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

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 ¨

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 ¨ 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 ¨

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 ¨

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. ¨

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 ¨		Non-accelerated filer ¨		Smaller reporting company ¨
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ¨ No þ

The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2010 was $11.0 billion.

As of January 31, 2011, there were 340.4 million Common Shares outstanding, as adjusted to give effect to the two-for-one stock split as described in Item 1. Business.

Documents Incorporated By Reference

Portions of the Proxy Statement for the 2011 annual shareholders meeting are incorporated by reference into Part III.

 

 

Part I

Item 1. Business.

     Eaton Corporation is a diversified power management company with 2010 sales of $13.7 billion. The Company 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.

     On January 27, 2011, Eaton’s Board of Directors announced a two-for-one stock split of the Company’s common shares effective in the form of a 100% stock dividend. The record date for the stock split was February 7, 2011, and the additional shares will be distributed on February 28, 2011. Accordingly, all per share amounts, average shares outstanding, shares outstanding, shares repurchased and equity based compensation presented in the consolidated financial statements and notes have been adjusted retroactively to reflect the stock split. Shareholders’ equity has been retroactively adjusted to give effect to the stock split for all periods presented by reclassifying the par value of the additional shares issued in connection with the stock split to Common shares from Retained earnings and Capital in excess of par value.

     In 2010, Eaton acquired businesses for combined net cash purchase prices of $222 million. The Consolidated Statements of Income include the results of these businesses from the dates of the transactions. These transactions are summarized below:

						Business		Annual sales
Acquired business		Date of transaction				segment		(in millions)
Chloride Phoenixtec Electronics		October 12,				Electrical		$25 for the
A China-based manufacturer of uninterruptible power supply (UPS) systems. Eaton acquired the remaining shares to increase its ownership from 50% to 100%.			2010			Rest of World		year ended September 30, 2010
CopperLogic, Inc.		October 1,				Electrical		$35 for the
A United States-based manufacturer of electrical and electromechanical systems.			2010			Americas		year ended September 30, 2010
Wright Line Holding, Inc.		August 25,				Electrical		$101 for the
A United States provider of customized enclosures, rack systems, and air-flow management systems to store, power, and secure mission-critical IT data center electronics.			2010			Americas		year ended June 30, 2010
EMC Engineers, Inc.		July 15, 2010				Electrical		$24 for 2009
A United States energy engineering and energy services company that delivers energy efficiency solutions for a wide range of governmental, educational, commercial and industrial facilities.						Americas

     On January 1, 2011, Eaton closed the acquisition of the Tuthill Coupling Group, a division of the Tuthill Corporation. This business, located in the United States and France, manufactures pneumatic and hydraulic quick coupling solutions and leak-free connectors used in industrial, construction, mining, defense, energy and power applications. This business had sales of $35 for the year ended November 30, 2010 and will be included in the Hydraulics business segment.

     On January 20, 2011, Eaton reached an agreement to acquire ACTOM (Pty) Limited’s low-voltage electrical business in South Africa. This business is a manufacturer and supplier of motor control components, engineered electrical distribution systems, and uninterruptible power supply systems and had sales of $58 for the year ended December 31, 2010. The terms of the agreement are subject to regulatory approvals and other customary closing conditions. The acquisition is expected to close during the first half of 2011. This business will be included in the Electrical Rest of World segment.

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 Note 14 of the Notes to the Consolidated Financial Statements on pages 48 through 52. Additional information regarding Eaton’s segments and business is presented below.

Electrical Americas and Electrical Rest of World

     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 many competitors in this segment and, with respect to many products, is considered among the market leaders. 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. In 2010, one large distributor of electrical products represented 11% of the sales of the Electrical Americas segment and two large distributors of electrical products represented 10% of the sales of the Electrical Rest of World segment.

Hydraulics

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

Aerospace

     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. In 2010, 11% of this segment’s sales were made to one large manufacturer of aircraft.

Truck

     Principal methods of competition in this segment are product performance, global 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. In 2010, 63% of this segment’s sales were made to five large manufacturers of heavy-, medium-, and light-duty trucks and off-highway vehicles.

Automotive

     Principal methods of competition in this segment are product performance, global 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. 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. In 2010, 53% of this segment’s sales were made to five large manufacturers of vehicles.

Information Concerning Eaton’s Business in General

Raw Materials

     Eaton’s major requirements for raw materials include iron, steel, copper, nickel, aluminum, brass, silver, lead, molybdenum, titanium, vanadium, rubber, plastic, electronic components, 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 2010, prices increased for many materials purchased by Eaton throughout the year. The Company mitigated these increases through a variety of cost out projects. Eaton maintained appropriate levels of inventory to guard against basic shortages, and did not experience any general availability constraints in 2010 with the exception of electronic components. These shortages were caused by an industry-wide capacity constraint. This constraint has eased throughout the year and Eaton successfully managed through it with negligible impact.

Patents and Trademarks

     Eaton considers its tradename and trademark to be significant value to its business as a whole. The Company’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 the Company’s product lines, management believes

that the loss or expiration of any single intellectual property right would not have a material effect on Eaton’s consolidated financial statements or its business segments. The Company’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 manufacturers 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 orders, the Company includes only the amount of orders to which customers are firmly committed. Using this criterion, total backlog at December 31, 2010 and 2009 was approximately $3.2 billion and $2.7 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 2010, 2009 and 2008 were $425, $395 and $417, respectively. Over the past five years, the Company has invested approximately $1.9 billion in research and development.

Environmental Contingencies

     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 2011 and 2012. Information regarding the Company’s liabilities related to environmental matters is presented in Note 7 of the Notes to the Consolidated Financial Statements on pages 36 through 37.

Foreign Operations

     Financial information related to Eaton’s foreign operations is presented in Note 14 of the Notes to the Consolidated Financial Statements on page 52. Information regarding risks that may affect 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:

Volatility of end markets that Eaton serves.

     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 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 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.

Eaton uses a variety of raw materials and components in its businesses, and significant shortages, price increases, or supplier 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 businesses are charged and the competitive position of their products and services, all of which could adversely affect the Company’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 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 Note 7 of the Notes to the Consolidated Financial Statements on page 36.

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.

Item 2. Properties.

     Eaton’s world headquarters is located in Cleveland, Ohio. The Company maintains manufacturing facilities at 216 locations in 31 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 Note 7 of the Notes to the Consolidated Financial Statements on page 36.

Item 4. (Removed and Reserved).

     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 2010 and 2009 is presented in “Quarterly Data” on page 65. At December 31, 2010, there were 8,113 holders of record of the Company’s common shares. Additionally, 17,463 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 66.

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

     “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is presented on pages 53 through 64.

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

     Information regarding market risk is presented in “Market Risk Disclosure” on pages 62 through 63.

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 2010 and 2009 is presented in “Quarterly Data” on page 65.

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, 2010.

     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 Securities and Exchange Commission’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.

     Pursuant to Section 404 of the Sarbanes Oxley Act of 2002 and the rules and regulations adopted pursuant thereto, Eaton has included a report of management’s assessment of the effectiveness of internal control over financial reporting, which is presented on page 17.

     “Report of Independent Registered Public Accounting Firm” relating to internal control over financial reporting as of December 31, 2010 is presented on page 16.

     During the fourth quarter of 2010, 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 18, 2011, 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, 2011, follows:

Name		Age				Position (Date elected to position)
Alexander M. Cutler			59			Chairman and Chief Executive Officer; President (August 1, 2000 — present) Director (September 22, 1993 — present)

Name		Age				Position (Date elected to position)
Richard H. Fearon			54			Vice Chairman and Chief Financial and Planning Officer (April 24, 2002 — present)
Craig Arnold			50			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			56			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)
James W. McGill			55			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)
Mark M. McGuire			53			Executive Vice President and General Counsel (December 1, 2005 — present)
Thomas E. Moran			46			Senior Vice President and Secretary (October 1, 2008 — present) Assistant Secretary and Managing Counsel, The Dow Chemical Company (2002 –2008)
Billie K. Rawot			59			Senior Vice President and Controller (March 1, 1991 — present)
Kurt B. McMaken			41			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 31, 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 18, 2011, 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 2010 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 18, 2011, 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 18, 2011, 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 18, 2011, 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 18, 2011, 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 18, 2011, and is incorporated by reference.

     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 18, 2011, 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 18, 2011, 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
			Consolidated Statements of Income — Years ended December 31, 2010, 2009 and 2008 — Page 18
			Consolidated Balance Sheets — December 31, 2010 and 2009 — Page 19
			Consolidated Statements of Cash Flows — Years ended December 31, 2010, 2009 and 2008 — Page 20
			Consolidated Statements of Shareholders’ Equity — Years ended December 31, 2010, 2009 and 2008— Pages 21 through 23
			Notes to Consolidated Financial Statements — Pages 24 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 February 24, 2010) — Incorporated by reference to the Form 8-K Report dated February 24, 2010
	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
	(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) — Incorporated by reference to the Form 10-K Report for the year ended December 31, 2009
	(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
	(mm)		Amended and Restated Grantor Trust Agreement for Non-Employee Directors’ Deferred Fees Plans — effective January 1, 2010 - Filed in conjunction with this Form 10-K report*
	(nn)		Amended and Restated Grantor Trust Agreement for Employees’ Deferred Compensation Plans — effective January 1, 2010 - Filed in conjunction with this Form 10-K report*

	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 *

		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, 2010, 2009 and 2008, (ii) Consolidated Balance Sheets at December 31, 2010 and 2009, (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008 (iv) Notes to Consolidated Financial Statements for the year ended December 31, 2010.
		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.

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.

     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 25, 2011

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		Christopher M. Connor		Director
*				*
Michael J. Critelli		Director		Charles E. Golden		Director
*				*
Ernie Green		Director		Arthur E. Johnson		Director
*				*
Ned C. Lautenbach		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

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, 2010 and 2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. 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, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, 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, 2010, 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 25, 2011 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP   Cleveland, Ohio
February 25, 2011

MANAGEMENT’S REPORT ON FINANCIAL STATEMENTS

We have prepared the accompanying consolidated financial statements and related information of Eaton Corporation included herein for the three years ended December 31, 2010. The primary responsibility for the integrity of the financial information included in this annual report rests with management. The financial information included in this annual report has been prepared in accordance with accounting principles generally accepted in the United States based on our best estimates and judgments and giving due consideration to materiality. The opinion of Ernst & Young LLP, Eaton’s independent registered public accounting firm, on those financial statements is included herein.

Eaton has high standards of ethical business practices supported by the Eaton Code of Ethics and corporate policies. Careful attention is given to selecting, training and developing personnel, to ensure that management’s objectives of establishing and maintaining adequate internal controls and unbiased, uniform reporting standards are attained. Our policies and procedures provide reasonable assurance that operations are conducted in conformity with applicable laws and with the Company’s commitment to a high standard of business conduct.

The Board of Directors pursues its responsibility for the quality of Eaton’s financial reporting primarily through its Audit Committee, which is composed of five independent directors. The Audit Committee meets regularly with management, the internal auditors and the independent registered public accounting firm to ensure that they are meeting their responsibilities and to discuss matters concerning accounting, control, audits and financial reporting. The internal auditors and independent registered public accounting firm have full and free access to senior management and the Audit Committee.

/s/ Alexander M. Cutler		/s/ Richard H. Fearon		/s/ Billie K. Rawot
Chairman and Chief Executive		Vice Chairman and Chief Financial		Senior Vice President
Officer; President		and Planning Officer		and Controller
February 25, 2011

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, 2010, 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, 2010, 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, 2010 and 2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010 and our report dated February 25, 2011 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP   Cleveland, Ohio
February 25, 2011

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, 2010. 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, 2010.

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, 2010. This report is included herein.

/s/ Alexander M. Cutler		/s/ Richard H. Fearon		/s/ Billie K. Rawot
Chairman and Chief Executive		Vice Chairman and Chief Financial		Senior Vice President
Officer; President		and Planning Officer		and Controller
February 25, 2011

EATON CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

		Year ended December 31
(In millions except for per share data)		2010				2009				2008
Net sales		$	13,715			$	11,873			$	15,376
Cost of products sold			9,633				8,782				11,191
Selling and administrative expense			2,486				2,252				2,513
Research and development expense			425				395				417
Interest expense-net			136				150				157
Other (income) expense-net			(1	)			(9	)			(42	)
Income from continuing operations before income taxes			1,036				303				1,140
Income tax expense (benefit)			99				(82	)			73
Income from continuing operations			937				385				1,067
Income from discontinued operations			—				—				3
Net income			937				385				1,070
Less net income for noncontrolling interests			(8	)			(2	)			(12	)
Net income attributable to Eaton common shareholders		$	929			$	383			$	1,058
Net income per common share — diluted
Continuing operations		$	2.73			$	1.14			$	3.25
Discontinued operations			—				—				0.01
Total		$	2.73			$	1.14			$	3.26
Net income per common share — basic
Continuing operations		$	2.76			$	1.16			$	3.29
Discontinued operations			—				—				0.01
Total		$	2.76			$	1.16			$	3.30
Weighted-average number of common shares outstanding
Diluted			339.5				335.8				324.6
Basic			335.5				332.7				320.4
Cash dividends paid per common share		$	1.08			$	1.00			$	1.00

Net income per common share, weighted-average number of common shares outstanding and cash dividends paid per common share have been restated to give effect to the two-for-one stock split. See Note 1 for additional information.

The notes on pages 24 to 52 are an integral part of the consolidated financial statements.

EATON CORPORATION
CONSOLIDATED BALANCE SHEETS

		December 31
(In millions)		2010				2009
Assets
Current assets
Cash		$	333			$	340
Short-term investments			838				433
Accounts receivable-net			2,239				1,899
Inventory			1,564				1,326
Deferred income taxes			303				377
Prepaid expenses and other current assets			229				149
Total current assets			5,506				4,524
Property, plant and equipment
Land and buildings			1,494				1,459
Machinery and equipment			4,485				4,241
Gross property, plant and equipment			5,979				5,700
Accumulated depreciation			(3,502	)			(3,255	)
Net property, plant and equipment			2,477				2,445
Other noncurrent assets
Goodwill			5,454				5,435
Other intangible assets			2,272				2,441
Deferred income taxes			1,001				973
Other assets			542				464
Total assets		$	17,252			$	16,282
Liabilities and shareholders’ equity
Current liabilities
Short-term debt		$	72			$	113
Current portion of long-term debt			4				5
Accounts payable			1,408				1,057
Accrued compensation			465				256
Other current liabilities			1,284				1,258
Total current liabilities			3,233				2,689
Noncurrent liabilities
Long-term debt			3,382				3,349
Pension liabilities			1,429				1,586
Other postretirement benefits liabilities			743				754
Deferred income taxes			487				550
Other noncurrent liabilities			575				536
Total noncurrent liabilities			6,616				6,775
Shareholders’ equity
Common shares (339.9 million outstanding in 2010 and 332.3 million in 2009)			170				166
Capital in excess of par value			4,093				3,947
Retained earnings			4,455				3,893
Accumulated other comprehensive loss			(1,348	)			(1,208	)
Deferred compensation plans			(8	)			(21	)
Total Eaton shareholders’ equity			7,362				6,777
Noncontrolling interests			41				41
Total equity			7,403				6,818
Total liabilities and equity		$	17,252			$	16,282

The number of common shares outstanding, Common shares, Capital in excess of par value and Retained earnings have been restated to give effect to the two-for-one stock split. See Note 1 for additional information.

The notes on pages 24 to 52 are an integral part of the consolidated financial statements.

EATON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

		Year ended December 31
(In millions)		2010				2009				2008
Operating activities
Net income		$	937			$	385			$	1,070
Adjustments to reconcile to net cash provided by operating activities
Depreciation and amortization			551				573				571
Deferred income taxes			26				(191	)			(225	)
Pension expense			179				270				215
Contributions to pension plans			(403	)			(271	)			(210	)
Changes in working capital
Accounts receivable-net			(305	)			440				128
Inventory			(219	)			292				118
Accounts payable			322				(73	)			(208	)
Other-net			194				(17	)			(18	)
Net cash provided by operating activities			1,282				1,408				1,441
Investing activities
Capital expenditures for property, plant and equipment			(394	)			(195	)			(448	)
Cash paid for acquisitions of businesses			(222	)			(10	)			(2,807	)
(Purchases) sales of short-term investments-net			(392	)			(64	)			100
Other-net			(4	)			44				(35	)
Net cash used in investing activities			(1,012	)			(225	)			(3,190	)
Financing activities
Borrowings with original maturities of more than three months
Proceeds			55				558				1,656
Payments			(65	)			(887	)			(984	)
Borrowings with original maturities of less than three months-net (primarily commercial paper)			(37	)			(424	)			(5	)
Cash dividends paid			(363	)			(334	)			(320	)
Sale of common shares			—				—				1,522
Exercise of employee stock options			157				27				47
Purchase of common shares			—				—				(100	)
Other-net			(8	)			(1	)			(1	)
Net cash (used in) provided by financing activities			(261	)			(1,061	)			1,815
Effect of foreign exchange rate changes on cash			(16	)			30				(20	)
Total (decrease) increase in cash			(7	)			152				46
Cash at the beginning of the year			340				188				142
Cash at the end of the year		$	333			$	340			$	188

The notes on pages 24 to 52 are an integral part of the consolidated financial statements.

EATON CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

																		Accumulated								Total
										Capital in								other				Deferred				Eaton
		Common shares								excess of				Retained				comprehensive				compensation				shareholders’				Noncontrolling				Total
(In millions)		Shares				Dollars				par value				earnings				loss				plans				equity				interests				equity
Balance at January 1, 2008			292.0			$	146			$	2,290			$	3,184			$	(423	)		$	(25	)		$	5,172			$	59			$	5,231
Net income			—				—				—				1,058				—				—				1,058				12				1,070
Foreign currency translation and related hedging instruments (net of income tax benefit of $68)			—				—				—				—				(722	)			—				(722	)			—				(722	)
Pensions (net of income tax benefit of $227)			—				—				—				—				(419	)			—				(419	)			—				(419	)
Other postretirement benefits (net of income tax expense of $31)			—				—				—				—				49				—				49				—				49
Cash flow hedges (net of income tax benefit of $12)			—				—				—				—				(23	)			—				(23	)			—				(23	)
Other comprehensive loss																											(1,115	)			—				(1,115	)
Total comprehensive loss																											(57	)			12				(45	)
Effects of changing retirement benefit 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-net (net of income tax benefit of $16)			3.4				2				109				(2	)			—				2				111				—				111
Sale of shares			37.4				19				1,503				—				—				—				1,522				—				1,522
Purchase of shares			(2.8	)			(2	)			(33	)			(65	)			—				—				(100	)			—				(100	)
Decrease in noncontrolling interests due to sale of business			—				—				—				—				—				—				—				(10	)			(10	)
Balance at December 31, 2008			330.0				165				3,869				3,844				(1,538	)			(23	)			6,317				48				6,365

EATON CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

																		Accumulated								Total
										Capital in								other				Deferred				Eaton
		Common shares								excess of				Retained				comprehensive				compensation				shareholders’				Noncontrolling				Total
(In millions)		Shares				Dollars				par value				earnings				loss				plans				equity				interests				equity
Balance at December 31, 2008			330.0				165				3,869				3,844				(1,538	)			(23	)			6,317				48				6,365
Net income			—				—				—				383				—				—				383				2				385
Foreign currency translation and related hedging instruments (net of income tax expense of $45)			—				—				—				—				349				—				349				—				349
Pensions (net of income tax expense of $42)											—				—				1				—				1				—				1
Other postretirement benefits (net of income tax benefit of $14)			—				—				—				—				(56	)			—				(56	)			—				(56	)
Cash flow hedges (net of income tax expense of $19)			—				—				—				—				36				—				36				—				36
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-net (net of income tax benefit of $3)			2.3				1				78				—				—				2				81				—				81
Decrease in noncontrolling interests due to sale of business			—				—				—				—				—				—				—				(4	)			(4	)
Balance at December 31, 2009			332.3				166				3,947				3,893				(1,208	)			(21	)			6,777				41				6,818

EATON CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

																		Accumulated								Total
										Capital in								other				Deferred				Eaton
		Common shares								excess of				Retained				comprehensive				compensation				shareholders’				Noncontrolling				Total
(In millions)		Shares				Dollars				par value				earnings				loss				plans				equity				interests				equity
Balance at December 31, 2009			332.3				166				3,947				3,893				(1,208	)			(21	)			6,777				41				6,818
Net income			—				—				—				929				—				—				929				8				937
Foreign currency translation and related hedging instruments			—				—				—				—				(78	)			—				(78	)			—				(78	)
Pensions (net of income tax benefit of $30)			—				—				—				—				(61	)			—				(61	)			—				(61	)
Other postretirement benefits (net of income tax benefit of $4)			—				—				—				—				(1	)			—				(1	)			—				(1	)
Other comprehensive loss																											(140	)			—				(140	)
Total comprehensive income																											789				8				797
Cash dividends paid			—				—				—				(363	)			—				—				(363	)			(8	)			(371	)
Issuance of shares under employee benefit plans-net (net of income tax expense of $3)			7.6				4				146				(4	)			—				13				159				—				159
Balance at December 31, 2010			339.9			$	170			$	4,093			$	4,455			$	(1,348	)		$	(8	)		$	7,362			$	41			$	7,403

The number of common shares outstanding, Common shares, Capital in excess of par value and Retained earnings have been restated to give effect to the two-for-one stock split. See Note 1 for additional information.

The notes on pages 24 to 52 are an integral part of the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amounts are in millions or shares unless indicated otherwise (per share data assume dilution).

Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General Information

     Eaton Corporation (Eaton or Company) is a diversified power management company with 2010 sales of $13.7 billion. The Company 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.

     Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and notes. Actual results could differ from these estimates. Management has evaluated subsequent events through the date the consolidated financial statements were filed with the Securities Exchange Commission.

     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 consolidated financial statements. Eaton does not have off-balance sheet arrangements or financings with unconsolidated entities. In the ordinary course of business, the Company leases certain real properties and equipment, as described in Note 7.

     On January 27, 2011, Eaton’s Board of Directors announced a two-for-one stock split of the Company’s common shares effective in the form of a 100% stock dividend. The record date for the stock split was February 7, 2011, and the additional shares will be distributed on February 28, 2011. Accordingly, all per share amounts, average shares outstanding, shares outstanding, shares repurchased and equity based compensation presented in the consolidated financial statements and notes have been adjusted retroactively to reflect the stock split. Shareholders’ equity has been retroactively adjusted to give effect to the stock split for all periods presented by reclassifying the par value of the additional shares issued in connection with the stock split to Common shares from Retained earnings and Capital in excess of par value.

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

Foreign Currency Translation

     The functional currency for subsidiaries outside the United States is primarily the local currency. Financial statements for these subsidiaries are translated 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 loss. Gains and losses related to foreign currency transactions are recognized in Other (income) expense-net.

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 agreements that contain multiple elements or non-standard terms and conditions. As a result, judgment is required to determine the appropriate accounting, including whether the deliverables specified in these agreements should be treated as separate units of accounting for 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 generally are recognized as the services are provided.

Long-Lived Assets

     Depreciation and amortization for property, plant and equipment, and intangible assets subject to amortization, are generally computed by the straight-line method and included in Cost of products sold, Selling and administrative expense, and Research and development expense, as appropriate. Cost of buildings are depreciated generally over 40 years and

machinery and equipment over 3 to 10 years. At December 31, 2010, 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 generally amortized over a period up to 7 years.

     Long-lived assets, except goodwill and indefinite life intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Upon indications of impairment, assets and liabilities are grouped 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. Determining asset groups and underlying cash flows requires the use of significant judgment.

Goodwill and Indefinite Life Intangible Assets

     Goodwill and indefinite life intangible assets are tested annually for impairment as of July 1 using a discounted cash flow model and other valuation techniques. Additionally, goodwill and indefinite life intangible assets are evaluated for impairment whenever events or circumstances indicate there may be a possible permanent loss of value.

     Goodwill is tested for impairment at the reporting unit level, which is equivalent to Eaton’s operating segments, and 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 is the level which 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 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 are performed around these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values.

     Indefinite life intangible assets primarily consist of trademarks. The fair value of these assets is determined using a royalty relief methodology similar to that employed when the associated assets were acquired, but using updated estimates of future sales, cash flows and profitability.

     For 2010, the fair value of Eaton’s reporting units and indefinite life intangible assets substantially exceeded the respective carrying values. For additional information about goodwill and other intangible assets, see Note 4.

Derivative Financial Instruments and Hedging Activities

     Eaton uses derivative financial instruments to manage the exposure to the volatility in raw material costs, foreign currency and interest rates on certain debt instruments. These instruments are marked to fair value. Changes in the fair value of derivative assets or liabilities (i.e., gains or losses) are recognized depending upon the type of hedging relationship and whether an instrument has been designated as a hedge. For those instruments that qualify for hedge accounting, Eaton designates the hedging instrument, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge, or a hedge of a net investment in a foreign operation. Changes in fair value of these instruments that do not qualify for hedge accounting are recognized immediately in net income. See Note 12 for additional information about hedges and derivative financial instruments.

Warranty Accruals

     Product warranty accruals are established at the time the related sale is recognized through a charge to Cost of products sold. Warranty accrual estimates are based primarily on historical warranty claim experience and specific customer contracts. Provisions for warranty accruals are comprised of basic warranties for products sold, as well as accruals for product recalls and other events when they are known and estimable. See Note 7 for additional information about warranty accruals.

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 when sufficient information is available to estimate fair value.

Income Taxes

     Deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax basis of the respective assets and liabilities, using enacted tax rates in effect for the year when the differences are expected to reverse. Deferred income tax assets are recognized for United States and non-United States income tax loss carryforwards and income tax credit carryforwards. Judgment is required in determining and evaluating income tax provisions and valuation allowances for deferred income tax assets. Eaton recognizes the income tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. Eaton evaluates and adjusts these accruals based on changing facts and circumstances. 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. For additional information about income taxes, see Note 8.

Stock Options and Restricted Stock Units

     Eaton recognizes equity-based compensation expense based on the grant date fair value of the award over the period during which an employee is required to provide service in exchange for the award. Stock options are granted with an exercise price equal to the closing market price of Eaton common shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option-pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate, and the expected dividend yield. The fair value of restricted stock units is based on the closing market price of Eaton common stock on the grant date. See Note 10 for additional information about stock options and restricted stock units.

New Accounting Standards

     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 2011. The adoption of this standard is not expected to have a material effect on Eaton’s consolidated financial statements.

Note 2. ACQUISITIONS OF BUSINESSES

     Eaton acquired businesses and entered into joint ventures in separate transactions for combined net cash purchase prices of $222 in 2010, $10 in 2009, and $2,807 in 2008. The Consolidated Statements of Income include the results of these businesses from the dates of the transactions or formation. These transactions are summarized below:

				Business		Annual
Acquired business		Date of transaction		segment		sales
Chloride Phoenixtec Electronics A China-based manufacturer of uninterruptible power supply (UPS) systems. Eaton acquired the remaining shares to increase its ownership from 50% to 100%.		October 12, 2010		Electrical Rest of World		$25 for the year ended September 30, 2010
CopperLogic, Inc. A United States-based manufacturer of electrical and electromechanical systems.		October 1, 2010		Electrical Americas		$35 for the year ended September 30, 2010
Wright Line Holding, Inc. A United States provider of customized enclosures, rack systems, and air-flow management systems to store, power, and secure mission-critical IT data center electronics.		August 25, 2010		Electrical Americas		$101 for the year ended June 30, 2010

				Business		Annual
Acquired business		Date of transaction		segment		sales
EMC Engineers, Inc. A United States energy engineering and energy services company that delivers energy efficiency solutions for a wide range of governmental, educational, commercial and industrial facilities.		July 15, 2010		Electrical Americas		$24 for 2009
Micro Innovation Holding AG A Switzerland-based manufacturer of human machine interfaces, programmable logic controllers and input/output devices. Eaton acquired the remaining shares to increase its ownership from 50% to 100%.		September 1, 2009		Electrical Rest of World		$33 for 2008
SEG Middle East Power Solutions & Switchboard Manufacture LLC A 49%-owned joint venture in Abu Dhabi that manufactures low-voltage switchboards and control panel assemblies for use in the Middle East power generation and industrial markets.		July 2, 2009		Electrical Rest of World		$10 for 2008
Integ Holding Limited The parent company of Integrated Hydraulics Ltd., a United Kingdom-based manufacturer of screw-in cartridge valves, custom-engineered hydraulic valves and manifold systems.		October 2, 2008		Hydraulics		$52 for 2007
Nittan Global Tech Co. Ltd. A 49%-owned joint venture to 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.		Operational October 1, 2008		Automotive		Joint venture
Engine Valves Business of Kirloskar Oil Engines Ltd. An India-based designer, manufacturer and distributor of intake and exhaust valves for diesel and gasoline engines.		July 31, 2008		Automotive		$5 for 2007
PK Electronics A Belgium-based distributor and service provider of single-phase and three-phase uninterruptible power supply (UPS) systems.		July 31, 2008		Electrical Rest of World		$9 for 2007
The Moeller Group A Germany-based supplier of electrical components for commercial and residential building applications and industrial controls for industrial equipment applications.		April 4, 2008		Electrical Rest of World		$1.4 billion (€1.02 billion) for 2007
Balmen Electronic, S.L. A Spain-based distributor and service provider of uninterruptible power supply (UPS) systems.		March 31, 2008		Electrical Rest of World		$6 for 2007
Phoenixtec Power Company Ltd. A Taiwan-based manufacturer of single- and three-phase uninterruptible power supply (UPS) systems.		February 26, 2008		Electrical Rest of World		$515 for 2007

     On January 1, 2011, Eaton closed the acquisition of the Tuthill Coupling Group, a division of the Tuthill Corporation. This business, located in the United States and France, manufactures pneumatic and hydraulic quick coupling solutions and leak-free connectors used in industrial, construction, mining, defense, energy and power applications. This business had sales of $35 for the year ended November 30, 2010 and will be included in the Hydraulics business segment.

     On January 20, 2011, Eaton reached an agreement to acquire ACTOM (Pty) Limited’s low-voltage electrical business in South Africa. This business is a manufacturer and supplier of motor control components, engineered electrical distribution systems, and uninterruptible power supply systems and had sales of $58 for the year ended December 31, 2010. The terms of the agreement are subject to regulatory approvals and other customary closing conditions. The acquisition is expected to close during the first half of 2011. This business will be included in the Electrical Rest of World segment.

Note 3. ACQUISITION INTEGRATION AND RESTRUCTURING CHARGES

Acquisition Integration Charges

     Eaton incurs charges related to the integration of acquired businesses. A summary of these charges follows:

		2010				2009				2008
Business segment
Electrical Americas		$	2			$	4			$	4
Electrical Rest of World			33				60				43
Hydraulics			1				3				6
Aerospace			4				12				20
Automotive			—				1				3
			40				80				76
Corporate			—				2				1
Total integration charges before income taxes		$	40			$	82			$	77
After-tax integration charges		$	27			$	54			$	51
Per common share		$	0.08			$	0.16			$	0.17

     Charges in 2010 were related primarily to Moeller and Phoenixtec. Charges in 2009 were related primarily to Moeller, Phoenixtec and Argo-Tech. Charges in 2008 were related primarily to Moeller, Phoenixtec, the MGE small systems UPS business, Argo-Tech, PerkinElmer and Cobham. See Note 2 for additional information about business acquisitions.

Workforce Reduction and Plant Closing Charges

     In 2009, Eaton took significant actions to reduce its fulltime workforce by 17% in response to the severe economic downturn. These actions resulted in the recognition of severance and pension and other postretirement benefits expense of $182 in 2009.

     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.

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

										Plant
		Workforce reductions								closing
		Employees				Dollars				and other				Total
Balance at January 1, 2008			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	)			(173	)			(61	)			(234	)
Balance at December 31, 2009			1,418				43				12				55
Liabilities recognized			202				7				33				40
Utilized			(1,293	)			(39	)			(40	)			(79	)
Balance at December 31, 2010			327			$	11			$	5			$	16

     These charges were included in Cost of products sold or Selling and administrative expense, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related business segment. See Note 14 for additional information about business segments.

 Page 28 

Note 4. GOODWILL AND OTHER INTANGIBLE ASSETS

     A summary of goodwill follows:

		2010				2009
Electrical Americas		$	2,061			$	2,003
Electrical Rest of World			985				1,005
Hydraulics			1,007				1,016
Aerospace			1,037				1,047
Truck			151				147
Automotive			213				217
Total goodwill		$	5,454			$	5,435

     The increase in goodwill in 2010 was due to businesses acquired during 2010, the finalization of purchase price allocations related to businesses acquired in 2009, and foreign currency translation. For additional information regarding acquired businesses, see Note 2.

     A summary of other intangible assets follows:

		2010								2009
		Historical				Accumulated				Historical				Accumulated
		cost				amortization				cost				amortization
Intangible assets not subject to amortization (primarily trademarks)		$	451							$	451
Intangible assets subject to amortization
Customer relationships		$	1,187			$	274			$	1,181			$	204
Patents and technology			835				260				885				245
Other			441				108				456				83
Total other intangible assets		$	2,463			$	642			$	2,522			$	532

     Expense related to intangible assets subject to amortization in 2010, and for each of the next five years, follows:

2010		$	152
2011			150
2012			149
2013			140
2014			134
2015			130

 Page 29 

Note 5. DEBT

     Short-term debt of $72 at December 31, 2010 included $50 of short-term commercial paper in the United States which had a weighted-average interest rate of 0.45%, $15 of other short-term debt in the United States, and $7 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 $975 from various banks worldwide at December 31, 2010.

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

		2010				2009
5.75% notes due 2012		$	300			$	300
7.58% notes due 2012			12				12
4.90% 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				250
12.50% United Kingdom pound sterling debentures due 2014			9				9
4.65% notes due 2015			100				100
5.30% notes due 2017			250				250
6.875% to 7.09% notes due 2018			36				36
5.60% notes due 2018 ($115 converted to floating rate by interest rate swap)			450				450
4.215% Japanese Yen notes due 2018			123				108
6.95% notes due 2019			300				300
8.875% 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
6.50% 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				140
5.25% notes due 2035			42				42
5.80% notes due 2037			240				240
Other			206				189
Total long-term debt			3,386				3,354
Less current portion of long-term debt			(4	)			(5	)
Long-term debt less current portion		$	3,382			$	3,349