year ended December 31, 2003 include $16 million
of accelerated benefit expense related to the unexpected passing of the
Company's President and Chief Operating Officer.

Operating profit margins, as reported, were 13.0 percent, 14.0 percent and
14.3 percent in 2004, 2003 and 2002, respectively. Operating profit margins,
excluding general corporate expense, the income/charge for litigation settlement
(2004, 2003 and 2002), the goodwill impairment charge (2004 and 2003), and
income from the planned disposition of a business (2002), were 15.7 percent,
14.9 percent and 17.0 percent in 2004, 2003 and 2002, respectively.

19

OTHER INCOME (EXPENSE), NET

In 2004, 2003 and 2002, the Company recorded $21 million, $19 million and
$24 million, respectively, of non-cash, pre-tax charges for the write-down of
certain financial investments.

In the fourth quarter of 2004, the Company recognized the above-mentioned
impairment charge of $21 million related to the Company's investment in
Furniture Brands International (NYSE: FBN). The FBN common stock was received in
June 2002 from the Company's investment in Furnishings International Inc. debt.
Based on its review, the Company considers the decline in market value related
to this investment to be other-than-temporary and recorded an impairment charge
to reduce the cost basis from $30.25 per share to $25.05 per share; the
aggregate carrying value after the adjustment is $100 million.

Other, net in 2004 includes $50 million of realized gains, net, from the
sale of marketable equity securities, dividend income of $27 million and $42
million of income, net, from other investments. Other, net in 2004 also includes
realized foreign currency exchange gains of $26 million and other miscellaneous
items.

Other, net in 2003 includes $23 million of realized gains, net, from the
sale of marketable equity securities, dividend income of $25 million and $17
million of income, net, from other investments. Other, net in 2003 also includes
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 $4 million and other miscellaneous items.

Other, net in 2002 includes $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 Company issuing
fixed-rate debt in 2002. Other items, net, in 2002 include realized foreign
currency exchange losses of $3 million and other miscellaneous items.

Interest expense was $217 million, $261 million and $235 million in 2004,
2003 and 2002, respectively. The decrease in interest expense in 2004 is
primarily due to debt retirement as well as the effect of the interest rate swap
agreements that converted a certain amount of fixed-rate debt to lower
variable-rate debt and reduced interest expense by $22 million for the year
ended December 31, 2004.

INCOME AND EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS

Income from continuing operations and diluted earnings per common share for
2004 were $930 million and $2.04 per common share, respectively. Income from
continuing operations for 2004 includes a non-cash, pre-tax goodwill impairment
charge of $168 million ($141 million, after tax) and income related to the Behr
litigation settlement of $30 million pre-tax ($19 million, after tax). Income
from continuing operations and diluted earnings per common share for 2003 were
$790 million and $1.61 per common share, respectively. Income from continuing
operations for 2003 includes a non-cash, pre-tax goodwill impairment charge of
$53 million ($47 million, after tax) and income related to the Behr litigation
settlement of $72 million pre-tax ($45 million, after tax). Income from
continuing operations and diluted earnings per common share for 2002 were $639
million and $1.24 per common share, respectively. Income from continuing
operations in 2002 was negatively affected by a $147 million pre-tax charge for
the Behr litigation settlement ($92 million, after tax).

The Company's effective tax rate for income from continuing operations was
37 percent in 2004 and 2003 compared with 34 percent in 2002. The increase in
the tax rate in 2004 and 2003 was due principally to a lower tax benefit related
to the goodwill impairment charges. The Company estimates that its effective tax
rate should approximate 35 percent for 2005.

20

OUTLOOK FOR THE COMPANY

The Company experienced significant commodity cost increases during 2004,
which reduced expected gross margins, including in the fourth quarter. Higher
commodity costs reflecting cost increases in 2004 and additional cost increases
in 2005 are expected to impact 2005 first half results. The Company already has
implemented and continues to implement additional selling price increases on a
number of its products, and believes that by the end of the second quarter, many
of these commodity cost increases will be largely offset by such price
increases.

The Company believes that the impact of the delay in offsetting these
recent cost increases with increased selling prices, and the shortage of certain
materials will negatively impact earnings in the first half of 2005, largely in
the first quarter. This impact has been reflected in the Company's previously
announced guidance.

The Company believes that it will achieve further organic sales growth in
2005, and, based on current business trends, believes that it will achieve
mid-to high-single-digit organic growth in 2005 resulting in record sales and
earnings.

The Company expects its 2005 operating results to be impacted by a decline
in housing starts of five percent from 2004 levels, share repurchases of a
minimum 12 million common shares, modest margin improvement reflecting selling
price increases and anticipated income from the sale of financial investments.
In addition, the Company is assuming no further significant commodity cost
increases beyond what it has already experienced in early 2005.

21

BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS

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

(A) 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).

(B) Excluding goodwill impairment charge. The 2004 goodwill impairment charge
was as follows: Cabinets and Related Products - $56 million; Plumbing
Products - $25 million; Decorative Architectural Products - $62 million; and
Other Specialty Products - $25 million. The 2003 goodwill impairment charge
was as follows: Plumbing Products - $17 million; Decorative Architectural
Products - $5 million; and Other Specialty Products - $31 million. These
2004 and 2003 charges relate to European businesses.

22

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 in 2004, 2003 and 2002, and the
goodwill impairment charges in 2004 and 2003.

CABINETS AND RELATED PRODUCTS

Net sales of Cabinets and Related Products increased 14 percent in 2004
compared with 2003 and 9 percent in 2003 compared with 2002. The sales increases
are 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. This segment was also favorably influenced by a weaker
U.S. dollar in 2004 and 2003, which affected the translation of local currencies
of European operations included in this segment.

Operating profit margins were 16.8 percent, 15.3 percent and 13.9 percent
for the years ended December 31, 2004, 2003 and 2002, respectively. Operating
profit margins in 2004 reflect the positive impact of higher sales volume as
well as certain cost improvement initiatives. 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 strong sales volume, offset
in part by costs related to a discontinued product line.

PLUMBING PRODUCTS

Net sales of Plumbing Products increased 14 percent in 2004 compared with
2003 primarily due to increased sales volume in the retail markets in North
America and Europe and in the new construction markets in North America. 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). A weaker U.S. dollar also had a
favorable impact on the translation of local currencies of European operations
included in this segment in 2004 and 2003.

Operating profit margins were 12.9 percent, 13.4 percent and 16.5 percent
for the years ended December 31, 2004, 2003 and 2002, respectively. Operating
profit margins in 2004 reflect an increase in European sales (which are
generally at lower margins) as well as increased material costs, offset in part
by increased sales volume. Operating profit margins in 2003 include the effect
of an 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. 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.

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 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 15 percent in 2004
compared with 2003 and 31 percent in 2003 compared with 2002. The increase in
net sales in 2004 is primarily due to increased selling prices, increased sales
volume of non-insulation products and a strong new housing market. The increase
in net sales in 2003 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 volume of non-insulation products.

Operating profit margins were 12.9 percent, 15.3 percent and 16.5 percent
for the years ended December 31, 2004, 2003 and 2002, respectively. The decline
in the 2004 operating profit margins is
23

primarily attributable to the time lag in implementing price increases related
to material cost increases as well as an increase in sales of generally
lower-margin, non-insulation products. Historically, the Company has generally
been able to increase its selling prices to reflect certain material cost
increases. However, the Company has not yet been able to increase selling prices
to offset all such cost increases, contributing to a decline in operating profit
margins. 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.

Within the Installation and Other Services segment, the availability of
fiberglass insulation to support the Company's installation and distribution
activities was constrained throughout 2004. The high level of demand for
fiberglass insulation as a result of the strength of the new residential
construction market has outpaced the industry's capacity to produce additional
product. The Company believes that these conditions will persist in 2005 and is
working with its diverse supplier base to secure the appropriate amount of
material. At the current time, the Company believes that it will be able to do
so, but if the Company cannot obtain the required amount of material, this could
have a negative impact on its operations.

DECORATIVE ARCHITECTURAL PRODUCTS

Net sales of Decorative Architectural Products increased 11 percent in 2004
compared with 2003, and 12 percent in 2003 compared with 2002. The increases in
net sales in 2004 and 2003 are primarily due to higher unit sales volume of
paints and stains as well as increased sales of decorative hardware.

Operating profit margins were 20.6 percent, 14.8 percent and 23.8 percent
for the years ended December 31, 2004, 2003 and 2002, respectively. The margin
improvement in 2004 includes the effect of increased sales volume of paints and
stains and increased sales volume and improved operating performance of the
Company's decorative hardware businesses, offset in part by increased material
and promotion costs. 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. As previously discussed, operating profit in this segment
for 2003 was negatively affected by non-cash, pre-tax charges of $55 million
related to a United Kingdom business unit. The charges relate 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 operating profit margins in
2002 reflect the leveraging of fixed costs over higher unit sales volume.

OTHER SPECIALTY PRODUCTS

Net sales of Other Specialty Products increased 17 percent in 2004 compared
with 2003, principally due to increased sales of vinyl and fiberglass windows
and doors in North America. Net sales of Other Specialty Products increased 17
percent in 2003 compared with 2002, principally due to acquisitions as well as
increased sales of vinyl windows. A weaker U.S. dollar in 2004 and 2003 also had
a favorable effect on the translation of local currencies of European operations
included in this segment.

Operating profit margins were 19.2 percent, 18.2 percent and 19.7 percent
for the years ended December 31, 2004, 2003 and 2002, respectively. The margin
improvement in 2004 is primarily attributable to increased sales volume of
windows. The lower operating profit margins in 2003 are primarily due to
increased material and insurance costs as well as lower results of European
operations. The operating profit margins in 2002 were positively influenced by
acquisitions, which in aggregate had higher operating profit margins than the
segment average.

24

GEOGRAPHIC AREA RESULTS DISCUSSION

NORTH AMERICA

Net sales from North American operations increased 13 percent in 2004
compared with 2003, and 14 percent in 2003 compared with 2002, primarily due to
increased unit sales volume of assembled cabinets, faucets, installed sales of
insulation and non-insulation products, paints and stains, and vinyl and
fiberglass windows and doors.

Operating profit margins were 16.6 percent, 16.4 percent and 17.5 percent
for the years ended December 31, 2004, 2003 and 2002, respectively. Operating
profit margins in 2004 were positively affected by increases in sales volume of
assembled cabinets, faucets, paints and stains, vinyl and fiberglass windows and
doors and installed sales of insulation and non-insulation products. Operating
profit margins for 2004 were negatively impacted by increased commodity costs,
which offset lower sales promotion costs. The decline in operating profit
margins for 2003 principally reflect increased sales in segments that have
somewhat lower operating profit margins, increased commodity and energy costs as
well as increased advertising and promotion costs. The operating profit margins
for 2002 principally reflect the leveraging of fixed costs over increased sales
volume and product mix.

INTERNATIONAL, PRINCIPALLY EUROPE

Net sales of the Company's International operations increased 21 percent in
2004 compared with 2003, due to increased local currency sales of plumbing
products, ready-to-assemble cabinets and windows. Net sales of the Company's
International operations increased 58 percent in 2003 compared with 2002,
primarily due to acquisitions. A weaker U.S. dollar had a positive effect on the
translation of European results in 2004 and 2003, increasing European net sales
in 2004 by approximately 12 percent and in 2003 by 16 percent.

Operating profit margins were 11.6 percent, 8.8 percent and 14.4 percent
for the years ended December 31, 2004, 2003 and 2002, respectively. Operating
profit margins for 2004 were positively affected by increases in sales volume of
plumbing products, ready-to-assemble cabinets and windows. 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.

OTHER MATTERS

COMMITMENTS AND CONTINGENCIES

Litigation

Information regarding legal proceedings involving the Company is set forth
in Note T to the consolidated financial statements.

Other Commitments

With respect to the Company's investments in private equity funds, the
Company, at December 31, 2004, has, under certain circumstances, commitments to
contribute additional capital to such funds of up to $123 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.

25

The Company has guaranteed repayment of the loans, for which the aggregate
amount outstanding was approximately $47 million at December 31, 2004, only 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, which are due in mid-2005, 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 made against builders by homeowners 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 life of the product. At the
time of 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 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 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 revenue, and deductions
are recorded at the time of sale.

CONTRACTUAL OBLIGATIONS

The following table provides payment obligations related to current
contracts at December 31, 2004, in millions:

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2004, the Emerging Issues Task Force ("EITF") Issue Summary No.
04-08, "Accounting Issues Related to Certain Features of Contingently
Convertible Debt and the Effect on Diluted Earnings Per Share" became effective.
EITF No. 04-08 would have required the Company to include

26

24 million shares in the calculation of diluted earnings per common share
related to the Company's Zero Coupon Convertible Senior Notes due 2031
("Notes"), with the add-back of the related interest expense to net income. In
December 2004, the Company exchanged the Zero Coupon Convertible Senior Notes
("Old Notes") for Zero Coupon Convertible Senior Notes ("New Notes"). The New
Notes have substantially the same terms as the Old Notes, except that upon
conversion of the New Notes, the Company will pay the conversion price, up to
the accreted value of the New Notes, in cash, and any value greater than the
accreted value will be settled in cash or shares of Company common stock, at the
option of the Company. At December 31, 2004, the Company included approximately
one million shares in the calculation of diluted earnings per common share as
the price of the Company common stock at December 31, 2004 exceeded the accreted
value of the New Notes.

In the first quarter of 2004, the Company adopted Financial Accounting
Standards Board ("FASB") Interpretation No. 46 - Revised ("FIN 46R"),
"Consolidation of Variable Interest Entities." FIN 46R requires that a company
that is the primary beneficiary of a variable interest entity consolidate the
assets, liabilities and results of operations of the variable interest entity in
the company's financial statements. The adoption of FIN 46R did not have a
material impact on the Company's consolidated financial statements.

In December 2004, the FASB issued a revision to SFAS No. 123 ("SFAS No.
123R"), "Accounting for Stock-Based Compensation," which supersedes Accounting
Principles Bulletin ("APB") No. 25, "Accounting For Stock Issued to Employees."
SFAS No. 123R requires companies to measure and recognize the cost (fair value)
of employee services received in exchange for stock options. SFAS No. 123R also
clarifies and expands guidance in several areas including measuring fair value
and classification of employee stock-based compensation, including stock
options, restricted stock awards and stock appreciation rights. The Company will
adopt SFAS No. 123R effective January 1, 2005 using the Modified Prospective
Application ("MPA"). The MPA method does not require restatement of prior-year
information and will require the Company to expense unvested stock options that
were awarded prior to January 1, 2003 through their remaining vesting periods.
The Company expects this additional expense to approximate $10 million in 2005.
The Company has been using the fair value method for options granted, modified
or settled subsequent to January 1, 2003. The Company is currently evaluating
the impact that the other provisions of SFAS No. 123R will have on its
consolidated financial statements.

27

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 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, 2004
consist of interest rate swap agreements entered into in 2003 and 2004, for the
purpose of effectively converting a portion of fixed-rate debt to variable-rate
debt, which is expected to reduce interest expense, given current interest
rates. Certain of the Company's European operations also entered into foreign
currency forward contracts for the purpose of managing exposure to currency
fluctuations related primarily to the United States dollar and the Great Britain
pound.

At December 31, 2004, 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.

28

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Masco Corporation is responsible for establishing and
maintaining adequate internal control over financial reporting. Masco
Corporation's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.

Management of Masco Corporation assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004. In making
this assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in "Internal Control -
Integrated Framework".

A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of December 31, 2004, in connection with the integration of two
business units, the Company did not maintain effective controls over the
conversion of certain accounting functions. This condition resulted in: (i)
business unit management's override of controls over the authorization and
recording of manual journal entries to accounts payable and cost of sales, (ii)
ineffective controls over the preparation, review and approval of account
reconciliations for accounts payable, and (iii) inadequate communication of
control deficiencies to corporate management. These control deficiencies did not
result in a material misstatement to the 2004 annual or interim consolidated
financial statements. However, these control deficiencies could result in a
material misstatement to the annual or interim consolidated financial statements
that would not be prevented or detected. Accordingly, management determined that
these control deficiencies constitute a material weakness. Because of this
material weakness, management concluded that the Company did not maintain
effective internal control over financial reporting as of December 31, 2004
based on the criteria in the "Internal Control - Integrated Framework."

Management's assessment of the effectiveness of Masco Corporation's
internal control over financial reporting as of December 31, 2004 has been
audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report (which expressed an unqualified
opinion on management's assessment and an adverse opinion on the effectiveness
of Masco Corporation's internal control over financial reporting as of December
31, 2004). Additionally, PricewaterhouseCoopers LLP expressed an unqualified
opinion on the Company's 2004 consolidated financial statements. This report
appears under Item 8. Financial Statements and Supplementary Data under the
heading Report of Independent Registered Public Accounting Firm.

29

MANAGEMENT'S REMEDIATION PLAN

Management has taken, or is in the process of taking, the following steps
with respect to the material weakness described in Management's Report on
Internal Control over Financial Reporting:

- All significant accounts impacted by the control lapse have been properly
reconciled.

- An information systems consultant has been retained to address technical
information systems issues to enable systematic and timely reconciliation
of unvouchered payables. Until a systematic solution is developed and
implemented, the unvouchered payables account will be manually monitored,
and adjustments will be made timely on a monthly basis.

- Staff training and process improvement initiatives at the business unit
have been identified and will be implemented over the course of first and
second fiscal quarters of 2005.

- Business unit management is in the process of recruiting three key
financial management positions.

- Group controller monitoring activities have been expanded to include the
performance of extended review procedures over key account
reconciliations and significant journal entries on a quarterly basis.

- The group president has expanded and reinforced the need for timeliness
and transparency of communication around significant financial and
business matters between the business unit and group oversight
management.

- The Company will extend the risk management framework of its information
technology risk management program launched in early 2004 to other major
business change initiatives such as business integrations.

30

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
of Masco Corporation:

We have completed an integrated audit of Masco Corporation's 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.

CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

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,
2004 and 2003, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2004 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
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.

INTERNAL CONTROL OVER FINANCIAL REPORTING

Also, we have audited management's assessment, included in Management's
Report on Internal Control over Financial Reporting appearing under Item 8, that
Masco Corporation did not maintain effective internal control over financial
reporting as of December 31, 2004, because the Company did not maintain
effective controls over the conversion of certain accounting functions in
connection with the integration of two business units, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.

A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal

31

control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's assessment. As of December 31, 2004, in connection with the
integration of two business units, the Company did not maintain effective
controls over the conversion of certain accounting functions. This condition
resulted in: (i) business unit management's override of controls over the
authorization and recording of manual journal entries to accounts payable and
cost of sales, (ii) ineffective controls over the preparation, review and
approval of account reconciliations for accounts payable, and (iii) inadequate
communication of control deficiencies to corporate management. These control
deficiencies did not result in a material misstatement to the 2004 annual or
interim consolidated financial statements. However, these control deficiencies
could result in a material misstatement to the annual or interim consolidated
financial statements that would not be prevented or detected. Accordingly,
management determined that these control deficiencies constitute a material
weakness. This material weakness was considered in determining the nature,
timing, and extent of audit tests applied in our audit of the 2004 consolidated
financial statements, and our opinion regarding the effectiveness of the
Company's internal control over financial reporting does not affect our opinion
on those consolidated financial statements.

In our opinion, management's assessment that Masco Corporation did not
maintain effective internal control over financial reporting as of December 31,
2004, is fairly stated, in all material respects, based on criteria established
in Internal Control -- Integrated Framework issued by the COSO. Also, in our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, Masco Corporation has not
maintained effective internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control -- Integrated
Framework issued by the COSO.

PRICEWATERHOUSECOOPERS LLP

Detroit, Michigan
March 16, 2005

32

MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AT DECEMBER 31, 2004 AND 2003

See notes to consolidated financial statements.

33

MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

See notes to consolidated financial statements.

34

MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

See notes to consolidated financial statements.

35

MASCO CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

See notes to consolidated financial statements.

36

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. In the first quarter
of 2004, the Company adopted Financial Accounting Standards Board ("FASB")
Interpretation No. 46 - Revised ("FIN 46R"), "Consolidation of Variable Interest
Entities." In accordance with FIN 46R, the Company consolidates the assets,
liabilities and results of operations of variable interest entities (as defined
by FIN 46R) for which the Company is the primary beneficiary.

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
and risk of loss 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 $82 million and $84 million at December 31, 2004 and 2003,
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 sheets and are amortized

37

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

A. ACCOUNTING POLICIES - (CONTINUED)

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

Depreciation. Depreciation expense 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
$209 million, $192 million and $164 million in 2004, 2003 and 2002,
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 performs impairment testing of
goodwill and other indefinite-lived intangible assets in the fourth quarter of
each year or as events occur or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying amount. The
Company compares the 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, 2004
was approximately $794 million and $4,027 million, as compared with the
aggregate carrying value of $785 million and $4,188 million, respectively, and
at December 31, 2003 such aggregate market value was approximately $956 million
and $4,129 million, as compared with the aggregate carrying value of $980
million and $3,849 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 exposure 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 sheets 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.

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.

38

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

A. ACCOUNTING POLICIES - (CONTINUED)

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 2004 and 2003, 5,627,000 and 5,121,800 option shares, respectively, including
restoration option shares, net of cancellations, were awarded and the related
expense of $21 million and $3 million was included in the Company's consolidated
statements of income for the years ended December 31, 2004 and 2003,
respectively. 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 2004, 2003
and 2002, were $10.36, $8.89 and $6.66, 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 2004, 2003 and 2002, respectively:
risk-free interest rate - 4.4%, 3.3% and 3.8%; dividend yield - 2.1%, 2.3% and
2.7%; volatility factor - 37%, 37% and 37%; and expected option life - 6 years,
7 years and 6 years.

Reclassifications. Certain prior-year amounts have been reclassified to
conform to the 2004 presentation in the consolidated financial statements. The
results of operations related to 2004 and 2003 dispositions of businesses and
2004 businesses held for sale have been reclassified and separately stated in
the accompanying consolidated statements of income for 2004, 2003 and 2002. The
assets and liabilities of these 2004 discontinued operations have not been
reclassified in the accompanying consolidated balance sheet as of December 31,
2003 and related notes. In the Company's consolidated statements of cash flows,
the cash flows from discontinued operations are not separately classified.

Recently Issued Accounting Pronouncements. In December 2004, the Emerging
Issues Task Force ("EITF") Issue Summary No. 04-08, "Accounting Issues Related
to Certain Features of Contingently Convertible Debt and the Effect on Diluted
Earnings Per Share," became effective. EITF No. 04-08 would have required the
Company to include 24 million shares in the calculation of diluted earnings per
common share related to the Company's Zero Coupon Convertible Senior Notes due
2031 ("Notes"), with the add-back of the related interest expense to net income.
In December 2004, the Company exchanged the Zero Coupon Convertible Senior Notes
("Old Notes") for Zero Coupon

39

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

A. ACCOUNTING POLICIES - (CONCLUDED)

Convertible Senior Notes ("New Notes"). The New Notes have substantially the
same terms as the Old Notes, except that upon conversion of the New Notes, the
Company will pay the conversion price, up to the accreted value of the New
Notes, in cash, and any value greater than the accreted value will be settled in
cash or shares of Company common stock, at the option of the Company. At
December 31, 2004, the Company included approximately one million shares in the
calculation of diluted earnings per common share as the price of the Company
common stock at December 31, 2004 exceeded the accreted value of the New Notes
on an equivalent per share basis.

In the first quarter of 2004, the Company adopted FASB Interpretation No.
46 - Revised ("FIN 46R"), "Consolidation of Variable Interest Entities." FIN 46R
requires that a company that is the primary beneficiary of a variable interest
entity consolidate the assets, liabilities and results of operations of the
variable interest entity in the company's financial statements. The adoption of
FIN 46R did not have a material impact on the Company's consolidated financial
statements.

In December 2004, the FASB issued a revision to SFAS No. 123, ("SFAS No.
123R") "Accounting for Stock-Based Compensation," which supersedes Accounting
Principles Bulletin ("APB") No. 25, "Accounting for Stock Issued to Employees."
SFAS No. 123R requires companies to measure and recognize the cost (fair value)
of employee services received in exchange for stock options. SFAS No. 123R also
clarifies and expands guidance in several areas including measuring fair value
and classification of employee stock-based compensation, including stock
options, restricted stock awards and stock appreciation rights. The Company will
adopt SFAS No. 123R effective January 1, 2005 using the Modified Prospective
Application ("MPA"). The MPA method does not require restatement of prior-year
information and will require the Company to expense unvested stock options that
were awarded prior to January 1, 2003 through their remaining vesting periods.
The Company expects this additional expense to approximate $10 million in 2005.
The Company has been using the fair value method for options granted, modified
or settled subsequent to January 1, 2003. The Company is currently evaluating
the impact that the other provisions of SFAS No. 123R will have on its
consolidated financial statements.

B. DISCONTINUED OPERATIONS

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.

In the first quarter of 2004, the Company determined that several European
businesses were not core to the Company's long-term growth strategy and,
accordingly, embarked on a plan of disposition. The Company originally estimated
expected proceeds from the sale of these businesses to approximate $300 million.
During 2004, the Company reduced its estimate of expected proceeds (recognizing
pre-tax charges of $139 million ($151 million, after tax) for those businesses
that are expected to be divested at a loss) for these operations as a result of
lower-than-expected operating results as well as weaker-than-expected demand for
the businesses that the Company is divesting. Any gains resulting from the
dispositions are recognized as such transactions are completed. The Company
expects aggregate net proceeds to approximate $250 million upon completion of
the dispositions, of which $178 million (including $6 million of notes
receivable) was received in 2004. The remaining dispositions are expected to be
completed by March 31, 2005.

40

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

B. DISCONTINUED OPERATIONS - (CONTINUED)

During 2004, in separate transactions, the Company completed the sale of
its Jung Pumpen, The Alvic Group, Alma Kuchen, E. Missel and SKS Group
businesses in Europe. Jung Pumpen manufactures a wide variety of submersible and
drainage pumps, The Alvic Group and Alma Kuchen manufacture kitchen cabinets, E.
Missel manufactures acoustic insulation for baths and showers and SKS Group
manufactures window shutters and ventilation systems; all of these businesses
were included in discontinued operations. Total gross proceeds from the sale of
these companies were $199 million, including cash of $193 million and notes
receivable of $6 million. The Company recognized a pre-tax net gain (principally
related to the sale of Jung Pumpen) on the disposition of these businesses of
$106 million.

Selected financial information for the 2004 and 2003 discontinued
operations, during the period owned by the Company, is as follows for the years
ended December 31, 2004, 2003 and 2002, in millions:

Included in income tax above is income tax (credit) related to income
(loss) from discontinued operations of $9 million, $(7) million and $21 million
in 2004, 2003, and 2002, respectively. (Loss) income before income tax above
includes a non-cash, pre-tax goodwill impairment charge of $89 million for the
year ended December 31, 2003.

The unusual relationship between income tax and (loss) income before income
tax (including the impairment charge for assets held for sale and the net gain
on disposals) in 2004 results primarily from the expected loss providing no
current tax benefit in the countries where the loss is anticipated to be
incurred and from the expensing of deferred tax assets of the discontinued
operations which are no longer expected to be realized. For 2004, the Company
also recorded approximately $5 million of severance and termination benefit
expenses related to the discontinued operations, included in (loss) income
before income tax in the above table. In addition, the Company expects such
costs totaling $1 million to be recognized in the first quarter of 2005.

The impairment charge for assets held for sale primarily includes the
write-down of goodwill of $61 million and fixed assets of $54 million for the
year ended December 31, 2004.

In 2003, the Company completed the sale of its Baldwin Hardware, Weiser
Lock and Marvel Group businesses. In accordance with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," the Company has accounted
for the businesses held for sale at December 31, 2004 as well as businesses
which were sold in 2004 and 2003 as discontinued operations.

41

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

B. DISCONTINUED OPERATIONS - (CONCLUDED)

Total assets and liabilities of 2004 discontinued operations held for sale
at December 31, 2004 consisted primarily of the following, in millions:

Cash........................................................ $ 38
Accounts receivable......................................... 40
Inventories................................................. 16
Property and equipment, net................................. 64
Goodwill.................................................... 4
Other assets................................................ 1
----
Total assets.............................................. $163
====
Accounts payable............................................ $ 17
Accrued salaries, wages and related benefits................ 21
Other accrued expenses...................................... 6
----
Total liabilities......................................... $ 44
====

The discontinued operations were previously included in each of the
Company's segments, except the Installation and Other Services segment.

C. ACQUISITIONS

During 2004, the Company acquired several relatively small installation
services companies (Installation and Other Services segment). 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 $10 million, and included cash of $8 million and assumed debt
of $2 million.

Certain recent purchase agreements provide 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. Common shares that are
contingently issuable at December 31, 2004 have been included in the computation
of diluted earnings per common share for 2004. The Company paid an additional
$31 million, including $8 million in cash, of acquisition-related consideration,
contingent consideration and other purchase price adjustments in 2004, relating
to previously acquired companies. The Company 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 2003, the Company acquired several relatively small businesses. 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 2003 acquisitions was $63 million, and included cash of $57
million and assumed debt of $6 million.

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, 2002, pro forma unaudited consolidated net sales, income before

42

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

C. ACQUISITIONS - (CONCLUDED)

cumulative effect of accounting change, net income and diluted earnings per
common share would have been as follows, in millions, except per common share
amount:

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 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 pre-tax 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 implemented changes to its operational and financial structure
in Europe which included: 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
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
inventories includes purchased parts, materials, direct labor and applied
manufacturing overhead.

43

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

F. INVESTMENTS

FINANCIAL INVESTMENTS

The Company maintains investments in marketable securities 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:

The Company's investments in marketable equity securities and bond funds at
December 31, 2004 and 2003 were as follows, 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'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, 2004, the carrying value of the Company's investments
in private equity funds exceeded the estimated market value, as determined by
the fund managers, by approximately $14 million, which the Company considers to
be a temporary difference.

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 six percent of the common equity of Metaldyne. The Company also
holds preferred stock of Metaldyne, which accrues dividends at the rate of 15
percent

44

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

F. INVESTMENTS - (CONCLUDED)

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 six percent of TriMas Corporation common stock
for $25 million. In November 2004, the Company acquired an additional investment
in TriMas common stock from Metaldyne for an aggregate cost of $21 million. The
Company has an approximate 10 percent ownership in TriMas Corporation common
stock at December 31, 2004.

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

In the fourth quarter of 2004, the Company recognized an impairment charge
of $21 million related to the Company's investment in Furniture Brands
International (NYSE: FBN). The FBN common stock, included in marketable equity
securities, was received in June 2002 from the Company's investment in
Furnishings International Inc. debt. Based on its review, the Company considers
the decline in market value related to this investment to be
other-than-temporary and recorded an impairment charge to reduce the cost basis
from $30.25 per share to $25.05 per share; the aggregate carrying value after
the adjustment is $100 million.

During 2003, the Company recognized impairment charges aggregating $19
million related to investments in an equity security and private equity funds.
In 2002, the Company recognized impairment charges of $24 million principally
related to certain of its investments in private equity funds and other
financial 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, 2004 and 2003. 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.

45

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

G. DERIVATIVES

During 2003, the Company entered into interest rate swap agreements for the
purpose of effectively converting a portion of fixed-rate debt to variable-rate
debt. In 2004, the Company terminated two interest rate swaps relating to $850
million of fixed-rate debt. These swap agreements were accounted for as fair
value hedges. The gain of approximately $45 million from the termination of
these swaps is being amortized as a reduction of interest expense over the
remaining term of the debt, through July 2012.

In early 2004, the Company entered into new interest rate swap agreements
for the purpose of effectively converting a portion of fixed-rate debt to
variable-rate debt, which is expected to reduce interest expense, given current
interest rates. The derivative contracts are with two major creditworthy
institutions, thereby minimizing the risk of credit loss. The interest rate swap
agreements are designated as 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 over the term of the agreement. The average
variable interest rates are based on LIBOR plus a fixed adjustment factor. The
average effective rate on the interest rate swaps is 3.302%. At December 31,
2004, 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 hedge is considered 100 percent effective; therefore, the market
valuation of $24 million and $7 million at December 31, 2004 and 2003,
respectively, is recorded in other assets with a corresponding increase to
long-term debt in the Company's consolidated balance sheets at December 31, 2004
and 2003.

The amount recognized as a reduction of interest expense was $22 million
and $3 million for the years ended December 31, 2004 and 2003, respectively.

At December 31, 2004, certain of the Company's European operations also
entered into foreign currency forward contracts with notional amounts of $24
million, $29 million and $1 million to manage exposure to currency fluctuations
in the United States dollar, Great Britain pound and various other currencies,
respectively. 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 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 from these leases, recorded in
the consolidated statements of income, totaled

46

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

H. PROPERTY AND EQUIPMENT - (CONCLUDED)

approximately $144 million, $123 million and $132 million during 2004, 2003 and
2002, respectively. Future minimum lease payments at December 31, 2004 were
approximately as follows: 2005 - $115 million; 2006 - $85 million; 2007 - $61
million; 2008 - $41 million; and 2009 and beyond - $113 million.

The Company leases operating facilities from certain related parties,
primarily former owners (and in certain cases, current management personnel) of
companies acquired. The Company recorded approximately $14 million of rental
expense paid in 2004 to such related parties.

I. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the years ended December
31, 2004 and 2003, by segment, are as follows, in millions:

(A) Additions include acquisitions and contingent consideration for prior
acquisitions of $8 million and $25 million, respectively, for 2004 and $45
million and $123 million, respectively, for 2003.

(B) During 2004, the Company reclassified the goodwill related to European
businesses held as discontinued operations. The Company also recognized
charges for those businesses expected to be divested at a loss; the charge
included a write-down of goodwill of $64 million (including $3 million
recognized at the time of a sale).

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

The Company completed its annual impairment testing of goodwill and other
indefinite-lived intangible assets in the fourth quarters of 2004 and 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 $168 million
($141 million, after tax) and $137 million ($113 million, after tax) for the
years ended December 31, 2004 and 2003, respectively. In 2003, the Company also
recorded a non-cash goodwill impairment charge of $5 million

47

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

I. GOODWILL AND OTHER INTANGIBLE ASSETS - (CONCLUDED)

related to a European business, as discussed in Note D. The pre-tax goodwill
impairment charge related to the discontinued European operations was $89
million for the year ended December 31, 2003 and has been reclassified to
discontinued operations.

Other indefinite-lived intangible assets of $255 million at both December
31, 2004 and 2003 primarily include registered trademarks. The carrying value of
the Company's definite-lived intangible assets was $71 million at December 31,
2004 (net of accumulated amortization of $65 million) and $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 ten years in 2004 and nine years in
2003. Amortization expense related to the definite-lived intangible assets was
$20 million in 2004 and $25 million in both 2003 and 2002.

At December 31, 2004, amortization expense related to the definite-lived
intangible assets during each of the next five years was approximately as
follows: 2005 - $16 million; 2006 - $12 million; 2007 - $9 million; 2008 - $8
million; and 2009 - $6 million.

J. OTHER ASSETS

K. ACCRUED LIABILITIES

48

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.

On March 9, 2004, the Company issued $300 million of floating-rate notes
due 2007, resulting in net proceeds of $299 million. The interest rate is
calculated based on the three-month LIBOR plus .25%; such rate averaged 1.8% for
the year ended December 31, 2004.

During 2004, the Company retired the remaining $266 million of 6% notes due
May 2004.

In July 2001, the Company issued $1.9 billion principal amount at maturity
of Zero Coupon Convertible Senior Notes due 2031 ("Old Notes"), resulting in
gross proceeds of $750 million. The issue price per Note was $394.45 per $1,000
principal amount at maturity, which represented a yield to maturity of 3.125%
compounded semi-annually. In July 2002, holders of $26.4 million principal at
maturity of Old Notes exercised their right to require the Company to
repurchase, for $10.7 million cash, the accreted value of such Notes. On April
30, 2004, holders of $31,000 principal at maturity of Old Notes exercised their
right to require the Company to repurchase such Notes for cash of $13,300, the
accreted value of such Notes.

In December 2004, the Company completed an exchange of the outstanding Old
Notes for Zero Coupon Convertible Senior Notes Series B due July 2031 ("New
Notes" or "Notes"). The Company exchanged the Notes as a result of EITF No.
04-08 that would have required the total number of shares underlying the Old
Notes to be included in the calculation of diluted earnings per common share,
whether or not the Old Notes were convertible according to their terms. The
issue price of the New Notes was the equivalent of the accreted value of the Old
Notes on the date of the exchange,

49

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

L. LONG-TERM DEBT - (CONTINUED)

or $438.54 per $1,000 principal amount at maturity, which continues to represent
a yield to maturity of 3.125% compounded semi-annually. In addition, in
consideration for exchanging the Old Notes, holders of the New Notes received an
exchange fee of $1.25 per $1,000 principal amount at maturity of the New Notes,
which approximated $2 million and was expensed through January 20, 2005.
Following completion of the exchange offer, at December 31, 2004, over 99
percent of the Old Notes were exchanged for New Notes.

The New Notes have substantially the same terms as the Old Notes, except
for the form of consideration payable upon conversion. Upon conversion of the
Old Notes, the Company would have delivered shares of its common stock at the
applicable conversion rate. Upon conversion of the New Notes, the Company will
pay the principal return, equal to the lesser of (1) the accreted value of the
Notes in cash, and (2) the conversion value, as defined, which will be settled
in cash or shares of Company common stock, or a combination of both, at the
option of the Company. Similar to the Old Notes, the New Notes are convertible
if the average price of Company common stock for the 20 days immediately prior
to the conversion date exceeds 119%, declining by 1/3% each year thereafter, of
the accreted value of the New Notes ($439.38 per $1,000 principal amount at
maturity as of December 31, 2004) divided by the conversion rate of 12.7243
shares for each $1,000 principal amount at maturity of the New Notes or $41.09
per common share at December 31, 2004. The New Notes, like the Old 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.

Similar to the Old Notes, the Company will not pay interest on the Notes
prior to maturity except in certain circumstances, including possible contingent
interest payments that are not expected to be material. Similar to the Old
Notes, holders of the New Notes have the option (put option) to require that the
New Notes be repurchased by the Company on January 20 of both 2005 and 2007;
July 20, 2011; and every five years thereafter. On January 20, 2005, holders of
$1.6 million of New Notes required the Company to repurchase such Notes for cash
of $712,300, the accreted value of such Notes.

Until January 25, 2007, the Company may redeem all, but not part, of the
Notes at their accreted value, only if the closing price for the Company's
common stock on the New York Stock Exchange exceeds the conversion price of the
Notes by 130% for a specified period of time. The Company may, at any time on or
after January 25, 2007, redeem all or part of the Notes at their accreted value.

At December 31, 2004, the Company has a $2.0 billion 5-year Revolving
Credit Agreement with a group of banks syndicated in the United States due and
payable in November 2009. This agreement allows for borrowings denominated in
U.S. dollars or European euros with interest payable based on various
floating-rate options as selected by the Company. There were no borrowings under
revolving credit agreements at December 31, 2004 and 2003.

Certain debt agreements contain limitations on additional borrowings; at
December 31, 2004, the Company had additional borrowing capacity, subject to
availability, of up to $3.9 billion. Certain debt agreements also contain a
requirement for maintaining a certain level of net worth; at December 31, 2004,
the Company's net worth exceeded such requirement by approximately $1.7 billion.

At December 31, 2004, the maturities of long-term debt during each of the
next five years were approximately as follows: 2005 - $80 million; 2006 - $811
million; 2007 - $1,431 million (includes $823 million related to the Zero Coupon
Notes, for the next put option); 2008 - $107 million; and 2009 - $10 million.

50

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

L. LONG-TERM DEBT - (CONCLUDED)

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 was able to
issue up to a combined $2 billion of debt and equity securities.

Interest paid was $219 million, $282 million and $204 million in 2004, 2003
and 2002, 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, 2004, the Company had
remaining authorization to repurchase up to 17 million shares of its common
stock in open-market transactions or otherwise. Approximately 31 million, 35
million and 8 million common shares were repurchased and retired in 2004, 2003
and 2002, respectively, at a cost aggregating $903 million, $779 million and
$166 million in 2004, 2003 and 2002, respectively.

On the basis of amounts paid (declared), cash dividends per common share
were $.66 ($.68) in 2004, $.58 ($.60) in 2003 and $.54 1/2 ($.55) in 2002,
respectively. In 2004, the Company increased its quarterly cash dividend by 12.5
percent to $.18 per common share from $.16 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 (loss) gain, net, on marketable securities is net of income
tax (credit) of $(2) million and $31 million for 2004 and 2003, respectively.
The minimum pension liability is net of income tax (credit) of $(3) million and
$(1) million for 2004 and 2003, respectively.

51

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

M. SHAREHOLDERS' EQUITY - (CONCLUDED)

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

The unrealized gain on marketable securities, net is reported net of income
tax of $13 million and $15 million at December 31, 2004 and 2003, respectively.
The minimum pension liability is reported net of tax credit of $38 million and
$35 million at December 31, 2004 and 2003, respectively.

The realized gains, net, on marketable securities of $19 million and $13
million, net of tax effect, for 2004 and 2003, respectively, were included in
determining net income and were reclassified from accumulated other
comprehensive income (loss).

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, 2004,
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

Long-term stock awards are granted to key employees and non-employee
Directors of the Company and do not cause net share dilution inasmuch as the
Company reacquires an equal number of shares on the open market.

The following table summarizes the long-term stock awards granted, net of
cancellations, for the three years ended December 31, 2004, shares in millions:

Compensation expense for the annual vesting of long-term stock awards was
$39 million, $50 million (including $15 million of accelerated expense due to
the unexpected passing of the Company's President and Chief Operating Officer),
and $29 million in 2004, 2003 and 2002, respectively. The unvested stock awards,
aggregating approximately $173 million (10 million common shares) and $165
million (10 million common shares) at December 31, 2004 and 2003, 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 2004, 2003 and 2002, the Company issued stock appreciation rights
("SARs") to foreign employees with cash compensation linked to the value of
315,000 shares, 287,800 shares and 332,000 shares,

52

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

N. STOCK OPTIONS AND AWARDS - (CONTINUED)

respectively, of Company common stock. The Company also issued phantom stock
awards linked to the value of 156,000 shares, 160,500 shares and 25,700 shares
of Company common stock in 2004, 2003 and 2002, respectively. Compensation
expense related to SARs and phantom stock awards for 2004, 2003 and 2002 was $17
million, $12 million and $3 million, respectively.

STOCK OPTIONS

Fixed stock options are granted to key employees and non-employee Directors
of the Company. The grant date 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. Restoration stock
options become exercisable six months from the date of grant.

The following table summarizes the stock options granted for the three
years ended December 31, 2004, shares in millions:

The Company recorded $21 million and $3 million of stock option expense in
the consolidated statements of income for the years ended December 31, 2004 and
2003, respectively, 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, 2004 is presented below, shares in millions:

53

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

N. STOCK OPTIONS AND AWARDS - (CONCLUDED)

The following table summarizes information for stock option shares
outstanding and exercisable at December 31, 2004, shares in millions:

At December 31, 2004, a total of 7,177,000 shares and 446,000 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
incentive awards.

O. EMPLOYEE RETIREMENT PLANS

The Company sponsors defined-benefit and defined-contribution plans for
most of its employees. In addition, substantially all salaried employees
participate in non-contributory defined-contribution plans, to which payments
are determined annually by the Organization and Compensation Committee of the
Board of Directors. Aggregate charges to earnings under the Company's
defined-benefit and defined-contribution plans were $55 million and $42 million
in 2004, $68 million and $38 million in 2003 and $40 million and $34 million in
2002, respectively.

Net periodic pension cost for the Company's qualified defined-benefit
pension plans includes the following components for the three years ended
December 31, 2004, in millions:

54

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

O. EMPLOYEE RETIREMENT PLANS - (CONTINUED)

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
qualified defined-benefit pension plans at December 31, in millions:

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

55

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

O. EMPLOYEE RETIREMENT PLANS - (CONTINUED)

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

The projected benefit obligation is in excess of plan assets for all
qualified defined-benefit pension plans.

PLAN ASSETS

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

The investment objectives of the Company's qualified defined-benefit
pension plans are: 1) to invest the portfolio to earn a return, net of fees,
greater than or equal to the expected long-term rate of return on plan assets;
2) to diversify the portfolio among various asset classes with the goal of
reducing volatility of return and reducing principal risk; and 3) to maintain
liquidity sufficient to meet Plan obligations. Target allocations are: equity
securities (85%), debt securities (5%) and other investments (10%).

Plan assets include approximately 1.4 million shares of Company common
stock valued at $52 million and $39 million at December 31, 2004 and 2003,
respectively.

CASH FLOWS

The Company expects to contribute approximately $7 million to its qualified
defined-benefit pension plans in 2005. The Company also expects to pay $6
million to participants of its non-qualified supplemental defined-benefit
pension plans in 2005.

The benefits expected to be paid in each of the next five years, and in
aggregate for the five years thereafter, relating to the Company's qualified
defined-benefit pension plans, are as follows: 2005 - $28 million; 2006 - $29
million; 2007 - $36 million; 2008 - $31 million; 2009 - $33 million; and 2010-
2014 - $200 million. The benefits expected to be paid in each of the next five
years, and in aggregate for the five years thereafter, relating to the Company's
non-qualified supplemental defined-benefit pension plans, are as follows:
2005 - $6 million; 2006 - $6 million; 2007 - $7 million; 2008 - $7 million;
2009 - $9 million; and 2010-2014 - $50 million.

56

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

O. EMPLOYEE RETIREMENT PLANS - (CONCLUDED)

The major assumptions used in accounting for the Company's defined-benefit
pension plans at December 31, 2004, 2003 and 2002 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 plan assets. The
measurement date used to determine the defined-benefit pension expense is
January 1.

OTHER

In addition to the Company's qualified defined-benefit pension plans, the
Company has non-qualified unfunded supplemental defined-benefit 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 $118 million and $125 million at December 31,
2004 and $109 million and $115 million at December 31, 2003, respectively. Net
periodic pension cost for these plans was $17 million, $13 million and $10
million in 2004, 2003 and 2002, 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 $6 million and $5 million at December 31, 2004 and 2003,
respectively.

57

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; showerheads and hand showers; 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; electronic locksets; staple gun tackers,
staples and other fastening tools; and hydronic radiators and heat
convectors.

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.

58

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:

59

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

P. SEGMENT INFORMATION - (CONCLUDED)

(1) Included in net sales in 2004, 2003 and 2002 were export sales from the
U.S. of $226 million, $184 million and $153 million, respectively.

(2) Intra-company sales between segments represented approximately one percent
of net sales in 2004, 2003 and 2002.

(3) Includes net sales to one customer in 2004, 2003 and 2002 of $2,641
million, $2,457 million and $2,276 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 $9,629 million,
$8,561 million and $7,479 million in 2004, 2003 and 2002, respectively.

(5) Net sales, operating profit and depreciation and amortization for 2004,
2003 and 2002 exclude the results of businesses sold in 2004 and 2003, and
those held for sale at December 31, 2004.

(6) Long-lived assets of the Company's operations in the U.S. and Europe were
$4,981 million and $2,017 million, $4,859 million and $2,130 million and
$4,875 million and $1,848 million at December 31, 2004, 2003 and 2002,
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 2004 are goodwill impairment
charges as follows: Cabinets and Related Products - $56 million; Plumbing
Products - $25 million; Decorative Architectural Products - $62 million;
and Other Specialty Products - $25 million. Included in segment operating
profit for 2003 are goodwill impairment charges as follows: Plumbing
Products - $17 million, Decorative Architectural Products - $5 million and
Other Specialty Products - $31 million. The goodwill impairment charges
were related to the Company's European businesses.

(10) Included in segment operating profit for 2002 is 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.

(11) Segment assets at December 31, 2004 exclude the assets of businesses sold
in 2004 and 2003, and those held for sale at December 31, 2004.

Q. OTHER INCOME (EXPENSE), NET

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

60

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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

Other items, net in 2004, 2003 and 2002 include realized foreign currency
exchange transaction gains (losses) of $26 million, $(4) million and $(3)
million, respectively, as well as other miscellaneous items.

R. INCOME TAXES

At December 31, 2004 and 2003, net deferred tax liability consisted of net
short-term deferred tax assets included in prepaid expenses and other of $175
million and $181 million, respectively, and net long-term deferred tax
liabilities of $504 million and $410 million, respectively.

During 2001, the Company recorded a non-cash charge for the write-down of
certain investments that created a capital loss carryforward for tax purposes in
2002. The Company believes that the capital

61

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

R. INCOME TAXES - (CONCLUDED)

loss carryforward of $21 million ($60 million pre-tax) at December 2004 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, 2004 or 2003.

Changes to the U.S. tax law enacted in the fourth quarter of 2004
significantly impacted the taxation of foreign earnings distributions. As a
result, the Company made a dividend distribution of accumulated earnings from
certain of its foreign subsidiaries of approximately $500 million in the fourth
quarter of 2004. Such earnings had been permanently reinvested, pursuant to the
provisions of the Accounting Principles Board Opinion No. 23, prior to the
fourth quarter of 2004 under the Company's previous tax planning strategy to
invest such earnings in operating and non-operating foreign investments.

This dividend generated significant foreign tax credits that were used to
offset the majority of the U.S. tax on the 2004 dividend and created a $50
million foreign tax credit carryforward at December 31, 2004. The Company
believes that the foreign tax credit carryforward will be utilized before the
newly enacted 10-year carryforward period expires on December 31, 2014,
principally with identified potential sources of future income taxed in foreign
jurisdictions at rates less than the present U.S. rate of 35 percent. Therefore,
a valuation allowance was not recorded at December 31, 2004.

Because the Company changed its position with respect to the repatriation
of foreign earnings, the Company recorded a $38 million deferred tax liability
in the fourth quarter of 2004, primarily related to the excess of its book basis
over the tax basis of investments in foreign subsidiaries.

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 $406 million, $328 million and $302
million in 2004, 2003 and 2002, respectively.

62

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:

During 2004, holders of all 17,000 shares of the Company's convertible
preferred stock converted their preferred stock to approximately 17 million
shares of the Company's common stock. The convertible preferred shares carried
substantially the same attributes as Company common stock and had been treated
as if converted at a ratio of one share of preferred stock to 1,000 shares of
common stock for basic and diluted earnings per common share computations.

At December 31, 2004, the Company included approximately one million common
shares related to the Zero Coupon Convertible Senior Notes ("Notes") in the
calculation of diluted earnings per common share, as the price of the Company's
common stock at December 31, 2004 exceeded the accreted value of the Notes.

Additionally, 1.0 million common shares, 7.9 million common shares and 3.5
million common shares for 2004, 2003 and 2002, 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 respective years.

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 State Settlement) to
resolve all class action lawsuits pending in the United States involving certain
exterior wood coating products formerly manufactured by Behr.

63

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

T. OTHER COMMITMENTS AND CONTINGENCIES - (CONTINUED)

The following is a reconciliation of the Company's Behr Process Settlement
liability, in millions:

The deadlines for filing claims were September 2, 2003 for the National
Settlement and January 17, 2004 for the Washington State Settlement.

During 2004, the Company estimated the average cost per claim received
related to the Washington State Settlement, and, as a result, estimated that the
remaining unpaid claims and administration costs would be approximately $20
million less than estimated at December 31, 2003. Accordingly, the Company
reduced the litigation accrual (recognizing income) by $20 million in 2004.

Proceeds from insurance carriers are recognized as income when Behr and its
carriers agree on such amounts. The Company expects that the evaluation,
processing and payment of claims for both the Washington State Settlement and
the National Settlement will be substantially completed by March 31, 2005.

Early in 2003, a suit was brought against the Company and a number of its
insulation installation companies in the federal court in Atlanta, Georgia,
alleging that certain practices violate provisions of federal and state
antitrust laws. The plaintiff publicized the lawsuit with a press release and
stated in that release that the Department of Justice was investigating the
business practices of the Company's insulation installation companies. Although
the Company was unaware of any investigation at that time, the Company was later
advised that an investigation had been commenced but was subsequently closed
without any enforcement action recommended. Two additional lawsuits were
subsequently brought in Virginia making similar claims under the antitrust laws.
Both of these lawsuits have since been dismissed without any payment or
requirement for any change in business practices. During the second half of
2004, the same counsel who commenced the initial action in Atlanta filed six
additional lawsuits on behalf of several of Masco's competitors in the
insulation installation business. Recently, the plaintiffs dismissed five of
these lawsuits and, represented by the same counsel, filed another action in the
same federal court, seeking class representation for all independent insulation
contractors against the Company, a number of its insulation installation
companies and certain of their suppliers. Based upon the advice of its outside
counsel, the Company believes that the conduct of the Company and its insulation
installation companies, which has been the subject of the above-described
lawsuits, has not violated any antitrust laws.

In the fall of 2004, the Company learned that European governmental
authorities are investigating possible anticompetitive business practices
relating to the plumbing and heating industries in Europe. The investigations
involve a number of European companies, including certain of the Company's
European manufacturing divisions and a number of other large businesses. As part
of its recently broadened governance activities, the Company, with the
assistance of its outside counsel, completed a review of the competition
practices of its European divisions, including those in the plumbing and heating
industries, and the Company is cooperating fully with the European governmental
authorities. Several private antitrust lawsuits have recently been filed in the
United States as putative class actions

64

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

T. OTHER COMMITMENTS AND CONTINGENCIES - (CONTINUED)

against the Company and certain of the other companies being investigated
relating to the defendants' plumbing operations. These appear to be an outgrowth
of the investigations being conducted by European governmental authorities, and
additional lawsuits involving the same subject matter may be filed. Based upon
the advice of its outside counsel, the review of the competition practices of
its European divisions referred to above and other factors, the Company believes
that it will not incur material liability as a result of the matters that are
the subject of these investigations or as a result of any such lawsuits.

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 life of the product. At the
time of 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 that the Company experiences any changes in
warranty claim activity or costs associated with servicing those claims, its
warranty liability is adjusted accordingly.

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

ACQUISITION-RELATED COMMITMENTS

As part of the agreement relating to the Company's acquisition of an
additional 37 percent ownership of Hansgrohe AG in December 2002, certain
minority shareholders of Hansgrohe AG hold an option expiring in December 2007
to require the Company to purchase additional outstanding 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, 2004, would have
approximated $23 million; if the option were settled in stock, the common shares
to be issued at December 31, 2004 would have approximated 686,000.

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

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, which matures April 30, 2005. The liability

65

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

T. OTHER COMMITMENTS AND CONTINGENCIES - (CONTINUED)

for this guarantee, which approximated $6 million and $20 million at December
31, 2004 and 2003, respectively, has been recorded in accrued liabilities and is
marked to market each reporting period.

CONTINGENT PURCHASE PRICE

As part of certain recent acquisition agreements, the Company has
additional consideration payable in cash of approximately $14 million contingent
on the operating performance of the acquired businesses.

INVESTMENTS

With respect to the Company's investments in private equity funds, the
Company had, at December 31, 2004, commitments to contribute up to $123 million
of additional capital to such funds, under certain circumstances.

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 $47 million at December 31, 2004,
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 vehicles. The aggregate value of the
residual value guarantees, assuming the fair value at lease termination is zero,
was approximately $104 million at December 31, 2004.

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
66

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

T. OTHER COMMITMENTS AND CONTINGENCIES - (CONCLUDED)

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.

67

MASCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)

U. INTERIM FINANCIAL INFORMATION (UNAUDITED)

Income per common share amounts for the four quarters of 2004 and 2003 may
not total to the per common share amounts for the years ended December 31, 2004
and 2003 due to the timing of common stock repurchases and the effect of
contingently issuable common shares.

Fourth quarter 2004 income from continuing operations and net income
include a $141 million after-tax ($168 million pre-tax), non-cash goodwill
impairment charge. Income from continuing operations and net income include
after-tax income related to the Behr litigation settlement of $13 million ($21
million pre-tax), $4 million ($7 million pre-tax) and $1.5 million ($2 million
pre-tax) in the first, second and third quarters of 2004, respectively. Net
income for 2004 includes after-tax (loss) income, net related to discontinued
operations of $(73) million ($(58) million pre-tax), $(33) million ($(32)
million pre-tax), $70 million ($87 million pre-tax) and $(1) million ($(1)
million pre-tax) in the first, second, third and fourth quarters of 2004,
respectively.

Income from continuing operations and net income in 2003 include after-tax
income related to the Behr litigation settlement of $8 million ($13 million
pre-tax), $36 million ($58 million pre-tax) and $.6 million ($1 million pre-tax)
in the first, third and fourth quarters, respectively. Fourth quarter 2003 net
income includes a $113 million after-tax ($137 million pre-tax), non-cash
goodwill impairment charge, of which $71 million after-tax ($89 million pre-tax)
was included in discontinued operations. 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 income from continuing operations and net
income also include adjustments of $42 million, after tax related to European
accounting charges including a $5 million non-cash goodwill impairment charge.

68

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

Not applicable

ITEM 9A. CONTROLS AND PROCEDURES.

(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.

The Company, with the participation of the Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of its disclosure controls and
procedures as required by Exchange Act Rules 13a-15(b) and 15d-15(b) as of the
end of the period covered by this Report. The Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are
designed to ensure that information required to be disclosed by the Company in
the reports it files or furnishes 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 that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required financial
disclosure.

Based on this evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were not
effective because of the material weakness related to the Company's internal
control over financial reporting discussed under Management's Report on Internal
Control over Financial Reporting.

In light of this material weakness, management performed extensive
additional procedures to ensure that the Company's consolidated financial
statements are prepared in accordance with generally accepted accounting
principles and that the financial statements fairly present, in all material
respects, the financial condition, results of operations and cash flows for the
periods presented. Such procedures included preparing and reviewing key account
reconciliations affected by the control deficiency as of December 31, 2004.
Furthermore, extended inquiry and analytical procedures were performed by group
oversight management. Management has concluded that the consolidated financial
statements included in this Annual Report on Form 10-K present fairly, the
financial position, results of operations and cash flows of the Company in
accordance with accounting principles generally accepted in the United States of
America.

(B) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.

Management's report on the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) is included in Item 8. Financial Statements and Supplementary Data
of this Report under the heading Management's Report on Internal Control over
Financial Reporting, and the related report of our independent registered public
accounting firm is included under the heading Report of Independent Registered
Public Accounting Firm under the same Item.

(C) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.

Other than the events leading to the material weakness and actions taken
thereon, noted in Item 8 under the heading Management's Report on Internal
Control over Financial Reporting and Management's Remediation Plan, there were
no changes in the Company's internal control over financial reporting that
occurred during the last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.

69

ITEM 9B. OTHER INFORMATION.

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Certain information regarding executive officers required by this Item is
set forth as a Supplementary Item at the end of Part I hereof (pursuant to
Instruction 3 to Item 401(b) of Regulation S-K). The Company's Code of Business
Ethics applies to all employees, officers and directors including the Principal
Executive Officer and Principal Financial Officer and Principal Accounting
Officer, and is posted on the Company's website at www.masco.com. Other
information required by this Item will be contained in the Company's definitive
Proxy Statement for its 2005 Annual Meeting of Stockholders, to be filed on or
before April 28, 2005, and such information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

Information required by this Item will be contained in the Company's
definitive Proxy Statement for its 2005 Annual Meeting of Stockholders, to be
filed on or before April 28, 2005, 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 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, 2004 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 2005 Annual Meeting of
Stockholders, to be filed on or before April 28, 2005, 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 2005 Annual Meeting of Stockholders, to be
filed on or before April 28, 2005, 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 2005 Annual Meeting of Stockholders, to be
filed on or before April 28, 2005, and such information is incorporated herein
by reference.

70

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) LISTING OF DOCUMENTS.

(1) Financial Statements. The Company's Consolidated Financial
Statements included in Item 8 hereof, as required at December 31,
2004 and 2003, and for the years ended December 31, 2004, 2003 and
2002, 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 Schedule.

(i) Financial Statement Schedule of the Company appended hereto, as
required for the years ended December 31, 2004, 2003 and 2002,
consists of the following:

II. Valuation and Qualifying Accounts

(3) Exhibits.

3.i Restated Certificate of Incorporation of Masco Corporation
and amendments thereto (6).
3.ii Bylaws of Masco Corporation, as amended December 5, 2001
(6).
4.a.i Indenture dated as of December 1, 1982 between Masco
Corporation and Morgan Guaranty Trust Company of New York,
as Trustee (4), and Directors' resolutions establishing
Masco Corporation's: (i) 7 1/8% Debentures Due August 15,
2013 (7); (ii) 6.625% Debentures Due April 15, 2018 (7);
(iii) 5.75% Notes Due October 15, 2008 (7); and (iv) 7 3/4%
Debentures Due August 1, 2029 (filed herewith).
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 (filed herewith).
4.a.iii Supplemental Indenture dated as of July 26, 1994 between
Masco Corporation and The First National Bank of Chicago
(filed herewith).
4.b.i Indenture dated as of February 12, 2001 between Masco
Corporation and J.P. Morgan Trust Company, National
Association (successor in interest to Bank One Trust
Company, National Association), as Trustee (2), and
Directors' Resolutions establishing Masco Corporation's: (i)
6 3/4% Notes Due March 15, 2006 (2); (ii) 5 7/8% Notes Due
July 15, 2012 (6); (iii) 4 5/8% Notes Due August 15, 2007
(6); (iv) 6 1/2% Notes Due August 15, 2032 (6); and (v)
Floating Rate Notes Due 2007 (filed herewith).
4.b.ii First Supplemental Indenture dated as of July 20, 2001 to
the Indenture dated February 12, 2001 by and among Masco
Corporation and J.P. Morgan Trust Company, National
Association (successor in interest to Bank One Trust
Company, National Association), as Trustee, relating to the
Company's Zero Coupon Convertible Senior Notes Due July 20,
2031 (3), Amendment No. 1 dated as of July 19, 2002 (5) and
Amendment No. 2 dated as of November 2, 2004 (9).

71

4.b.iii Second Supplemental Indenture between Masco Corporation and
J.P. Morgan Trust Company, National Association, as trustee
dated as of December 23, 2004 (including form of Zero Coupon
Convertible Senior Note, Series B due 2031) (11).
4.c Rights Agreement dated as of December 6, 1995, between Masco
Corporation and The Bank of New York, as Rights Agent (2);
and Amendment No. 1 dated September 23, 1998 (2).
4.d U.S. $2 billion 5-Year Revolving Credit Agreement dated as
of November 5, 2004 among Masco Corporation and Masco
Europe, S.a.r.l. as borrowers, the banks party thereto, as
lenders, J.P. Morgan Securities Inc. and Citigroup Global
Markets, Inc., as Joint Lead Arrangers and Joint Book
Runners and Citibank, N.A., as Syndication Agent, Sumitomo
Mitsui Banking Corporation, as Documentation Agent, and Bank
One, NA (Main Office Chicago), as Administrative Agent (10).
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 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
(2).
NOTE: Exhibits 10.b through 10.p 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) (7).
10.c Forms of awards under the Masco Corporation 1991 Long Term
Stock Incentive Plan: Restricted Stock Award Agreement for
awards prior to January 1, 2005 (9) and for awards on and
after January 1, 2005 (12).
10.d Forms of awards under the Masco Corporation 1991 Long Term
Stock Incentive Plan: Restoration Stock Option (9).
10.e Forms of awards under the Masco Corporation 1991 Long Term
Stock Incentive Plan: Stock Option Grant (9).
10.f Forms of awards under the Masco Corporation 1991 Long Term
Stock Incentive Plan: Stock Option Grant for Non-Employee
Directors (9).
10.g Forms of Masco Corporation Supplemental Executive Retirement
and Disability Plan (filed herewith).
10.h Masco Corporation 2002 Annual Incentive Compensation Plan
(6).
10.i Masco Corporation 1997 Non-Employee Directors Stock Plan (as
amended May 11, 2004) (8).
10.j Form of awards under the Masco Corporation 1997 Non-Employee
Directors Stock Plan: Restricted Stock Award Agreement (9).
10.k Form of awards under the Masco Corporation 1997 Non-Employee
Directors Stock Plan: Stock Option Grant (9).
10.l Other compensatory arrangements for executive officers
(filed herewith).

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

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

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

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

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

(6) Incorporated by reference to the Exhibits filed with Masco Corporation's
Annual Report on Form 10-K for the year ended December 31, 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, 2003.

(8) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

(9) Incorporated by reference to the Exhibits filed with Masco Corporation's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.

(10) Incorporated by reference to the Exhibits filed with Masco Corporation's
Current Report on Form 8-K dated November 5, 2004.

(11) Incorporated by reference to the Exhibits filed with Masco Corporation's
Current Report on Form 8-K dated December 23, 2004.

(12) Incorporated by reference to the Exhibits filed with Masco Corporation's
Current Report on Form 8-K dated January 1, 2005.

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.

73

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

March 16, 2005

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/ DENNIS W. ARCHER Director
- --------------------------------------
Dennis W. Archer

/s/ THOMAS G. DENOMME Director
- --------------------------------------
Thomas G. Denomme

/s/ PETER A. DOW Director
- --------------------------------------
Peter A. Dow

/s/ ANTHONY F. EARLEY, JR. Director March 16, 2005
- --------------------------------------
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

74

MASCO CORPORATION

SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

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

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

75

EXHIBIT INDEX