10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the year ended December 31, 2009

Commission file number 1-1396

EATON CORPORATION

(Exact name of registrant as specified in its charter)

Ohio	34-0196300
(State or other jurisdiction of	(IRS Employer Identification Number)
incorporation or organization)
Eaton Center
Cleveland, Ohio	44114-2584
(Address of principal executive offices)	(Zip code)

(216) 523-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

	Name of each exchange on
Title of each class	which registered
Common Share ($.50 par value)	The New York Stock Exchange
	The Chicago Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No þ

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 ninety days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule
12b-2 of the Exchange Act (Check one):

Large accelerated filer þ  Accelerated filer o  Non-accelerated filer   o
(Do not check if a smaller reporting company) Smaller reporting company o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2009 was $7.4 billion.

As of January 31, 2010, there were 166.4 million Common Shares outstanding.

Documents Incorporated By Reference

Portions of the Proxy Statement for the 2010 annual shareholders meeting are incorporated by reference into Part III.

TABLE OF CONTENTS

Part I
	Item 1. Business
	Item 1A. Risk Factors
	Item 1B. Unresolved Staff Comments
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
Part II
	Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures about Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9A. Controls and Procedures
	Item 9B. Other Information
Part III
	Item 10. Directors, Executive Officers and Corporate Governance
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13. Certain Relationships and Related Transactions, and Director Independence
	Item 14. Principal Accounting Fees and Services
Part IV
	Item 15. Exhibits, Financial Statement Schedules
SIGNATURES
Exhibit Index
EX-10(cc)
EX-12
EX-21
EX-23
EX-24
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Part I

Item 1. Business.

Eaton Corporation is a diversified power management company with 2009 sales of $11.9 billion. Eaton is a global technology leader in electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety. Eaton has approximately 70,000 employees in over 50 countries, and sells products to customers in more than 150 countries.

Eaton electronically files or furnishes reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) to the United States Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy and information statements, as well as any amendments to those reports. As soon as reasonably practicable, these reports are available free of charge through the Company’s Internet web site at http://www.eaton.com. These filings are also accessible on the SEC’s Internet web site at http://www.sec.gov.

In 2009, Eaton acquired a business and entered into a joint venture for combined net cash purchase prices of $10. The Statements of Consolidated Income include the results of these businesses from the dates of acquisition or formation. A summary of these transactions follows:

	Date of	Business
Acquired business	acquisition	segment	Annual sales
Micro Innovation Holding AG	September 1,	Electrical	$33 for 2008
A Switzerland-based manufacturer of human	2009	Rest of
machine interfaces, programmable logic		World
controllers and input/output devices. Eaton acquired the remaining shares to increase its ownership from 50% to 100%.
SEG Middle East Power Solutions & Switchboard Manufacture LLC	July 2,	Electrical	$10 for 2008
A 49%-owned joint venture to manufacture low	2009	Rest of
voltage switchboards and control panel assemblies for use in the Middle East power generation and industrial markets		World

Business Segment Information

Information by business segment and geographic region regarding principal products, principal markets, methods of distribution, net sales, operating profit and assets is presented in “Business Segment & Geographic Region Information” on pages 48 through 52. Additional information regarding Eaton’s segments and business is presented below.

Electrical Americas and Electrical Rest of World

Seasonal Fluctuations — In normal economic cycles, sales of these segments are historically lower in the first quarter and higher in the third and fourth quarters of a year.

Significant Customers — Approximately 11% of the sales of the Electrical Americas segment in 2009 were made to one large distributor of electrical products.

Competition — Principal methods of competition in these segments are performance of products and systems, technology, customer service and support, and price. Eaton has a strong competitive position in relation to the many competitors in this segment and, with respect to many products, is considered among the market leaders.

Hydraulics

Seasonal Fluctuations — Sales of this segment are historically higher in the first and second quarters and lower in the third and fourth quarters of the year.

Competition — Principal methods of competition in this segment are product performance, geographic coverage, service and price. Eaton has a strong competitive position in relation to the many competitors in this segment and, with respect to many products, is considered among the market leaders.

Page 2

Aerospace

Significant Customers — Approximately 13% of this segment’s sales in 2009 were made to one large manufacturer of aircraft.

Competition — Principal methods of competition in this segment are total cost of ownership, product and system performance, quality, design engineering capabilities and timely delivery. Eaton has a strong competitive position in relation to the many competitors in this segment and, with respect to many products and platforms, is considered among the market leaders.

Truck

Significant Customers — Approximately 54% of this segment’s sales in 2009 were made to four large manufacturers of heavy-, medium-, and light-duty trucks and off-highway vehicles.

Competition — Principal methods of competition in this segment are product performance, service and price. Eaton has a strong competitive position in relation to the many competitors in this segment and, with respect to many products, is considered among the market leaders.

Automotive

Seasonal Fluctuations — Sales of this segment historically are lower in the third quarter of the year as a result of the normal seasonal pattern of automotive industry production.

Significant Customers — Approximately 29% of this segment’s sales in 2009 were made to two large manufacturers of vehicles.

Competition — Principal methods of competition in this segment are product performance, service and price. Eaton has a strong competitive position in relation to the many competitors in this segment and, with respect to many products, is considered among the market leaders.

Information Concerning Eaton’s Business in General

Raw Materials - Eaton’s major requirements for raw materials include iron, steel, copper, nickel, aluminum, brass, silver, molybdenum, titanium, vanadium, rubber, plastic and insulating materials. Materials are purchased in various forms, such as extrusions, castings, powder metal, metal sheets and strips, forging billets, bar stock and plastic pellets. Raw materials, as well as parts and other components, are purchased from many suppliers and, under normal circumstances, the Company had no difficulty obtaining them. In 2009, prices decreased for some basic metals purchased by Eaton through the second quarter, with some prices rising during the second half of 2009 due to optimism that the global economic slow down was over and recovery was beginning. The Company maintained appropriate levels of inventory to guard against basic metals shortages, and did not experience any general availability constraints in 2009.

Patents and Trademarks - Eaton views its name and mark as significant to its business as a whole. Eaton’s products are marketed with a portfolio of patents, trademarks, licenses or other forms of intellectual property that expire at various dates in the future. Eaton develops and acquires new intellectual property on an ongoing basis and considers all of its intellectual property to be valuable. Based on the broad scope of Eaton’s product lines, management believes that the loss or expiration of any single intellectual property right would not have a material effect on the results of operations or financial position of Eaton or its business segments. Eaton’s policy is to file applications and obtain patents for its new products including product modifications and improvements.

Order Backlog - Since a significant portion of open orders placed with Eaton by original equipment manufactures of trucks, off-highway vehicles and passenger cars are historically subject to month to month releases by customers during each model year, these orders are not considered firm. In measuring backlog of orders, the Company includes only the amount of those orders to which customers are firmly committed as of the dates listed. Using this criterion, total backlog at December 31, 2009 and 2008 was approximately $2.7 billion and $3.2 billion, respectively. Backlog should not be relied upon as being indicative of results of operations for future periods.

Research and Development - Research and development expenses (in millions) for new products and improvement of existing products in 2009, 2008 and 2007 were $395, $417 and $335, respectively. Over the past five years, the Company has invested approximately $1.7 billion in research and development.

Protection of the Environment - Operations of the Company involve the use and disposal of certain substances regulated under environmental protection laws. Eaton continues to modify certain processes on an ongoing, regular basis in order to reduce the impact on the environment, including the reduction or elimination of certain chemicals used in, and wastes generated from, operations. Compliance with Federal, State and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, are not expected to have a material adverse effect upon earnings or the competitive position of the Company. Eaton’s estimated capital expenditures for environmental control facilities are not expected to be material for 2010 and 2011. Information regarding the Company’s liabilities related to environmental matters is presented in “Protection of the Environment & Sustainability” on page 38.

Page 3

Foreign Operations - Financial information related to Eaton’s foreign operations is presented in “Geographic Region Information” on page 50. Information regarding risks that may affect Eaton’s foreign operations is presented in Item 1A of this Form 10-K Report.

Item 1A. Risk Factors.

Among the risks that could materially adversely affect Eaton’s businesses, financial condition or results of operations are the following:

Uncertainty regarding the rate of recovery in the global end markets that Eaton serves.

As a result of the global economic downturn, Eaton’s end markets significantly declined during the first half of 2009. While most of Eaton’s markets have begun to recover, certain markets that are characterized as late cycle markets are still declining. While Eaton remains optimistic about a global economic recovery, there is still substantial uncertainty about the rate of that recovery.

Eaton’s segment revenues, operating results and profitability have varied in the past and may vary from quarter to quarter in the future. Profitability can be negatively impacted by volatility in the end markets that Eaton serves. The Company has undertaken measures to reduce the impact of this volatility through diversification of markets it serves and expansion of geographic regions in which it operates. Future downturns in any of the markets that Eaton serves could adversely affect the Company’s revenues, operating results and profitability.

Eaton’s operating results depend in part on continued successful research, development and marketing of new and/or improved products and services, and there can be no assurance that Eaton will continue to successfully introduce new products and services.

The success of new and improved products and services depends on their initial and continued acceptance by Eaton’s customers. The Company’s businesses are affected, to varying degrees, by technological change and corresponding shifts in customer demand, which could result in unpredictable product transitions or shortened life cycles. Eaton may experience difficulties or delays in the research, development, production or marketing of new products and services which may prevent Eaton from recouping or realizing a return on the investments required to bring new products and services to market. The end result could be a negative impact on the Company’s operating results.

Eaton’s operations depend on production facilities throughout the world, many of which are located outside the United States and are subject to greater risks of disrupted production.

Eaton manages businesses with manufacturing facilities worldwide. In recent years, the Company’s operations outside the United States have increased significantly in relative size in comparison to its total operations. The Company’s manufacturing facilities and operations could be disrupted by a natural disaster, or labor strike, war, political unrest, terrorist activity or public health concerns. Some of Eaton’s non-United States manufacturing facilities also may be more susceptible to economic and political upheaval than Eaton’s United States facilities. Any such disruption could cause delays in shipments of products and the loss of sales and customers, and insurance proceeds may not adequately compensate the Company for the losses.

Eaton’s substantial foreign sales subject it to economic risk as Eaton’s results of operations may be adversely affected by changes in local government regulations and policies and foreign currency fluctuations.

As noted above in Item 1 “Foreign Operations,” a significant portion of Eaton’s sales are to customers outside the United States, and the Company expects sales in foreign markets to continue to represent a significant portion of its total sales. Foreign sales and operations are subject to changes in local government regulations and policies, including those related to tariffs and trade barriers, investments, property ownership rights, taxation, exchange controls and repatriation of earnings. Changes in the relative values of currencies occur from time to time and could affect Eaton’s operating results. While the Company monitors exchange rate exposures and attempts to reduce these exposures through hedging activities, these risks could adversely affect the Company’s operating results.

Page 4

Eaton uses a variety of raw materials and components in its businesses, and significant shortages, price increases or suppliers insolvencies could increase operating costs and adversely impact the competitive positions of Eaton’s products.

Eaton’s major requirements for raw materials are described above in Item 1 “Raw Materials”. Significant shortages could affect the prices Eaton’s affected businesses are charged and the competitive position of their products and services, all of which could adversely affect Eaton’s results of operations.

Further, Eaton’s suppliers of component parts may increase their prices in response to increases in costs of raw materials that they use to manufacture component parts. As a result, the Company may not be able to increase its prices commensurately with its increased costs. Consequently, the Company’s results of operations could be materially and adversely affected.

Finally, while Eaton carefully monitors the viability of each of its suppliers, the global economic downturn has, and may continue to have, an adverse impact on Eaton’s suppliers’ liquidity and solvency. Should one or more of Eaton’s material suppliers become insolvent, Eaton could be required to pay increased prices for affected raw materials or components, or experience difficulty in replacing the insolvent supplier, either of which could adversely affect Eaton’s results of operations.

Eaton engages in acquisitions and joint ventures, and may encounter unexpected difficulties identifying, pricing or integrating those businesses.

Eaton seeks to grow, in part, through strategic acquisitions and joint ventures, which are intended to complement or expand the Company’s businesses, and expects to continue to do so in the future. The success of this strategy will depend on Eaton’s ability to identify, price, finance and complete these transactions or arrangements. Success will also depend on the Company’s ability to integrate the businesses acquired in these transactions and to develop satisfactory working arrangements with the Company’s strategic partners in the joint ventures. Eaton may encounter unexpected difficulties in completing and integrating acquisitions with Eaton’s existing operations, and in managing strategic investments. Furthermore, the Company may not realize the degree, or timing, of benefits Eaton anticipated when it first entered into a transaction. Any of the foregoing could adversely affect the Company’s business and results of operations.

Eaton may be unable to adequately protect its intellectual property rights, which could affect the Company’s ability to compete.

Protecting Eaton’s intellectual property rights is critical to its ability to compete and succeed. The Company owns a large number of United States and foreign patents and patent applications, as well as trademark and copyright registrations that are necessary, and contribute significantly, to the preservation of Eaton’s competitive position in various markets. Although management believes that the loss or expiration of any single intellectual property right would not have a material effect on the results of operations or financial position of Eaton or its business segments, there can be no assurance that any one, or more, of these patents and other intellectual property will not be challenged, invalidated or circumvented by third parties. Eaton enters into confidentiality and invention assignment agreements with the Company’s employees, and into non-disclosure agreements with Eaton’s suppliers and appropriate customers so as to limit access to and disclosure of the Company’s proprietary information. These measures may not suffice to deter misappropriation or independent third party development of similar technologies. Moreover, the protection provided to Eaton’s intellectual property by the laws and courts of foreign nations may not be as advantageous to Eaton as the remedies available under United States law.

Eaton is subject to litigation and environmental regulations that could adversely impact Eaton’s businesses.

At any given time, Eaton may be subject to litigation, the disposition of which may have a material adverse effect on the Company’s businesses, financial condition or results of operations. Information regarding the Company’s current legal proceedings is presented in “Protection of the Environment & Sustainability”, “Contingencies” and “Meritor Litigation” on pages 38 and 39.

Eaton participates in markets that are competitive and Eaton’s results could be adversely impacted by competitors’ actions.

Eaton’s businesses operate in competitive markets. The Company competes against other global manufacturers and service providers on the basis of product performance, quality and price, in addition to other factors. While Eaton’s product development and quality initiatives have been competitive strengths in the past, actions by Eaton’s competitors could lead to downward pressure on prices and/or a decline in the Company’s market share, either of which could adversely affect Eaton’s results.

Item 1B. Unresolved Staff Comments.

None.

Page 5

Item 2. Properties.

Eaton’s world headquarters is located in Cleveland, Ohio. The Company maintains manufacturing facilities at 210 locations in 33 countries. The Company is a lessee under a number of operating leases for certain real properties and equipment, none of which is material to its operations. Management believes that the existing manufacturing facilities are adequate for operations, and these facilities are maintained in good condition.

Item 3. Legal Proceedings.

Information regarding the Company’s current legal proceedings is presented in “Protection of the Environment & Sustainability”, “Contingencies” and “Meritor Litigation” on pages 38 and 39.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Executive Officers of the Registrant

Information regarding executive officers of the Company is presented in Item 10 of this Form 10-K Report.

Part II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company’s common shares are listed for trading on the New York and Chicago stock exchanges. Information regarding cash dividends paid, and the high and low market price per common share for each quarter in 2009 and 2008, is presented in “Quarterly Data” on page 73. At December 31, 2009, there were 8,452 holders of record of the Company’s common shares. Additionally, 17,960 current and former employees were shareholders through participation in the Eaton Savings Plan (ESP), Eaton Personal Investment Plan (EPIP), and the Eaton Electrical de Puerto Rico Inc. Retirement Savings Plan.

Information regarding equity compensation plans required by Regulation S-K Item 201(d) is provided in Item 12 of this Form 10-K Report.

Item 6. Selected Financial Data.

Information regarding selected financial data is presented in the “Ten-Year Consolidated Financial Summary” on page 74.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

“Management’s Discussion & Analysis of Financial Condition & Results of Operations” is presented on pages 53 through 72.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Information regarding market risk is presented in “Market Risk Disclosure” on page 66.

Item 8. Financial Statements and Supplementary Data.

The report of the independent registered public accounting firm, consolidated financial statements, and notes to consolidated financial statements are presented on pages 14 through 52.

Information regarding selected quarterly financial information for 2009 and 2008 is presented in “Quarterly Data” on page 73.

Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures — Pursuant to SEC Rule 13a-15, an evaluation was performed under the supervision and with the participation of Eaton’s management, including Alexander M. Cutler — Chairman and Chief Executive Officer; President; and Richard H. Fearon — Vice Chairman and Chief Financial and Planning Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, Eaton’s management concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2009.

Page 6

Disclosure controls and procedures are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

“Management’s Report on Internal Control Over Financial Reporting” as of December 31, 2009 is presented on page 16.

“Report of Independent Registered Public Accounting Firm” relating to internal control over financial reporting as of December 31, 2009 is presented on page 15.

During the fourth quarter of 2009, there was no change in Eaton’s internal control over financial reporting that materially affected, or is reasonably likely to materially affect, Eaton’s internal control over financial reporting.

Item 9B. Other Information.

None.

Part III

Item 10. Directors, Executive Officers and Corporate Governance.

Information required with respect to the directors of the Company is set forth under the caption “Election of Directors” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

A listing of the Company’s executive officers, their ages, positions and offices held over the past five years, as of February 1, 2010, follows:

Name	Age	Position (Date elected to position)
Alexander M. Cutler	58	Chairman and Chief Executive Officer; President      (August 1, 2000 — present) Director (September 22, 1993 — present)
Richard H. Fearon	53	Vice Chairman and Chief Financial and Planning Officer      (April 24, 2002 — present)
Craig Arnold	49	Vice Chairman and Chief Operating Officer — Industrial Sector      (February 1, 2009 — present) Chief Executive Officer — Fluid Power Group      (October 25, 2000 — January 31, 2009)
Thomas S. Gross	55	Vice Chairman and Chief Operating Officer — Electrical Sector      (February 1, 2009 — present) President — Power Quality and Control Business      (April 1, 2008 — January 31, 2009) Vice President and President — Power Quality Solutions Operations      (May 16, 2005 — March 31, 2008) Vice President — Power Quality Solutions Operations      (July 29, 2004 — May 15, 2005) Vice President — Eaton Business System      (July 23, 2003 — July 28, 2004)
James W. McGill	54	Executive Vice President — Chief Human Resources Officer      (January 1, 2010 — present) President — Asia-Pacific Region      (April 1, 2008 — December 31, 2009) Vice President — Asia-Pacific      (April 1, 2006 — March 31, 2008) Vice President — Eaton Business System      (July 29, 2004 — March 31, 2006)

Page 7

Name	Age	Position (Date elected to position)
Mark M. McGuire	52	Executive Vice President and General Counsel      (December 1, 2005 — present) Vice President and Deputy General Counsel,      International Paper Company (2003 — 2005)
Thomas E. Moran	45	Senior Vice President and Secretary      (October 1, 2008 — present) Assistant Secretary and Managing Counsel, The Dow      Chemical Company (2002 — 2008)
Billie K. Rawot	58	Senior Vice President and Controller      (March 1, 1991 — present)
Kurt B. McMaken	40	Senior Vice President — Corporate Development and Treasury      (February 1, 2009 — present) Vice President — Corporate Development and Planning      (January 1, 2008 — January 31, 2009) Director — Corporate Planning      (April 1, 2006 — December 31, 2007) Director — Corporate Development      (October 1, 2004 — March 30, 2006)

There are no family relationships among the officers listed, and there are no arrangements or understandings pursuant to which any of them were elected as officers. All officers hold office for one year and until their successors are elected and qualified, unless otherwise specified by the Board of Directors; provided, however, that any officer is subject to removal with or without cause, at any time, by a vote of a majority of the Board of Directors.

Information required with respect to compliance with Section 16(a) of the Exchange Act is set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

The Company has adopted a Code of Ethics, which applies to the Directors, officers and employees worldwide. This document is available on the Company’s website at http://www.eaton.com.

There were no changes during fourth quarter 2009 to the procedures by which security holders may recommend nominees to the Company’s Board of Directors.

Information related to the Company’s Audit Committee, and members of the Committee that are financial experts, is set forth under the caption “Board Committees — Audit Committee” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

Item 11. Executive Compensation.

Information required with respect to executive compensation is set forth under the caption “Executive Compensation” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information required with respect to securities authorized for issuance under equity compensation plans is set forth under the caption “Equity Compensation Plans” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

Information required with respect to security ownership of certain beneficial owners, is set forth under the caption “Share Ownership Tables” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Information required with respect to certain relationships and related transactions is set forth under the caption “Review of Related Person Transactions” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

Page 8

Information required with respect to director independence is set forth under the caption “Director Independence” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

Item 14. Principal Accounting Fees and Services.

Information required with respect to principal accountant fees and services is set forth under the caption “Audit Committee Report” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

Part IV

Item 15. Exhibits, Financial Statement Schedules.

(a) (1)	The report of the independent registered public accounting firm, consolidated financial statements and notes to consolidated financial statements are included in Item 8 above:
	Report of Independent Registered Public Accounting Firm - Page 14
	Statements of Consolidated Income - Years ended December 31, 2009, 2008 and 2007 - Page 17
	Consolidated Balance Sheets - December 31, 2009 and 2008 - Page 18
	Statements of Consolidated Cash Flows - Years ended December 31, 2009, 2008 and 2007 - Page 19
	Statements of Consolidated Shareholders’ Equity - Years ended December 31, 2009, 2008 and 2007 - Pages 20 through 22
	Notes to Consolidated Financial Statements - Pages 23 through 52

	All other schedules for which provision is made in Regulation S-X of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(3)	Exhibits

3(i)	Amended Articles of Incorporation (amended and restated as of April 24, 2008) - Incorporated by reference to the Form 10-Q Report for the three months ended March 31, 2008
3(ii)	Amended Regulations (amended and restated as of April 23, 2008) - Incorporated by reference to the Form 10-Q Report for the three months ended March 31, 2008
4(a)	Pursuant to Regulation S-K Item 601(b) (4), the Company agrees to furnish to the SEC, upon request, a copy of the instruments defining the rights of holders of its other long-term debt
10	Material contracts

(a)	Senior Executive Incentive Compensation Plan (effective January 1, 2008) - Incorporated by reference to the definitive Proxy Statement dated March 14, 2008
(b)	Executive Incentive Compensation Plan (effective January 1, 2005) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2005
(c)	2005 Non-Employee Director Fee Deferral Plan (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(d)	Deferred Incentive Compensation Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(e)	Excess Benefits Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007

Page 9

(f)	Incentive Compensation Deferral Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(g)	Limited Eaton Service Supplemental Retirement Income Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(h)	Supplemental Benefits Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(i)	Form of Restricted Share Unit Agreement (2 year vesting) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(j)	Form of Restricted Share Unit Agreement (4 year vesting) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(k)	Form of Restricted Share Agreement (2 year vesting) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(l)	Form of Restricted Share Agreement (4 year vesting) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(m)	Form of Restricted Share Agreement (Non-Employee Directors) - Incorporated by reference to the Form 8-K Report filed February 1, 2010
(n)	Form of Stock Option Agreement for Executives (2008) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(o)	Form of Stock Option Agreement for Executives - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2006
(p)	Form of Stock Option Agreement for Non-Employee Directors (2008) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(q)	2002 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 15, 2002
(r)	2004 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 19, 2004
(s)	2008 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 14, 2008
(t)	2009 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 13, 2009
(u)	Plan for the Deferred Payment of Directors’ Fees (originally adopted in 1985 and amended effective September 24, 1996, January 28, 1998, January 23, 2002, February 24, 2004, December 8, 2004 and, in certain respects, January 1, 2005) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(v)	1996 Non-Employee Director Fee Deferral Plan (amended and restated effective January 1, 2005) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2006
(w)	Form of Change of Control Agreement entered into with officers of Eaton Corporation - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2008

Page 10

(x)	Form of Indemnification Agreement entered into with officers of Eaton Corporation - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
(y)	Form of Indemnification Agreement entered into with directors of Eaton Corporation - Incorporated by reference to the Form 8-K Report filed January 26, 2007
(z)	Executive Strategic Incentive Plan (amended and restated January 1, 2008) - Incorporated by reference to the definitive Proxy Statement dated March 14, 2008
(aa)	Executive Strategic Incentive Plan II (effective January 1, 2001) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
(bb)	Supplemental Executive Strategic Incentive Plan (effective as of June 25, 2008) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2008
(cc)	Deferred Incentive Compensation Plan (amended and restated effective November 1, 2007) - Filed in conjunction with this Form 10-K Report*
(dd)	1998 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 13, 1998
(ee)	Incentive Compensation Deferral Plan (amended and restated October 1, 1997) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2000
(ff)	Trust Agreement - Officers and Employees (dated December 6, 1996) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
(gg)	Trust Agreement - Non-employee Directors (dated December 6, 1996) - - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
(hh)	Group Replacement Insurance Plan (GRIP) (effective June 1, 1992) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 1992
(ii)	1991 Stock Option Plan - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
(jj)	Excess Benefits Plan (amended and restated effective January 1, 1989) - - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
(kk)	Supplemental Benefits Plan (amended and restated January 1, 1989) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
(ll)	Eaton Corporation Board of Directors Policy on Incentive Compensation, Stock Options and Other Equity Grants upon the Restatement of Financial Results - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007

12	Ratio of Earnings to Fixed Charges - Filed in conjunction with this Form 10-K Report *
14	Code of Ethics - Incorporated by reference to the definitive Proxy Statement filed on March 14, 2008
21	Subsidiaries of Eaton Corporation - Filed in conjunction with this Form 10-K Report *

Page 11

23	Consent of Independent Registered Public Accounting Firm - Filed in conjunction with this Form 10-K Report *
24	Power of Attorney - Filed in conjunction with this Form 10-K Report *
31.1	Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) - Filed in conjunction with this Form 10-K Report *
31.2	Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) - Filed in conjunction with this Form 10-K Report *
32.1	Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) - Filed in conjunction with this Form 10-K Report *
32.2	Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) - Filed in conjunction with this Form 10-K Report *

101.INS	XBRL Instance Document *
101.SCH	XBRL Taxonomy Extension Schema Document *
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB	XBRL Taxonomy Extension Label Linkbase Document *
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document *

* Submitted electronically herewith.

	Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007, (ii) Consolidated Balance Sheets at December 31, 2009 and 2008, (iii) Statements of Consolidated Cash Flows for the years ended December 31, 2009, 2008 and 2007 (iv) Notes to Consolidated Financial Statements for the year ended December 31, 2009.
	In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
(b)	Exhibits
	Certain exhibits required by this portion of Item 15 are filed as a separate section of this Form 10-K Report.

Page 12

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.

	Eaton Corporation Registrant
Date: February 26, 2010	/s/ Richard H. Fearon
	Richard H. Fearon
	Vice Chairman and Chief Financial and Planning Officer

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.

Date: February 26, 2010

Signature	Title
*
Alexander M. Cutler	Chairman and Chief Executive Officer; President; Principal Executive Officer; Director
*
Billie K. Rawot	Senior Vice President and Controller; Principal Accounting Officer
*
Todd M. Bluedorn	Director
*
Michael J. Critelli	Director
*
Ernie Green	Director
*
Ned C. Lautenbach	Director
*
John R. Miller	Director
*
Victor A. Pelson	Director
*
Christopher M. Connor	Director
*
Charles E. Golden	Director
*
Arthur E. Johnson	Director
*
Deborah L. McCoy	Director
*
Gregory R. Page	Director
Gary L. Tooker	Director

*By /s/ Richard H. Fearon   Richard H. Fearon, Attorney-in-Fact
for the officers and directors signing in the capacities indicated

Page 13

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Eaton Corporation

We have audited the accompanying consolidated balance sheets of Eaton Corporation as of December 31, 2009 and 2008, and the related statements of consolidated income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eaton Corporation at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Eaton Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Cleveland, Ohio
February 26, 2010

Page 14

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Eaton Corporation

We have audited Eaton Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Eaton Corporation’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 included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit 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. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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 control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.

In our opinion, Eaton Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Eaton Corporation as of December 31, 2009 and 2008, and the related statements of consolidated income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009 and our report dated February 26, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Cleveland, Ohio
February 26, 2010

Page 15

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Eaton Corporation is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act rules 13a-15(f)).

Under the supervision and with the participation of Eaton’s management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In conducting this evaluation, we used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on this evaluation under the framework referred to above, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2009.

The independent registered public accounting firm Ernst & Young LLP has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. This report is included herein.

/s/ Alexander M. Cutler	/s/ Richard H. Fearon	/s/ Billie K. Rawot
Chairman and Chief	Vice Chairman and	Senior Vice President and
Executive Officer;	Chief Financial and Planning	Controller
President	Officer

February 26, 2010

Page 16

STATEMENTS OF CONSOLIDATED INCOME

	Year ended December 31
(Millions except for per share data)	2009			2008			2007
Net sales	$	11,873		$	15,376		$	13,033
Cost of products sold		8,782			11,191			9,382
Selling & administrative expense		2,252			2,513			2,139
Research & development expense		395			417			335
Interest expense-net		150			157			147
Other (income) expense-net		(9	)		(42	)		(25	)
Income from continuing operations before income taxes		303			1,140			1,055
Income tax (benefit) expense		(82	)		73			82
Income from continuing operations		385			1,067			973
Income from discontinued operations					3			35
Net income		385			1,070			1,008
Adjustment of net income for noncontrolling interests		(2	)		(12	)		(14	)
Net income attributable to common shareholders	$	383		$	1,058		$	994
Net income per common share – diluted
Continuing operations	$	2.27		$	6.50		$	6.38
Discontinued operations					.02			.24
Total	$	2.27		$	6.52		$	6.62
Average number of common shares outstanding – diluted		167.9			162.3			150.3
Net income per common share – basic
Continuing operations	$	2.31		$	6.58		$	6.51
Discontinued operations					.02			.24
Total	$	2.31		$	6.60		$	6.75
Average number of common shares outstanding – basic		166.4			160.2			147.3
Cash dividends paid per common share	$	2.00		$	2.00		$	1.72
Amounts attributable to common shareholders
Income from continuing operations	$	383		$	1,055		$	959
Income from discontinued operations					3			35
Total	$	383		$	1,058		$	994

The notes on pages 23 to 52 are an integral part of the consolidated financial statements.

Page 17

CONSOLIDATED BALANCE SHEETS

	December 31
(Millions)	2009			2008
Current assets
Cash	$	340		$	188
Short-term investments		433			342
Accounts receivable		1,899			2,295
Inventories		1,326			1,554
Deferred income taxes		377			239
Other current assets		149			177
Total current assets		4,524			4,795
Property, plant & equipment
Land & buildings		1,459			1,425
Machinery & equipment		4,241			4,142
Gross property, plant & equipment		5,700			5,567
Accumulated depreciation		(3,255	)		(2,928	)
Net property, plant & equipment		2,445			2,639
Goodwill		5,435			5,232
Other intangible assets		2,441			2,518
Deferred income taxes		973			971
Other assets		464			500
Total assets	$	16,282		$	16,655
Current liabilities
Short-term debt	$	113		$	812
Current portion of long-term debt		5			269
Accounts payable		1,057			1,121
Accrued compensation		256			297
Other current liabilities		1,258			1,246
Total current liabilities		2,689			3,745
Long-term debt		3,349			3,190
Pension liabilities		1,586			1,650
Other postretirement benefits liabilities		754			703
Deferred income taxes		550			543
Other liabilities		536			459
Equity
Common shares (166.2 million outstanding in 2009 and 165.0 million in 2008)		83			82
Capital in excess of par value		3,957			3,879
Retained earnings		3,966			3,917
Accumulated other comprehensive loss		(1,208	)		(1,538	)
Deferred compensation plans		(21	)		(23	)
Eaton shareholders’ equity		6,777			6,317
Noncontrolling interests		41			48
Total equity		6,818			6,365
Total liabilities & equity	$	16,282		$	16,655

The notes on pages 23 to 52 are an integral part of the consolidated financial statements.

Page 18

STATEMENTS OF CONSOLIDATED CASH FLOWS

	Year ended December 31
(Millions)	2009			2008			2007
Net cash provided by (used in) operating activities
Net income	$	385		$	1,070		$	1,008
Adjustments to reconcile to net cash provided by operating activities
Depreciation & amortization		573			571			439
Deferred income taxes		(191	)		(225	)		(51	)
Pension liabilities, net of contributions		(1	)		5			26
Gains on sales of businesses		(9	)		(19	)		(46	)
Other long-term liabilities		(16	)		(40	)		(25	)
Other non-cash items in income		(15	)		44			60
Changes in working capital, excluding acquisitions & sales of businesses
Accounts receivable		440			128			(72	)
Inventories		292			118			(79	)
Accounts payable		(73	)		(208	)		27
Accrued income & other taxes		30			(31	)		(41	)
Other working capital accounts		56			(206	)		21
Cash received from termination of interest rate swaps		15			85			19
Other-net		(78	)		149			(128	)
Net cash provided by operating activities		1,408			1,441			1,158
Net cash provided by (used in) investing activities
Expenditures for property, plant & equipment		(195	)		(448	)		(354	)
Cash paid for acquisitions of businesses		(10	)		(2,807	)		(1,433	)
Proceeds from sales of businesses		24			25			119
(Purchases) sales of short-term investments-net		(64	)		100			247
Other-net		20			(60	)		(35	)
Net cash used in investing activities		(225	)		(3,190	)		(1,456	)
Net cash provided by (used in) financing activities
Borrowings with original maturities of more than three months – proceeds		558			1,656			1,652
Borrowings with original maturities of more than three months – payments		(887	)		(984	)		(979	)
Borrowings with original maturities of less than three months-net, primarily commercial paper		(424	)		(5	)		62
Cash dividends paid		(334	)		(320	)		(251	)
Proceeds from sale of common shares					1,522
Proceeds from exercise of employee stock options		27			47			141
Income tax benefit from exercise of employee stock options		4			13			42
Purchase of common shares					(100	)		(340	)
Other-net		(5	)		(14	)		(7	)
Net cash (used in) provided by financing activities		(1,061	)		1,815			320
Effect of foreign exchange rate changes on cash		30			(20	)		6
Total increase in cash		152			46			28
Cash at the beginning of the year		188			142			114
Cash at the end of the year	$	340		$	188		$	142

The notes on pages 23 to 52 are an integral part of the consolidated financial statements.

Page 19

STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY

													Accumulated
							Capital in						other			Deferred			Eaton
	Common stock						excess of			Retained			comprehensive			compensation			shareholders’			Noncontrolling			Total
(Millions)	Shares			Dollars			par value			earnings			loss			plans			equity			interests			equity
Balance at January 1, 2007		146.3		$	73		$	2,114		$	2,796		$	(849	)	$	(28	)	$	4,106		$	50		$	4,156
Net income											994									994			14			1,008
Foreign currency translation and related hedging hedging instruments (including income tax expense of $14)														212						212						212
Deferred loss on cash flow hedges (net of income income tax benefit of $3)														(5	)					(5	)					(5	)
Pensions (net of income tax expense of $101)														214						214						214
Other postretirement benefits (net of income tax expense of $8)														5						5						5
Other comprehensive income																				426						426
Total comprehensive income																				1,420			14			1,434
Cash dividends paid											(251	)								(251	)		(7	)		(258	)
Issuance of shares under employee benefit plans (including income tax benefit of $51)		3.7			2			237			(5	)					8			242						242
Purchase of shares by trust																	(5	)		(5	)					(5	)
Purchase of shares		(4.0	)		(2	)		(61	)		(277	)								(340	)					(340	)
Other																							2			2
Balance at December 31, 2007		146.0			73			2,290			3,257			(423	)		(25	)		5,172			59			5,231

Page 20

STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY

													Accumulated
							Capital in						other			Deferred			Eaton
	Common stock						excess of			Retained			comprehensive			compensation			shareholders’			Noncontrolling			Total
(Millions)	Shares			Dollars			par value			earnings			loss			plans			equity			interests			equity
Balance at December 31, 2007		146.0			73			2,290			3,257			(423	)		(25	)		5,172			59			5,231
Net income											1,058									1,058			12			1,070
Foreign currency translation and related hedging instruments (including income tax benefit of $68)														(722	)					(722	)					(722	)
Deferred loss on cash flow hedges (net of income tax benefit of $12)														(23	)					(23	)					(23	)
Pensions (net of income tax benefit of $227)														(419	)					(419	)					(419	)
Other postretirement benefits (net of income tax expense of $31)														49						49						49
Other comprehensive loss																				(1,115	)					(1,115	)
Total comprehensive loss																				(57	)		12			(45	)
Effects of changing retirement benefits plans measurement date (net of income tax benefit of $8)											(11	)								(11	)					(11	)
Cash dividends paid											(320	)								(320	)		(13	)		(333	)
Issuance of shares under employee benefit plans (including income tax benefit of $16)		1.7			1			109			(1	)					5			114						114
Sale of shares		18.7			9			1,513												1,522						1,522
Purchase of shares by trust																	(3	)		(3	)					(3	)
Purchase of shares		(1.4	)		(1	)		(33	)		(66	)								(100	)					(100	)
Decrease in noncontrolling interests due to sale of business																							(10	)		(10	)
Balance at December 31, 2008		165.0			82			3,879			3,917			(1,538	)		(23	)		6,317			48			6,365

Page 21

STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY

										Accumulated
					Capital in					other			Deferred			Eaton
	Common stock				excess of		Retained			comprehensive			compensation			shareholders’			Noncontrolling			Total
(Millions)	Shares		Dollars		par value		earnings			loss			plans			equity			interests			equity
Balance at December 31, 2008		165.0		82		3,879		3,917			(1,538	)		(23	)		6,317			48			6,365
Net income								383									383			2			385
Foreign currency translation and related hedging instruments (including income taxes of $45)											349						349						349
Deferred gain on cash flow hedges (including income taxes of $19)											36						36						36
Pensions (net of income taxes of $42)											1						1						1
Other postretirement benefits (net of income tax benefit of $14)											(56	)					(56	)					(56	)
Other comprehensive income																	330						330
Total comprehensive income																	713			2			715
Cash dividends paid								(334	)								(334	)		(5	)		(339	)
Issuance of shares under employee benefit plans (including income tax benefit of $3)		1.2		1		78								2			81						81
Decrease in noncontrolling interests due to sale of business																				(4	)		(4	)
Balance at December 31, 2009		166.2	$	83	$	3,957	$	3,966		$	(1,208	)	$	(21	)	$	6,777		$	41		$	6,818

The notes on pages 23 to 52 are an integral part of the consolidated financial statements.

Page 22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Millions of dollars and shares unless indicated otherwise (per share data assume dilution)

DESCRIPTION OF COMPANY

Eaton Corporation (Eaton or Company) is a diversified power management company with 2009 sales of $11.9 billion. Eaton is a global technology leader in electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety. Eaton has approximately 70,000 employees in over 50 countries, and sells products to customers in more than 150 countries.

ADOPTION OF NEW ACCOUNTING STANDARDS

Financial Accounting Standards Board Accounting Standards Codification

In 2009, the Financial Accounting Standards Board (FASB) issued the Accounting Standards Codification, which establishes a sole source of U.S. authoritative generally accepted accounting principles (GAAP). The Codification is meant to simplify user access to all authoritative accounting standards by reorganizing U.S. GAAP pronouncements into approximately ninety accounting topics within a consistent structure; its purpose is not to create new accounting and reporting standards. Pursuant to the provisions of the Codification, Eaton has updated references to U.S. GAAP in these consolidated financial statements. The adoption of the Codification did not have an effect on Eaton’s financial position, results of operations or cash flows.

Business Combinations

In 2009, Eaton adopted the revised Business Combinations Standard, which addresses accounting for the acquisitions of businesses. Under the revised standard, acquisition costs will be expensed as incurred; restructuring costs associated with the acquisition will generally be expensed subsequent to the acquisition date; in-process research and development will be recognized at fair value as an indefinite-lived asset at the acquisition date; changes in deferred income tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense, including changes related to acquisitions of businesses completed prior to 2009; and noncontrolling interests will be valued at fair value at the acquisition date. The adoption of this standard did not have a material effect on Eaton’s financial position, results of operations or cash flows in 2009 because no businesses were acquired in 2009 that were material. The standard could have a material effect in 2010, and future years, based on the specific conditions related to future acquisitions.

Subsequent Events

In 2009, Eaton adopted the new Subsequent Events Standard, as amended, which established general guidance for accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued. Eaton has evaluated subsequent events through the date the financial statements were issued, noting no events that require adjustment of, or disclosure in, the consolidated financial statements for the period ended December 31, 2009.

Noncontrolling Interests in Consolidated Financial Statements

In 2009, Eaton adopted the revised standard related to noncontrolling interests in consolidated financial statements. This standard clarifies accounting and disclosures related to noncontrolling interests, sometimes referred to as minority interest, which is the portion of equity in a subsidiary not owned, directly or indirectly, by Eaton. As a result of the adoption of this standard, prior period amounts were reclassified to conform to the current period presentation. The adoption of this standard did not have a material effect on Eaton’s financial position, results of operations or cash flows.

Fair Value Measurements & Disclosures

In 2009, Eaton adopted the additional required guidance of the Fair Value Measurements and Disclosures Standard. This standard addresses accounting and disclosures related to non-financial assets and liabilities, primarily goodwill, intangible assets, non-financial assets and liabilities related to acquired businesses, and impairment and restructuring activities. In 2009, Eaton also adopted the revised guidance for measuring liabilities at fair value. This guidance addresses circumstances in which a quoted price in an active market for the identical liability is not available. The adoption of these standards did not have a material effect on Eaton’s financial position, results of operations or cash flows.

Page 23

ACCOUNTING POLICIES

Consolidation & Basis of Presentation

The consolidated financial statements include accounts of Eaton and all subsidiaries and other controlled entities. Intercompany transactions and balances have been eliminated. The equity method of accounting is used for investments in associate companies where the Company has a 20% to 50% ownership interest. These associate companies are not material either individually, or in the aggregate, to Eaton’s financial position, results of operations or cash flows.

Eaton does not have off-balance sheet arrangements or financings with unconsolidated entities or other persons. In the ordinary course of business, the Company leases certain real properties and equipment, as described in “Lease Commitments” in the Notes below.

Revenue Recognition

Sales of products are recognized when a sales agreement is in place, products have been shipped to unaffiliated customers and title has transferred in accordance with shipping terms (FOB shipping point, FOB destination or equivalent International Commercial (INCO) Terms), the selling price is fixed and determinable and collectability is reasonably assured, all significant related acts of performance have been completed, and no other significant uncertainties exist. Shipping and handling costs billed to customers are included in Net sales and the related costs in Cost of products sold. Although the majority of the sales agreements contain standard terms and conditions, there are also agreements that contain multiple elements or non-standard terms and conditions. As a result, judgement is sometimes required to determine the appropriate accounting, including whether the deliverables specified in these agreements should be treated as separate units of accounting for sales recognition purposes, and, if so, how the sales price should be allocated among the elements and when to recognize sales for each element. For delivered elements, sales are recognized only when the delivered elements have standalone value, fair values of undelivered elements are known, there are no uncertainties regarding customer acceptance, and there are no customer-negotiated refund or return rights affecting the sales recognized for delivered elements. Sales for service contracts are generally recognized as the services are provided.

Foreign Currency Translation

The functional currency for all subsidiaries outside the United States is primarily the local currency. Financial statements for these subsidiaries are translated into United States dollars at year-end exchange rates as to assets and liabilities and weighted-average exchange rates as to revenues and expenses. The resulting translation adjustments are recognized in Accumulated other comprehensive income (loss) in Equity. Gains and losses related to foreign currency transactions are recognized in Other (income) expense-net in the Statements of Consolidated Income.

Inventories

Inventories are carried at lower of cost or market. Inventories in the United States are generally accounted for using the last-in, first-out (LIFO) method. Remaining United States and all other inventories are accounted for using the first-in, first-out (FIFO) method. Cost components include raw materials, purchased components, direct labor, indirect labor, utilities, depreciation, inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, and costs of the distribution network.

Depreciation & Amortization

Depreciation and amortization for property, plant and equipment, and intangible assets subject to amortization, are generally computed by the straight-line method and are included in Cost of products sold, Selling and administrative expense, and Research and development expense, as appropriate. Cost of buildings is depreciated over principally 40 years and machinery and equipment over principally 3 to 10 years. At December 31, 2009, the weighted-average amortization period for intangible assets subject to amortization was 18 years for patents and technology and 17 years for customer relationships, primarily as a result of the long life of aircraft platforms. Software is amortized over a period up to 7 years.

Long-lived assets, except goodwill and indefinite life intangible assets as described in the Notes below, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Events or

Page 24

circumstances that would result in an impairment review include operations reporting losses, a significant adverse change in the use of an asset, the planned disposal or sale of the asset, a significant adverse change in the business climate or legal factors related to the asset, or a significant decrease in the estimated fair value of an asset. Upon indications of impairment, assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The asset group would be considered impaired when the estimated future net undiscounted cash flows generated by the asset group are less than its carrying value. In instances where the carrying amount of the asset group exceeded the undiscounted cash flows, the fair value of the asset group would be determined and an impairment loss would be recognized based on the amount by which the carrying value of the asset group exceeds its fair value. Determining asset groups and underlying cash flows requires the use of significant judgments and estimates.

Goodwill & Indefinite Life Intangible Assets

Goodwill and indefinite life intangible assets recognized in connection with business acquisitions are not amortized to expense. Indefinite life intangible assets primarily consist of trademarks.

Goodwill and indefinite life intangible assets are tested annually for impairment. Further, goodwill and indefinite life intangible assets are reviewed for impairment whenever events or changes in circumstances indicate there may be a possible permanent loss of value. Eaton completed annual impairment tests for goodwill and indefinite life intangible assets as of July 1 of each year presented using discounted cash flow and other valuation techniques. These tests confirmed that the fair value of Eaton’s reporting units and indefinite life intangible assets exceed their respective carrying values and that no impairment loss was required to be recognized in 2009 or for any prior periods.

Goodwill is tested for impairment at the reporting unit level, which is equivalent to Eaton’s operating segments, and is based on the net assets for each segment, including goodwill and intangible assets. Goodwill is assigned to each operating segment as this represents the lowest level that constitutes a business and for which discrete financial information is available and segment management regularly reviews the operating results. A discounted cash flow model is used to estimate the fair value of each operating segment, which considers forecasted cash flows discounted at an estimated weighted-average cost of capital. The Company selected the discounted cash flow methodology as it believes that it is comparable to what would be used by other market participants. The forecasted cash flows are based on the Company’s long-term operating plan, and a terminal value is used to estimate the operating segment cash flows beyond the period covered by the operating plan. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market participants of a business enterprise. These analyses require the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the timing of expected future cash flows. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective operating segment. Sensitivity analyses were performed around these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values.

Derivative Financial Instruments

In the normal course of business, Eaton is exposed to certain risks related to fluctuations in interest rates, foreign currency exchange rates and commodity prices. The Company uses various derivative and non-derivative financial instruments, primarily interest rate swaps, foreign currency forward exchange contracts, foreign currency swaps and, to a lesser extent, commodity contracts, to manage risks from these market fluctuations. The derivative financial instruments used by Eaton are straightforward, non-leveraged instruments. The counterparties to these financial instruments are financial institutions with strong credit ratings. Eaton maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such derivative financial instruments are not purchased and sold for trading purposes.

Derivative financial instruments are measured at fair value and recognized as assets or liabilities in the Consolidated Balance Sheet. Accounting for the gain or loss resulting from the change in the fair value of the derivative financial instrument depends on whether it has been designated, and is effective, as part of a hedging relationship and, if so, on the nature of the hedging activity. Eaton formally documents all relationships between derivative financial instruments accounted for as hedges and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge transaction. This process includes linking all derivative financial instruments to a recognized asset or liability, specific firm commitment, forecasted transaction, or net investment in a foreign operation. These financial instruments can be designated as:

Page 25

• Hedges of the change in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire such an asset or liability (a fair value hedge). For these hedges, the gain or loss from the derivative financial instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in income during the period of change in fair value.

• Hedges of the variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of such an asset or liability (a cash flow hedge). For these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Eaton shareholders’ equity and reclassified to income in the same period when the gain or loss on the hedged item is included in income.

• Hedges of the foreign currency exposure related to a net investment in a foreign operation (a net investment hedge). For these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Eaton shareholders’ equity and reclassified to income in the same period when the gain or loss related to the net investment in the foreign operation is included in income.

The gain or loss from a derivative financial instrument designated as a hedge that is effective as a hedge is included in the same line of the Statement of Consolidated Income as the offsetting loss or gain on the hedged item.

The change in fair value of a derivative financial instrument that is not effective as a hedge is immediately recognized in income.

For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in income. The majority of derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency that arise in the normal course of business.

Warranty Expenses

Estimated product warranty expenses are accrued in Cost of products sold at the time the related sale is recognized. Estimates of warranty expenses are based primarily on historical warranty claim experience and specific customer contracts. Warranty expenses include accruals for basic warranties for products sold, as well as accruals for product recalls and other related events when they are known and estimable.

Asset Retirement Obligations

A conditional asset retirement obligation is recognized at fair value when incurred, if the fair value of the liability can be reasonably estimated. Uncertainty about the timing or method of settlement of a conditional asset retirement obligation would be considered in the measurement of the liability when sufficient information exists. Eaton believes that for substantially all of its asset retirement obligations, there is an indeterminate settlement date because the range of time over which the Company may settle the obligation is unknown or cannot be estimated. A liability for these obligations will be recognized in the period when sufficient information regarding timing and method of settlement becomes available to make a reasonable estimate of the liability’s fair value.

Estimates

Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from these estimates.

Financial Presentation Changes

Certain amounts for prior years have been reclassified to conform to the current year presentation.

Page 26

NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

Consolidation of Variable Interest Entities

In 2009, the FASB issued a revised standard for accounting and disclosure related to the consolidation of variable interest entities. The standard will require enterprises involved with these types of entities to provide more information about these entities in their financial statements. The standard is effective for Eaton in 2010. The Company expects the adoption of this standard will not have a material effect on Eaton’s financial position, results of operations or cash flows.

Revenue Recognition for Multiple-Deliverable Arrangements

In 2009, the FASB issued a revised standard for accounting and disclosures of revenues related to arrangements with customers to provide multiple products and services at different points in time or over different time periods. This standard is effective for Eaton in 2011. The Company expects the adoption of this standard will not have a material effect on Eaton’s financial position, results of operations or cash flows.

ACQUISITIONS OF BUSINESSES

Eaton acquired certain businesses and entered into joint ventures in separate transactions for combined net cash purchase prices of $10 in 2009, $2,807 in 2008, and $1,433 in 2007. The Statements of Consolidated Income include the results of these businesses from the dates of acquisition or formation. A summary of these transactions follows:

	Date of		Business
Acquired business	acquisition		segment	Annual sales
Micro Innovation Holding AG	September 1,		Electrical	$33 for 2008
A Switzerland-based manufacturer of human		2009	Rest of
machine interfaces, programmable logic			World
controllers and input/output devices. Eaton acquired the remaining shares to increase its ownership from 50% to 100%.
SEG Middle East Power Solutions & Switchboard	July 2,		Electrical	$10 for 2008
Manufacture LLC		2009	Rest of
A 49%-owned joint venture to manufacture low			World
voltage switchboards and control panel assemblies for use in the Middle East power generation and industrial markets
Integ Holding Limited	October 2,		Hydraulics	$52 for 2007
The parent company of Integrated Hydraulics		2008
Ltd., a U.K.-based manufacturer of screw-in cartridge valves, custom-engineered hydraulic valves and manifold systems
Nittan Global Tech Co. Ltd.	Operational		Automotive	Joint
A 49%-owned joint venture to manage the global	October 1,			Venture
design, manufacture and supply of engine valves		2008
and valve actuation products to Japanese and Korean automobile and engine manufacturers. In addition, during the second half of 2008, several related manufacturing joint ventures were established.
Engine Valves Business of Kirloskar Oil Engines Ltd.	July 31, 2008		Automotive	$5 for 2007
An India-based designer, manufacturer and distributor of intake and exhaust valves for diesel and gasoline engines

Page 27

PK Electronics	July 31, 2008		Electrical	$9 for 2007
A Belgium-based distributor and service provider			Rest of
of single phase and three-phase uninterruptible			World
power supply (UPS) systems
The Moeller Group	April 4, 2008		Electrical	€1.02 billion for
A Germany-based supplier of electrical			Rest of		2007
components for commercial and residential			World
building applications and industrial controls for industrial equipment applications
Balmen Electronic, S.L.	March 31,		Electrical	$6 for 2007
A Spain-based distributor and service provider		2008	Rest of
of uninterruptible power supply (UPS) systems			World
Phoenixtec Power Company Ltd.	February 26,		Electrical	$515 for 2007
A Taiwan-based manufacturer of single and		2008	Rest of
three-phase uninterruptible power supply (UPS)			World
systems
Arrow Hose & Tubing Inc.	November 8,		Hydraulics	$12 for 2006
A Canada-based manufacturer of thermoplastic		2007
hose and tubing for the industrial, food and beverage, and agricultural markets
MGE small systems UPS business from	October 31,		Electrical	$245 for 2007
Schneider Electric		2007	Rest of
A France-based global provider of power quality			World
solutions including uninterruptible power supply (UPS) systems, power distribution units, static transfer switches and surge suppressors
Babco Electric Group	October 19,		Electrical	$11 for 2007
A Canada-based manufacturer of specialty low-		2007	Americas
and medium-voltage switchgear and electrical housings for use in the Canadian oil and gas industry and other harsh environments
Pulizzi Engineering	June 19, 2007		Electrical	$12 for 2006
A U.S. manufacturer of alternating current (AC)			Americas
power distribution, AC power sequencing, redundant power and remote-reboot power management systems
Technology and related assets of SMC Electrical	May 18, 2007		Electrical	None
Products, Inc.’s industrial medium-voltage adjustable			Americas
frequency drive business
Fuel components division of Saturn Electronics &	May 2, 2007		Automotive	$28 for 2006
Engineering, Inc. A U.S. designer and manufacturer of fuel containment and shutoff valves, emissions control valves and specialty actuators
Aphel Technologies Limited	April 5, 2007		Electrical	$12 for 2006
A U.K.-based global supplier of high density,			Rest of
fault-tolerant power distribution solutions for			World
datacenters, technical offices, laboratories and retail environments

Page 28

Argo-Tech Corporation	March 16,		Aerospace	$206 for 2006
A U.S.-based manufacturer of high-performance		2007
aerospace engine fuel pumps and systems, airframe fuel pumps and systems, and ground fueling systems for commercial and military aerospace markets
Power Protection Business of Power Products Ltd.	February 7,		Electrical	$3 for 2006
A Czech Republic distributor and service provider		2007	Rest of
of Powerware® products and other uninterruptible			World
power supply (UPS) systems

As described above, in 2008 Eaton acquired The Moeller Group electrical business and the Phoenixtec electrical business for combined cash purchase prices of $2,696. In 2008, the assets and liabilities for these businesses were recognized at estimated fair values as determined by Eaton’s management based on available information and on assumptions as to future operations. As completed in 2009, the final allocations of the purchase prices, which did not differ materially from the preliminary estimates, are summarized below:

Current assets	$	759
Property, plant & equipment		432
Goodwill		1,710
Other intangible assets		1,071
Other assets		104
Total assets acquired		4,076
Total liabilities assumed		1,380
Net assets acquired	$	2,696

Other intangible assets of $1,071 included $638 of customer relationships having a useful life of 15 years, $251 related to trademarks having a useful life of 15 to 20 years, and $182 of technology having a useful life of 3 to 13 years. Goodwill of $1,319 for Moeller and $391 for Phoenixtec are non-deductible for income tax purposes.

As described above, in 2007 Eaton acquired the Argo-Tech aerospace business and the MGE small systems UPS electrical business for combined cash purchase prices of $1,346. In 2007, the assets and liabilities for these businesses were recognized at estimated fair values as determined by Eaton’s management based on available information and on assumptions as to future operations. As completed in 2008, the final allocations of the purchase prices, which did not differ materially from preliminary estimates, are summarized below:

Current assets	$	223
Property, plant & equipment		23
Goodwill		899
Other intangible assets		582
Total assets acquired		1,727
Total liabilities assumed		381
Net assets acquired	$	1,346

Other intangible assets of $582 included $42 related to trademarks not subject to amortization, $436 of customer relationships having a useful life of 5 to 25 years, and $104 of technology having a useful life of 5 to 25 years. Goodwill of $420 for Argo-Tech and $479 for the MGE small systems UPS electrical business are non-deductible for income tax purposes.

Restructuring Liabilities

For acquisitions completed prior to 2009, Eaton has undertaken restructuring activities at acquired businesses, including workforce reductions, plant consolidations, and facility closures. Liabilities for these restructuring activities were recognized in the allocation of the purchase price related to the acquired business. A summary of these liabilities, and utilization of the various components, follows:

Page 29

							Plant
	Workforce reductions						closing
	Employees			Dollars			& other			Total
Balance at January 1, 2007		1,076		$	33		$	22		$	55
Liabilities recognized		282			7			2			9
Utilized		(699	)		(13	)		(12	)		(25	)
Balance at December 31, 2007		659			27			12			39
Liabilities recognized		52			3			2			5
Utilized		(428	)		(18	)		(13	)		(31	)
Balance at December 31, 2008		283			12			1			13
Liabilities recognized		1,081			8			1			9
Utilized		(1,035	)		(9	)		(1	)		(10	)
Balance at December 31, 2009		329		$	11		$	1		$	12

ACQUISITION INTEGRATION, WORKFORCE REDUCTION & PLANT CLOSING CHARGES

Acquisition Integration Charges

In 2009, 2008 and 2007, Eaton incurred charges related to the integration of acquired businesses. These charges, which consisted of plant consolidations and integration, were recognized as expense as incurred. A summary of these charges follows:

	2009		2008		2007
Electrical Americas	$	4	$	4
Electrical Rest of World		60		43	$	12
Hydraulics		3		6		12
Aerospace		12		20		39
Automotive		1		3		1
Corporate		2		1
Pretax charges	$	82	$	77	$	64
After-tax charges	$	54	$	51	$	42
Per common share	$	.32	$	.31	$	.28

Charges in 2009 were related primarily to the integration of the following acquisitions: Integrated Hydraulics, Kirloskar, Moeller, Phoenixtec and Argo-Tech. Charges in 2008 were related primarily to the integration of the following acquisitions: Kirloskar, Moeller, Phoenixtec, the MGE small systems UPS business, Saturn, Argo-Tech, Ronningen-Petter, Synflex, PerkinElmer and Cobham. Charges in 2007 were related primarily to the integration of the following acquisitions: the MGE small systems UPS business, Saturn, Argo-Tech, Schreder-Hazemeyer, Senyuan, Synflex, PerkinElmer, Cobham, Powerware, Hayward and Walterscheid.

Workforce Reduction Charges

Eaton took significant actions in 2009 to reduce its workforce in response to the severe economic downturn. The reductions total approximately 17% of the full-time workforce. These actions resulted in the recognition of severance and pension and other postretirement benefits expense of $182 in 2009.

Plant Closing Charges

In 2008, charges of $27 were recognized related to the closure of the automotive engine valve lifters manufacturing plant in Massa, Italy. These charges, consisting of $17 for severance, $7 for the write-down of assets and $3 for other costs, reduced operating profit of the Automotive segment.

Summary of Acquisition Integration, Workforce Reduction & Plant Closing Liabilities

A summary of acquisition integration charges, workforce reduction charges and plant closing charges, and remaining liabilities, follows:

Page 30

							Plant
	Workforce reductions						closing
	Employees			Dollars			& other			Total
Balance at January 1, 2007		1,603		$	49		$	6		$	55
Liabilities recognized		4			2			64			66
Utilized		(1,044	)		(37	)		(69	)		(106	)
Balance at December 31, 2007		563			14			1			15
Liabilities recognized		422			21			87			108
Utilized		(451	)		(14	)		(84	)		(98	)
Balance at December 31, 2008		534			21			4			25
Liabilities recognized		12,073			195			69			264
Utilized		(11,189	)		(164	)		(70	)		(234	)
Balance at December 31, 2009		1,418		$	52		$	3		$	55

These charges were included in the Statements of Consolidated Income in Cost of products sold or Selling & administrative expense, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related business segment.

DISCONTINUED OPERATIONS

In 2007, Eaton sold the Mirror Controls Division of the Automotive segment for $111, resulting in a $20 after-tax gain, or $.12 per common share. The gain on sale of the Mirror Controls Division, and other results of this business, are reported as Discontinued operations in the Statements of Consolidated Income.

SHORT-TERM INVESTMENTS

Eaton invests excess cash generated from operations in short-term marketable investments and classifies these investments as “available-for-sale”. These investments are recognized at fair value, with the unrealized gain or loss recognized in Accumulated other comprehensive income (loss) in Eaton shareholders’ equity. A summary of the carrying value of short-term investments follows:

	2009		2008
Time deposits & certificate of deposits with banks	$	300	$	237
Bonds issued by foreign governments				63
Money market investments		125		34
Other		8		8
Total short-term investments	$	433	$	342

GOODWILL & OTHER INTANGIBLE ASSETS

A summary of goodwill follows:

	2009		2008
Electrical Americas	$	2,003	$	1,890
Electrical Rest of World		1,005		948
Hydraulics		1,016		1,002
Aerospace		1,047		1,037
Truck		147		143
Automotive		217		212
Total goodwill	$	5,435	$	5,232

The increase in goodwill in 2009 was due to goodwill for businesses acquired during 2009, the finalization of purchase price allocations related to businesses acquired in 2008, and foreign currency translation. These transactions are described in the “Acquisitions of Businesses” Note above.

In 2009, the Electrical segment was divided into Electrical Americas and Electrical Rest of World. Goodwill was allocated to these segments based on the relative fair values of each segment.

A summary of other intangible assets follows:

Page 31

	2009				2008
	Historical		Accumulated		Historical		Accumulated
	cost		amortization		cost		amortization
Intangible assets not subject to amortization
(primarily trademarks)	$	451			$	525
Intangible assets subject to amortization
Customer relationships	$	1,181	$	204	$	1,327	$	144
Patents and technology		885		245		872		181
Other		477		104		190		71
Total other intangible assets	$	2,543	$	553	$	2,389	$	396

Expense related to intangible assets subject to amortization was $153 in 2009. Expense for intangible assets subject to amortization for each of the next five years is $156 in 2010, $148 in 2011, $149 in 2012, $141 in 2013, and $135 in 2014.

DEBT & OTHER FINANCIAL INSTRUMENTS

Short-term debt of $113 at December 31, 2009 included $75 of short-term commercial paper in the United States which had a weighted-average interest rate of 0.4%, $13 of other short-term debt in the United States, and $25 of short-term debt outside the United States. Borrowings outside the United States are generally denominated in local currencies. Operations outside the United States have available short-term lines of credit of approximately $680 from various banks worldwide.

A summary of long-term debt, including the current portion, follows:

	2009		2008
7.40% notes due 2009			$	15
Floating rate senior notes due 2009 (2.88% at December 31, 2008 - LIBOR+0.08%)				250
Floating rate senior note due 2010 (2.44% at December 31, 2008 - LIBOR+0.25%)				281
5.75% notes due 2012	$	300		300
7.58% notes due 2012		12		12
4.9% notes due 2013 ($200 converted to floating rate by interest rate swap)		300		300
5.80% notes due 2013		7		7
5.95% notes due 2014 ($100 converted to floating rate by interest rate swap)		250
12.5% U.K. pound sterling debentures due 2014		9		8
4.65% notes due 2015		100		100
5.3% notes due 2017		250		250
6.875% to 7.09% notes due 2018		36		36
5.6% notes due 2018 ($275 converted to floating rate by interest rate swap)		450		450
4.215% Japanese Yen notes due 2018		108		110
6.95% notes due 2019		300
8-7/8% debentures due 2019 ($25 converted to floating rate by interest rate swap)		38		38
8.10% debentures due 2022		100		100
7.625% debentures due 2024 ($25 converted to floating rate by interest rate swap)		66		66
6-1/2% debentures due 2025		145		145
7.875% debentures due 2026		72		72
7.65% debentures due 2029 ($50 converted to floating rate by interest rate swap)		200		200
5.45% debentures due 2034 ($25 converted to floating rate by interest rate swap)		140		150
5.25% notes due 2035		42		72
5.8% notes due 2037		240		240
Other		189		257
Total long-term debt		3,354		3,459

Page 32

Less current portion of long-term debt		(5	)		(269	)
Long-term debt less current portion	$	3,349		$	3,190

Eaton’s United States long-term revolving credit facilities with banks total $1.5 billion, of which $500 expires in each year from 2011 through 2013. These facilities support Eaton’s commercial paper borrowings. There were no borrowings outstanding under these revolving credit facilities at December 31, 2009.

Mandatory maturities of long-term debt for each of the next five years are $5 in 2010, related principally to capitalized leases, $0 in 2011, $312 in 2012, $307 in 2013, and $259 in 2014.

Interest paid on debt follows:

	2009		2008		2007
Interest paid	$	180	$	206	$	204

Eaton has entered into fixed-to-floating interest rate swaps to manage interest rate risk. These interest rate swaps are accounted for as fair value hedges of certain long-term debt. The maturity of the swap corresponds with the maturity of the debt instrument as noted in the table of long-term debt above. A summary of interest rate swaps outstanding at December 31, 2009, follows:

	Interest rates at December 31, 2009
	Fixed			Floating
	interest			interest
Notional	rate			rate			Basis for contracted
Amount	received			paid			floating interest rate paid
$200		4.90	%		2.67	%	6 month LIBOR+2.15%
$100		5.95	%		3.28	%	6 month LIBOR+2.60%
$275		5.60	%		1.74	%	6 month LIBOR+1.22%
$  25		8.88	%		4.30	%	6 month LIBOR+3.84%
$  25		7.63	%		3.11	%	6 month LIBOR+2.48%
$  50		7.65	%		3.09	%	6 month LIBOR+2.57%
$  25		5.45	%		0.87	%	6 month LIBOR+0.28%

RETIREMENT BENEFITS PLANS

Adoption of Measurement Provisions of the Compensation — Retirement Benefits Standard

In 2008, Eaton adopted the revised measurement date provisions of the Compensation — Retirement Benefits Standard, which requires measurement of the funded status of all pension and other postretirement benefits plans to be as of the date of the year-end financial statements. Previously, the measurement date for Eaton’s pension and other postretirement benefits plans was November 30. As a result of the change in measurement dates, in the fourth quarter of 2008, Eaton recognized a charge to retained earnings of $19 for one month of costs ($11 after-tax) related to pension benefits and other postretirement benefits with no corresponding adjustment to net income.

Retirement Benefits Plan Liabilities & Assets

Eaton has defined benefits pension plans and other postretirement benefits plans. Components of plan obligations and assets, and recognized liabilities and assets, follow:

							Other postretirement
	Pension liabilities						liabilities
	2009			2008			2009			2008
Changes in benefit obligation
Beginning balance	$	(3,288	)	$	(3,092	)	$	(779	)	$	(859	)
Service cost		(110	)		(137	)		(15	)		(15	)
Interest cost		(203	)		(190	)		(49	)		(49	)
Actuarial (loss) gain		(198	)		67			(70	)		58
Benefits paid		318			287			96			87
Foreign currency translation		(98	)		239			(3	)		4
Business acquisitions					(419	)
Other		(31	)		(43	)		(10	)		(5	)
Ending balance		(3,610	)		(3,288	)		(830	)		(779	)

Page 33

							Other postretirement
	Pension liabilities						liabilities
	2009			2008			2009			2008
Change in plan assets
Beginning balance		1,674			2,403
Actual return on plan assets		330			(641	)
Employer contributions		271			217			96			87
Benefits paid		(318	)		(287	)		(96	)		(87	)
Foreign currency translation		79			(214	)
Business acquisitions					171
Other		6			25
Ending balance		2,042			1,674
Amount recognized in the Consolidated Balance Sheet	$	(1,568	)	$	(1,614	)	$	(830	)	$	(779	)

Amounts recognized in the Consolidated Balance Sheet follow:

							Other postretirement
	Pension liabilities						liabilities
	2009			2008			2009			2008
Non-current assets	$	50		$	67
Current liabilities		(32	)		(31	)	$	(76	)	$	(76	)
Non-current liabilities		(1,586	)		(1,650	)		(754	)		(703	)
Total	$	(1,568	)	$	(1,614	)	$	(830	)	$	(779	)

Amounts recognized in Accumulated other comprehensive loss follow:

					Other postretirement
	Pension liabilities				liabilities
	2009		2008		2009			2008
Net actuarial loss	$	1,363	$	1,410	$	228		$	159
Prior service cost (credit)		7		3		(12	)		(13	)
Total	$	1,370	$	1,413	$	216		$	146

Changes in pension and other postretirement benefits liabilities recognized in Accumulated other comprehensive loss in Eaton shareholders’ equity follow:

							Other postretirement
	Pension liabilities						liabilities
	2009			2008			2009			2008
Beginning balance	$	1,413		$	767		$	146		$	226
Prior service cost arising during the year		5			4						(8	)
Net loss (gain) arising during the year		59			772			70			(58	)
Foreign currency translation		21			(44	)		1			(3	)
Less amounts included in costs during the year		(128	)		(83	)		(1	)		(11	)
Other					(3	)
Net change for the year		(43	)		646			70			(80	)
Ending balance	$	1,370		$	1,413		$	216		$	146

Pension Plans

Assumptions used to determine pension benefit obligations and costs follow:

										United States &
										non-United States
	United States plans									plans (weighted-average)
	2009			2008			2007			2009			2008			2007
Assumptions used to determine benefit obligation at year-end
Discount rate		6.00	%		6.30	%		6.00	%		5.85	%		6.29	%		5.96	%
Rate of compensation increase		3.50	%		3.50	%		3.50	%		3.61	%		3.61	%		3.68	%

Page 34

										United States &
										non-United States
	United States plans									plans (weighted-average)
	2009			2008			2007			2009			2008			2007
Assumptions used to determine cost
Discount rate		6.30	%		6.00	%		5.60	%		6.29	%		5.96	%		5.39	%
Expected long-term return on plan assets		8.95	%		8.95	%		8.75	%		8.18	%		8.44	%		8.31	%
Rate of compensation increase		3.50	%		3.50	%		3.50	%		3.61	%		3.68	%		3.67	%

The expected long-term rate of return on pension assets was determined separately for each country and reflects long-term historical data taking into account each plan’s target asset allocation.

The components of pension benefit cost recognized in the Statements of Consolidated Income follow:

	2009			2008			2007
Service cost	$	(110	)	$	(137	)	$	(147	)
Interest cost		(203	)		(190	)		(163	)
Expected return on plan assets		189			198			179
Amortization		(38	)		(49	)		(74	)
		(162	)		(178	)		(205	)
Curtailment loss		(22	)		(1	)		(1	)
Settlement loss		(86	)		(35	)		(41	)
Total cost	$	(270	)	$	(214	)	$	(247	)

Due to limitations imposed by the Pension Protection Act on pension lump sum distributions, Eaton’s U.S. Qualified Pension Plan became restricted in 2009 from making 100% lump sum payments. As a result, the plan experienced a significant increase in lump sum payments before the limitation went into effect. Total pension settlement expense was $86 in 2009, of which $83 was attributable to the U.S. pension plans. A portion of the increase was attributable to the workforce reduction in 2009. These charges were primarily included in the Statements of Consolidated Income in Cost of products sold or Selling & administrative expense, as appropriate. In Business Segment Information, the charges were included in Pension & other postretirement benefits expense.

As a result of the workforce reduction in 2009, curtailment expense of $22 related to pension plans was recognized in 2009. The curtailment expense included recognition of the change in the projected benefit obligation, as well as recognition of a portion of the unrecognized prior service cost. These charges were primarily included in the Statements of Consolidated Income in Cost of products sold or Selling & administrative expense, as appropriate. In Business Segment Information, the charges were included in Pension & other postretirement benefits expense.

The estimated net loss and prior service cost for the defined benefit pension plans that will be recognized from Accumulated other comprehensive loss into net periodic benefit cost in 2010 are $80 and $1, respectively.

The total accumulated benefit obligation for all pension plans at December 31, 2009 was $3,404 and at December 31, 2008 was $3,083. The components of pension plans with an accumulated benefit obligation in excess of plan assets at December 31 follow:

	2009		2008
Projected benefit obligation	$	3,390	$	2,819
Accumulated benefit obligation		3,217		2,663
Fair value of plan assets		1,792		1,168

United States pension plans represent 62% and 65% of benefit obligations at December 31, 2009 and 2008, respectively.

Contributions to pension plans that Eaton expects to make in 2010, and made in 2009, 2008 and 2007, follow:

Page 35

	2010		2009		2008		2007
United States	$	300	$	177	$	115	$	150
Other		102		94		95		70
Total contributions	$	402	$	271	$	210	$	220

In January 2010, Eaton contributed $300 to the U.S. Pension Plan as described in the table above.

Pension benefit payments in 2009, and assumed pension benefit payments for each of the next five years, and the five years thereafter in the aggregate, were $318 in 2009, $171 in 2010, $178 in 2011, $181 in 2012, $409 in 2013, $250 in 2014 and $1,428 in 2015 - 2019. Pension lump sum payments in 2010, 2011 and 2012 are restricted to 50% due to limitations imposed by the Pension Protection Act.

The Company has various defined contribution benefit plans, primarily consisting of the Eaton Savings Plan in the United States. The total contributions related to these plans are charged to expense and were as follows:

	2009		2008		2007
Contributions	$	25	$	64	$	59

Disclosures about Pension Plan Assets

Financial instruments included in pension plan assets are categorized into a fair value hierarchy of three levels, based on the degree of subjectivity inherent in the valuation methodology as follows:

• Level 1 - Quoted prices (unadjusted) for identical assets in active markets.

• Level 2 - Quoted prices for similar assets in active markets, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3 - Unobservable prices or inputs.

A summary of the fair value of pension plan assets at December 31, 2009, and the fair value measurement used, follows:

	Level 1		Level 2		Level 3		Total
Registered investment companies	$	25					$	25
Common collective trusts
Cash equivalents			$	27				27
U.S. equity				646				646
Non-U.S. equity & global equities				839				839
Fixed income				296				296
Long duration funds				84				84
U.S. Treasuries		37						37
Other fixed income				21				21
Cash equivalents		1		27				28
Other		7		3	$	29		39
Total pension plan assets	$	70	$	1,943	$	29	$	2,042

Following is a description of the valuation methodologies used for pension plan assets measured at fair value. There have been no changes in the methodologies used at December 31, 2009 and 2008.

• Registered investment companies - Valued at the closing price of the exchange traded fund’s shares.

• Common collective trusts - Valued at the net unit value of units held by the trust at year end. The unit value is determined by the total value of fund assets divided by the total number of units of the fund owned. The equity investments in collective trusts are predominantly in index funds for which the underlying securities are actively traded in public markets based upon readily measurable prices.

• U.S. Treasuries - Valued at the closing price of each security.

Page 36

• Other fixed income - Asset backed securities, agencies and variable rate bonds valued based on pricing models which incorporate information from market sources and observed market movements.

• Cash equivalents - Primarily certificates of deposit, commercial paper and repurchase agreements.

• Other - Primarily insurance contracts for international plans and also futures contracts and over the counter options. These investments are valued based on the closing prices of future contracts or indices as available on the Bloomberg or similar service, and private equity investments.

The weighted-average pension plan asset allocations by asset category at December 31, 2009 and 2008 are as follows:

	2009			2008
Equity securities		75	%		70	%
Debt securities		21	%		24	%
Other		4	%		6	%
		100	%		100	%

Investment policies and strategies are developed on a country specific basis. The U.S. plans, representing 59% of worldwide pension assets, and the U.K. plans representing 33% of worldwide pension assets, are invested primarily for growth, as they are open plans with active participants and ongoing accruals. In general, the plans have their primary allocation to diversified, global equities, primarily through index funds in the form of common collective trusts. The U.S. plan’s target allocation is 37.5% U.S. equities, 37.5% non-U.S. equities and 25% debt securities and other, including cash equivalents. The U.K. plan’s target asset allocations are 64% equities and the remainder in debt securities. The equity risk for the plans is managed through broad geographical diversification and diversification across industries and levels of market capitalization. The majority of debt allocations for these plans are longer duration government (including inflation protected securities) and corporate debt. The U.S. pension plan is authorized to use derivatives to achieve more economically desired market exposures and to use futures, swaps and options to gain or hedge exposures. In 2009, the U.S. pension fund purchased put spreads on the S&P 500 to manage the downside risk of a portion of its domestic equity exposure. One U.K. plan uses long duration funds to more closely manage the interest rate risk of the liabilities.

Other Postretirement Benefits Plans

Assumptions used to determine other postretirement benefit obligations and cost follow:

	2009			2008			2007
Assumptions used to determine benefit obligation at year-end
Discount rate		5.70	%		6.30	%		6.00	%
Health care cost trend rate assumed for next year		8.30	%		8.25	%		8.30	%
Ultimate health care cost trend rate		4.75	%		4.75	%		4.75	%
Year ultimate health care cost trend rate is achieved		2017			2017			2015
Assumptions used to determine cost
Discount rate		6.30	%		6.00	%		5.60	%
Initial health care cost trend rate		8.25	%		8.30	%		8.80	%
Ultimate health care cost trend rate		4.75	%		4.75	%		4.75	%
Year ultimate health care cost trend rate is achieved		2017			2015			2014

The components of other postretirement benefits cost recognized in the Statements of Consolidated Income follow:

Page 37

	2009			2008			2007
Service cost	$	(15	)	$	(15	)	$	(15	)
Interest cost		(49	)		(49	)		(47	)
Amortization		(1	)		(11	)		(11	)
		(65	)		(75	)		(73	)
Curtailment loss		(1	)
Total costs	$	(66	)	$	(75	)	$	(73	)

Estimated net loss and prior service cost (credit) for other postretirement benefits plans that will be recognized from Accumulated other comprehensive loss into net periodic benefits cost in 2010 are $11 and $(2), respectively.

Assumed health care cost trend rates may have a significant effect on the amounts reported for the health care plans. A 1-percentage point change in the assumed health care cost trend rates would have the following effects:

	1% Increase		1% Decrease
Effect on total service and interest cost	$	2	$	(2	)
Effect on other postretirement liabilities		22		(20	)

At December 31, 2009, expected other postretirement benefit payments for each of the next five years and the five years thereafter in the aggregate are $87 in 2010, $86 in 2011, $84 in 2012, $82 in 2013, $81 in 2014 and $370 in 2015-2019. The expected subsidy receipts related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which would reduce the other postretirement benefit payments listed above for each of the next five years and the five years thereafter in the aggregate are, $8 in 2010 and 2011, $9 in 2012, 2013 and 2014, and $45 in 2015-2019.

PROTECTION OF THE ENVIRONMENT & SUSTAINABILITY

Eaton has established policies to ensure that its operations are conducted in keeping with good corporate citizenship and with a positive commitment to the protection of the natural and workplace environments. For example, each manufacturing facility has a person responsible for environmental, health and safety (EHS) matters. All of the Company’s manufacturing facilities are required to be certified to ISO 14001, an international standard for environmental management systems. The Company routinely reviews EHS performance at each of its facilities and continuously strives to improve pollution prevention at its facilities.

As a result of past operations, Eaton is involved in remedial response and voluntary environmental remediation at a number of sites, including certain of its currently-owned or formerly-owned plants. The Company has also been named a potentially responsible party (PRP) under the Federal Superfund law at a number of waste disposal sites.

A number of factors affect the cost of environmental remediation, including the number of parties involved at a particular site, the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, and the continuing advancement of remediation technology. Taking these factors into account, Eaton has estimated the costs of remediation, which will be incurred over a period of years. The Company accrues an amount on an undiscounted basis, consistent with the estimates of these costs when it is probable that a liability has been incurred. The Consolidated Balance Sheet included a liability for these costs of $80 at December 31, 2009 and $85 at December 31, 2008.

Based upon Eaton’s analysis and subject to the difficulty in estimating these future costs, the Company expects that any sum it may be required to pay in connection with environmental matters is not reasonably likely to exceed the liability by an amount that would have a material adverse effect on its financial position, results of operations or cash flows. All of these estimates are forward-looking statements and, given the inherent uncertainties in evaluating environmental exposures, actual results can differ from these estimates.

Page 38

CONTINGENCIES

Eaton is subject to a broad range of claims, administrative proceedings, and legal proceedings, such as lawsuits that relate to contractual allegations, patent infringement, personal injuries (including asbestos claims) antitrust matters and employment-related matters. Although it is not possible to predict with certainty the outcome or cost of these matters, the Company believes that these matters will not have a material adverse effect on its financial position, results of operations or cash flows.

MERITOR LITIGATION

On October 5, 2006, ZF Meritor LLC and Meritor Transmission Corporation (collectively, Meritor) filed an action against Eaton in the U.S. District Court for Delaware. The action seeks damages, which would be trebled under U.S. antitrust laws, as well as injunctive relief and costs. The suit alleged that Eaton engaged in anti-competitive conduct against Meritor in the sale of heavy-duty truck transmissions in North America. Following a four week trial on liability only, on October 8, 2009, the jury returned a verdict in favor of Meritor. Eaton firmly believes that it competes fairly and honestly for business in the marketplace, and that at no time did it act in an anti-competitive manner. During an earlier stage in the case, the judge concluded that damage estimates contained in a report filed by Meritor were not based on reliable data and the report was specifically excluded from the case. On November 3, 2009, Eaton filed a motion for judgment as a matter of law and to set aside the verdict. That motion is currently pending. Accordingly, an estimate of any potential loss related to this action cannot be made at this time.

EATON SHAREHOLDERS’ EQUITY

There are 500 million common shares authorized ($.50 par value per share), 166.2 million of which were issued and outstanding at year-end 2009. At December 31, 2009, there were 8,452 holders of record of common shares. Additionally, 17,960 current and former employees were shareholders through participation in the Eaton Savings Plan (ESP), Eaton Personal Investment Plan (EPIP) and Eaton Electrical de Puerto Rico Inc. Retirement Savings Plan.

In 2008, Eaton sold 18.678 million of its common shares in a public offering, resulting in net cash proceeds of $1.522 billion. The cash proceeds from the sale of the common shares were used to repay borrowings incurred to fund the acquisitions of Moeller and Phoenixtec, and to repay commercial paper issued under the backstop provided by a $3.0 billion revolving credit agreement that Eaton terminated in May 2008.

Eaton has a common share repurchase plan that authorizes the repurchase of 10 million common shares. The shares are expected to be repurchased over time, depending on market conditions, the market price of the Company’s common shares, the Company’s capital levels and other considerations. The number of common shares repurchased in the open market and total cost, follows:

	2009		2008		2007
Shares repurchased in millions		0		1.420		4.092
Cost	$	0	$	100	$	340
The number of stock options exercised and the resulting cash proceeds follows:
	2009		2008		2007
Stock options exercised in millions		.844		1.240		3.713
Cash proceeds	$	27	$	47	$	141

Eaton has plans that permit certain employees and directors to defer a portion of their compensation. A trust contains $22 of common shares and marketable securities, as valued at December 31, 2009, to fund a portion of these liabilities. The marketable securities were included in Other assets and the common shares were included in Eaton shareholders’ equity at historical cost.

Stock Options

Under various plans, stock options have been granted to certain employees and directors to purchase common shares at prices equal to fair market value on the date of grant. Substantially all of these options vest ratably during the three-year period following the date of grant and expire 10 years from the date of grant. Compensation expense is recognized for stock options based on the fair value of the options at the date of grant. Expense is recognized on a straight-line basis over the period the employee or director is required to provide service in exchange for the award.

Page 39

The fair value of stock options granted was estimated using the Black-Scholes option pricing model. A summary of the assumptions used in determining the fair value of options follows:

	2009			2008			2007
Expected volatility		30	%	27% to 22		%		22	%
Expected option life in years		5.5			5.5			5
Expected dividend yield		2.0	%		2.0	%		2.0	%
Risk-free interest rate		1.7% to 2.2	%		3.6% to 1.7	%		4.0% to 4.9	%
Weighted-average fair value of stock options granted	$	10.27		$	16.59		$	17.79

Application of the Black-Scholes option pricing model involves assumptions that are judgmental and affect compensation expense. Historical information was the primary basis for the selection of expected volatility, expected option life, and expected dividend yield. Expected volatility was based on the most recent historical period equal to the expected life of the option. The risk-free interest rate was based on yields of U.S. Treasury zero-coupon issues with a term equal to the expected life of the option, on the date the stock options were granted.

A summary of stock option activity for 2009 follows:

						Weighted-
	Weighted-					average
	average					remaining		Aggregate
	price per					contractual		intrinsic
(Options in millions)	option		Options			life in years		value
Outstanding at January 1, 2009	$	62.61		11.6
Granted		41.89		.1
Exercised		33.12		(.8	)
Canceled		75.00		(.4	)
Outstanding at December 31, 2009	$	64.37		10.5			5.4	$	72
Exercisable at December 31, 2009	$	61.06		8.7			4.9	$	70
Reserved for future grants at December 31, 2009				7.5

The aggregate intrinsic value in the table above represents the total excess of the $63.62 closing price of Eaton common shares on the last trading day of 2009 over the exercise price of the stock option, multiplied by the related number of options outstanding and exercisable. The aggregate intrinsic value is not recognized for financial accounting purposes and the value changes based on the daily changes in the fair market value of the Company’s common shares.

Information related to stock options follows:

	2009		2008		2007
Pretax expense for stock options	$	28	$	29	$	30
After-tax expense for stock options		19		20		21
Proceeds from stock options exercised		27		47		141
Income tax benefits related to stock options exercised
Reported in operating activities in statement of cash flows		2		4		11
Reported in financing activities in statement of cash flows		4		13		42
Intrinsic value of stock options exercised		19		52		163
Total fair value of stock options vesting		22		31		31

As of December 31, 2009, the total compensation expense not yet recognized related to nonvested stock options was $14, and the weighted-average period in which the expense is expected to be recognized is 1.2 years.

Page 40

Restricted Stock Units and Awards

Restricted stock units and awards (RSUs) have been issued to certain employees at fair market value at the date of grant. These awards entitle the holder to receive one common share for each RSU upon vesting, generally over three years. A summary of the RSU activity for 2009 follows:

	Number of
	restricted			Weighted
	stock			-average
	award			fair value
	units			per award
Non-vested at January 1, 2009		.5		$	78.62
Granted		1.9			43.60
Vested		(.2	)		74.40
Forfeited		(.1	)		47.83
Non-vested at December 31, 2009		2.1			48.59

Information related to RSUs follows:

	2009		2008		2007
Pretax expense for RSUs	$	25	$	15	$	10
After-tax expense for RSUs		17		10		6

As of December 31, 2009, the total compensation expense not yet recognized related to nonvested RSUs was $64, and the weighted-average period in which the expense is expected to be recognized is 1.8 years.

Accumulated Other Comprehensive Loss

The components of Accumulated other comprehensive loss as reported in the Consolidated Balance Sheet follow:

	2009			2008
Foreign currency translation and related hedging instruments (net of income tax benefit of $32 in 2009 and $77 in 2008)	$	(183	)	$	(532	)
Deferred gain (loss) on cash flow hedges (net of income taxes of $4 in 2009 and income tax benefit of $16 in 2008)		7			(29	)
Pensions (net of income tax benefit of $459 in 2009 and $501 in 2008)		(911	)		(912	)
Other postretirement benefits (net of income tax benefit of $95 in 2009 and $81 in 2008)		(121	)		(65	)
Total accumulated other comprehensive loss	$	(1,208	)	$	(1,538	)

A discussion of the adjustments related to pensions and other postretirement benefit liabilities is included in the “Retirement Benefits Plans” Note above.

INCOME TAXES

Income from continuing operations before income taxes is summarized below based on the geographic location of the operation to which such earnings are attributable. Certain foreign operations are branches of Eaton and are, therefore, subject to United States as well as foreign income tax regulations. As a result, pretax income by location and the components of income tax expense by taxing jurisdiction are not directly related. For purposes of this note to the consolidated financial statements, non-United States operations include Puerto Rico.

	Income (loss) from continuing
	operations before income taxes
	2009			2008		2007
United States	$	(298	)	$	123	$	60
Non-United States		601			1,017		995
Total income before income taxes	$	303		$	1,140	$	1,055

Page 41

	Income tax (benefit) expense
	from continuing operations
	2009			2008			2007
Current
United States
Federal	$	40		$	36		$	7
State & local		5			4			9
Non-United States		69			219			140
Total current income tax expense		114			259			156
Deferred
United States
Federal		(174	)		(17	)		(15	)
State & local		(4	)		(42	)		(20	)
Non-United States		(18	)		(127	)		(39	)
Total deferred income tax (benefit)		(196	)		(186	)		(74	)
Total income tax (benefit) expense	$	(82	)	$	73		$	82

Reconciliations of income taxes from the United States Federal statutory rate to the effective income tax rate for continuing operations follow:

	2009			2008			2007
Income taxes at the United States Federal statutory rate		35.0	%		35.0	%		35.0	%
United States operations
State & local income taxes		0.4	%		0.3	%		0.2	%
Deductible dividends		(2.1	)%		(0.5	)%		(0.4	)%
Deductible interest		(2.3	)%		(0.6	)%		(0.6	)%
Credit for increasing research activities		(3.9	)%		(1.2	)%		(1.2	)%
Other United States-net		5.0	%		4.8	%		0.4	%
Non-United States operations
Foreign tax credit		(2.5	)%		(3.0	)%		(1.2	)%
Non-United States operations (earnings taxed at other than United States tax rate)		(52.6	)%		(18.9	)%		(19.0	)%
Worldwide operations
Adjustments to tax liabilities		(11.9	)%		(3.6	)%		(5.6	)%
Adjustments to valuation allowances		7.7	%		(5.9	)%		0.2	%
Effective income tax (benefit) expense rate		(27.2	)%		6.4	%		7.8	%

The income tax benefit rate for 2009 was favorably affected by tax benefits of $104 from U.S. Federal income tax losses where it is more likely than not that they will be realized. The 2009 income tax rate reconciliation is also impacted by the favorable non-United States operations tax rate differential being applied to a significantly lower worldwide income before income taxes. Eaton also recognized income tax benefits of $13, $108 and $57 in 2009, 2008 and 2007, respectively, which represented adjustments to worldwide tax liabilities and valuation allowances. The 2009 benefits resulted from multiple income tax items including benefits related to the settlement of international income tax audits. The 2008 income tax benefits reduced the effective income tax rate for 2008 from 15.9% to 6.4%. The 2008 benefits resulted from multiple income tax items including a benefit of $44 related to the consolidation of various legal entities and the recognition of $25 of tax credits related to the transfer of certain international operations. The 2007 income tax benefits reduced the effective income tax rate for 2007 from 13.2% to 7.8%. The 2007 income tax benefits resulted from multiple income tax items including a $14 benefit from changes to state tax laws and a favorable revaluation of worldwide deferred income tax assets.

With limited exceptions, no provision has been made for income taxes on undistributed earnings of non-United States subsidiaries of $4,945 at December 31, 2009, since it is the Company’s intention to indefinitely reinvest undistributed earnings of its foreign subsidiaries. It is not practicable to estimate the additional income taxes and applicable foreign withholding taxes that would be payable on the remittance of such undistributed earnings.

Worldwide income tax payments for 2009, 2008 and 2007 follows:

Page 42

	2009		2008		2007
Worldwide income tax payments	$	124	$	185	$	141

Deferred Income Tax Assets & Liabilities

Significant components of current and long-term deferred income taxes follow:

	2009						2008
				Long-term						Long-term
	Current			assets &			Current			assets &
	assets			liabilities			assets			liabilities
Accruals & other adjustments
Employee benefits	$	78		$	773		$	57		$	821
Depreciation & amortization		3			(642	)		(3	)		(692	)
Other accruals & adjustments		293			103			188			125
Other items					(5	)					(5	)
United States Federal income tax loss carryforwards		13			38						7
United States Federal income tax credit carryforwards					165						121
United States state & local tax loss carryforwards and tax credit carryforwards					72						69
Non-United States tax loss carryforwards					291						206
Non-United States income tax credit carryforwards					66						52
Valuation allowance for income tax loss and income tax credit carryforwards					(360	)					(259	)
Other valuation allowance		(10	)		(78	)		(3	)		(17	)
Total deferred income taxes	$	377		$	423		$	239		$	428

At the end of 2009, United States Federal income tax loss carryforwards and income tax credit carryforwards were available to reduce future Federal income tax liabilities. A summary of these carryforwards and their expiration dates are summarized below:

	2010		2015		2020		2025		Not		Related
	through		through		through		through		subject to		valuation
	2014		2019		2024		2029		expiration		allowance
United States Federal income tax loss carryforwards	$	4			$	5	$	136
United States Federal deferred income tax assets for income tax loss carryforwards		1				2		48			$	(6	)
United States Federal income tax credit carryforwards			$	46				66	$	53		(13	)

United States state and local tax loss carryforwards and tax credit carryforwards with a future tax benefit are also available at the end of 2009. A summary of these carryforwards and their expiration are summarized below:

	2010		2015		2020		2025		2030		Related
	through		through		through		through		through		valuation
	2014		2019		2024		2029		2034		allowance
United States state and local income tax loss carryforwards - net of Federal tax effect	$	7		$6	$	17	$	9	$	1	$	(12	)
United States state and local income tax credit carryforwards - net of Federal tax effect		9		10		5		4		4		(18	)

Page 43

At December 31, 2009, certain non-United States subsidiaries had tax loss carryforwards and income tax credit carryforwards that are available to offset future taxable income. A summary of these carryforwards and their expiration is provided below:

	2010		2015		2020		2025	Not		Related
	through		through		through		through	subject to		valuation
	2014		2019		2024		2029	expiration		allowance
Non-United States tax loss carryforwards	$	155	$	146	$	40	$2	$	708
Non-United States deferred income tax assets for income tax loss carryforwards		40		40		12			199	$	(279	)
Non-United States income tax credit carryforwards		2		58					6		(32	)

Recoverability of Deferred Income Tax Assets

Eaton is subject to the income tax laws in the jurisdictions in which it operates. In order to determine its income tax provision for financial statement purposes, Eaton must make significant estimates and judgments about its business operations in these jurisdictions. These estimates and judgments are also used in determining the deferred income tax assets and liabilities that have been recognized for the differences between the financial accounting and income tax basis of assets, liabilities, tax loss carryforwards and income tax credit carryforwards.

Management evaluates the realizability of deferred income tax assets for each of the jurisdictions in which it operates. If the Company experiences cumulative pretax income in a particular jurisdiction in the three-year period including the current and prior two years, management normally concludes that the deferred income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments would lead management to conclude otherwise. However, if the Company experiences cumulative pretax losses in a particular jurisdiction in the three-year period including the current and prior two years, management then considers a series of significant factors in the determination of whether the deferred income tax assets can be realized. The significant factors include historical operating results, known or planned operating developments, the period of time over which certain temporary differences will reverse, consideration of the utilization of certain deferred tax liabilities, tax law carryback capability in the particular country, prudent and feasible tax planning actions, and estimates of future earnings and taxable income using the same assumptions as the Company’s goodwill and other impairment testing. After evaluation of these factors, if the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, management would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, management would conclude that a valuation allowance is required.

Deferred income tax assets and liabilities are described in detail above. As of December 31, 2009, U.S. Federal deferred income tax assets were $1.4 billion. The largest component of the deferred income tax assets is due to the differing timing of revenue and expense recognition for income tax versus financial statement purposes. In addition, the Company had a net operating loss in the U.S. in 2009 and possesses certain income tax credit carryforwards that comprise the remainder of the balance. Over the 20 year carryforward period available for net operating losses and general business credits, taxable income of approximately $4.0 billion would need to be realized to utilize all deferred income tax assets. After applying the methodology described above, as of December 31, 2009, management believes that it is more likely than not that the entire U.S. Federal deferred income tax assets will be realized. Accordingly, the Company has not established a valuation allowance on its U.S. Federal deferred income tax assets.

Applying the above methodology, valuation allowances have been established for certain U.S. state and local income as well as certain non-U.S. deferred income tax assets to the extent they are not expected to be realized within the particular tax carryforward period.

Unrecognized Income Tax Benefits

Eaton’s historical policy has been to enter into tax planning strategies only if it is more likely than not that the benefit would be sustained upon audit. For example, the Company does not enter into any of the Internal Revenue Service (IRS) Listed Transactions as set forth in Treasury Regulation 1.6011-4.

Page 44

A summary of gross unrecognized income tax benefits follows:

	2009			2008			2007
Beginning balance	$	139		$	96		$	93
Increases and decreases as a result of positions taken during prior years:
Transfers from (to) valuation allowances		(1	)		(2	)		10
Other increases		37			11			4
Other decreases, including foreign currency translation		(4	)		(18	)		(26	)
Balances related to acquired businesses		5			30
Increases as a result of positions taken during the current year		28			35			33
Decreases relating to settlements with tax authorities		(4	)					(18	)
Decreases as a result of a lapse of the applicable statute of limitations		(3	)		(13	)
Ending balance	$	197		$	139		$	96

If all of the gross unrecognized tax benefits were recognized, the net impact on the effective income tax rate would be $149.

Eaton recognizes interest and penalties related to unrecognized income tax benefits in the provision for income tax expense. The Company has accrued penalties in jurisdictions where they are automatically applied to any deficiency, regardless of the merit of the position. As of December 31, 2009, Eaton had accrued approximately $43 for the payment of worldwide interest and penalties. The Company had accrued approximately $38 at December 31, 2008.

The resolution of the majority of Eaton’s unrecognized income tax benefits is dependent on uncontrollable factors such as law changes; new case law; the willingness of the income tax authority to settle the issue, including the timing thereof; and other factors. Therefore, for the majority of unrecognized income tax benefits, it is not reasonably possible to estimate the increase or decrease in the next 12 months. For each of the unrecognized income tax benefits where it is possible to estimate the increase or decrease in the balance within the next 12 months, the Company does not anticipate any significant change.

Eaton or its subsidiaries file income tax returns in the United States and foreign jurisdictions. The U.S. Internal Revenue Service (IRS) is currently in the process of conducting an examination of the Company’s U.S. income tax returns for 2005 and 2006. Eaton is also under examination for the income tax filings in various state and foreign jurisdictions. With only a few exceptions, the Company is no longer subject to state and local income tax examinations for years before 2006, or foreign examinations for years before 2004. Eaton does not anticipate any adjustments that would result in a material change in financial position.

OTHER INFORMATION

Accounts Receivable

Accounts receivable are net of an allowance for doubtful accounts at December 31, 2009 and 2008 as follows:

	2009			2008
Allowance for doubtful accounts	$	67		$	38
Inventories
The components of inventories follow:
	2009			2008
Raw materials	$	608		$	683
Work-in-process		222			285
Finished goods		601			702
Inventories at FIFO		1,431			1,670
Excess of FIFO over LIFO cost		(105	)		(116	)
Total inventories	$	1,326		$	1,554

Page 45

Inventories at FIFO accounted for using the LIFO method were 46% and 43% at the end of 2009 and 2008, respectively.

Warranty Liabilities

A summary of the current and long-term liabilities for warranties follows:

	2009			2008			2007
Beginning balance	$	165		$	167		$	176
Current year provision		77			95			57
Business acquisitions					13			7
Claims paid/satisfied		(98	)		(108	)		(73	)
Other		3			(2	)
Ending balance	$	147		$	165		$	167

Lease Commitments

Eaton leases certain real properties and equipment. Minimum rental commitments at December 31, 2009 under noncancelable operating leases, which expire at various dates and in most cases contain renewal options, for each of the next five years and thereafter in the aggregate were, $121 in 2010, $96 in 2011, $64 in 2012, $45 in 2013, $27 in 2014 and $47 thereafter.

Rental expense follows:

	2009		2008		2007
Rental expense	$	177	$	173	$	133

Net Income per Common Share

A summary of the calculation of net income per common share attributable to common shareholders assuming dilution and basic follows:

(Shares in millions)	2009		2008		2007
Income from continuing operations	$	383	$	1,055	$	959
Income from discontinued operations				3		35
Net income attributable to common shareholders	$	383	$	1,058	$	994
Average number of common shares outstanding – diluted		167.9		162.3		150.3
Less dilutive effect of stock options and restricted stock awards		1.5		2.1		3.0
Average number of common shares outstanding – basic		166.4		160.2		147.3
Net income per common share – diluted
Continuing operations	$	2.27	$	6.50	$	6.38
Discontinued operations				.02		.24
Total	$	2.27	$	6.52	$	6.62
Net income per common share – basic
Continuing operations	$	2.31	$	6.58	$	6.51
Discontinued operations				.02		.24
Total	$	2.31	$	6.60	$	6.75

In 2009 and 2008, 6.6 million and 8.5 million stock options, respectively, were excluded from the calculation of diluted net income per common share because the exercise price of the options exceeded the average market price of the common shares during the period and their effect, accordingly, would have been antidilutive.

Financial Assets & Liabilities Measured at Fair Value

Financial instruments are categorized into a fair value hierarchy of three levels, based on the degree of subjectivity inherent in the valuation methodology as follows:

• Level 1 - Quoted prices (unadjusted) for identical assets in active markets.

• Level 2 - Quoted prices for similar assets in active markets, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the financial instrument.

Page 46

• Level 3 - Unobservable prices or inputs.

A summary of financial instruments recognized at fair value at December 31, 2009, and the fair value measurement used, follows:

	Recognized
	value			Level 1		Level 2			Level 3
Cash	$	340		$	340
Short-term investments		433			433
Foreign currency forward exchange contracts		(12	)			$	(12	)
Commodity contracts		8					8
Fixed-to-floating interest rate swaps		29					29
Related long-term debt converted to floating interest rates by interest rate swaps		(29	)				(29	)
Total	$	769		$	773	$	(4	)

Long-term debt and current portion of long-term debt had a carrying value of $3,354 and fair value of $3,601 at December 31, 2009 compared to $3,459 and $3,427 at the end of 2008.

Assets of $2,042 related to defined benefit pension plans were also measured at fair value at December 31, 2009, compared to $1,674 at December 31, 2008. The assets related to the defined benefit pension plans are described in the “Retirement Benefits Plans” Note above.

Disclosures about Derivative Financial Instruments & Hedging Activities

Information as to derivative financial instruments recognized in the Consolidated Balance Sheet as of December 31, 2009 follows:

	Fair value of
	derivative financial instruments
	Other		Other		Other
	current		long-term		current
	assets		assets		liabilities
Derivatives designated as hedges
Fixed-to-floating interest rate swaps (fair value hedges)			$	29
Foreign currency exchange contracts (cash flow hedges)	$	6			$	4
Commodity contracts (cash flow hedges)		5
Total	$	11	$	29	$	4
Derivatives not designated as hedges
Foreign currency exchange contracts	$	17			$	31
Commodity contracts		3
Total	$	20			$	31

At December 31, 2009, the notional amount related to derivatives designated as hedges in the table above was $879, including $700 of fixed-to-floating interest rate swaps.

Amounts recognized in net income and in Eaton shareholders’ equity for the year ended December 31, 2009 follow:

Page 47

	Amount of gain
	(loss) recognized
	in net income
Derivatives designated as fair value hedges
Fixed-to-floating interest rate swaps	$	(47	)	Interest expense
Related long-term debt converted to floating interest rates by interest rate swaps		47		Interest expense

	Amount of gain			Amount of gain
	(loss)			(loss)
	recognized in			reclassified
	Eaton			from Eaton
	shareholders’			shareholders’
	equity			equity
Derivatives designated as cash flow hedges
Foreign currency exchange contracts	$	(1	)	$	(8	)	Cost of products sold
Commodity contracts		22			(14	)	Cost of products sold
Total	$	21		$	(22	)

As of December 31, 2009, $6 of deferred net gains related to foreign currency exchange contracts and commodity contracts that were recognized in Eaton shareholders’ equity are expected to be reclassified to net income during the next twelve months.

In 2008, Eaton issued Yen 10 billion ($110 million) of 10-year long-term debt. The debt is designated and qualifies as a non-derivative instrument hedging the foreign currency exposure of Eaton’s net investment in Japanese operations. As of December 31, 2009, a gain of $2 resulting from this hedge was recognized in Eaton shareholders’ equity.

BUSINESS SEGMENT & GEOGRAPHIC REGION INFORMATION

Eaton Corporation is a diversified power management company with 2009 sales of $11.9 billion. Eaton is a global technology leader in electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety. Eaton has approximately 70,000 employees in over 50 countries, and sells products to customers in more than 150 countries.

In 2009, Eaton changed its business segment financial reporting structure. The Electrical segment was divided into Electrical Americas and Electrical Rest of World. The Hydraulics, Aerospace, Truck and Automotive segments continued as individual reporting segments. Accordingly, business segment information for prior years has been restated to conform to the current year’s presentation. The change to the business segments did not affect net income for any of the periods presented.

Electrical Americas & Electrical Rest of World

The Electrical segments are global leaders in power distribution, power quality, industrial automation and power control products and services. Products include circuit breakers, switchgear, UPS systems, power distribution units, panelboards, loadcenters, motor controls, meters, sensors, relays and inverters. The principal markets for the Electrical Americas and Electrical Rest of World segments are industrial, institutional, government, utility, commercial, residential, information technology and original equipment manufacturer customers. These products are used wherever there is a demand for electrical power in commercial buildings, data centers, residences, apartment and office buildings, hospitals, factories and utilities. The segments share several common global customers, but a large number of customers are located regionally and sales are made directly and indirectly through distributors, resellers and manufacturers representatives.

Page 48

Hydraulics

The Hydraulics segment is a worldwide leader in reliable, high-efficiency hydraulic components and systems for use in mobile and industrial markets. Eaton offers a wide range of power products including pumps, motors and hydraulic power units; a broad range of controls and sensing products, including valves, cylinders and electronic controls; a full range of fluid conveyance products, including industrial and hydraulic hose, fittings, and assemblies, thermoplastic hose and tubing, couplings, connectors, and assembly equipment; filtration systems solutions; heavy-duty drum and disc brakes; and golf grips. The principal market segments for Hydraulics include oil and gas, renewable energy, marine, agriculture, construction, mining, forestry, utility, material handling, truck and bus, machine tools, molding, primary metals and power generation. Key manufacturers in these markets and other customers are located globally, and these products are sold and serviced through a variety of channels.

Aerospace

The Aerospace segment is a leading global supplier to the commercial and military aviation and aerospace industries. Products include hydraulic power generation systems for aerospace applications including pumps, motors, hydraulic power units, hose and fittings, electro-hydraulic pumps and power and load management systems; controls and sensing products, including valves, cylinders, electronic controls, electromechanical actuators, sensors, displays and panels, aircraft flap and slat systems and nose wheel steering systems; fluid conveyance products, including hose, thermoplastic tubing, fittings, adapters, couplings, sealing and ducting; and fuel systems, including fuel pumps, sensors, valves, adapters and regulators. The principal markets for the Aerospace segment are manufacturers of commercial and military aircraft and related after-market customers. These manufacturers and other customers operate globally, and these products are sold and serviced through a variety of channels.

Truck

The Truck segment is a leader in the design, manufacture and marketing of a complete line of powertrain systems and components for commercial vehicles. Products include transmissions, clutches and hybrid electric power systems. The principal markets for the Truck segment are original equipment manufacturers and after-market customers of heavy-, medium- and light-duty trucks and passenger cars. These manufacturers and other customers are located globally, and most sales of these products are made directly to these customers.

Automotive

The Automotive segment is a leading supplier of critical components that reduce emissions and fuel consumption and improve stability and performance of cars, light trucks and commercial vehicles. Products include superchargers, engine valves and valve actuation systems, cylinder heads, locking and limited slip differentials, transmission controls, engine controls, fuel vapor components, compressor control clutches for mobile refrigeration, fluid connectors and hoses for air conditioning and power steering, decorative spoilers, underhood plastic components, fluid conveyance products including, hose, thermoplastic tubing, fittings, adapters, couplings and sealing products to the global automotive industry. The principal markets for the Automotive segment are original equipment manufacturers and aftermarket customers of light-duty trucks and passenger cars. These manufacturers and other customers are located globally, and most sales of these products are made directly to these customers.

Other Information

No single customer represented more than 10% of net sales in 2009, 2008 or 2007.

The accounting policies of the business segments are generally the same as the policies described under “Accounting Policies” above, except that inventories and related cost of products sold of the segments are accounted for using the FIFO method and operating profit only reflects the service cost component related to pensions and other postretirement benefits. Intersegment sales and transfers are accounted for at the same prices as if the sales and transfers were made to third parties.

For purposes of business segment performance measurement, the Company does not allocate to the business segments items that are of a non-operating nature, or corporate organizational and functional expenses of a governance nature. Corporate expenses consist of corporate office expenses including compensation, benefits, occupancy, depreciation, and other administrative costs. Identifiable assets of the business segments exclude goodwill, other intangible assets, and general corporate assets, which principally consist of cash, short-term investments, deferred income taxes, certain accounts receivable, certain property, plant and equipment, and certain other assets.

Page 49

Geographic Region Information

Net sales are measured based on the geographic location of the selling plant. Long-lived assets consist of property, plant and equipment-net.

				Long-lived
	Net sales			assets
2009
United States	$	6,767		$	1,024
Canada		355			23
Latin America		1,061			272
Europe		3,007			748
Asia Pacific		1,642			378
Eliminations		(959	)
Total	$	11,873		$	2,445
2008
United States	$	8,775		$	1,129
Canada		428			21
Latin America		1,455			250
Europe		4,002			827
Asia Pacific		1,963			412
Eliminations		(1,247	)
Total	$	15,376		$	2,639
2007
United States	$	8,556		$	1,158
Canada		371			20
Latin America		1,246			345
Europe		2,624			595
Asia Pacific		1,144			215
Eliminations		(908	)
Total	$	13,033		$	2,333

Page 50

Business Segment Information

	2009			2008			2007
Net sales
Electrical Americas	$	3,410		$	4,016		$	3,601
Electrical Rest of World		2,483			2,904			1,158
Hydraulics		1,692			2,523			2,391
Aerospace		1,602			1,811			1,594
Truck		1,457			2,251			2,147
Automotive		1,229			1,871			2,142
Total net sales	$	11,873		$	15,376		$	13,033
Segment operating profit (loss)
Electrical Americas	$	518		$	630		$	534
Electrical Rest of World		107			233			45
Hydraulics		51			285			265
Aerospace		245			283			233
Truck		39			315			357
Automotive		(10	)		59			234
Corporate
Amortization of intangible assets		(170	)		(161	)		(79	)
Interest expense-net		(150	)		(157	)		(147	)
Pension & other postretirement benefits expense		(212	)		(141	)		(164	)
Stock option expense		(28	)		(29	)		(30	)
Other corporate expense-net		(87	)		(177	)		(193	)
Income from continuing operations before income taxes		303			1,140			1,055
Income tax (benefit) expense		(82	)		73			82
Income from continuing operations		385			1,067			973
Income from discontinued operations					3			35
Net income		385			1,070			1,008
Adjustment of net income for noncontrolling interests		(2	)		(12	)		(14	)
Net income attributable to common shareholders	$	383		$	1,058		$	994
Business segment operating profit was reduced by acquisition integration charges as follows:
Electrical Americas	$	4		$	4
Electrical Rest of World		60			43		$	12
Hydraulics		3			6			12
Aerospace		12			20			39
Automotive		1			3			1
Total	$	80		$	76		$	64

Page 51

Business Segment Information

	2009		2008		2007
Identifiable assets
Electrical Americas	$	1,050	$	1,238	$	1,264
Electrical Rest of World		1,625		1,817		696
Hydraulics		939		1,132		1,192
Aerospace		729		798		852
Truck		797		801		996
Automotive		866		947		1,145
Total identifiable assets		6,006		6,733		6,145
Goodwill		5,435		5,232		3,982
Other intangible assets		2,441		2,518		1,557
Corporate		2,400		2,172		1,746
Total assets	$	16,282	$	16,655	$	13,430
Expenditures for property, plant & equipment
Electrical Americas	$	30	$	85	$	61
Electrical Rest of World		39		77		21
Hydraulics		21		54		56
Aerospace		16		23		39
Truck		30		69		62
Automotive		24		54		79
Total		160		362		318
Corporate		35		86		36
Total expenditures for property, plant & equipment	$	195	$	448	$	354
Depreciation of property, plant & equipment
Electrical Americas	$	56	$	61	$	61
Electrical Rest of World		61		49		18
Hydraulics		57		59		62
Aerospace		26		27		26
Truck		83		89		84
Automotive		85		97		94
Total		368		382		345
Corporate		30		27		23
Total depreciation of property, plant & equipment	$	398	$	409	$	368

Page 52

MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS

Millions of dollars unless indicated otherwise (per share data assume dilution)

Net income refers to net income attributable to Eaton common shareholders

OVERVIEW OF THE COMPANY

Eaton Corporation is a diversified power management company with 2009 sales of $11.9 billion. Eaton is a global technology leader in electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety. Eaton has approximately 70,000 employees in over 50 countries, and sells products to customers in more than 150 countries.

In 2009, Eaton changed its business segment financial reporting structure. The Electrical segment was divided into Electrical Americas and Electrical Rest of World. The Hydraulics, Aerospace, Truck and Automotive segments continued as individual reporting segments. Accordingly, business segment information for prior years has been restated to conform to the current year’s presentation. The change to the business segments did not affect net income for any of the periods presented.

The principal markets for the Electrical Americas and Electrical Rest of World segments are industrial, institutional, government, utility, commercial, residential, information technology and original equipment manufacturers. These products are used wherever there is a demand for electrical power in commercial buildings, data centers, residences, apartment and office buildings, hospitals, factories and utilities. The segments share several common global customers, but a large number of customers are located regionally and sales are made directly and indirectly through distributors, resellers and manufacturers representatives.

The principal markets for the Hydraulics segment include oil and gas, renewable energy, marine, agriculture, construction, mining, forestry, utility, material handling, truck and bus, machine tools, molding, primary metals and power generation. Key manufacturers in these markets and other customers are located globally, and these products are sold and serviced through a variety of channels.

The principal markets for the Aerospace segment are manufacturers of commercial and military aircraft and related after-market customers. These manufacturers and customers are located globally, and products are sold and serviced through a variety of channels.

The principal markets for the Truck and Automotive segments are original equipment manufacturers and after-market customers of heavy-, medium-, and light-duty trucks, SUVs, CUVs, or passenger cars. Customers are located globally, and most sales are made directly.

SUMMARY OF RESULTS FOR 2009

Eaton reported sales of $11.9 billion in 2009, which were 23% below 2008, and net income of $383, which declined 64% from 2008. Net income per common share was $2.27, a reduction of 65% from 2008. Looking at 2009 as a whole, Eaton’s net income was adversely affected by the decline in net sales due to the global economic recession. The Company believes the steps it took to deal with the downturn, including workforce reductions and other cost containment actions, effectively adjusted its cost structure to ensure it can operate profitably at lower sales volumes and realize attractive incremental profits on increases in net sales.

Financial results in 2009 for each of Eaton’s business segments were adversely affected by the significant downturn in all markets in all geographic regions. Profits were impacted across the Company by the sales declines as a result of the market downturn, offset by the net savings resulting from the workforce reductions in all segments and other cost containment actions. Sales and operating profit of the Electrical Americas segment declined 15% and 18%, respectively, due to a decline in end markets that was partially offset by sales growth above end markets in the U.S. Sales of the Electrical Rest of World segment declined 15% primarily due to end markets that fell in Europe and Asia, while operating profit declined 54%. Sales of the Hydraulics segment declined 33% due to the sharp fall in end markets that were down in all regions, while operating profit declined 82%. Sales and operating profit of the Aerospace segment declined 12% and 13%, respectively, reflecting the decline in end markets. Sales of the Truck segment declined 35% primarily due to lower end markets, and operating profit declined 88%. Sales of the Automotive segment declined 34% due to lower end markets, resulting in operating losses of $10.

Page 53

In 2009, cash flow from operations of $1.4 billion was a near record in spite of the difficult economic environment. Eaton used its cash flow in 2009 to markedly reduce long-term liabilities, with over $750 of debt paid off during the year, $271 contributed to global pension plans in 2009, and an additional $300 contributed to the U.S. pension plan in January 2010. As a result of these actions, the Company has greatly strengthened its financial position, with little commercial paper outstanding, no long-term debt maturities until the middle of 2012, and no additional contributions to the U.S. pension plan required until 2011.

The following are highlights of 2009:

							Increase
	2009			2008			(Decrease)
Continuing operations
Net sales	$	11,873		$	15,376			(23	)%
Gross profit		3,091			4,185			(26	)%
Percent of net sales		26.0	%		27.2	%
Income before income taxes		303			1,140			(73	)%
Income after income taxes	$	385		$	1,067			(64	)%
Income from discontinued operations					3
Net income		385			1,070			(64	)%
Adjustment of net income for noncontrolling interests		(2	)		(12	)
Net income attributable to common shareholders	$	383		$	1,058			(64	)%
Net income per common share - diluted
Continuing operations	$	2.27		$	6.50			(65	)%
Discontinued operations					.02
Total	$	2.27		$	6.52			(65	)%
Average common shares outstanding - diluted (in millions)		167.9			162.3			3	%

Net sales in 2009 declined by 23% compared to 2008. The reduction included 22% from core sales, which resulted from the global economic recession, and 3% from foreign exchange, partially offset by a 2% increase from acquisitions of businesses. The decline in core sales was driven by weakness in key end markets for each business segment in 2009. The reduction from foreign exchange was primarily due to changes in exchange rates for the euro, the Brazilian real, the U.K. pound sterling, and the Polish zloty. Acquisitions of businesses were primarily the Moeller electrical business, acquired in April 2008, and the Phoenixtec electrical business, acquired in February 2008.

Gross profit declined by 26% in 2009 compared to 2008. The reduction was primarily due to the decline in net sales discussed above; operating inefficiencies related to the difficulty in absorbing fixed manufacturing costs resulting from reduced sales; and pretax charges of $182 resulting from actions taken in 2009 to reduce the workforce including related pension settlement and curtailment expense, a substantial portion of which was recognized in Cost of products sold. These reductions in gross profit were partially offset by savings associated with workforce reductions and other cost containment actions, and the benefits of integrating recently acquired businesses, primarily Moeller and Phoenixtec.

In 2009, Eaton reported net income of $383 and net income per common share of $2.27, declines of 64% and 65%, respectively, compared to net income of $1,058 and net income per share of $6.52 for 2008. The declines were primarily due to lower net sales in 2009, the factors that affected gross profit discussed above, partially offset by an income tax benefit rate of 27.2% in 2009 compared to an effective income tax expense rate of 6.4% in 2008. Net income per share was also reduced due to a higher number of average shares outstanding in 2009 compared to 2008, resulting principally from the sale of 18.678 million shares in 2008.

Net cash provided by operating activities was $1,408 in 2009, a slight decline from $1,441 in 2008. Operating cash flows in 2009 reflected lower net income of $385 in 2009 compared to net income of $1,070 in 2008, with results for 2009 reflecting the effects of the global economic recession. The effect of this decline in net income was more than offset by the $944 cash flow resulting from the net reduction in funding of working capital in 2009 compared to 2008. The reduction in working capital, primarily accounts receivable and inventory, was due to lower levels of operations resulting from the global economic recession, and internal efforts to reduce the investment in working capital. Cash and short-term investments totaled $773 at December 31, 2009, an increase of $243 from $530 at year-end 2008.

Page 54

Total debt of $3,467 at December 31, 2009 declined by $804 from $4,271 at year-end 2008. The decline was primarily due to a $699 reduction of short-term debt (largely commercial paper) during 2009, and a $264 reduction in current portion of long-term debt due to the repayment of certain long-term debt that matured during 2009. Short-term debt and current portion of long-term debt were reduced through the use of cash generated from operations and from long-term borrowings. In 2009, Eaton issued $550 of long-term debt through the sale of $250 of 5.95% Notes due 2014 and $300 of 6.95% Notes due 2019, with the cash proceeds from the sale of the Notes used to repay outstanding short-term commercial paper. The net-debt-to-capital ratio was 28.4% at December 31, 2009 compared to 37.2% at the end of 2008, reflecting the combined effect of the $804 decrease in total debt, the $243 increase in cash and short-term investments, and the $460 increase in Eaton shareholders’ equity. The increase in equity primarily resulted from net income of $383 and foreign currency translation adjustments of $349, partially offset by cash dividends paid of $334 and other adjustments.

Net working capital of $1,835 at December 31, 2009 rose by $785 from $1,050 at the end of 2008. The increase was primarily due to the reduction of short-term debt and current portion of long-term debt by $963 compared to the end of 2008, largely due to the repayment of short-term commercial paper and current portion of long-term debt as discussed above. Changes in other working capital included an increase of $243 in cash and short-term investments primarily due to strong cash flow from operations, reductions of $396 in accounts receivable and $228 in inventories due to lower sales and internal efforts to reduce the investment in working capital, and a net increase of $203 in other working capital. The current ratio was 1.7 at December 31, 2009, up from 1.3 at year-end 2008.

In 2009, Eaton acquired one business and entered into a joint venture. The Statements of Consolidated Income include the results of these businesses from the dates of the transactions. These transactions are summarized below:

• On September 1, 2009, Eaton acquired the remaining shares of Micro Innovation Holding AG, increasing its ownership from 50% to 100%. This company is a Switzerland-based manufacturer of human machine interfaces, programmable logic controllers and input/output devices. This business had sales of $33 for 2008 and is included in the Electrical Rest of World segment.

• On July 2, 2009, Eaton entered into a joint venture in Abu Dhabi. The joint venture operates as SEG Middle East Power Solutions & Switchboard Manufacture LLC, a manufacturer of low voltage switchboards and control panel assemblies for use in the Middle East power generation and industrial markets. This business had annual sales of $10 for 2008 and is included in the Electrical Rest of World segment.

RESULTS OF OPERATIONS — 2009 COMPARED TO 2008

							Increase
	2009			2008			(Decrease)
Continuing operations
Net sales	$	11,873		$	15,376			(23	)%
Gross profit		3,091			4,185			(26	)%
Percent of net sales		26.0	%		27.2	%
Income before income taxes		303			1,140			(73	)%
Income after income taxes	$	385		$	1,067			(64	)%
Income from discontinued operations					3
Net income		385			1,070			(64	)%
Adjustment of net income for noncontrolling interests		(2	)		(12	)
Net income attributable to common shareholders	$	383		$	1,058			(64	)%
Net income per common share - diluted
Continuing operations	$	2.27		$	6.50			(65	)%
Discontinued operations					.02
Total	$	2.27		$	6.52			(65	)%
Average common shares outstanding - diluted (in millions)		167.9			162.3			3	%

Page 55

Net sales in 2009 declined by 23% compared to 2008. The reduction included 22% from core sales, which resulted from the global economic recession and 3% from foreign exchange, partially offset by a 2% increase from acquisitions of businesses. The decline in core sales was driven by weakness in key end markets for each business segment in 2009. The reduction from foreign exchange was primarily due to changes in exchange rates for the euro, the Brazilian real, the U.K. pound sterling, and the Polish zloty. Acquisitions of businesses were primarily the Moeller electrical business, acquired in April 2008, and the Phoenixtec electrical business, acquired in February 2008.

Gross profit declined by 26% in 2009 compared to 2008. The reduction was primarily due to the decline in net sales discussed above; operating inefficiencies related to the difficulty in absorbing fixed manufacturing costs resulting from reduced sales; and pretax charges of $182 resulting from actions taken in 2009 to reduce the workforce including related pension settlement and curtailment expense, a substantial portion of which was recognized in Cost of products sold. These reductions in gross profit were partially offset by savings associated with workforce reductions and other cost containment actions, and the benefits of integrating recently acquired businesses, primarily Moeller and Phoenixtec.

Net Sales by Geographic Region

Net sales are measured based on the geographic location of the selling plant.

	Net sales
	2009			2008			Decrease
United States	$	6,767		$	8,775			(23	)%
Canada		355			428			(17	)%
Latin America		1,061			1,455			(27	)%
Europe		3,007			4,002			(25	)%
Asia Pacific		1,642			1,963			(16	)%
Eliminations		(959	)		(1,247	)
	$	11,873		$	15,376			(23	)%

Sales declines in 2009 of 23% in the United States, 17% in Canada, and 27% in Latin America were primarily due to the global economic recession. In Europe, sales in 2009 declined 25% compared to 2008, primarily due to the global economic recession, partially offset by the acquisition of the Moeller electrical business, acquired in April 2008. In Asia Pacific, sales declined 16% in 2009 primarily due to the global economic recession, partially offset by the acquisition of the Phoenixtec electrical business, acquired in February 2008.

Other Results of Operations

Eaton took significant actions in 2009 to reduce its workforce in response to the severe economic downturn. The reductions totaled approximately 17% of the full-time workforce. These actions resulted in the recognition of severance and pension and other postretirement benefits expense of $182 in 2009. These charges were primarily included in the Statements of Consolidated Income in Cost of products sold or Selling & administrative expense, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related business segment.

Due to limitations imposed by the Pension Protection Act on pension lump sum distributions, Eaton’s U.S. Qualified Pension Plan became restricted in 2009 from making 100% lump sum payments. As a result, the plan experienced a significant increase in lump sum payments before the limitation went into effect. Total pension settlement expense was $86 in 2009, of which $83 was attributable to the U.S. pension plans. A portion of this expense was attributable to the workforce reduction in 2009. These charges were primarily included in the Statements of Consolidated Income in Cost of products sold or Selling & administrative expense, as appropriate. In Business Segment Information, the charges were included in Pension & other postretirement benefits expense.

As a result of the workforce reduction in 2009, curtailment expense of $22 related to pension plans was recognized in 2009. The curtailment expense included recognition of the change in the projected benefit obligation, as well as recognition of a portion of the unrecognized prior service cost. These charges were primarily included in the Statements of Consolidated Income in Cost of products sold or Selling & administrative expense, as appropriate. In Business Segment Information, the charges were included in Pension & other postretirement benefits expense.

Page 56

In 2009 and 2008, Eaton incurred charges related to the integration of acquired businesses. These charges, which consisted of plant consolidations and integration, were recognized as expense as incurred. A summary of these charges follows:

	2009		2008
Electrical Americas	$	4	$	4
Electrical Rest of World		60		43
Hydraulics		3		6
Aerospace		12		20
Automotive		1		3
Corporate		2		1
Pretax charges	$	82	$	77
After-tax charges	$	54	$	51
Per common share	$	.32	$	.31

Charges in 2009 were related primarily to the integration of the following acquisitions: Integrated Hydraulics, Kirloskar, Moeller, Phoenixtec and Argo-Tech. Charges in 2008 were related primarily to the integration of the following acquisitions: Kirloskar, Moeller, Phoenixtec, the MGE small systems UPS business, Saturn, Argo-Tech, Ronningen-Petter, Synflex, PerkinElmer and Cobham. These charges were included in the Statements of Consolidated Income in Cost of products sold or Selling & administrative expense, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related business segment.

In 2008, charges of $27 were recognized related to the closure of the automotive engine valve lifters manufacturing plant in Massa, Italy. These charges, consisting of $17 for severance, $7 for the write-down of assets and $3 for other costs, reduced operating profit of the Automotive segment. These charges were primarily included in the Statements of Consolidated Income in Cost of products sold.

During 2009, income tax benefits of $82 were recognized (a tax benefit rate of 27.2% for 2009) compared to income tax expense of $73 for 2008 (a tax expense rate of 6.4% for 2008). The income tax benefit rate for 2009 was favorably affected by tax benefits of $104 from U.S. Federal income tax losses where it is more likely than not that they will be realized. Eaton also recognized income tax benefits of $13 and $108 in 2009 and 2008, respectively, which represented adjustments to worldwide tax liabilities and valuation allowances. The 2009 benefits resulted from multiple income tax items including benefits related to the settlement of international income tax audits. The 2008 income tax benefits reduced the effective income tax rate from 15.9% to 6.4%. The 2008 benefits resulted from multiple income tax items including a benefit of $44 related to the consolidation of various legal entities and the recognition of $25 of tax credits related to the transfer of certain international operations. Further analysis regarding the change in the effective income tax rate in 2009 compared to 2008 is found in “Income Taxes” in the Notes to the Consolidated Financial Statements.

In 2009, Eaton reported net income of $383 and net income per common share of $2.27, declines of 64% and 65%, respectively, compared to net income of $1,058 and net income per share of $6.52 for 2008. The declines were primarily due to lower net sales in 2009, the factors that affected gross profit discussed above, partially offset by the income tax benefit rate of 27.2% in 2009 compared to an effective income tax expense rate of 6.4% in 2008, discussed above. Net income per share was also reduced due to a higher number of average shares outstanding in 2009 compared to 2008, resulting principally from the sale of 18.678 million shares in 2008.

In 2009, Eaton adopted the revised standard related to noncontrolling interests in consolidated financial statements. This standard clarifies accounting and disclosures related to noncontrolling interests, sometimes referred to as minority interest, which is the portion of equity in a subsidiary not owned, directly or indirectly, by Eaton. As a result of the adoption of this standard, prior period amounts were reclassified to conform to the current period presentation. The adoption of this standard did not have a material effect on Eaton’s financial position, results of operations or cash flows.

Page 57

RESULTS BY BUSINESS SEGMENT

Electrical Americas

	2009			2008			Decrease
Net sales	$	3,410		$	4,016			(15	)%
Operating profit		518			630			(18	)%
Operating margin		15.2	%		15.7	%

Sales of the Electrical Americas segment declined 15% in 2009 compared to 2008. The reduction included 14% from core sales and 1% from foreign exchange. The decline in core sales was driven by weakness in non-residential and residential construction markets during 2009 due to the global economic recession, partially offset by a 7% increase from outgrowing end markets. The decline in end markets in 2009 reflected lower private nonresidential construction spending in the United States, which declined by 23% in 2009.

Operating profit declined 18% in 2009 compared to 2008. The reduction was due to the decline in net sales discussed above, partially offset by net savings resulting from the workforce reductions and other cost containment actions. Operating profit was reduced by acquisition integration charges of $4 in both 2009 and 2008, which reduced the operating margin by 0.1% in both 2009 and 2008.

Electrical Rest of World

	2009			2008			Decrease
Net sales	$	2,483		$	2,904			(15	)%
Operating profit		107			233			(54	)%
Operating margin		4.3	%		8.0	%

Sales of the Electrical Rest of World segment declined 15% in 2009 compared to 2008. The reduction included 19% from core sales and 5% from foreign exchange, partially offset by a 9% increase from acquisitions of businesses. The decline in core sales was due to softness in European and Asian markets during 2009 due to the global economic recession. Acquisitions of businesses were primarily the Moeller electrical business, acquired in April 2008, and the Phoenixtec electrical business, acquired in February 2008.

Operating profit declined 54% in 2009 compared to 2008. The reduction was largely due to the decline in sales described above, unabsorbed fixed costs resulting from significant sales reductions, and changes in sales mix, partially offset by net savings resulting from the workforce reductions and other cost containment actions. Operating profit was reduced by acquisition integration charges of $60 in 2009 compared to charges of $43 in 2008, which reduced the operating margin by 2.4% in 2009 and 1.5% in 2008. Acquisition integration charges in 2009 primarily related to Moeller and Phoenixtec, while charges in 2008 also included the MGE small systems UPS business.

On September 1, 2009, Eaton acquired the remaining shares of Micro Innovation Holding AG, increasing its ownership from 50% to 100%. This company is a Switzerland-based manufacturer of human machine interfaces, programmable logic controllers and input/output devices. This business had sales of $33 for 2008.

On July 2, 2009, Eaton entered into a joint venture in Abu Dhabi. The joint venture operates as SEG Middle East Power Solutions & Switchboard Manufacture LLC, a manufacturer of low voltage switchboards and control panel assemblies for use in the Middle East power generation and industrial markets. This business had annual sales of $10 for 2008.

Hydraulics

	2009			2008			Decrease
Net sales	$	1,692		$	2,523			(33	)%
Operating profit		51			285			(82	)%
Operating margin		3.0	%		11.3	%

Sales of the Hydraulics segment declined 33% in 2009 compared to 2008. The reduction included 32% from core sales and 2% from foreign exchange, partially offset by a 1% increase from acquisitions of businesses. The decline in core sales resulted from market weakness in all regions beginning in late 2008 and continuing throughout 2009 due to the global economic recession, with the U.S. leading the decline and Asia Pacific and Latin American markets having relatively lower declines.

Page 58

Operating profit declined 82% in 2009 compared to 2008. The reduction was primarily due to the decline in sales discussed above and operating inefficiencies related to the difficulty in absorbing fixed manufacturing costs resulting from reduced sales in 2009, partially offset by net savings resulting from the workforce reductions and other cost containment actions. Operating profit was reduced by acquisition integration charges of $3 in 2009 compared to charges of $6 in 2008, which reduced the operating margin by 0.2% in both 2009 and 2008.

Aerospace

	2009			2008			Decrease
Net sales	$	1,602		$	1,811			(12	)%
Operating profit		245			283			(13	)%
Operating margin		15.3	%		15.6	%

Sales of the Aerospace segment declined 12% in 2009 compared to 2008. The reduction included 9% from core sales and 3% from foreign exchange. The decline in core sales was driven by lower sales in civilian aerospace markets in 2009, partially offset by a slight improvement in defense aerospace markets.

Operating profit declined 13% in 2009 compared to 2008. The reduction was primarily due to the decline in sales discussed above, partially offset by net savings resulting from the workforce reductions and other cost containment actions. Operating profit was reduced by acquisition integration charges of $12 in 2009 compared to charges of $20 in 2008, which reduced the operating margin by 0.7% in 2009 and 1.1% in 2008. The acquisition integration charges related to Argo-Tech, PerkinElmer and Cobham.

Truck

	2009			2008			Decrease
Net sales	$	1,457		$	2,251			(35	)%
Operating profit		39			315			(88	)%
Operating margin		2.7	%		14.0	%

Sales of the Truck segment declined 35% in 2009 compared to 2008. The reduction included 30% from core sales and 5% from foreign exchange. The decline in core sales resulted from truck markets being down in all regions in 2009 due to the global economic recession, with the NAFTA Class 8 market at levels not seen since 1991. Orders in the North American Class 8 truck market improved marginally in the second half of 2009.

Operating profit declined 88% in 2009 compared to 2008. The reduction in operating profit was primarily due to the significant decline in sales in 2009 discussed above and operating inefficiencies related to the difficulty in absorbing fixed manufacturing costs resulting from reduced sales in 2009, partially offset by net savings resulting from the workforce reductions and other cost containment actions.

Automotive

	2009			2008			Decrease
Net sales	$	1,229		$	1,871			(34	)%
Operating profit (loss)		(10	)		59		NM
Operating margin	NM				3.2	%

Sales of the Automotive segment declined 34% in 2009 compared to 2008. The reduction included 28% from core sales and 6% from foreign exchange. The decline in core sales was primarily attributable to a contraction in global automotive end markets that began in 2008 and worsened in 2009 due to the global economic recession. The automotive market in the U.S. in 2009 was markedly impacted in the second quarter by the shutdowns at General Motors and Chrysler. Global automotive production improved in the third quarter of 2009, to a large extent as a result of the governmental stimulus programs.

Operating losses were $(10) in 2009 compared to operating profit of $59 in 2008. The reduction was primarily due to the significant decline in sales in 2009 discussed above and operating inefficiencies related to the difficulty in absorbing fixed manufacturing costs resulting from reduced sales in 2009, partially offset by net savings resulting from the workforce reductions and other cost containment actions.

Page 59

Corporate

Amortization of intangible assets was $170 in 2009 compared to $161 in 2008. The increase was due to amortization of intangible assets associated with acquired businesses, primarily Moeller and Phoenixtec.

Corporate pension & other postretirement benefits expense was $212 in 2009 compared to $141 in 2008. The increase was primarily due to pension settlement expense of $86 in 2009, which primarily resulted from a significant increase in lump sum payments in 2009 before limitations on these payments went into effect and the workforce reduction in 2009. The increase in expense also reflected curtailment expense of $22, which resulted from the reduction in workforce in 2009.

Other corporate expense-net was $87 in 2009 compared to $177 in 2008. The decline was primarily due to the amortization in 2008 of purchase price accounting adjustments related to the fair value of inventories of businesses acquired in 2008, principally Moeller, and lower corporate expenses in 2009.

LIQUIDITY, CAPITAL RESOURCES & CHANGES IN FINANCIAL CONDITION DURING 2009

Cash Flow & Working Capital

Net cash provided by operating activities was $1,408 in 2009, a slight decline from $1,441 in 2008. Operating cash flows in 2009 reflected lower net income of $385 in 2009 compared to net income of $1,070 in 2008, with results for 2009 reflecting the effects of the global economic recession. The effect of this decline in net income was more than offset by the $944 cash flow resulting from the net reduction in funding of working capital in 2009 compared to 2008. The reduction in working capital, primarily accounts receivable and inventory, was due to lower levels of operations resulting from the global economic recession, and internal efforts to reduce the investment in working capital. Cash and short-term investments totaled $773 at December 31, 2009, an increase of $243 from $530 at year-end 2008.

Net working capital of $1,835 at December 31, 2009 rose by $785 from $1,050 at the end of 2008. The increase was primarily due to the reduction of short-term debt and current portion of long-term debt by $963 compared to the end of 2008, largely due to the repayment of short-term commercial paper and current portion of long-term debt as discussed above. Changes in other working capital included an increase of $243 in cash and short-term investments primarily due to strong cash flow from operations, reductions of $396 in accounts receivable and $228 in inventories due to lower sales and internal efforts to reduce the investment in working capital, and a net increase of $203 in other working capital. The current ratio was 1.7 at December 31, 2009, up from 1.3 at year-end 2008.

On a regular basis, Eaton monitors the third-party depository institutions that hold its cash and short-term investments. Its emphasis is primarily on safety of principal and secondarily on maximizing yield. Eaton diversifies its cash and short-term investments among counterparties to minimize exposure to any one of these entities. Eaton also monitors the creditworthiness of its customers and suppliers to mitigate any adverse impact. Derivative financial instruments used by Eaton are straightforward and non-leveraged; the counterparties to these instruments are financial institutions with strong credit ratings. Eaton maintains controls over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions.

Capital expenditures for property, plant and equipment were $195, down from $448 in 2008, primarily due to efforts to conserve cash. Capital expenditures for 2010 are expected to be $400.

Debt & Equity

Total debt of $3,467 at December 31, 2009 declined by $804 from $4,271 at year-end 2008. The decline was primarily due to a $699 reduction of short-term debt (largely commercial paper) during 2009, and a $264 reduction in current portion of long-term debt due to the repayment of certain long-term debt that matured during 2009. Short-term debt and current portion of long-term debt were reduced through the use of cash generated from operations and from long-term borrowings. In 2009, Eaton issued $550 of long-term debt through the sale of $250 of 5.95% Notes due 2014 and $300 of 6.95% Notes due 2019, with the cash proceeds from the sale of the Notes used to repay outstanding short-term commercial paper. The net-debt-to-capital ratio was 28.4% at December 31, 2009 compared to 37.2% at the end of 2008, reflecting the combined effect of the $804 decrease in total debt, the $243 increase in cash and short-term investments, and the $460 increase in Eaton shareholders’ equity. The increase in equity primarily resulted from net income of $383 and foreign currency translation adjustments of $349, partially offset by cash dividends paid of $334 and other adjustments.

Page 60

Eaton has long-term revolving credit facilities with United States banks of $1.5 billion, of which $500 expires in each year from 2011 through 2013. These facilities support Eaton’s commercial paper borrowings. There were no borrowings outstanding under these revolving credit facilities at December 31, 2009. Eaton’s non-United States operations also had short-term lines of credit of approximately $680 at December 31, 2009.

Eaton’s ability to access the commercial paper market, and the related cost of these borrowings, is due to the strength of its credit rating and overall market conditions. To date, Eaton has not experienced any material limitations on its ability to access these sources of liquidity. Eaton maintains $1.5 billion of long-term revolving credit facilities with banks in support of its commercial paper program, as discussed above.

At December 31, 2009, Eaton was in compliance with all covenants related to its long-term debt obligations.

Credit Ratings

Eaton’s credit rating at Standard & Poor’s is A-/A-2 (long-term rating/short-term rating) and at Moody’s is A3/P-2, both with stable outlooks. Eaton’s credit rating at Fitch is A-/F2 with a negative outlook.

Pension Plan Assets

During 2009, the fair value of plan assets in the Company’s employee pension plan increased $368 to $2,042 at December 31, 2009. This was principally the result of increases in the investment values due to the broad improvement in the global equity markets.

At December 31, 2009, the net unfunded position of $1.568 billion in pension liabilities consisted of $923 in the U.S. Pension Plan, $84 in all other plans that require minimum funding, ($50) in plans that are overfunded, and $611 in plans that have no minimum funding requirements.

Funding requirements are a major consideration in making contributions to Eaton’s pension plans. With respect to the Company’s pension plans worldwide, it intends to contribute annually not less than the minimum required by applicable laws and regulations. In 2009, $271 was contributed to the pension plans. The Company contributed $300 to the U.S. Pension Plan in January 2010 and anticipates making an additional $102 of contributions to all other pension plans during the remainder of 2010. The funded status of the Company’s pension plans at the end of 2010, and future contributions, will depend primarily on the actual return on assets during the year and the discount rate used to calculate certain benefits at the end of the year. Depending on these factors, and the resulting funded status of the pension plans, the level of future contributions could be materially higher or lower than in 2009.

Meritor Litigation

On October 5, 2006, ZF Meritor LLC and Meritor Transmission Corporation (collectively, “Meritor”) filed an action against Eaton in the U.S. District Court for Delaware. The action seeks damages, which would be trebled under U.S. antitrust laws, as well as injunctive relief and costs. The suit alleged that Eaton engaged in anti-competitive conduct against Meritor in the sale of heavy duty truck transmissions in North America. Following a four week trial on liability only, on October 8, 2009, the jury returned a verdict in favor of Meritor. Eaton firmly believes that it competes fairly and honestly for business in the marketplace, and that at no time did it act in an anti-competitive manner. During an earlier stage in the case, the judge concluded that damage estimates contained in a report filed by Meritor were not based on reliable data and the report was specifically excluded from the case. On November 3, 2009, Eaton filed a motion for judgment as a matter of law and to set aside the verdict. That motion is currently pending. Accordingly, an estimate of any potential loss related to this action cannot be made at this time.

OUTLOOK FOR 2010

As of late February, Eaton estimates that its end markets for all of 2010 will grow by between 5% and 6%, and expects to outgrow end markets in 2010 by approximately $300 in net sales. The Company also expects approximately $225 of sales growth from foreign exchange in 2010. In total, it is anticipated that net sales in 2010 will likely grow by approximately 10% compared to 2009.

Page 61

For the Electrical Americas segment, end markets are expected to decline about 3% in 2010.

End markets for the Electrical Rest of World segment are expected to grow about 5% in 2010.

Global hydraulics markets are anticipated to grow about 15% in 2010. End markets in the U.S. are expected to grow about 15% and non-U.S. markets are expected to grow about 14%.

End markets for the Aerospace segment are expected to decline about 3% in 2010. U.S. markets are expected to decline about 1%, while non-U.S. markets are expected to decline about 7%.

For the Truck segment, good market growth is expected in 2010, although volumes are likely to still be at depressed levels. It is anticipated that overall truck markets will grow about 19% in 2010, with U.S. markets up about 27% and non-U.S. markets up about 10%.

End markets for the Automotive segment are expected to grow about 8% in 2010. Growth is expected in U.S. Automotive production of about 20% and growth in non-U.S. production of about 2%.

FORWARD-LOOKING STATEMENTS

This Annual Report to Shareholders contains forward-looking statements concerning Eaton’s full year 2010 sales, the performance in 2010 of its worldwide end markets, and Eaton’s 2010 growth in relation to end markets. These statements may discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to Eaton, based on current beliefs of management as well as assumptions made by, and information currently available to, management. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside Eaton’s control. The following factors could cause actual results to differ materially from those in the forward-looking statements: unanticipated changes in the markets for Eaton’s products; unanticipated downturns in business relationships with customers or their purchases from the Company; competitive pressures on sales and pricing; increases in the cost of material and other production costs, or unexpected costs that cannot be recouped in product pricing; the introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; the impact of acquisitions and divestitures; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; interest rate changes; changes in currency exchange rates; stock market fluctuations; and unanticipated deterioration of economic and financial conditions in the United States and around the world. Eaton does do not assume any obligation to update these forward-looking statements.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires Eaton’s management to make estimates and use assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements. In preparing these financial statements, management has made their best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. For any estimate or assumption there may be other reasonable estimates or assumptions that could have been used. However, the Company believes that given the current facts and circumstances, it is unlikely that applying such other estimates and assumptions would have caused materially different amounts to have been reported. Application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, future actual results could differ from estimates used.

Revenue Recognition

Sales of products are recognized when a sales agreement is in place, products have been shipped to unaffiliated customers and title has transferred in accordance with shipping terms (FOB shipping point, FOB destination or equivalent International Commercial (INCO) Terms), the selling price is fixed and determinable and collectability is reasonably assured, all significant related acts of performance have been completed, and no other significant uncertainties exist. Shipping and handling costs billed to customers are included in Net sales and the related costs in Cost of products sold. Although the majority of the sales agreements contain standard terms and conditions, there are also agreements that contain multiple elements or non-standard terms and conditions. As a result, judgement is sometimes required to determine the appropriate accounting, including whether

Page 62

the deliverables specified in these agreements should be treated as separate units of accounting for sales recognition purposes, and, if so, how the sales price should be allocated among the elements and when to recognize sales for each element. For delivered elements, sales are recognized only when the delivered elements have standalone value, fair values of undelivered elements are known, there are no uncertainties regarding customer acceptance and there are no customer-negotiated refund or return rights affecting the sales recognized for delivered elements. Sales for service contracts are generally recognized as the services are provided.

Accounts Receivable

The Company performs ongoing credit evaluations of its customers and maintains sufficient allowances for potential credit losses. The Company evaluates the collectability of its accounts receivable based on the length of time the receivable is past due and the anticipated future write-off based on historic experience. Accounts receivable balances are written off against allowance for doubtful accounts after a final determination of uncollectibility has been made.

Impairment of Goodwill & Other Long-Lived Assets

Goodwill and indefinite life intangible assets are tested annually for impairment. Further, goodwill and indefinite life intangible assets are reviewed for impairment whenever events or changes in circumstances indicate there may be a possible permanent loss of value. Eaton completed annual impairment tests for goodwill and indefinite life intangible assets as of July 1 of each year presented using discounted cash flow and other valuation techniques. These tests confirmed that the fair value of Eaton’s reporting units and indefinite life intangible assets exceed their respective carrying values and that no impairment loss was required to be recognized in 2009 or for any prior periods.

Goodwill is tested for impairment at the reporting unit level, which is equivalent to Eaton’s operating segments, and is based on the net assets for each segment, including goodwill and intangible assets. Goodwill is assigned to each operating segment as this represents the lowest level that constitutes a business and for which discrete financial information is available and segment management regularly reviews the operating results. A discounted cash flow model is used to estimate the fair value of each operating segment, which considers forecasted cash flows discounted at an estimated weighted-average cost of capital. The Company selected the discounted cash flow methodology as it believes that it is comparable to what would be used by other market participants. The forecasted cash flows are based on the Company’s long-term operating plan, and a terminal value is used to estimate the operating segment’s cash flows beyond the period covered by the operating plan. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market participants of a business enterprise. These analyses require the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the timing of expected future cash flows. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective operating segment. Sensitivity analyses were performed around these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values. Based on this test, no reporting unit was at risk of failing the impairment test as of December 31, 2009.

Goodwill and other intangible assets totaled $7.9 billion at the end of 2009 and represented 48% of total assets. These assets resulted primarily from the $2.1 billion acquisition in 2008 of The Moeller Group, a leading supplier of electrical components; the $587 acquisition in 2008 of Phoenixtec, a manufacturer of uninterruptible power supply (UPS) electrical systems; the $614 acquisition in 2007 of the MGE small systems UPS electrical business; the $731 acquisition in 2007 of Argo-Tech, a manufacturer of aerospace, airframe, and ground fueling pumps and systems for commercial and military aerospace markets; the $573 acquisition in 2004 of Powerware Corporation, the electrical UPS business; the $1.6 billion acquisition in 1999 of Aeroquip-Vickers, Inc., a mobile and industrial hydraulics business; and the $1.1 billion acquisition in 1994 of the electrical distribution and controls business unit of Westinghouse. These businesses have a long history of operating successfully and profitably and hold significant market positions in the majority of their product lines. Their products are not subject to rapid technological or functional obsolescence. These factors support the recognized values of the goodwill and intangible assets related to acquired businesses.

Long-lived assets, other than goodwill and indefinite life intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Events or circumstances that would result in an impairment review include operations reporting losses, a significant adverse change in the use of an asset, the planned disposal or sale of the asset, a significant adverse change in the business climate or legal factors related to the asset, or a significant decrease in the estimated fair value of an asset. Upon indications of impairment, assets are grouped with other assets and

Page 63

liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The asset group would be considered impaired when the estimated future net undiscounted cash flows generated by the asset group are less than its carrying value. In instances where the carrying amount of the asset group exceeded the undiscounted cash flows, the fair value of the asset group would be determined and an impairment loss would be recognized based on the amount by which the carrying value of the asset group exceeds its fair value. Determining asset groups and underlying cash flows requires the use of significant judgments and estimates.

Recoverability of Deferred Income Tax Assets

Eaton is subject to the income tax laws in the jurisdictions in which it operates. In order to determine its income tax provision for financial statement purposes, Eaton must make significant estimates and judgments about its business operations in these jurisdictions. These estimates and judgments are also used in determining the deferred income tax assets and liabilities that have been recognized for the differences between the financial accounting and income tax basis of assets, liabilities, tax loss carryforwards and income tax credit carryforwards.

Management evaluates the realizability of deferred income tax assets for each of the jurisdictions in which it operates. If the Company experiences cumulative pretax income in a particular jurisdiction in the three-year period including the current and prior two years, management normally concludes that the deferred income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments would lead management to conclude otherwise. However, if the Company experiences cumulative pretax losses in a particular jurisdiction in the three-year period including the current and prior two years, management then considers a series of significant factors in the determination of whether the deferred income tax assets can be realized. The significant factors include historical operating results, known or planned operating developments, the period of time over which certain temporary differences will reverse, consideration of the utilization of certain deferred tax liabilities, tax law carryback capability in the particular country, prudent and feasible tax planning actions, and estimates of future earnings and taxable income using the same assumptions as the Company’s goodwill and other impairment testing. After evaluation of these factors, if the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, management would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, management would conclude that a valuation allowance is required.

Deferred income tax assets and liabilities are described in detail in “Income Taxes” in the Notes to the Consolidated Financial Statements. As of December 31, 2009, U.S. Federal deferred income tax assets were $1.4 billion. The largest component of the deferred income tax assets is due to the differing timing of revenue and expense recognition for income tax versus financial statement purposes. In addition, the Company had a net operating loss in the U.S. in 2009 and possesses certain income tax credit carryforwards that comprise the remainder of the balance. Over the 20 year carryforward period available for net operating losses and general business credits, taxable income of approximately $4.0 billion would need to be realized to utilize all deferred income tax assets. After applying the methodology described above, as of December 31, 2009, management believes that it is more likely than not that the entire U.S. Federal deferred income tax assets will be realized. Accordingly, the Company has not established a valuation allowance on its U.S. Federal deferred income tax assets.

Applying the above methodology, valuation allowances have been established for certain U.S. state and local income as well as certain non-U.S. deferred income tax assets to the extent they are not expected to be realized within the particular tax carryforward period.

Pension & Other Postretirement Benefit Plans

The measurement of liabilities related to pension plans and other postretirement benefits plans is based on management’s assumptions related to future events including interest rates, return on pension plan assets, rate of compensation increases, and health care cost trend rates. Actual pension plan asset performance will either reduce or increase pension losses included in accumulated other comprehensive loss, which ultimately affects net income.

Page 64

The discount rate for United States plans was determined by constructing a zero-coupon spot yield curve derived from a universe of high-quality bonds as of the measurement date, which was designed to match the discounted expected benefit payments. Only bonds rated Aa3 or better by Moody’s Investor Services were included. Callable bonds with explicit call schedules were excluded but bonds with “make-whole” call provisions were included. Finally, a subset of bonds was selected by grouping the universe of bonds by duration and retaining 50% of the bonds that had the highest yields.

The discount rates for non-United States plans are appropriate for each region and are based on high-quality long-term corporate and government bonds. Consideration has been given to the duration of the liabilities in each plan for selecting the bonds to be used in determining the discount rate.

Key assumptions used to calculate pension and other postretirement benefits expense are adjusted at each year end. A 1-percentage point change in the assumed rate of return on pension plan assets is estimated to have approximately a $24 effect on pension expense. Likewise, a 1-percentage point change in the discount rate is estimated to have approximately a $37 effect on pension expense. A 1-percentage point change in the discount rate is estimated to have approximately a $3 effect on expense for other postretirement benefits plans. Additional information related to changes in key assumptions used to recognize expense for other postretirement benefits plans is found in “Retirement Benefits Plans” in the Notes to the Consolidated Financial Statements.

Fair Value

In determining fair value, Eaton uses various valuation techniques and prioritizes the use of observable inputs. The availability of observable inputs varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded and other characteristics specific to the instrument. Eaton assesses the inputs used to measure fair value using a three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market. Level 1 inputs include quoted prices in active markets for identical instruments. Level 2 inputs include quoted prices in active markets for similar instruments. Level 3 inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in the pricing of the asset or liability. The use of inputs is reflected in the hierarchy assessment disclosed in “Retirement Benefits Plans” and “Financial Assets & Liabilities Measured at Fair Value” in the Notes to the Consolidated Financial Statements. Eaton’s fair value processes include controls that are designed to ensure that fair values are appropriate. Such controls include model valuation, review of key inputs, analysis of fluctuations between periods, and reviews by senior management.

Protection of the Environment

As a result of past operations, Eaton is involved in remedial response and voluntary environmental remediation at a number of sites, including certain of its currently-owned or formerly-owned plants. The Company has also been named a potentially responsible party (PRP) under the Federal Superfund law at a number of disposal sites.

A number of factors affect the cost of environmental remediation, including the number of parties involved at a particular site, the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, and the continuing advancement of remediation technology. Taking these factors into account, Eaton has estimated the costs of remediation, which will be incurred over a period of years. The Company accrues an amount on an undiscounted basis, consistent with the estimates of these costs, when it is probable that a liability has been incurred. At December 31, 2009, the balance sheet included a liability for these costs of $80. All of these estimates are forward-looking statements and, given the inherent uncertainties in evaluating environmental exposures, actual results can differ from these estimates.

Contingencies

Eaton is subject to a broad range of claims, administrative proceedings, and legal proceedings, such as lawsuits that relate to contractual allegations, patent infringement, personal injuries (including asbestos claims), antitrust matters and employment-related matters. Although it is not possible to predict with certainty the outcome or cost of these matters, the Company believes that these matters will not have a material adverse effect on its financial position, results of operations or cash flows.

Page 65

OFF-BALANCE SHEET ARRANGEMENTS

Eaton does not have off-balance sheet arrangements or financings with unconsolidated entities or other persons. In the ordinary course of business, the Company leases certain real properties and equipment, as described in “Lease Commitments” in the Notes to the Consolidated Financial Statements.

MARKET RISK DISCLOSURE

Eaton is exposed to various changes in financial market conditions, including fluctuations in interest rates, foreign currency exchange rates, and commodity prices. The Company manages exposure to such risks through normal operating and financing activities.

Eaton monitors the third-party depository institutions that hold its cash and short-term investments on a regular basis. Its emphasis is primarily on safety of principal and secondarily on maximizing yield on those funds. The Company diversifies its cash and short-term investments among counterparties to minimize exposure to any one of these entities. It also monitors the creditworthiness of its customers and suppliers to mitigate any adverse impact on Eaton.

Derivative financial instruments used by Eaton to manage exposures to financial risks are straightforward, non-leveraged instruments. The counterparties to these instruments are financial institutions with strong credit ratings. The Company maintains controls over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions.

Eaton’s ability to access the commercial paper market, and the related cost of these borrowings, is related to the strength of its credit rating and overall market conditions. To date, the Company has not experienced any material limitations in its ability to access these sources of liquidity. At December 31, 2009, Eaton had $1.5 billion of long-term revolving credit facilities with banks in support of its commercial paper program, as discussed above. It has no direct borrowings outstanding under these credit facilities. Eaton’s non-United States operations also had short-term lines of credit of approximately $680 at December 31, 2009.

Interest rate risk can be measured by calculating the near-term earnings impact that would result from adverse changes in interest rates. This exposure results from short-term debt, which includes commercial paper at a floating interest rate, long-term debt that has been swapped to floating rates, and money market investments that have not been swapped to fixed rates. Based upon the balances of investments and floating rate debt at year end 2009, a 100 basis point increase in short-term interest rates would have a negligible effect on the Company’s net, pretax interest expense.

Eaton also measures interest rate risk by estimating the net amount by which the fair value of the Company’s financial liabilities would change as a result of movements in interest rates. Based on Eaton’s best estimate for a hypothetical, immediate 100 basis point decrease in interest rates at December 31, 2009, the market value of the Company’s debt and interest rate swap portfolio, in aggregate, would increase by $210.

Foreign currency risk is the risk that Eaton will incur economic losses due to adverse changes in foreign currency exchange rates. The Company mitigates foreign currency risk by funding some investments in foreign markets through local currency financings. Such non-U.S. dollar debt was $151 at December 31, 2009. To augment Eaton’s non-U.S. dollar debt portfolio, the Company also enters into forward foreign exchange contracts and foreign currency swaps from time to time to mitigate the risk of economic loss in its foreign investments due to adverse changes in exchange rates. At December 31, 2009, the aggregate balance of such contracts was $573. Eaton also monitors exposure to transactions denominated in currencies other than the functional currency of each country in which the Company operates, and regularly enters into forward contracts to mitigate that exposure. In the aggregate, Eaton’s portfolio of forward contracts related to such transactions was not material to its financial position, results of operations or cash flows during 2009.

Other than the above noted debt and financial derivative arrangements, there were no material derivative instrument transactions in place or undertaken during 2009.

CONTRACTUAL OBLIGATIONS

A summary of contractual obligations as of December 31, 2009 follows:

Page 66

				2011			2013
				to			to			After
	2010			2012			2014			2014			Total
Long-term debt	$	5		$	318		$	568		$	2,463		$	3,354
Interest expense related to long-term debt		190			372			311			1,245			2,118
Reduction of interest expense from interest rate swap agreements related to long-term debt		(34	)		(43	)		(17	)		(72	)		(166	)
Operating leases		121			160			72			47			400
Purchase obligations		891			521			72			32			1,516
Other long-term liabilities		413			24			24			38			499
	$	1,586		$	1,352		$	1,030		$	3,753		$	7,721

Long-term debt includes obligations under capital leases, which are not material. Interest expense related to long-term debt is based on the fixed interest rate, or other applicable interest rate related to the debt instrument, at December 31, 2009. The reduction of interest expense due to interest rate swap agreements related to long-term debt is based on the difference in the fixed interest rate the Company receives from the swap, compared to the floating interest rate the Company pays on the swap, at December 31, 2009. Purchase obligations are entered into with various vendors in the normal course of business. These amounts include commitments for purchases of raw materials, outstanding non-cancelable purchase orders, releases under blanket purchase orders and commitments under ongoing service arrangements. Other long-term liabilities include $402 of contributions to pension plans in 2010 and $90 of deferred compensation earned under various plans for which the participants have elected to receive disbursement at a later date. The table above does not include future expected pension benefit payments or expected other postretirement benefit payments for each of the next five years and the five years thereafter. Information related to the amounts of these future payments is described in “Retirement Benefits Plans” in the Notes to the Consolidated Financial Statements. The table above also excludes the liability for unrecognized income tax benefits, since the Company cannot predict with reasonable reliability the timing of cash settlements with the respective taxing authorities. At December 31, 2009, the gross liability for unrecognized income tax benefits totaled $197, including interest and penalties of $43.

RESULTS OF OPERATIONS — 2008 COMPARED TO 2007

							Increase
	2008			2007			(Decrease)
Continuing operations
Net sales	$	15,376		$	13,033			18	%
Gross profit		4,185			3,651			15	%
Percent of net sales		27.2	%		28.0	%
Income before income taxes		1,140			1,055			8	%
Income after income taxes	$	1,067		$	973			10	%
Income from discontinued operations		3			35
Net income		1,070			1,008			6	%
Adjustment of net income for noncontrolling interests		(12	)		(14	)
Net income attributable to common shareholders	$	1,058		$	994			6	%
Net income per common share - diluted
Continuing operations	$	6.50		$	6.38			2	%
Discontinued operations		.02			.24
Total	$	6.52		$	6.62			(1	)%
Average common shares outstanding - diluted (in millions)		162.3			150.3			8	%

Sales growth of 18% in 2008 over 2007 consisted of 14% from acquisitions of businesses, 3% from organic growth, and 1% from foreign exchange. Acquisitions of businesses were primarily the Moeller electrical business, acquired in April 2008; the Phoenixtec electrical business, acquired in February 2008; and the MGE small systems UPS electrical business, acquired in October 2007, all of which were included in the Electrical Rest of World segment, along with the Argo-Tech aerospace business, acquired in March 2007.

Page 67

Gross profit increased 15% in 2008 over 2007. This increase was primarily due to sales growth of 18%, which included sales of acquired businesses; the benefits of integrating acquired businesses; and continued productivity improvements driven by the Eaton Business System (EBS). These increases in gross profit were partially offset by the impact of rising prices for raw materials, supplies and other commodities, and expense of $27 related to the closing in 2008 of the automotive engine valve lifters manufacturing plant in Massa, Italy.

Net Sales by Geographic Region

Net sales are measured based on the geographic location of the selling plant.

	Net sales
	2008			2007			Increase
United States	$	8,775		$	8,556			3	%
Canada		428			371			15	%
Latin America		1,455			1,246			17	%
Europe		4,002			2,624			53	%
Asia Pacific		1,963			1,144			72	%
Eliminations		(1,247	)		(908	)
	$	15,376		$	13,033			18	%

In the United States, sales increased 3% in 2008 compared to 2007. Sales growth was primarily due to growth in the Electrical Americas, Aerospace and Hydraulics segments, as well as the acquisitions in 2007 of Argo-Tech aerospace and other businesses. These increases were partially offset by reduced sales in the Automotive segment due to the sharp decline in the North American automotive market during 2008, and reduced sales of the Truck segment.

Sales growth in Canada of 15% in 2008 over 2007 was primarily due to higher sales in the Electrical Americas segment resulting from growth in end markets and from acquired businesses.

In Latin America, sales growth of 17% in 2008 over 2007 was largely due to the Truck, Electrical Americas and Hydraulics segments, primarily due to growth in end markets.

Sales growth in Europe of 53% in 2008 over 2007 was primarily due to higher sales in the Electrical Rest of World segment, which was largely due to the acquisitions of Moeller in 2008 and the MGE small systems UPS business in 2007, as well as growth in end markets. Sales growth was also due to increased sales in the Aerospace, Hydraulics, Truck and Automotive segments largely due to growth in end markets.

Sales growth in Asia Pacific of 72% in 2008 over 2007 was primarily due to the acquisition of the Phoenixtec electrical business in 2008 and higher sales in the Electrical Rest of World, Hydraulics, Automotive and Truck segments, mainly resulting from growth in end markets.

Other Results of Operations

In 2008 and 2007, Eaton incurred charges related to the integration of acquired businesses. These charges, which consisted of plant consolidations and integration, were recognized as expense as incurred. A summary of these charges follows:

	2008		2007
Electrical Americas	$	4
Electrical Rest of World		43	$	12
Hydraulics		6		12
Aerospace		20		39
Automotive		3		1
Corporate		1
Pretax charges	$	77	$	64
After-tax charges	$	51	$	42
Per common share	$	.31	$	.28

Page 68

Charges in 2008 were related primarily to the integration of the following acquisitions: Kirloskar, Moeller, Phoenixtec, the MGE small systems UPS business, Saturn, Argo-Tech, Ronningen-Petter, Synflex, PerkinElmer and Cobham. Charges in 2007 were related primarily to the integration of the following acquisitions: the MGE small systems UPS business, Saturn, Argo-Tech, Schreder-Hazemeyer, Senyuan, Synflex, PerkinElmer, Cobham, Powerware, Hayward, and Walterscheid. These charges were included in the Statements of Consolidated Income in Cost of products sold or Selling & administrative expense, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related segment.

In 2008, Eaton announced the closure of its automotive engine valve lifters manufacturing plant in Massa, Italy. There were 350 employees affected by the closure decision. The action was taken to better align manufacturing capacity with future industry demand and to improve the competitive position of the valve actuation business. Aggregate pretax charges associated with this closure were $27, which were recognized in 2008, when management approved this action. These costs, which consisted of charges of $17 for severance, $7 for the write-down of assets and $3 for other costs, reduced operating profit of the Automotive segment.

In 2008 and 2007, Eaton recognized income tax benefits of $108 and $57, respectively, which represented adjustments to worldwide tax liabilities and valuation allowances. The 2008 income tax benefits reduced the effective income tax rate for 2008 from 15.9% to 6.4%. The 2008 benefits resulted from multiple income tax items including a benefit of $44 related to the consolidation of various legal entities and the recognition of $25 of tax credits related to the transfer of certain international operations. The 2007 income tax benefits reduced the effective income tax rate for 2007 from 13.2% to 7.8%. The 2007 income tax benefits resulted from multiple income tax items, including a $14 benefit from changes to state tax laws and a favorable revaluation of worldwide deferred tax assets. Further analysis regarding the change in the effective income tax rate in 2008 compared to 2007 is found in “Income Taxes” in the Notes to the Consolidated Financial Statements.

Net income of $1,058 in 2008 increased 6% over 2007. The increase was primarily due to higher sales and the other factors that affected gross profit discussed above, along with lower income taxes. These increases were partially offset by increases in selling, administrative, research and development, and interest expenses resulting from the inclusions of Moeller and Phoenixtec, and higher levels of expenses to support sales from existing operations. In addition, a $20 after-tax gain on the sale of the Mirror Controls business was included in Income from discontinued operations in 2007 that was not present in 2008. Net income per common share of $6.52 in 2008 decreased 1% from 2007 due to the factors that resulted in increased net income discussed above, offset by the increase in average shares outstanding resulting from the sale of 18.678 million common shares in a public offering in 2008.

RESULTS BY BUSINESS SEGMENT

Electrical Americas

	2008			2007			Increase
Net sales	$	4,016		$	3,601			12	%
Operating profit		630			534			18	%
Operating margin		15.7	%		14.8	%

The 12% increase in sales in 2008 over 2007 for the Electrical Americas segment consisted of 1% from acquisitions of businesses and 11% from organic growth. End markets for the Electrical Americas segment were adversely affected by the global economic recession in the second half of 2008, although nonresidential construction spending in the United States held up well in 2008.

Operating profit rose 18% in 2008 over 2007, and operating margin rose to 15.7%. The increase in operating profit was largely due to growth in sales and continued productivity improvements. Operating profit was reduced by acquisition integration charges of $4 in 2008 compared to no charges in 2007, which reduced the operating margin by 0.1% in 2008. The incremental operating margin for 2008 (the increase in operating profit compared to the increase in sales) was 23%.

Electrical Rest of World

	2008			2007			Increase
Net sales	$	2,904		$	1,158			151	%
Operating profit		233			45			418	%
Operating margin		8.0	%		3.9	%

Page 69

The 151% increase in sales in 2008 over 2007 for the Electrical Rest of World segment consisted of 150% from acquisitions of businesses, primarily Moeller, Phoenixtec and the MGE small systems UPS business, and 2% from organic growth, partially offset by a 1% decline in foreign exchange. End market growth for the Electrical Rest of World segment slowed in the second half of 2008 reflecting the global economic recession.

Operating profit rose 418% in 2008 over 2007, and operating margin rose to 8.0%. The increase in operating profit was largely due to results of acquired businesses, other growth in sales and continued productivity improvements. Operating profit was reduced by acquisition integration charges of $43 in 2008 compared to charges of $12 in 2007, which reduced the operating margin by 1.5% and 1.0% in 2008 and 2007, respectively. Acquisition integration charges in 2008 primarily related to Moeller, Phoenixtec and the MGE small systems UPS business. Charges in 2007 related to MGE small systems UPS business, Schreder-Hazemeyer, Senyuan and Powerware. The incremental operating margin for 2008 (the increase in operating profit compared to the increase in sales) was 11%. The operating margin for acquired businesses for 2008 was 14%.

Businesses acquired during 2008 in the Electrical Rest of World segment included the following:

• On July 31, 2008, PK Electronics, a Belgium-based distributor and service provider of single phase and three-phase uninterruptible power supply (UPS) systems, was acquired. This business had sales of $9 for 2007.

• On April 4, 2008, The Moeller Group, a Germany-based business which is a leading supplier of electrical components for commercial and residential building applications and industrial controls for industrial equipment applications, was acquired. This business had sales of €1.02 billion for 2007.

• On March 31, 2008, Balmen Electronic, S.L., a Spain-based distributor and service provider of uninterruptible power supply (UPS) systems, was acquired. This business had sales of $6 for 2007.

• On February 26, 2008, Phoenixtec Power Company Ltd., a Taiwan-based manufacturer of single and three-phase uninterruptible power supply (UPS) systems, was acquired. This business had sales of $515 for 2007.

Hydraulics

	2008			2007			Increase
Net sales	$	2,523		$	2,391			6	%
Operating profit		285			265			8	%
Operating margin		11.3	%		11.1	%

The 6% increase in sales in 2008 over 2007 for the Hydraulics segment consisted of 3% from foreign exchange, 2% from organic growth and 1% from acquisitions of businesses. Global hydraulics end markets were stronger in the early part of 2008 led by growth in Asia Pacific markets. However, global hydraulics markets declined markedly in the fourth quarter of 2008, led by steep production cutbacks by customers around the world.

Operating profit rose 8% in 2008 over 2007, and operating margin increased to 11.3%. The increase in operating profit was due to growth in sales, the benefits of integrating acquired businesses, and an overall improvement in operating efficiencies. Operating profit was reduced by acquisition integration charges of $6 in 2008 compared to charges of $12 in 2007, which reduced the operating margin by 0.2% and 0.5% in 2008 and 2007, respectively. Acquisition integration charges in 2008 primarily related to Ronningen-Petter and Synflex. Charges in 2007 largely related to Synflex, Hayward and Walterscheid. The incremental operating margin for 2008 was 15%.

On October 2, 2008, Integ Holdings Limited, the parent company of Integrated Hydraulics Ltd., a U.K.-based manufacturer of screw-in cartridge valves, custom-engineered hydraulic valves and manifold systems, was acquired. The business had sales of $52 in 2007.

Page 70

Aerospace

	2008			2007			Increase
Net sales	$	1,811		$	1,594		14	%
Operating profit		283			233		21	%
Operating margin		15.6	%		14.6	%

The 14% increase in sales in 2008 over 2007 for the Aerospace segment consisted of 13% from organic growth and 2% from acquisitions of businesses, partially offset by a decrease of 1% from foreign exchange. Aerospace end market growth in 2008 was led by non-U.S markets, driven by strong deliveries from Airbus, while U.S. markets were flat, due to a decline in deliveries of new aircraft from Boeing as a result of a strike at its manufacturing operations.

Operating profit rose 21% in 2008 over 2007. The increase in operating profit was due to growth in sales, the benefits of integrating acquired businesses, and an overall improvement in operating efficiencies. Operating profit was reduced by acquisition integration charges of $20 in 2008 compared to charges of $39 in 2007, which reduced the operating margin by 1.1% and 2.4% in 2008 and 2007, respectively. Acquisition integration charges in 2008 and 2007 primarily related to Argo-Tech, PerkinElmer and Cobham. Despite inefficiencies incurred as a result of the Boeing strike, this segment earned a 15.6% operating margin in 2008. The incremental operating margin for 2008 was 23%.

Truck

	2008			2007			Increase (Decrease)
Net sales	$	2,251		$	2,147			5	%
Operating profit		315			357			(12	)%
Operating margin		14.0	%		16.6	%

Sales of the Truck segment increased 5% in 2008 over 2007. The increase consisted of 2% from organic growth and 3% from foreign exchange. End markets were mixed in 2008, with U.S. markets broadly lower, while certain international markets grew.

Operating profit of $315 in 2008 was 12% lower than 2007, primarily due to operating inefficiencies related to the inability to absorb fixed manufacturing costs resulting from volatile end markets. In spite of end markets for the Truck segment that performed unevenly in 2008, this segment achieved an operating margin of 14.0% in 2008.

Automotive

	2008			2007			Decrease
Net sales	$	1,871		$	2,142			(13	)%
Operating profit		59			234			(75	)%
Operating margin		3.2	%		10.9	%

The 13% decrease in sales of the Automotive segment in 2008 from 2007 reflected a 15% decrease in sales volume, partially offset by a 2% increase from foreign exchange. In 2008, global automotive markets declined. U.S. markets led the decline, which was partially offset by growth in Asia Pacific and Latin America markets. The North American markets were weak throughout 2008, and Europe, Brazil and China also weakened dramatically during the year. In addition, the strike at a major U.S. automotive supplier was not fully resolved until very late in the second quarter of 2008, further reducing automotive production in the U.S. in 2008. Additionally, due to the economic downturn in the fourth quarter of 2008, automotive markets dropped sharply around the world, with automotive unit production in the fourth quarter declining significantly.

Operating profit decreased 75% in 2008 from 2007, largely due to the decline in sales volume and changes in product mix. The sharp slowdown in end markets in 2008, as well as continued shifts in mix to smaller vehicles in the U.S., resulted in the inability of this business to absorb fixed manufacturing costs, which severely impacted operating profit. The sudden drop in sales volume during the fourth quarter of 2008 created significant additional manufacturing inefficiencies and necessitated significant reductions in personnel. In addition, an action was taken in 2008 to close the Massa, Italy, valve actuation plant, which resulted in a charge of $27. Operating profit was also reduced by acquisition integration charges of $3 in 2008 as compared to $1 in 2007, which reduced operating margin by 0.2% in 2008 and 0.1% in 2007. Acquisition integration charges in 2008 related to Saturn and the engine valve business of Kirloskar Oil Engines Ltd. Charges in 2007 related to Saturn.

Page 71

On October 1, 2008, Nittan Global Tech Co. Ltd., a joint venture, became operational. The new joint venture will manage the global design, manufacture and supply of engine valves and valve actuation products to Japanese and Korean automobile and engine manufacturers. In addition, during the second half of 2008, several related manufacturing joint ventures were established.

On July 31, 2008, the engine valves business of Kirloskar Oil Engines Ltd. was acquired. This India-based company, which had sales of $5 in 2007, designs, manufacturers and sells intake and exhaust valves for diesel and gasoline engines.

Corporate

Amortization of intangible assets was $161 in 2008 compared to $79 in 2007. The increase reflected amortization of intangible assets associated with recently acquired businesses, primarily the Moeller, Phoenixtec and MGE small systems UPS electrical businesses.

Interest expense was $157 in 2008 compared to $147 in 2007. The increase was primarily due to borrowings to finance recently acquired businesses, primarily the Moeller, Phoenixtec, MGE small systems UPS electrical businesses, and Argo-Tech.

Corporate pension & other postretirement benefit expense was $141 in 2008 compared to $164 in 2007. The decrease was primarily due to the effect of updated actuarial assumptions.

Page 72

QUARTERLY DATA (unaudited)

	Quarter ended in 2009												Quarter ended in 2008
(Millions except for per share data)	Dec. 31			Sept. 30			June 30			Mar. 31			Dec. 31			Sept. 30			June 30			Mar. 31
Continuing operations
Net sales	$	3,131		$	3,028		$	2,901		$	2,813		$	3,487		$	4,114		$	4,279		$	3,496
Gross profit		890			850			712			639			861			1,150			1,210			964
Percent of net sales		28.4	%		28.1	%		24.5	%		22.7	%		24.7	%		28.0	%		28.3	%		27.6	%
Income (loss) before income taxes		170			166			30			(63	)		136			357			358			289
Income (loss) after income taxes	$	212		$	194		$	31		$	(52	)	$	165		$	318		$	337		$	247
Income from discontinued operation																							3
Net income (loss)		212			194			31			(52	)		165			318			337			250
Adjustment of net income (loss) for noncontrolling interests		(1	)		(1	)		(2	)		2			(2	)		(3	)		(4	)		(3	)
Net income (loss) attributable to common shareholders	$	211		$	193		$	29		$	(50	)	$	163		$	315		$	333		$	247
Net income (loss) per common share - diluted
Continuing operations	$	1.25		$	1.14		$	.17		$	(.30	)	$	.98		$	1.87		$	2.03		$	1.62
Discontinued operations																							.02
Total	$	1.25		$	1.14		$	.17		$	(.30	)	$	.98		$	1.87		$	2.03		$	1.64
Net income (loss) per common share - basic
Continuing operations	$	1.27		$	1.16		$	.17		$	(.30	)	$	.98		$	1.90		$	2.07		$	1.65
Discontinued operations																							.02
Total	$	1.27		$	1.16		$	.17		$	(.30	)	$	.98		$	1.90		$	2.07		$	1.67
Cash dividends paid per common share	$	.50		$	.50		$	.50		$	.50		$	.50		$	.50		$	.50		$	.50
Market price per common share
High	$	67.06		$	60.65		$	49.75		$	53.34		$	54.58		$	84.33		$	96.69		$	96.18
Low		53.95			40.28			36.04			30.02			38.78			53.77			78.94			77.55
Earnings per common share for the four quarters in a year may not equal full year earnings per share.
Significant non-recurring adjustments included in income (loss) before income taxes are as follows:
Workforce reduction charges	$	(26	)	$	(22	)	$	(69	)	$	(65	)
Acquisition integration charges		(27	)		(19	)		(15	)		(21	)	$	(26	)	$	(21	)	$	(17	)	$	(13	)
Plant closing charge														(27	)

Page 73

TEN-YEAR CONSOLIDATED FINANCIAL SUMMARY

(Millions except for per share data)	2009			2008			2007			2006			2005			2004			2003			2002			2001			2000
Continuing operations
Net sales	$	11,873		$	15,376		$	13,033		$	12,232		$	10,874		$	9,547		$	7,796		$	6,983		$	7,092		$	8,103
Income before income taxes		303			1,140			1,055			979			969			756			475			378			257			528
Income after income taxes	$	385		$	1,067		$	973		$	907		$	788		$	633		$	368		$	272		$	158		$	350
Percent of net sales		3.2	%		6.9	%		7.5	%		7.4	%		7.2	%		6.6	%		4.7	%		3.9	%		2.2	%		4.3	%
Income from discontinued operations					3			35			53			22			22			30			23			19			111
Net income		385			1,070			1,008			960			810			655			398			295			177			461
Adjustment of net income for noncontrolling interests		(2	)		(12	)		(14	)		(10	)		(5	)		(7	)		(12	)		(14	)		(8	)		(8	)
Net income attributable to common shareholders	$	383		$	1,058		$	994		$	950		$	805		$	648		$	386		$	281		$	169		$	453
Net income per common share - diluted
Continuing operations	$	2.27		$	6.50		$	6.38		$	5.87		$	5.08		$	3.99		$	2.36		$	1.80		$	1.07		$	2.36
Discontinued operations					.02			.24			.35			.15			.14			.20			.16			.13			.76
Total	$	2.27		$	6.52		$	6.62		$	6.22		$	5.23		$	4.13		$	2.56		$	1.96		$	1.20		$	3.12
Average number of common shares outstanding - diluted		167.9			162.3			150.3			152.9			154.0			157.1			150.5			143.4			141.0			145.2
Net income per common share - basic
Continuing operations	$	2.31		$	6.58		$	6.51		$	5.97		$	5.21		$	4.10		$	2.40		$	1.82		$	1.08		$	2.39
Discontinued operations					.02			.24			.35			.15			.14			.21			.17			.14			.77
Total	$	2.31		$	6.60		$	6.75		$	6.32		$	5.36		$	4.24		$	2.61		$	1.99		$	1.22		$	3.16
Average number of common shares outstanding - basic		166.4			160.2			147.3			150.2			150.2			153.1			147.9			141.2			138.8			143.6
Cash dividends paid per common share	$	2.00		$	2.00		$	1.72		$	1.48		$	1.24		$	1.08		$	.92		$	.88		$	.88		$	.88
Total assets	$	16,282		$	16,655		$	13,430		$	11,417		$	10,218		$	9,075		$	8,223		$	7,138		$	7,646		$	8,180
Long-term debt		3,349			3,190			2,432			1,774			1,830			1,734			1,651			1,887			2,252			2,447
Total debt		3,467			4,271			3,417			2,586			2,464			1,773			1,953			2,088			2,440			3,004
Eaton shareholders’ equity		6,777			6,317			5,172			4,106			3,778			3,606			3,117			2,302			2,475			2,410
Eaton shareholders’ equity per common share	$	40.78		$	38.28		$	35.42		$	28.07		$	25.44		$	23.52		$	20.37		$	16.30		$	17.80		$	17.64
Common shares outstanding		166.2			165.0			146.0			146.3			148.5			153.3			153.0			141.2			139.0			136.6

Page 74

Eaton Corporation
2009 Annual Report on Form 10-K
Exhibit Index

3	(i)	Amended Articles of Incorporation (amended and restated as of April 24, 2008) - Incorporated by reference to the Form 10-Q Report for the three months ended March 31, 2008
3	(ii)	Amended Regulations (amended and restated as of April 23, 2008) - Incorporated by reference to the Form 10-Q Report for the three months ended March 31, 2008
4	(a)	Pursuant to Regulation S-K Item 601(b) (4), the Company agrees to furnish to the SEC, upon request, a copy of the instruments defining the rights of holders of its other long-term debt
10		Material contracts

(a)	Senior Executive Incentive Compensation Plan (effective January 1, 2008) - Incorporated by reference to the definitive Proxy Statement dated March 14, 2008
(b)	Executive Incentive Compensation Plan (effective January 1, 2005) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2005
(c)	2005 Non-Employee Director Fee Deferral Plan (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(d)	Deferred Incentive Compensation Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(e)	Excess Benefits Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(f)	Incentive Compensation Deferral Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(g)	Limited Eaton Service Supplemental Retirement Income Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(h)	Supplemental Benefits Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(i)	Form of Restricted Share Unit Agreement (2 year vesting) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(j)	Form of Restricted Share Unit Agreement (4 year vesting) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(k)	Form of Restricted Share Agreement (2 year vesting) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(l)	Form of Restricted Share Agreement (4 year vesting) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(m)	Form of Restricted Share Agreement (Non-Employee Directors) - Incorporated by reference to the Form 8-K Report filed February 1, 2010
(n)	Form of Stock Option Agreement for Executives (2008) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007

Page 75

(o)	Form of Stock Option Agreement for Executives - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2006
(p)	Form of Stock Option Agreement for Non-Employee Directors (2008) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(q)	2002 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 15, 2002
(r)	2004 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 19, 2004
(s)	2008 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 14, 2008
(t)	2009 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 13, 2009
(u)	Plan for the Deferred Payment of Directors’ Fees (originally adopted in 1985 and amended effective September 24, 1996, January 28, 1998, January 23, 2002, February 24, 2004, December 8, 2004 and, in certain respects, January 1, 2005) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
(v)	1996 Non-Employee Director Fee Deferral Plan (amended and restated effective January 1, 2005) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2006
(w)	Form of Change of Control Agreement entered into with officers of Eaton Corporation - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2008
(x)	Form of Indemnification Agreement entered into with officers of Eaton Corporation - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
(y)	Form of Indemnification Agreement entered into with directors of Eaton Corporation - Incorporated by reference to the Form 8-K Report filed January 26, 2007
(z)	Executive Strategic Incentive Plan (amended and restated January 1, 2008) - Incorporated by reference to the definitive Proxy Statement dated March 14, 2008
(aa)	Executive Strategic Incentive Plan II (effective January 1, 2001) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
(bb)	Supplemental Executive Strategic Incentive Plan (effective as of June 25, 2008) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2008
(cc)	Deferred Incentive Compensation Plan (amended and restated effective November 1, 2007) - Filed in conjunction with this Form 10-K Report*
(dd)	1998 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 13, 1998
(ee)	Incentive Compensation Deferral Plan (amended and restated October 1, 1997) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2000

Page 76

(ff)	Trust Agreement - Officers and Employees (dated December 6, 1996) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
(gg)	Trust Agreement - Non-employee Directors (dated December 6, 1996) - - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
(hh)	Group Replacement Insurance Plan (GRIP) (effective June 1, 1992) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 1992
(ii)	1991 Stock Option Plan - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
(jj)	Excess Benefits Plan (amended and restated effective January 1, 1989) - - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
(kk)	Supplemental Benefits Plan (amended and restated January 1, 1989) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
(ll)	Eaton Corporation Board of Directors Policy on Incentive Compensation, Stock Options and Other Equity Grants upon the Restatement of Financial Results - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007

12	Ratio of Earnings to Fixed Charges - Filed in conjunction with this Form 10-K Report *
14	Code of Ethics - Incorporated by reference to the definitive Proxy Statement filed on March 14, 2008
21	Subsidiaries of Eaton Corporation - Filed in conjunction with this Form 10-K Report *

23	Consent of Independent Registered Public Accounting Firm - Filed in conjunction with this Form 10-K Report *
24	Power of Attorney - Filed in conjunction with this Form 10-K Report *
31.1	Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) - Filed in conjunction with this Form 10-K Report *
31.2	Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) - Filed in conjunction with this Form 10-K Report *
32.1	Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) - Filed in conjunction with this Form 10-K Report *
32.2	Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) - Filed in conjunction with this Form 10-K Report *

101.INS	XBRL Instance Document *
101.SCH	XBRL Taxonomy Extension Schema Document *
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB	XBRL Taxonomy Extension Label Linkbase Document *
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document *

* Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007, (ii) Consolidated Balance Sheets at December 31, 2009 and 2008, (iii) Statements of Consolidated Cash Flows for the years ended December 31, 2009, 2008 and 2007 (iv) Notes to Consolidated Financial Statements for the year ended December 31, 2009.

In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

Page 77

EX-10.CC

Exhibit 10 (cc)

Eaton Corporation

2009 Annual Report on Form 10-K

Item 15 (b)

EATON CORPORATION

DEFERRED INCENTIVE COMPENSATION PLAN

TABLE OF CONTENTS

		Page
I.	Purpose		1
II.	Concept		1
III.	Definitions		1
IV.	Election to Defer		8
V.	Periodic Compensation		9
VI.	Retirement Compensation		9
VII.	Amendment and Termination		13
VIII.	Administration		14
IX.	Payments to Participants		15
X.	Miscellaneous		16

EATON CORPORATION
DEFERRED INCENTIVE COMPENSATION PLAN

I.	PURPOSE
	The purpose of the Deferred Incentive Compensation Plan is to promote the greater success of Eaton Corporation and its subsidiaries by providing a means to defer Incentive Compensation for key employees whose level and nature of position enable them to affect significantly the profitability, competitiveness and growth of Eaton.
II.	CONCEPT
	The Plan is based on the concept that the deferral of Incentive Compensation for later payment to a Participant, including the later payment during Retirement, will provide a benefit to each Participant and an incentive to improve the profitability, competitiveness and growth of Eaton.
III.	DEFINITIONS
	Unless otherwise required by the context, the terms used herein shall have the meanings as set forth below:
	ACCOUNT: The account established by Eaton for each Participant to which may be credited his or her Deferred Incentive Compensation, Dividend Equivalents, Treasury Bill Interest Equivalents and Fixed Rate Interest Equivalents.
	BENEFICIARY: The person or entity (including a trust or the estate of the Participant) designated in a written document executed by the Participant and delivered to the Committee. If at the time when any unpaid balance of Deferred Incentive Compensation shall be or become due at or after the death of a Participant, there shall not be any living person or any entity in existence so designated, the term “Beneficiary” shall mean the Participant’s estate.
	BOARD: The Board of Directors of Eaton.
	CAUSE: For the purposes of this Plan, Eaton shall have “Cause” to terminate the Participant’s employment hereunder upon (i) the willful and continued failure by the Participant to substantially perform the Participant’s duties with Eaton (other than any such failure resulting from the Participant’s incapacity due to physical or mental illness), after a demand for substantial performance is delivered to the Participant by the Board which specifically identifies the manner in which the Board believes that the Participant has not substantially performed the Participant’s duties, or (ii) the willful engaging by the

Participant in gross misconduct materially and demonstrably injurious to Eaton. For purposes of this definition, no act, or failure to act, on the Participant’s part shall be considered “willful” unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that the Participant’s action or omission was in the best interest of Eaton. Notwithstanding the foregoing, the Participant’s employment shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant’s counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Participant was guilty of conduct set forth above in clauses (i) or (ii) of this definition and specifying the particulars thereof in detail.

CHANGE IN CONTROL OF EATON: For purposes of this Plan, a “Change in Control of Eaton” shall be deemed to have occurred if (i) a tender offer shall be made and consummated for the ownership of securities of Eaton representing 25% or more of the combined voting power of Eaton’s then outstanding voting securities, (ii) Eaton shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of Eaton, other than affiliates (within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”)) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation, (iii) Eaton shall sell substantially all of its assets to another corporation which is not a wholly owned subsidiary of Eaton, (iv) any “person” (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of Eaton representing 25% or more of the combined voting power of Eaton’s then outstanding securities; or (v) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by Eaton’s shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were Directors at the beginning of the period. For purposes of this Plan, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) of the Exchange Act (as then in effect).

COMMITTEE: The Corporate Compensation Committee of Management of Eaton.

BOARD COMMITTEE : The Compensation and Organization Committee of the Board of Directors of Eaton.

CONTINGENT SHARE UNITS: Units credited to a Participant’s Account which are equivalent in value to the market value of Eaton Common Shares.

2

DEFERRAL PLANS: Shall mean the Incentive Compensation Deferral Plan, the Strategic Incentive and Option Plan and this Plan.

DEFERRED INCENTIVE COMPENSATION: That portion of Incentive Compensation which has been deferred pursuant to the Plan and any Dividend Equivalents, Treasury Bill Interest Equivalents, Fixed Rate Interest Equivalents and Contingent Share Units which are attributable thereto.

DEFERRED INCENTIVE COMPENSATION AGREEMENT: The written agreement between Eaton and a Participant pursuant to which Incentive Compensation is deferred under the Plan.

DISABILITY: If, as a result of the Participant’s incapacity due to physical or mental illness, the Participant shall have been absent from the Participant’s duties with Eaton on a full-time basis for 180 consecutive business days and within thirty (30) days after written Notice of Termination the Participant shall not have returned to the full-time performance of the Participant’s duties, any termination of the Participant’s employment by Eaton shall be for “Disability.”

DIVIDEND EQUIVALENT: An amount equal to the per share dividends paid on Eaton Common Shares.

EATON: Eaton Corporation, an Ohio corporation, and its subsidiaries and successors and assigns.

EATON COMMON SHARES: The common shares of Eaton.

EXECUTIVE INCENTIVE COMPENSATION PLAN: An incentive compensation plan approved (a) by the Board of Directors of Eaton for participation in this Plan and whose participants are designated by the Committee on an annual basis or (b) by the Management Compensation Committee (comprised solely of officers of the Company) and whose participants do not include any officers of the Company.

FAILURE TO PAY: Shall mean that the circumstances described in either (i) or (ii) have occurred:

(i) Any Participant shall have notified Eaton and the Trustee in writing that Eaton shall have failed to pay to the Participant, when due, either directly or by direction to the trustee of any trust holding assets for the payment of benefits pursuant to the Plan, at least 75% of any and all amounts which the Participant was entitled to receive at any time in accordance with the terms of the Plan, and that such amounts remain unpaid. Such notice must set forth the amount, if any, which was paid to the Participant, and the amount which the Participant believes he or she was entitled to receive under the Plan. The failure to make such payment shall have continued for a period of 30 days after receipt of such notice by Eaton, and during

3

such 30-day period Eaton shall have failed to prove, by clear and convincing evidence as determined by the Trustee in its sole and absolute discretion, that such amount was in fact paid or was not due and payable; or

(ii)

More than two Plan Participants shall have notified Eaton and the Trustee in writing that they have not been paid when due, either directly or by direction to the Trustee, amounts to which they are entitled under the Plan and that such amounts remain unpaid. Each such notice must set forth the amount, if any, which was paid to the Participant, and the amount which the Participant believes he or she was entitled to receive under the Plan. Within 15 days after receipt of each such notice, the Trustee shall determine, on a preliminary basis, whether any failure to pay such Participants has resulted in a failure to pay when due, directly or by direction, at least 75% of the aggregate amount due to all Participants under all the Deferral Plans in any two-year period, and that such amounts remain unpaid. If the Trustee determines that such a failure has occurred, then it shall so notify Eaton and the Participants in writing within the same 15 day period. Within a period of 20 days after receipt of such notice from the Trustee, Eaton shall have failed to prove by clear and convincing evidence, in the sole and absolute discretion of the Trustee, that such amount was paid or was not due and payable.

FIXED RATE INTEREST EQUIVALENT: With respect to any Participant, the rate of interest as specified in the Deferred Incentive Compensation Agreement between such Participant and Eaton.

FUNDED AMOUNT: With respect to the Account of any Participant, the value of any assets which have been placed in a grantor trust established by the Company to pay benefits with respect to that Plan Account, as determined at the time initial payments are to be made pursuant to the selections made by the Participants in accordance with Section 9.03.

GOOD REASON: For purposes of this Plan, any Termination of Employment by a Participant under the following circumstances shall be for “Good Reason”:

(i)

without the Participant’s express written consent, the assignment to the Participant of any duties inconsistent with the Participant’s positions, duties, responsibilities and status with Eaton immediately prior to a Change in Control of Eaton, or a change in the Participant’s reporting responsibilities, titles or offices as in effect immediately prior to a Change in Control of Eaton, or any removal of the Participant from or any failure to re-elect the Participant to any of such positions, except in connection with the termination of the Participant’s employment for Cause, Disability or as a result of the Participant’s death;

(ii)

a reduction by Eaton in the Participant’s base salary as in effect immediately prior to the Change in Control of Eaton or as the same may be increased from time to time; or the failure by Eaton to increase such base salary each year after a Change

4

	in Control of Eaton by an amount which at least equals, on a percentage basis, the average annual percentage merit increase in the Participant’s base salary during the five (5) full calendar years immediately preceding a Change in Control of Eaton;
(iii)	a failure by Eaton to continue the Participant’s participation in Eaton’s Executive Incentive Compensation Plan (the “I.C. Plan”), Deferred Incentive Compensation Plan (the “Deferred I.C. Plan”), Limited Eaton Service Supplemental Retirement Income Plan (the “Limited Service Plan”), the Executive Strategic Incentive Plan (the “ESIP Plan”) and the Supplemental Benefit Plan established by the Board as a result of the limitations on pension benefits imposed by Section 415 of the Internal Revenue Code (the “Supplemental Plan”), as each plan may be modified from time to time but substantially in the form presently in effect, on at least the basis as in effect immediately prior to the Change in Control of Eaton or to pay the Participant any amounts earned under such plans in accordance with the terms of such plans.
(iv)	the relocation of Eaton’s principal executive offices to a location outside Cuyahoga County, Ohio or any county adjoining Cuyahoga County, Ohio, or Eaton’s requiring the Participant to be based anywhere other than Eaton’s principal executive offices or the location where the Participant is based immediately prior to the Change in Control of Eaton except for required travel on Eaton’s business to an extent substantially consistent with the Participant’s business travel obligations in effect immediately prior to the Change in Control of Eaton, or, in the event the Participant consents to any such relocation of Eaton’s principal executive offices, the failure by Eaton to pay (or reimburse the Participant for) all reasonable moving expenses incurred by the Participant relating to a change of the Participant’s principal residence in connection with such relocation and to indemnify the Participant against any loss (defined as the difference between the actual sale price of such residence and the higher of (a) the Participant’s aggregate investment in such residence or (b) the fair market value of such residence as determined by any real estate appraiser designated by the Participant and reasonably satisfactory to Eaton) realized in the sale of the Participant’s principal residence in connection with any such change of residence;
(v)	the failure by Eaton to continue to effect any benefit or compensation plan (including but not limited to the plans described under paragraph (p)(iii) above), pension plan, life insurance plan, health and accident plan or disability plan in which the Participant is participating at the time of a Change in Control of Eaton (or plans providing the Participant with substantially similar benefits), the taking of any action by Eaton which would adversely affect the Participant’s participation in or materially reduce the Participant’s benefits under any of such plans or deprive the Participant of any material fringe or personal benefit enjoyed by the Participant at the time of the Change in Control of Eaton, or the failure by Eaton to provide the Participant with the number of paid vacation days to which the Participant is then entitled on the basis of years of service with Eaton in accordance with Eaton’s

5

	normal vacation policy in effect immediately prior to the Change in Control of Eaton;
(vi)	the failure of Eaton to obtain the assumption of this Plan by any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the assets of Eaton, by agreement in form and substance satisfactory to the Participant, to expressly assume this Plan and the obligations of Eaton hereunder; or
(vii)	any purported termination of the Participant’s employment which is not effected pursuant to a Notice of Termination satisfying the requirements of a Notice of Termination as herein defined (and, if applicable, the definition of “Cause” as herein defined); and for purposes of this Plan, no such purported termination shall be effective.

INCENTIVE COMPENSATION: The full amount of the annual Incentive Compensation awarded to a Participant under the Executive Incentive Compensation Plan.

INCENTIVE YEAR: An incentive year as defined under the provisions of the Executive Incentive Compensation Plan.

LUMP SUM PAYMENT: Means an amount (payable in cash or Eaton Common Shares, or a combination thereof) equal to the total of the following amounts calculated as of the date of the payment:

(i)	The amount, if any, of the Participant’s Periodic Compensation then credited to his Account and accrued and unpaid Treasury Bill Interest Equivalents thereon; plus
(ii)	The amount, if any, of the Participant’s unpaid Type A Retirement Compensation calculated in accordance with Section 6.04 of the Plan and assuming for purposes of the conversion calculation that a Change in Control of Eaton has occurred within the relevant time period so that Section 6.04(b) is applicable; plus
(iii)	The amount, if any, payable as a lump sum in relation to Type B Retirement Compensation, calculated in accordance with Section 6.10(a)(ii) of the Plan, assuming that the Type B Retirement Compensation would be credited with Fixed Rate Interest Equivalents from the date of the Lump Sum Payment until paid over the fifteen-year period following the date of such Lump Sum Payment.

In the event that a Participant or a Participant’s Designated Beneficiary has begun to receive benefit installment payments under the Plan prior to the date of the Lump Sum Payment, the amount of such Lump Sum shall be equal to the present value of the remaining annual payments which otherwise would have been made calculated as described in this Section.

6

MEAN PRICE: The mean between the highest and lowest quoted selling price of an Eaton Common Share on the New York Stock Exchange List of Composite Transactions.

NORMAL RETIREMENT DATE: The date a Participant attains age sixty-five (65).

NOTICE OF TERMINATION: Any termination of the Participant’s employment by Eaton for Cause or Disability or by the Participant for Good Reason shall be communicated by written Notice of Termination to the Participant or Eaton, respectively. For purposes of this Plan, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Plan relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant’s employment under the provision so indicated.

PARTICIPANT: An employee of Eaton in a key position receiving benefits under the Executive Incentive Compensation Plan and participating under the Plan.

PERIODIC COMPENSATION: That portion of a Participant’s Incentive Compensation which is deferred under the Plan for payment over a period of five (5) years.

PERIODIC INSTALLMENTS: Equal monthly, quarterly, semiannual or annual payments, over a period not to exceed 15 years, as determined by the Committee in its sole discretion.

PLAN: The Deferred Incentive Compensation Plan pursuant to which all or a portion of Incentive Compensation may be deferred for later payment to a participant, as amended and restated as of January 1, 1989, and as subsequently amended on March 31, 2000 to provide that distributions of Type A Retirement Compensation first commencing after March 31, 2000 shall be made in Eaton Common Shares (except as otherwise provided in Section 6.04), and as further amended on November 1, 2007 to provide that Type A Retirement compensation will no longer be credited with the greater of appreciation or earnings on Eaton Common Shares or Treasury Bill Interest Equivalent, but instead will only be credited with appreciation and earnings on Eaton Common Shares.

RETIREMENT: The Termination of Employment of a Participant who is age fifty-five (55) or older and who has at least ten (10) years of service with Eaton or who is age sixty-five (65) or older or under circumstances making him eligible to receive pension payments under a pension plan sponsored by Eaton commencing within sixty (60) days of the date of such Termination of Employment.

RETIREMENT COMPENSATION: That portion of Incentive Compensation deferred under the Plan for payment to a Participant upon his or her Retirement which either shall be Type A Retirement Compensation or Type B Retirement Compensation as selected by the Participant in accordance with Section 4.01.

7

	TERMINATION AND CHANGE IN CONTROL: Shall mean the termination of the employment of a Participant for any reason whatsoever prior to a Change in Control, upon a subsequent Change in Control or termination of the employment of a Participant for any reason whatsoever during the three-year period immediately following a Change in Control.
	TERMINATION OF EMPLOYMENT: The time when a Participant shall no longer be employed by Eaton whether by reason of Retirement, death, voluntary resignation (with or without Good Reason), divestiture or closing of a business unit, plant or facility, discharge (with or without Cause), or such disability that, under the then current employment practices of Eaton, the employment of the Participant is deemed to have been terminated.
	TREASURY BILL INTEREST EQUIVALENT: A rate of interest equal to the quarterly average yield of 13-week U.S. Government Treasury Bills.
	TRUSTEE: Shall mean the trustee of any trust which holds assets for the payment of the benefits provided by the Plan.
	TYPE A RETIREMENT COMPENSATION: As defined in Section 6.01.
	TYPE B RETIREMENT COMPENSATION: As defined in Section 6.01.
IV.	ELECTION TO DEFER
	Section 4.01. With respect to Incentive Compensation for each Incentive Year commencing in or after 1986, the Participant shall be given the opportunity to elect, by signing and delivering to the Committee a Deferred Incentive Compensation Agreement, the manner and extent to which the Participant’s Incentive Compensation awarded in respect to such Incentive Year shall be deferred under the Plan, the allocation between Periodic Compensation and Retirement Compensation and, with respect to the latter, the allocation between Type A Retirement Compensation and Type B Retirement Compensation.
	Section 4.02. Not less than 10% of Incentive Compensation awarded for any Incentive Year may be deferred under the Plan.
	Section 4.03. If a Participant elects to allocate a portion of Incentive Compensation to both Periodic Compensation and Retirement Compensation, the amount allocated to each form of Compensation shall be not less than 10% of the Incentive Compensation awarded for any Incentive Year.
	Section 4.04. To be in effect for an Incentive Year, a Participant’s election pursuant to Section 4.01 must be completed on or before June 15 of such Incentive Year; provided,

8

	however, that in order to select Type B Retirement Compensation such election must be completed on or before December 2 of the immediately preceding Incentive Year. Only Participants who have elected to allocate Deferred Incentive Compensation to Retirement Compensation for the Incentive Year commencing in 1985 (under the Plan as in effect prior to the October 23, 1985 amendment and restatement thereof) shall be entitled to allocate all or part of such Deferred Incentive Compensation to Type B Retirement Compensation.
	Section 4.05. Once a Participant has made an effective election under Section 4.01 with respect to the deferral and allocation of his or her Incentive Compensation, he or she may not thereafter change that election or change the allocation between Periodic Compensation and Retirement Compensation or between Type A Retirement Compensation and Type B Retirement Compensation.
V.	PERIODIC COMPENSATION
	Section 5.01. There shall be computed and credited quarterly to the Participant’s Account Treasury Bill Interest Equivalents on all unpaid Periodic Compensation.
	Section 5.02. Commencing in January of the second year following the Incentive Year for which the Periodic Compensation was credited to the Participant, the Periodic Compensation shall be paid to the Participant in five (5) equal annual installments; and, with each such installment, there shall be paid to the Participant all Treasury Bill Interest Equivalents credited to the Participant and then unpaid.
	Section 5.03. Upon Termination of Employment, any unpaid Periodic Compensation and any unpaid Treasury Bill Interest Equivalents credited thereon shall be paid to the Participant, or his or her Beneficiary, as the case may be, pursuant to the schedule for payment described in Section 5.02.
VI.	RETIREMENT COMPENSATION

A. General.

Section 6.01. The amount of Deferred Incentive Compensation allocated to Retirement Compensation shall correspond with the portion of the Incentive Compensation award elected by the Participant pursuant to Section 4.01. Such amount may be allocated between Type A Retirement Compensation and, subject to Sections 6.08 and 6.09, Type B Retirement Compensation. Amounts allocated as Type A Retirement Compensation shall be converted into a number of Contingent Share Units on such date or dates as shall correspond with the determination and transfer of Incentive Compensation (it being understood that such transfer may be the payment date of such Incentive Compensation). The amounts allocated as Type A Retirement Compensation shall be converted into a number of Contingent Share Units based upon the average of the Mean Prices for Eaton Common Shares for the twenty trading days of the New York

9

Stock Exchange during which Eaton Common Shares were traded immediately following the end of the Incentive Year in which the Incentive Compensation so allocated was earned. Amounts allocated as Type B Retirement Compensation shall not be converted into Contingent Share Units, but instead shall be credited with Fixed Rate Interest Equivalents, compounded annually, until paid.

Retirement Compensation which the Participant elects to have converted into Contingent Share Units is referred to herein as “Type A Retirement Compensation” and Retirement Compensation to be credited with Fixed Rate Interest Equivalents is referred to herein as “Type B Retirement Compensation.”

B. Provisions Regarding Type A Retirement Compensation.

Section 6.02. On each dividend payment date for Eaton Common Shares, Dividend Equivalents shall be credited to the Participant’s Account with respect to all Contingent Share Units then credited to such Account and shall be converted into an appropriate number of Contingent Share Units utilizing the procedures set forth in Section 6.01 but at the Mean Price on said dividend payment date.

Section 6.03. In determining the number of Contingent Share Units to be credited to a Participant, whether by reason of the conversion of Retirement Compensation to Contingent Share Units or by reason of the conversion of Dividend Equivalents to Contingent Share Units, such number may be expressed in fractions of a Contingent Share Unit computed to the nearest tenth. The number of Contingent Share Units credited to a Participant shall be appropriately adjusted to reflect any change in the capitalization of Eaton resulting from a stock dividend, stock split, reorganization, merger, consolidation, recapitalization, combination, exchange of shares or any other similar events.

Section 6.04. Upon Retirement or other Termination of Employment of the Participant or upon any other distribution of Type A Retirement Compensation, (x) all Contingent Share Units standing to his or her credit shall be converted to an equal number of Eaton Common Shares and (y) his or her account shall be credited with an additional amount equal to the amount, if any, by which the amount determined under Subsection 6.04(a) exceeds the amount determined under Subsection 6.04(b):

(a)	the product of the average of the Mean Prices for an Eaton Common Share for the twenty (20) trading days of the New York Stock Exchange during which Eaton Common Shares were traded immediately preceding the date of Retirement or other Termination of Employment or distribution multiplied by the number of Contingent Share Units then credited to the Participant’s Account.
(b)	if a Change in Control of Eaton shall have occurred at any time within the period of thirty-six (36) months immediately preceding the Participant’s Retirement or other Termination of Employment, the product of the highest of the following:

10

(i)	the highest price paid for an Eaton Common Share in any tender offer in connection with the Change in Control;
(ii)	the price received for an Eaton Common Share in any merger, consolidation or similar event in connection with the Change in Control; or
(iii)	the highest price paid for an Eaton Common Share as reported in any Schedule 13D within the sixty (60) day period immediately preceding the Change in Control;

multiplied by the number of Contingent Share Units credited to the Participant’s Account at the time of his or her Retirement or other Termination of Employment or distribution.

The additional amount, if any, so determined shall be converted to Eaton Common Shares based on the average of the Mean Prices for Eaton Common Shares on the date of such determination which shall be credited to the Participant’s Account and held for later distribution as set forth in Section 6.05.

Section 6.05. Upon Retirement or other Termination of Employment of a Participant or upon any other distribution of Type A Retirement Compensation, and after the conversion of Contingent Share Units to Eaton Common Shares and the calculation of the additional amount, if any, to be credited to the Participant’s Account as set forth in Section 6.04, the Committee shall determine in its sole discretion the method of distribution of such Eaton Common Shares and the additional amount, if any, whether in a lump sum, to be paid within one year after Retirement or other Termination of Employment or upon the date of any of other distribution of such Compensation, or Periodic Installments; provided, however, that in making such determination the Committee may consider the wishes and needs of the Participant or his or her Beneficiary, as the case may be, with respect to the payment of Type A Retirement Compensation.

Section 6.06. There shall be computed on a quarterly basis and credited to the Participant’s Account Dividend Equivalents on the unpaid amount of Type A Retirement Compensation determined pursuant to Section 6.04 until such Compensation is paid by Eaton. All credited Dividend Equivalents shall be converted to Eaton Common Shares using the method set forth in Section 6.04 but based on a date which is as near to the distribution date as is administratively practical.

Section 6.07. Commencing at such time as the Committee shall determine, but not later than one (1) year following Retirement or other Termination of Employment, the Eaton Common Shares credited to the Participant’s Account in accordance with Section 6.04 shall be distributed to the Participant or his Beneficiary, as the case may be, in accordance with the schedule for distribution determined under Section 6.05 and, with

11

each Periodic Installment, there shall be paid all Dividend Equivalents credited to the Participant and then unpaid.

C. Provisions Regarding Type B Retirement Compensation.

Section 6.08. A Participant may defer as Type B Retirement Compensation all or any portion of his or her future Incentive Compensation which is earned during a period of four (4) consecutive Incentive Years or for the period to his or her Normal Retirement Date, if earlier; provided, however, that with respect to any Incentive Year, the amount of Incentive Compensation a Participant may defer as Type B Retirement Compensation must be at least $5,000 and no greater than the maximum amount for such Incentive Year specified in such Participant’s Deferred Incentive Compensation Agreement; provided, further, that any Incentive Compensation in excess of such annual maximum limitation may be deferred as either Periodic Compensation or Type A Retirement Compensation.

Section 6.09. Notwithstanding anything herein to the contrary, Eaton shall be entitled to deny Participants the opportunity to elect to defer future Incentive Compensation as Type B Retirement Compensation for any reason if such Incentive Compensation is not then subject to an effective deferral election; provided, however, that any such denial by Eaton of the opportunity to elect deferrals shall apply to all Participants equally.

Section 6.10.

(a) Following Retirement, all Type B Retirement Compensation then credited to a Participant’s Account, together with Fixed Rate Interest Equivalents earned during the period of deferral, shall be paid to the Participant or his or her Beneficiary in fifteen (15) equal annual installments commencing on the first day of February following the year in which the Participant attains age 65; provided, however, that after consideration of the wishes and needs of the Participant or his or her Beneficiary, the Committee may determine in its sole discretion (i) to commence payment of the installments to any Participant at an earlier date following Retirement; (ii) to pay to any Participant the Type B Retirement Compensation in a lump sum within one year following Retirement; or (iii) to pay Type B Retirement Compensation in a lump sum upon any Termination of Employment by reason of divestiture or closing of a business unit, subsidiary, plant or facility or to provide that such Type B Retirement Compensation shall be paid commencing on a date which is subsequent to such Termination of Employment but not later than the Participant’s Normal Retirement Date. For purposes of the payments under the foregoing clauses (ii) and (iii), the amount of such lump sum shall be equal to the then present value of the fifteen (15) annual payments which otherwise would have been made as calculated using an interest rate equal to “Moody’s Corporate Bond Yield Average — Monthly (Average Corporates)” most recently published by Moody’s Investor Services, Inc. (or any successor thereto) at the time of the calculation.

12

(b)

The rate of each Participant’s Fixed Rate Interest Equivalent, as set forth in his or her Deferred Incentive Compensation Agreement, is based on the assumption that the Participant will defer a specified amount of Incentive Compensation for four (4) consecutive years or to his or her Retirement, if earlier. Notwithstanding any provisions hereof to the contrary, upon a Participant’s Termination of Employment, other than for Retirement and except as provided in Section 6.10(c), all Type B Retirement Compensation then credited to his or her Account shall be credited only with Treasury Bill Interest Equivalents, compounded quarterly, for the actual period of deferral until paid in lieu of the Fixed Rate Interest Equivalents otherwise credited to Type B Retirement Compensation; provided, however, that the Committee may determine in its sole discretion that all Type B Retirement Compensation credited to a Participant’s Account shall continue to be credited with Fixed Rate Interest Equivalents until paid. Upon such Termination of Employment, payment of the amounts credited to a Participant’s Account shall be made as determined by the Committee (i) in Periodic Installments commencing within one year following such Termination of Employment or at such other date not later than first February following the Participant’s Normal Retirement Date as determined by the Committee, or (ii) in a lump sum within one year following such Termination of Employment or at such other date not later than the first February following the Participant’s Normal Retirement Date as determined by the Committee.

(c)

Notwithstanding anything in Section 6.10(b) to the contrary, (i) if a Participant’s Termination of Employment occurs within five (5) years after a Change in Control of Eaton and such Termination of Employment is by Eaton without Cause or by the Participant for Good Reason or for Retirement, all Type B Retirement Compensation then credited to the Participant’s Account shall be credited with the Fixed Rate Interest Equivalents and held under the Plan as elected by the Participant in his or her Deferred Incentive Compensation Agreement; (ii) if within five (5) years after a Change in Control of Eaton a Participant is not permitted to complete the deferral of Incentive Compensation until the Participant’s Retirement because of any amendment or termination of the Plan, all Type B Retirement Compensation then credited to the Participant’s Account shall be credited with the Fixed Rate Interest Equivalents and held under the Plan as elected by the Participant in his or her Deferred Incentive Compensation Agreement; or (iii) if a Participant’s Termination of Employment is caused by any divestiture or closing of a business unit, subsidiary, plant or facility, the Board Committee may determine in its sole discretion that all Type B Retirement Compensation then credited to the Participant’s Account shall be credited with the Fixed Rate Interest Equivalents until paid as provided under Section 6.10(a).

VII.	AMENDMENT AND TERMINATION
	Section 7.01. Eaton fully expects to continue the Plan but it reserves the right, except as otherwise provided herein, at any time or from time to time, by action of the Board

13

	Committee, to modify or amend the Plan, in whole or in part, or to terminate the Plan, in whole or in part, at any time and for any reason, including, but not limited to, adverse changes in the federal tax laws; provided, however, that no amendment may be made to the provisions of the Plan which comply with Rule l6b-3(c)(2)(ii)(A) of the Securities Exchange Act of 1934, as amended, more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder.
	Section 7.02. In the event of any termination of the Plan which results in the Participants being unable to have any future Incentive Compensation allocated as Type B Retirement Compensation, the amount of all Type B Retirement Compensation credited to a Participant’s Account at the date of such Plan termination shall be converted to Type A Retirement Compensation, effective retroactively to the date such Retirement Compensation was allocated pursuant to Section 6.01, and either shall be paid to the Participant or continue to be held under the Plan as elected by the Participant in his or her Deferred Incentive Compensation Agreement, except for 1985 Incentive Compensation, if any, deferred as Type B Retirement Compensation which shall continue to be held under the Plan. Notwithstanding the foregoing, in the event of a termination of the Plan within five (5) years after a Change in Control of Eaton, all Type B Retirement Compensation then credited to a Participant’s Account together with Fixed Rate Interest Equivalents earned during the period of deferral shall not be converted to Type A Retirement Compensation but shall be held under the Plan as elected by the Participant in his or her Deferred Incentive Compensation Agreement. No amendment to, or termination of, the Plan after a Change in Control of Eaton shall modify this provision or any provision hereof relating to a Change in Control of Eaton or the rights of a Participant in effect under the Plan immediately prior to such Change in Control of Eaton. Notwithstanding anything herein to the contrary, no amendment, modification or termination of the Plan shall, without the consent of the Participant, alter or impair this provision or any of the Participant’s rights under the Plan with respect to benefits accrued prior to such amendment, modification or termination.
VIII.	ADMINISTRATION
	Section 8.01. The Plan shall be administered by the Committee in accordance with rules of general application for the administration of the Plan as the Committee may, from time to time, adopt. The Committee shall interpret the provisions of the Plan where necessary and may adopt procedures for the administration of the Plan which are consistent with the provisions of the Plan and the rules adopted by the Committee.
	Section 8.02. Each Participant or Beneficiary must claim any benefit to which he or she may be entitled under the Plan by a written notification to the Committee. If a claim is denied, it must be denied within a reasonable period of time in a written notice stating the specific reasons for the denial.

14

	The claimant may have a review of the denial by the Committee by filing a written notice with the Committee within sixty (60) days after the notice of the denial of his or her claim.
	The written decision by the Committee with respect to the review must be given within one hundred and twenty (120) days after receipt of the written request.
IX.	PAYMENTS TO PARTICIPANTS
	Section 9.01.
	Notwithstanding anything herein to the contrary, upon the occurrence of a Termination and Change in Control, the Participants shall be entitled to receive from the Company the payments as provided in Section 9.03 .
	Section 9.02.
	Notwithstanding anything herein to the contrary, upon the occurrence of a Failure to Pay, each Participant covered by the situation described in clause (i) of the definition of Failure to Pay, or each of the Participants in the event of a situation described in clause (ii) of that definition, as the case may be, shall be entitled to receive from the Company the payments as provided in Section 9.03.
	Section 9.03.
	No later than the first to occur of (i) one year following the date hereof for any current Participant, (ii) a Termination and Change in Control or a Failure to Pay for any current Participant or (iii) the date upon which any person who is not a current Participant upon the date hereof becomes a Participant, each Participant shall select one of the payment alternatives set forth below with respect to that portion of the Participant’s Plan Account equal to the full amount of the Account minus the Funded Amount, and with respect to that portion of the Account equal to the Funded Amount. The payment alternatives selected with respect to the two portions of the Account need not be the same. The payment alternatives are as follows:

(a)

a lump sum payment within 30 days following the Termination and Change in Control or Failure to Pay, as the case may be;

(b)

payment in monthly, quarterly, semiannual or annual payments, over a period not to exceed fifteen years, as selected by the Participant at the time provided in the first paragraph of this Section 9.03, commencing within 30 days following the Termination and Change in Control or Failure to Pay, as the case may be, which are substantially equal in amount or in the number of share units being valued and paid, except that earnings attributable to periods following Termination and Change in Control or Failure to Pay shall be included with each payment.

15

	Payment shall be made to each such Participant in accordance with his or her selected alternative as provided in Sections 9.01 and 9.02.
X.	MISCELLANEOUS
	Section 10.01. Each Participant shall have the right, by written instruction to the Committee, on a form supplied by the Committee, to designate one or more primary and contingent beneficiaries (and the proportion to be paid to each, if more than one is designated) to receive his or her Deferred Incentive Compensation upon his or her death. Any such designation shall be revocable by the Participant.
	Section 10.02. The Committee may, in its sole discretion, change the amount of the Periodic Installments or the number of years over which the Periodic Installments are to be paid or permit the payment of any Deferred Incentive Compensation at any date or dates which may be earlier than the payment date or dates provided under the Plan. The Committee may consider the needs and desires of the participant or beneficiary in making this decision. The determination of the Committee shall be final and conclusive upon Eaton, the Participant and the Beneficiary. Any Type B Retirement Compensation paid pursuant to this Section 10.02 to a Participant who would then be eligible to terminate his or her employment for Retirement shall be credited with the Fixed Rate Interest Equivalent on the amount so paid. Any Type B Retirement Compensation paid to a Participant who is not then eligible to terminate his or her employment for Retirement shall be credited only with the Treasury Bill Interest Equivalent.
	Section 10.03. All payments under the Plan shall be subject to such taxes (federal, state or local) as may be due thereon and the determination by the Committee as to withholding with respect thereto shall be binding upon the Participant and his or her Beneficiary.
	Section 10.04. If any Participant under the Plan is a member of the Committee, he or she shall not participate as a member of the Committee in any determination under the Plan relating to his or her Deferred Incentive Compensation.
	Section 10.05. All action of the Committee hereunder may be taken with or without a meeting. If taken without a meeting, the action shall be in writing and signed by a majority of the members of the Committee and if taken with a meeting, a majority of the Committee shall constitute a quorum for any such action.
	Section 10.06. Subject to any federal statute to the contrary, no right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities, or torts of the person entitled to such benefits. If the Participant or Beneficiary shall become

16

bankrupt, or attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right hereunder, then such right or benefit shall, in the discretion of the Company, cease and terminate, and in such event, the Company may hold or apply the same or any part thereof for the benefit of the Participant or his or her spouse, children, or other dependents, or any of them, in such manner and in such amounts and proportions as the Company may deem proper.

Section 10.07. The obligations of Eaton to make payments hereunder shall constitute a liability of Eaton to the Participant. Eaton may, but shall not be required to, establish or maintain any special or separate fund, or purchase or acquire life insurance on a Participant’s life, or otherwise to segregate assets to assure that such payments shall be made.

Section 10.08. The Plan shall not be deemed to constitute a contract of employment between Eaton and a Participant. Neither shall the execution of this Plan nor any action taken by Eaton pursuant to this Plan be held or construed to confer on a Participant any legal right to be continued as an employee of Eaton, in an executive position or in any other capacity with Eaton whatsoever.

Section 10.09. Obligations incurred by Eaton pursuant to this Plan shall be binding upon and inure to the benefit of Eaton, its successors and assigns, and the Participant or his or her Beneficiary.

Section 10.10. This Plan shall be construed and governed in accordance with the law of the State of Ohio.

Section 10.11. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates to the contrary.

Section 10.12. All headings used in the Plan are for convenience of reference only and are not part of the substance of the Plan.

17

APPROVAL AND ADOPTION

The Eaton Corporation Deferred Incentive Compensation Plan, as amended and restated effective November 1, 2007, is hereby approved.

	Date:                                          , 2010
Name
Title
Name
Title

18

EX-12

Eaton Corporation
2009 Annual Report on Form 10-K
Item 15(b)
Exhibit 12
Ratio of Earnings to Fixed Charges

	Year ended December 31
(Millions of dollars)	2009			2008			2007			2006		2005
Income from continuing operations before income taxes & noncontrolling interests in consolidated subsidiaries	$	303		$	1,140		$	1,055		$	979	$	969
Adjustments
(Income) losses of equity investees		(6	)		(11	)		(6	)		1		1
Distributed income of equity investees		9			1			1			1		4
Interest expensed		170			192			193			139		109
Amortization of debt issue costs		5			2			1			1		1
Estimated portion of rent expense representing interest		59			58			44			41		38
Amortization of capitalized interest		13			13			12			12		12
Adjusted income from continuing operations before income taxes	$	553		$	1,395		$	1,300		$	1,174	$	1,134
Fixed charges
Interest expensed	$	170		$	192		$	193		$	139	$	109
Interest capitalized		7			13			14			14		13
Amortization of debt issue costs		5			2			1			1		1
Estimated portion of rent expense representing interest		59			58			44			41		38
Total fixed charges	$	241		$	265		$	252		$	195	$	161
Ratio of earnings to fixed charges		2.29			5.26			5.16			6.02		7.04

Page 78

EX-21

Eaton Corporation
2009 Annual Report on Form 10-K
Item 15(b)
Exhibit 21
Subsidiaries of Eaton Corporation

Eaton is publicly held and has no parent corporation. Eaton’s subsidiaries as of December 31, 2009 and the state or country in which each was organized are as follows:

Consolidated subsidiaries (A)	Where Organized
Argo-Tech Corporation Costa Mesa	California
Aeroquip International Inc.	Delaware
Argo-Tech Corporation (Aftermarket)	Delaware
Durodyne Inc.	Delaware
Eaton Asia Investments Corporation	Delaware
Eaton Aerospace LLC	Delaware
Eaton Holding International LLC	Delaware
Eaton Hydraulics LLC	Delaware
Eaton Industrial Corporation	Delaware
Eaton International Corporation	Delaware
Eaton Worldwide LLC	Delaware
EIC Holding I LLC	Delaware
EIC Holding II LLC	Delaware
EIC Holding III LLC	Delaware
EIC Holding IV LLC	Delaware
EIC Holding V LLC	Delaware
EIC Holding VI LLC	Delaware
EIC Holding GP I	Delaware
EIC Holding GP II	Delaware
EIC Holding GP III	Delaware
EIC Holding GP IV	Delaware
Intelligent Switchgear Organization LLC	Delaware
Vickers International Inc.	Delaware
Eaton Aeroquip Inc.	Michigan
Eaton Ann Arbor LLC	Michigan
Eaton Inoac Company	Michigan
Eaton Aeroquip LLC	Ohio
Eaton Leasing Corporation	Ohio
Cutler-Hammer de Argentina S.A.	Argentina
Eaton Power Quality S.A.	Argentina
Eaton S.A.	Argentina
Eaton Electric Services Pty. Ltd.	Australia
Eaton Industries Pty. Ltd.	Australia
Eaton Holding G.m.b.H.	Austria
Moeller Beteligungen G.m.b.H.	Austria
Moeller Gebaudeautomation G.m.b.H.	Austria
Moeller Holding Austria G.m.b.H.	Austria
Aeroquip-Vickers Assurance Ltd.	Barbados
Eaton Holding Srl	Barbados
Eaton Electric S.A.	Belgium
Eaton Filtration, BVBA	Belgium
Aeroquip-Vickers International Inc.	Bermuda
Cambridge International Insurance Company Ltd.	Bermuda
Eaton Services Limited	Bermuda
Saturn Insurance Company Ltd.	Bermuda
Aeroquip do Brasil, Ltda.	Brazil
Eaton Ltda.	Brazil
Eaton Power Solutions Ltda.	Brazil
Moeller Electric Ltda.	Brazil
Phoenixtec International Corp.	British Virgin Islands
Senyuan International Investments Limited	British Virgin Islands
Teamachieve Investments Limited	British Virgin Islands

Page 79

Consolidated subsidiaries (A)	Where Organized
Winner Hydraulics Ltd.	British Virgin Islands
Moeller Electric Bulgaria	Bulgaria
Aeroquip-Vickers Canada, Inc.	Canada
Arrow Hose & Tubing, Inc.	Canada
Eaton ETN Offshore Company	Canada
Eaton ETN Offshore II Company	Canada
Eaton Power Quality Company	Canada
Eaton Yale Company	Canada
Aeroquip Financial Ltd.	Cayman Islands
Cutler-Hammer Electrical Company	Cayman Islands
Cutler-Hammer Industries Ltd.	Cayman Islands
Eaton Holding III Limited	Cayman Islands
Georgetown Financial Services Ltd.	Cayman Islands
Green Holding Company	Cayman Islands
Senyuan International Holdings Limited	Cayman Islands
Changzhou Lanling Electrical Co., Ltd.	China
Changzhou Eaton Senyuan Switch Co. Ltd.	China
Eaton (China) Investments Co., Ltd.	China
Eaton Commercial (Shanghai) Co, Ltd	China
Eaton Electrical Ltd.	China
Eaton Electrical (Zhongshan) Co.,Ltd	China
Eaton Filtration (Shanghai) Co. Ltd.	China
Eaton Fluid Conveyance (Luzhou) Co. Ltd.	China
Eaton Fluid Power (Shanghai) Co. Ltd.	China
Eaton Hydraulics Systems (Jining) Co. Ltd.	China
Eaton Industries (Shanghai) Co. Ltd.	China
Eaton Industries (Wuxi) Co. Ltd.	China
Eaton Industrial Clutches and Brakes (Shanghai) Co., Ltd.	China
Eaton (Ningbo) Fluid Conveyance Co., Ltd.	China
Eaton Power Quality (Shanghai) Co., Ltd.	China
Eaton Senstar Automotive Fluid Connectors (Shanghai) Co. Ltd.	China
Eaton Truck and Bus Components Company (Shanghai) Ltd.	China
Hangzhou Eaton Power Quality Co., Ltd.	China
Lian Zheng Electronics (Shenzhen) Co. Ltd.	China
Moeller Electrical Equipment (Suzhou) Co. Ltd.	China
Moeller Electric (Shanghai) Co. Ltd.	China
Phoenixtec Electronics (Shenzhen) Co. Ltd.	China
Santak Electronics (Shenzhen) Co. Ltd.	China
Shanghai Eaton Engine Components Company, Ltd.	China
UPE Electronics (Shenzen) Co. Ltd.	China
Zhenjiang Daqo Eaton Electrical Systems Company Limited	China
Eaton Electrical S.A.	Costa Rica
Eaton Electric S.r.o.	Czech Republic
Eaton Industries S.r.o.	Czech Republic
Eaton Elektrotechnika S.r.o.	Czech Republic
Eaton Electric ApS	Denmark
Cutler-Hammer, S. A.	Dominican Republic
Eaton Holec, OY	Finland
Eaton Power Quality Oy (Finland)	Finland
Eaton Aviation S.A.S.	France
Eaton Electric S.A.S.	France
Eaton Electric Sales S.A.S.	France
Eaton Power Quality Holding S.A.S.	France
Eaton Power Quality S.A.S.	France
Eaton Power Solutions S.A.S.	France
Eaton S.A.S.	France
Eaton Technologies S.A.	France
Eaton Automotive G.m.b.H.	Germany
Eaton Filtration G.m.b.H.	Germany
Eaton Filtration Holdings G.m.b.H.	Germany
Eaton Fluid Connectors G.m.b.H.	Germany
Eaton Fluid Power G.m.b.H.	Germany

Page 80

Consolidated subsidiaries (A)	Where Organized
Eaton Holding G.m.b.H.	Germany
Eaton Holding II G.m.b.H. and Co. KG	Germany
Eaton Holding Investments G.m.b.H. & Co. KG	Germany
Eaton Industries Holding G.m.b.H.	Germany
Eaton Moeller G.m.b.H. & Co. KG	Germany
Eaton Power Quality G.m.b.H.	Germany
Institute for International Product Safety G.m.b.H.	Germany
Micro Innovation G.m.b.H.	Germany
Moeller Eaton Holding G.m.b.H.	Germany
Moeller Electric G.m.b.H.	Germany
Moeller G.m.b.H.	Germany
Eaton Filtration Limited	Hong Kong
Eaton Power Quality Limited	Hong Kong
Riseson International Limited	Hong Kong
Scoremax Limited	Hong Kong
Smartwish International Enterprise Limited	Hong Kong
Team Billion Investment Limited	Hong Kong
Vickers Systems Limited	Hong Kong
Moeller Electric Kft	Hungary
Eaton Fluid Power Limited	India
Eaton Industrial Systems Private Limited	India
Eaton Industries Private Limited	India
Eaton Power Quality Private Limited	India
Eaton Technologies Private Limited	India
PT. Fluid Sciences Batam	Indonesia
Tractech (Ireland) Limited	Ireland
Eaton Electric S.r.l.	Italy
Eaton Fluid Power S.r.l.	Italy
Eaton S.r.l.	Italy
Eaton Filtration Ltd.	Japan
Eaton Fluid Power Ltd.	Japan
Eaton Japan Co., Ltd.	Japan
Moeller Electric Ltd.	Japan
Moeller Electric SIA	Latvia
Eaton Holding S.a r.l.	Luxembourg
Eaton Holding II S.a.r.l.	Luxembourg
Eaton Holding III S.a.r.l.	Luxembourg
Eaton Holding IV S.a.r.l.	Luxembourg
Eaton Holding V S.a.r.l.	Luxembourg
Eaton Holding VI S.a.r.l.	Luxembourg
Eaton Holding VII S.a.r.l.	Luxembourg
Eaton Holding VIII S.a.r.l.	Luxembourg
Eaton Holding IX S.a.r.l.	Luxembourg
Eaton Holding X S.a.r.l.	Luxembourg
Eaton Moeller S.a.r.l.	Luxembourg
Eaton Industries Sdn. Bhd.	Malaysia
ETN Asia International Limited	Mauritius
ETN Holding 1 Limited	Mauritius
ETN Holding 2 Limited	Mauritius
ETN Holding 3 Limited	Mauritius
Eaton Controls, S. de R.L. de C.V.	Mexico
Eaton Industries, S. de R.L. de C.V.	Mexico
Eaton Technologies, S. de R.L. de C.V.	Mexico
Eaton Trading Company, S. de R.L. de C.V.	Mexico
Eaton Truck Components, S. de R.L. de C.V.	Mexico
Eaton Power Quality S.a.r.l.	Morocco
Eaton B.V.	Netherlands
Eaton C.V.	Netherlands
Eaton Electric B.V.	Netherlands
Eaton Holding B.V.	Netherlands
Eaton Holding I B.V.	Netherlands
Eaton Holding II B.V.	Netherlands

Page 81

Consolidated subsidiaries (A)	Where Organized
Eaton Holding III B.V.	Netherlands
Eaton Holding IV B.V.	Netherlands
Eaton Holding V B.V.	Netherlands
Eaton Holding VI B.V.	Netherlands
Eaton Holding International I B.V.	Netherlands
Eaton Holding International II B.V.	Netherlands
Eaton Industries B.V.	Netherlands
Eaton International B.V.	Netherlands
Moeller Electric B.V.	Netherlands
Eaton Finance N.V.	Netherlands Antilles
Eaton Industries Company	New Zealand
Eaton Electric AS	Norway
Eaton Automotive Components Sp. z.o.o.	Poland
Eaton Automotive Spolka z o.o.	Poland
Eaton Automotive Systems Sp. z o.o.	Poland
Eaton Electric Sp. Z.o.o.	Poland
Eaton Electric Spolka z.o.o.	Poland
Eaton Truck Components Spolka z o.o.	Poland
Eaton Madeira SGPS Lda.	Portugal
Eaton Electro Prodictie SRL	Romania
Moeller Electric SRL	Romania
Eaton LLC	Russia
OOO Moeller Elektrik Produktion	Russia
Moeller Electric d.o.o. Serbia	Serbia
Eaton Industries Pte. Ltd.	Singapore
Moeller Electric Pte. Ltd.	Singapore
Phoenixtec (Singapore) Co. Pte. Ltd.	Singapore
Eaton Electric Solutions s.r.o.	Slovak Republic
Eaton Electric s.r.o.	Slovak Republic
Eaton Hydraulics (Proprietary) Limited	South Africa
Eaton Truck Components (Proprietary) Limited	South Africa
Eaton Automotive Controls Limited	South Korea
Eaton Limited	South Korea
Aeroquip Iberica S.L.	Spain
Eaton Electric S.L.	Spain
Eaton Power Quality S.L.	Spain
Eaton S.L.	Spain
Productos Eaton Livia S.L.	Spain
Eaton Holec AB	Sweden
Eaton Power Quality AB	Sweden
Eaton Industries Manufacturing GmbH	Switzerland
Eaton Manufacturing LP	Switzerland
Eaton Manufacturing III GmbH	Switzerland
Micro Innovation Holding AG	Switzerland
Moeller Electric GmbH	Switzerland
Centralion Industrial Inc.	Taiwan
Eaton Phoenixtec MMPL Co.,Ltd.	Taiwan
Eaton Industries (Thailand) Ltd.	Thailand
Rubberon Technology Corporation Limited	Thailand
Eaton Electric Ticaret Ltd. Sirket	Turkey
D.P. Eaton Electric	Ukraine
Aphel Limited	United Kingdom
Aphel Technologies Limited	United Kingdom
Carter Ground Fueling, Limited	United Kingdom
Eaton Aerospace Limited	United Kingdom
Eaton Electric Limited	United Kingdom
Eaton Filtration Limited	United Kingdom
Eaton Holding Limited	United Kingdom
Eaton Holding II Limited	United Kingdom
Eaton Industries Limited	United Kingdom
Eaton Limited	United Kingdom
Eaton Power Quality Limited	United Kingdom

Page 82

Consolidated subsidiaries (A)	Where Organized
Eaton Power Solutions Limited	United Kingdom
Integ Holdings Limited	United Kingdom
Integrated Hydraulics Limited	United Kingdom
Eaton Electric Sales Limited	United Kingdom
Moeller Holding Limited	United Kingdom
Ultronics Limited	United Kingdom
Eaton Electrical, S.A.	Venezuela
Megatec-Texenco Electrical & Lighting BCC	Vietnam

(A) Other Eaton subsidiaries, many inactive, are not listed above. If considered in the aggregate, they would not be material.

Page 83

EX-23

Eaton Corporation
2009 Annual Report on Form 10-K
Item 15(b)
Exhibit 23
Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements of Eaton Corporation and in the related Prospectuses of our reports dated February 26, 2010, with respect to the consolidated financial statements of Eaton Corporation, and the effectiveness of internal control over financial reporting of Eaton Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2009.

Registration
Number	Description	Filing Date
333-157597	Eaton Corporation — Shareholder Dividend Reinvestment and Direct Share Purchase Plan —1,000,000 Shares — Prospectus	August 20, 2009
333-161002	Eaton Corporation 2009 Stock Plan — Form S-8 Registration Statement — 9,600,000 Shares	August 4, 2009
333-158823	Eaton Incentive Compensation Deferral Plan — Form S-8 Registration Statement — 25,000 Shares	April 27, 2009
333-158822	Eaton Electrical de Puerto Rico Retirement Savings Plan — 90,000 shares	April 27, 2009
333-158821	Eaton Incentive Compensation Deferral Plan II — Form S-8 Registration Statement — 250,000 Shares	April 27, 2009
333-158820	Eaton Savings Plan — Form S-8 Registration Statement — 10,000,000 Shares	April 27, 2009
333-158818	2005 Non-Employee Director Fee Deferral Plan — Form S-8 Registration Statement — 30,000 Shares	April 27, 2009
333-157597	Eaton Corporation — Form S-3 Automatic Shelf Registration Statement	February 27, 2009
333-152763	Eaton Corporation 2008 Stock Plan — Form S-8 Registration Statement — 2,700,000 Shares	August 5, 2008
333-150637	Eaton Personal Investment Plan — 375,000 shares	May 5, 2008
333-150636	Eaton Electrical de Puerto Rico Retirement Savings Plan — 75,000 shares	May 5, 2008
333-147267	Eaton Savings Plan — Form S-8 Registration Statement — 10,000,000 Shares	November 9, 2007
333-136292	Eaton Corporation Incentive Compensation Deferral Plan — Form S-8 Registration Statement — 70,000 Shares	August 4, 2006
333-136291	Eaton Corporation — Shareholder Dividend Reinvestment and Direct Share Purchase Plan —1,000,000 Shares — Prospectus	August 4, 2006
333-125836	Eaton Savings Plan — Form S-8 Registration Statement — 9,000,000 Shares	June 15, 2005
333-124129	Eaton Corporation Incentive Compensation Deferral Plan II — Form S-8 Registration Statement — 400,000 Shares	April 18, 2005
333-124128	Eaton Corporation Deferred Incentive Compensation Plan II — Form S-8 Registration Statement — 750,000 Shares	April 18, 2005

Page 84

Registration
Number	Description	Filing Date
333-124127	2005 Non-Employee Director Fee Deferral Plan — Form S-8 Registration Statement — 30,000 Shares	April 18, 2005
333-116974	Eaton Corporation Deferred Incentive Compensation Plan — Form S-8 Registration Statement — 750,000 Shares	June 29, 2004
333-116970	Eaton Corporation 2004 Stock Plan — Form S-8 Registration Statement — 7,000,000 Shares	June 29, 2004
333-104367	Eaton Savings Plan — Form S-8 Registration — 5,000,000 Shares	April 8, 2003
333-104366	1996 Non-Employee Director Fee Deferral Plan — Form S-8 Registration Statement — 30,000 Shares	April 8, 2003
333-97365	Eaton Corporation Incentive Compensation Deferral Plan — Form S-8 Registration Statement	July 30, 2002
333-97373	Cutler-Hammer de Puerto Rico Inc. Retirement Savings Plan — Form S-8 Registration Statement	July 30, 2002
333-97371	Eaton Corporation 2002 Stock Plan — Form S-8 Registration Statement	July 30, 2002
333-43876	Eaton Corporation 401(k) Savings Plan — Form S-8 Registration Statement — 500,000 Shares	August 16, 2000
333-35946	Deferred Incentive Compensation Plan — Form S-8 Registration Statement — 375,000 Shares	May 1, 2000
333-86389	Eaton Corporation Executive Strategic Incentive Plan — Form S-8 Registration Statement	September 2, 1999
333-62375	Eaton Corporation 1998 Stock Plan — Form S-8 Registration Statement	August 27, 1998
333-62373	Eaton Holding Limited U.K. Savings — Related Share Option Scheme [1998] – Form S-8 Registration Statement	August 27, 1998
333-23539	Eaton Non-Employee Director Fee Deferral Plan — Form S-8 Registration Statement	March 18, 1997
333-22597	Eaton Incentive Compensation Deferral Plan — Form S-8 Registration Statement	March 13, 1997
333-01365	Eaton Corporation Incentive Compensation Deferral Plan — Form S-3 Registration Statement	March 1, 1996

/s/ Ernst & Young LLP Cleveland, Ohio

February 26, 2010

Page 85

EX-24

Eaton Corporation
2009 Annual Report on Form 10-K
Item 15(b)
Exhibit 24
Power of Attorney

     KNOW ALL MEN BY THESE PRESENTS: That each person whose name is signed below has made, constituted and appointed, and by this instrument does make, constitute and appoint, Richard H. Fearon, Billie K. Rawot or William J. Nowak his or her true and lawful attorney, for him or her and in his or her name, place and stead to subscribe, as attorney-in-fact, his or her signature as Director or Officer or both, as the case may be, of Eaton Corporation, an Ohio corporation, to its Annual Report on Form 10-K for the year ended December 31, 2009 pursuant to the Securities Exchange Act of 1934, and to any and all amendments to that Annual Report, hereby giving and granting unto each such attorney-in-fact full power and authority to do and perform every act and thing whatsoever necessary to be done in the premises, as fully as he or she might or could do if personally present, hereby ratifying and confirming all that each such attorney-in-fact shall lawfully do or cause to be done by virtue hereof.

     This Power of Attorney shall not apply to any Annual Report on Form 10-K or amendment thereto filed after December 31, 2010.

     IN WITNESS WHEREOF, this Power of Attorney has been signed at Cleveland, Ohio this 27^th day of January, 2010.

/s/ Alexander M. Cutler	/s/ Richard H. Fearon
Alexander M. Cutler, Chairman and Chief Executive Officer; President; Principal Executive Officer; Director	Richard H. Fearon, Vice Chairman and Chief Financial and Planning Officer; Principal Financial Officer
/s/ Billie K. Rawot
Billie K. Rawot,
Senior Vice President and Controller;
Principal Accounting Officer
/s/ Todd M. Bluedorn	/s/ Christopher M. Connor
Todd M. Bluedorn, Director	Christopher M. Connor, Director
/s/ Michael J. Critelli	/s/ Charles E. Golden
Michael J. Critelli, Director	Charles E. Golden, Director
/s/ Ernie Green	/s/ Arthur E. Johnson
Ernie Green, Director	Arthur E. Johnson, Director
/s/ Ned C. Lautenbach	/s/ Deborah L. McCoy
Ned C. Lautenbach, Director	Deborah L. McCoy, Director
/s/ John R. Miller	/s/ Gregory R. Page
John R. Miller, Director	Gregory R. Page, Director
/s/ Victor A. Pelson
Victor A. Pelson, Director	Gary L. Tooker, Director

EX-31.1

Eaton Corporation
2009 Annual Report on Form 10-K
Item 15(b)

Exhibit 31.1
Certification

I, Alexander M. Cutler, certify that:

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

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 26, 2010	/s/ Alexander M. Cutler
	Alexander M. Cutler
	Chairman and Chief Executive Officer; President

EX-31.2

Eaton Corporation
2009 Annual Report on Form 10-K
Item 15(b)
Exhibit 31.2
Certification

I, Richard H. Fearon, certify that:

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

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 26, 2010	/s/ Richard H. Fearon
	Richard H. Fearon
	Vice Chairman and Chief Financial and Planning Officer

EX-32.1

Eaton Corporation
2009 Annual Report on Form 10-K
Item 15(b)
Exhibit 32.1
Certification

This written statement is submitted in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. It accompanies Eaton Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009 (“10-K Report”).

I hereby certify that, based on my knowledge, the 10-K Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C 78m), and information contained in the 10-K Report fairly presents, in all material respects, the financial condition and results of operations of Eaton Corporation and its consolidated subsidiaries.

Date: February 26, 2010	/s/ Alexander M. Cutler
	Alexander M. Cutler
	Chairman and Chief Executive Officer; President

EX-32.2

Eaton Corporation
2009 Annual Report on Form 10-K
Item 15(b)
Exhibit 32.2
Certification

This written statement is submitted in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. It accompanies Eaton Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009 (“10-K Report”).

I hereby certify that, based on my knowledge, the 10-K Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C 78m), and information contained in the 10-K Report fairly presents, in all material respects, the financial condition and results of operations of Eaton Corporation and its consolidated subsidiaries.

Date: February 26, 2010	/s/ Richard H. Fearon
	Richard H. Fearon
	Vice Chairman and Chief Financial and Planning Officer