EATON CORP, DEF 14A, 1997-03-17

EATON CORP
DEF 14A, 1997-03-17
ELECTRONIC & OTHER ELECTRICAL EQUIPMENT (NO COMPUTER EQUIP)

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SCHEDULE 14A
(RULE 14A)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>

EATON CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

XXXXXXXXXXXXXXXX
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)

Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:

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<PAGE> 2
PROXY
STATEMENT
&
NOTICE OF MEETING

1 9 9 7 A N N U A L M E E T I N G O F S H A R E H O L D E R S
- -----------------------------------------------------------------
EATON LOGO

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NOTICE OF MEETING

The 1997 annual meeting of Eaton Corporation shareholders will be held
Wednesday, April 23, at 10:30 a.m. local time at The Forum Conference and
Education Center, One Cleveland Center, 1375 East Ninth Street, Cleveland, Ohio
44114, for the purpose of:

1. Electing directors;

2. Ratifying the appointment of independent auditors; and

3. Considering reports and such other business as may properly come before the
meeting.

These matters are more fully described in the following pages.

The record date for the meeting has been fixed by the Board of Directors as the
close of business on February 24, 1997. Shareholders of record at that time are
entitled to vote at the meeting.

By order of the Board of Directors

EARL R. FRANKLIN SIGNATURE

Earl R. Franklin
Secretary

March 17, 1997

Your Vote Is Important

To vote your shares, please indicate your choices, sign and date the enclosed
proxy card and return it in the accompanying postage-paid envelope. You will
save your Company the expense of a second mailing by returning your proxy card
promptly.
<PAGE> 4

CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROXY STATEMENT ........................ 3

Proxy Solicitation ..................... 3

Voting at the Meeting .................. 3

Election of Directors .................. 4

Board Committees ....................... 8

Compensation of Directors .............. 9

Executive Compensation ................. 10

Ratification of the Appointment of
Independent Auditors ................. 20

Other Business ......................... 20

Ownership of Outstanding Voting
Shares................................ 20

Future Shareholder Proposals ........... 22
</TABLE>
<PAGE> 5

PROXY STATEMENT

EATON CORPORATION
Eaton Center
Cleveland, Ohio 44114-2584
(216) 523-5000

- ----------------------------------------------

This proxy statement and the accompanying proxy form are scheduled to be sent to
shareholders on March 17, 1997. Eaton's annual report for the year ended
December 31, 1996 is scheduled to be mailed to shareholders beginning March 13,
1997.

PROXY SOLICITATION

Eaton's Board of Directors solicits your proxy, in the form enclosed, for use
at the 1997 annual meeting of shareholders and at any adjournments thereof. The
persons appointed by the enclosed form of proxy have advised the Board that it
is their intention to vote at the meeting in compliance with instructions on
all forms of proxy tendered by shareholders and, where no contrary instruction
is indicated on the proxy form, for the election of the persons nominated to
serve as directors and for ratification of the appointment of Ernst & Young LLP
as independent auditors. These matters are described in the following sections
of this proxy statement.

Any shareholder giving a proxy in the form enclosed has the power to revoke it
by giving Eaton written notice before the meeting or by revoking it at the
meeting. All properly executed proxies not revoked will be voted at the meeting.

In addition to soliciting proxies through the mail, certain employees may
solicit proxies in person or by telephone or facsimile. Eaton has retained
Morrow & Co., Inc., 909 Third Avenue, New York, New York 10022, to assist in the
solicitation of proxies, primarily from brokers, banks and other nominees, for a
fee estimated at $7,000. Brokerage firms, nominees, custodians and fiduciaries
may be requested to forward proxy soliciting material to the beneficial owners
of shares of record. All reasonable soliciting costs will be borne by Eaton.

VOTING AT THE MEETING

Each Eaton shareholder of record at the close of business on February 24, 1997
is entitled to one vote for each share then held. On February 24th, 77,207,589
Eaton common shares (par value, 50c each) were outstanding and entitled to vote.

At the 1997 annual meeting, in accordance with Ohio law and Eaton's Amended
Regulations, the inspectors of election appointed by the Board of Directors for
the annual meeting will determine the presence of a quorum and will tabulate the
results of shareholder voting. As provided by Ohio law and Eaton's Amended
Regulations, Eaton shareholders present in person or by proxy at the 1997 annual
meeting will constitute a quorum for such meeting. The inspectors of election
intend to treat properly executed proxies marked "abstain" as "present" for
these purposes. The inspectors will also treat as "present" shares held in
"street name" by brokers that are voted on at least one proposal to come before
the 1997 annual meeting.

Director nominees receiving the greatest number of votes will be elected
directors. Votes withheld in respect of the election of directors will not be
counted in determining the outcome of the election. Adoption of all other
proposals to come before the 1997 annual meeting will require the affirmative
vote of the holders of a majority of the outstanding Eaton common shares, which
requirement is consistent with the general vote requirement in Eaton's Amended

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Articles of Incorporation. The practical effect of this vote requirement will be
that abstentions and shares held in "street name" by brokers that are not voted
in respect of such proposals will be treated the same as votes cast against such
proposals.

As provided by Ohio law, each shareholder is entitled to cumulative voting
rights in the election of directors if any shareholder gives written notice to
the President or a Vice President or the Secretary of Eaton at least 48 hours
before the time fixed for the meeting, stating that cumulative voting is
desired, and if an announcement of such notice is made at the beginning of the
meeting by the Chairman or Secretary, or by or on behalf of the shareholder who
gave the notice. If cumulative voting is in effect with respect to an election
of directors, each shareholder has the right to cumulate his or her voting power
by giving one nominee that number of votes which equals the number of directors
to be elected multiplied by the number of the shareholder's votes, or by
distributing his or her votes on the same principle among two or more nominees,
as he or she sees fit. In the event that cumulative voting is in effect with
respect to an election of directors, the persons named in the proxy will vote
the shares represented by the proxy cumulatively for such of the nominees as
they may in their discretion determine, except that no votes with respect to any
proxy will be cumulated for any nominee for whom the shareholder executing the
proxy has directed that his or her vote be withheld.

1. ELECTION OF DIRECTORS

The Board of Directors is presently composed of eleven members. The terms of
four directors will expire in April, 1997, and those directors have been
nominated for re-election. Each of the nominees was elected at the 1994 annual
meeting. (See page 5.)

Charles E. Hugel, a director since 1978, having attained the normal retirement
age, will resign as director at the conclusion of the annual meeting of
shareholders on April 23. Ned C. Lautenbach has been nominated to fill the
vacancy thus created. (See page 6.)

Following is biographical information about each nominee and each director
continuing in office.

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NOMINEES FOR ELECTION TO TERMS ENDING IN 2000 OR WHEN THEIR SUCCESSORS ARE
ELECTED AND HAVE QUALIFIED:

<TABLE>
<S> <C> <C> <C>
A. M. CUTLER PHOTO P. B. DAVIS PHOTO S. R. HARDIS PHOTO G. L. TOOKER PHOTO

ALEXANDER M. CUTLER, PHYLLIS B. DAVIS, 65, STEPHEN R. HARDIS, 61, GARY L. TOOKER, 57, is
45, is President and is former Senior Vice is Chairman and Chief Chairman of the Board of
Chief Operating Officer President of Avon Executive Officer of Motorola, Inc., a
of Eaton Corporation. Products, Inc., a Eaton Corporation. Mr. manufacturer of
Mr. Cutler joined manufacturer and Hardis joined Eaton in electronics equipment.
Cutler-Hammer, Inc. in marketer of cosmetics, 1979 as Executive Vice Mr. Tooker joined
1975, which was toiletries and jewelry. President - Finance and Motorola in 1962 and
subsequently acquired Mrs. Davis joined Avon Administration. He was advanced to the position
by Eaton, and became in 1968 as Product elected Vice Chairman of Senior Executive Vice
President of Eaton's Manager, advanced to in 1986 and designated President and Chief
Industrial Group in Group Vice President Chief Financial and Corporate Staff Officer
1986 and President of (U.S.) in 1977 and led Administrative Officer. in 1986. He became Chief
the Controls Group in Sales and Distribution He became Chief Operating Officer in
1989. He advanced to from 1985 to 1988. In Executive Officer in 1988, President in 1990,
Executive Vice 1989, she became September, 1995 and Vice Chairman and Chief
President - Operations Corporate Senior Vice Chairman in January, Executive Officer in
in 1991, was elected President for Business 1996. Mr. Hardis is a December, 1993 and
Executive Vice Development and director of KeyCorp, Chairman in 1997.
President and Chief Corporate Affairs until Lexmark International DIRECTOR SINCE 1992
Operating Officer - her retirement in late Group Inc., Nordson
Controls in September, 1991. Mrs. Davis is a Corporation and
1993 and assumed his director of BellSouth Progressive
present position in Corporation and The TJX Corporation.
September, 1995. Companies, Inc., and a DIRECTOR SINCE 1983
DIRECTOR SINCE 1993 trustee of the Fidelity
mutual funds.
DIRECTOR SINCE 1991
</TABLE>

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NOMINEE FOR ELECTION TO TERM ENDING IN 1999 OR WHEN A SUCCESSOR IS ELECTED AND
HAS QUALIFIED AND DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL APRIL, 1998:

<TABLE>
<S> <C> <C> <C>
N. C. LAUTENBACH PHOTO N. A. ARMSTRONG PHOTO E. GREEN PHOTO A. WILLIAM REYNOLDS
PHOTO

NED C. LAUTENBACH, 53, NEIL A. ARMSTRONG, 66, ERNIE GREEN, 58, is A. WILLIAM REYNOLDS, 63,
is Senior Vice is former Chairman of founder, President and is Chief Executive of
President and Group Computing Technologies Chief Executive Officer the Old Mill Group, a
Executive, Worldwide for Aviation, Inc., a of EGI, Inc., a private investment firm.
Sales and Services, of computer systems manufacturer of Mr. Reynolds is former
IBM Corporation. IBM's company, a position he automotive components. Chairman of GenCorp Inc.
primary business held from 1982 until He is also President of He was Chairman of
segments include 1992. He is a director Florida Production GenCorp from 1987
information processors, of Cincinnati Milacron, Engineering, Inc., through March, 1995 and
personal systems Inc., Cinergy Corp., subsidiary of EGI. He Chief Executive Officer
clients, OEM hardware, RMI Titanium Co., is a director of from August, 1985 to
software and services. Thiokol Corporation and Acordia, Inc., Bank July, 1994. Mr. Reynolds
Mr. Lautenbach began USX Corporation. One, Dayton, N.A., DP&L is a director of Boise
his career with IBM in DIRECTOR SINCE 1981 Inc., Duriron Company, Cascade Corporation,
1968 and was elected Inc., Fluor Daniel GTI Boise Cascade Office
Vice President in 1987. and Gradall Industries, Products Corp. and Stant
He became President of Inc. Corporation.
IBM Asia Pacific in DIRECTOR SINCE 1995 DIRECTOR SINCE 1987
1991, Senior Vice
President of IBM in
1992 and Chairman of
IBM World Trade
Corporation in 1993 and
has been in his present
position since 1995.
Mr. Lautenbach is
standing for election
to the Eaton board for
the first time. He is a
director of Providian
Corporation.
</TABLE>

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DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL APRIL, 1999:

<TABLE>
<S> <C> <C>
J. R. MILLER PHOTO F. C. MOSELEY PHOTO V. A. PELSON PHOTO

JOHN R. MILLER, 59, is FURMAN C. MOSELEY, 62, VICTOR A. PELSON, 59,
President and Chief is Chairman of is a Director of
Executive Officer of Sasquatch Publishing Dillon, Read & Co.,
TBN Holdings Inc., a Company. He is former Inc., investment
company engaged in the President of Simpson bankers, and Senior
resource recovery and Investment Company, Advisor to the firm.
recycling business. He holding company for Before joining Dillon
was President, Chief Simpson Paper Company Read in April, 1996,
Operating Officer and a and Simpson Timber Mr. Pelson was
director of The Company. He was associated with AT&T
Standard Oil Company Chairman of Simpson from 1959 to March,
from August, 1980 Paper from 1969 to 1996, where he held a
through March, 1986. January, 1995 and number of executive
Mr. Miller formerly retired as President of positions, including
served as Chairman of Simpson Investment in Group Executive and
the Federal Reserve July, 1995. Mr. Moseley President responsible
Bank of Cleveland. is a director of Owens- for the Communications
DIRECTOR SINCE 1985 Corning Fiberglas Services Group,
Corporation. Executive Vice
DIRECTOR SINCE 1975 President and member of
the Management
Executive Committee. At
his retirement from
AT&T, Mr. Pelson was
Chairman of Global
Operations and a member
of the Board of
Directors. Mr. Pelson
is also a director of
United Parcel Service.
DIRECTOR SINCE 1994
</TABLE>

7
<PAGE> 10

BOARD COMMITTEES -- Eaton's Board of Directors has standing Audit, Compensation
and Organization, Corporate Responsibility and Public Policy, Executive, and
Finance Committees.

Audit Committee. The functions of the Audit Committee include aiding directors
in fulfilling the Board's responsibility for the quality of financial reporting,
meeting with the Company's director of internal audits to review the annual
internal audit plan and, subsequently, the results thereof, receiving and
considering management recommendations regarding the appointment of independent
auditors and recommending to the Board a firm to serve as independent auditors,
meeting with the independent auditors and management to review the scope of and
the plan for the annual audit and, subsequently, to review the results of the
audit, reviewing any significant changes in accounting policies, reviewing the
annual financial statements, reviewing significant non-audit professional
services provided by the independent auditors and fees for those services and
serving as the auditors' access to the Board (for both internal and independent
auditors). The Audit Committee held three meetings in 1996. The present members
are Messrs. Armstrong, Green, Hugel and Reynolds.

Compensation and Organization Committee. The functions of the Compensation and
Organization Committee include recommending and attracting qualified candidates
as director nominees, recommending the number of directors to serve for each
ensuing year, reviewing and recommending changes in the functions and
responsibilities of each of the Board's committees, reviewing proposed
organization or responsibility changes at the officer level, evaluating the
performance of the Chief Executive Officer and reviewing the performance
evaluations of the other elected officers, reviewing succession planning for key
officer positions and recommending the individual to assume the position of
Chief Executive Officer if that position becomes vacant due to unforeseen
circumstances. The committee is also responsible for recommending to the Board
of Directors the salary of each elected officer and the retainer and attendance
fees and other compensation to non-employee directors, reviewing awards to
elected officers under the Executive Incentive Compensation Plan and the
aggregate amount of awards under the Plan, adjusting that amount as appropriate
within the terms of the Plan, establishing and subsequently determining the
attainment of performance objectives under the Company's long-term incentive
compensation plans, administering stock option plans and reviewing compensation
and benefit plans as they relate to key employees to confirm that those plans
remain equitable and competitive, as well as maintaining a program to analyze
and recommend such plans for the long range, and preparing an annual report for
the Company's proxy statement regarding executive compensation. The Compensation
and Organization Committee held three meetings in 1996. Prior to being combined
in April, 1996, the former Compensation Committee held two meetings in 1996; and
the former Organization and Nominating Committee held one meeting. Present
members of the Compensation and Organization Committee are Mrs. Davis and
Messrs. Miller, Moseley, Pelson and Tooker.

The Compensation and Organization Committee will consider persons for nomination
to stand for election as directors who are recommended to it in writing by any
Eaton shareholder. Any shareholder wishing to submit a recommendation to the
committee for consideration as a nominee for election at the annual meeting of
shareholders to be held in 1998 should send a signed letter of recommendation,
to be received before November 7, 1997, to the following address: Eaton
Corporation, Eaton Center, Cleveland, Ohio 44114-2584, attention Corporate
Secretary. Recommendation letters must state

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the reasons for the recommendation and contain the full name and address of each
proposed nominee as well as a brief biographical history setting forth past and
present directorships, employments, occupations and civic activities. Any such
recommendation should be accompanied by a written statement from the proposed
nominee consenting to be named as a candidate and, if nominated and elected, to
serve as a director.

Corporate Responsibility and Public Policy Committee. The function of the
Corporate Responsibility and Public Policy Committee is to provide oversight
regarding significant public issues of concern with respect to the Company's
relationships with shareholders, employees, customers, competitors, suppliers
and the communities in which the Company operates, including such areas as
ethics compliance, environmental, health and safety issues, diversity and equal
employment opportunity, community relations, government relations, charitable
contributions, shareholder and investor relations and the Eaton Philosophy of
Excellence through People. The Corporate Responsibility and Public Policy
Committee held three meetings since being formed in April, 1996. Present members
are Mrs. Davis and Messrs. Armstrong, Green, Hugel and Tooker.

Executive Committee. The functions of the Executive Committee include all of the
functions of the Board of Directors other than the filling of vacancies in the
Board of Directors or in any of its committees. The Executive Committee acts
upon matters requiring Board action during the intervals between Board meetings.
It did not meet in 1996. Mr. Hardis is a member for the full twelve-month term;
each of the non-employee directors serves a four-month term.

Finance Committee. The functions of the Finance Committee include the periodic
review of the Company's financial condition and the recommendation of financial
policies, analyzing Company policy regarding its debt-equity relationship,
reviewing and making recommendations regarding the Company's dividend policy,
reviewing the Company's cash flow, proposals for long- and short-term debt
financing and the risk management program, meeting with and reviewing the
performance of management pension committees and any other fiduciaries appointed
by the Board for pension and profit-sharing retirement plans and reviewing those
plans and recommending modifications to them. The Finance Committee held three
meetings in 1996. Before merging into the Finance Committee in April, 1996, the
Pension Review Committee held one meeting in 1996. Present Finance Committee
members are Messrs. Armstrong, Green, Miller, Moseley, Pelson and Reynolds.

The Board of Directors held ten meetings in 1996. All of the directors attended
at least 75% of the meetings of the Board and its committees. Attendance at
meetings of the Board and its committees as a whole averaged 94%.

COMPENSATION OF DIRECTORS -- Employee directors are not compensated for their
services as directors. Non-employee directors receive an annual retainer of
$30,000, a fee of $1,000 for each Board meeting and each Board committee meeting
attended and a fee of $1,000 for each special presentation attended on non-Board
meeting days. Non-employee directors receive an additional annual retainer of
$3,000 for each Board committee on which they serve or $5,000 for each committee
which they chair, except that no such retainers are paid for membership or
chairmanship of the Executive Committee or any ad hoc committee of the Board.

Non-employee directors first elected before 1996 may defer payment of their
annual fees not to exceed $30,000 at a rate of return specified in their
deferred compensation agreements. The rate of interest is based upon the number
of years until a director's retirement date and, in general, is higher than
prevailing

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market rates. Such directors also may defer their annual fees at the prime bank
rate. All non-employee directors may defer their fees at a rate of return which
varies, depending on whether the director defers the fees as retirement
compensation or as short-term compensation. At least 50% of retirement
compensation, or any greater portion which the director elects, is converted to
share units and earns share price appreciation and dividend equivalents. The
balance of retirement compensation earns 10-year Treasury note returns plus 300
basis points. Short-term compensation earns 13-week Treasury bill returns. These
arrangements provide for accelerated lump sum or installment payments upon a
failure by the Company to pay or termination of service in the context of a
change in control of the Company.

Pursuant to the Company's 1995 Stock Plan, as approved by the shareholders, each
person serving as a non-employee director on January 24, 1995 and who continued
serving in that capacity after the annual meeting of shareholders on April 26,
1995 was granted an option for 5,000 shares. Each person becoming a non-employee
director thereafter is granted an option for 5,000 shares on the date of his or
her first election to the Board. Beginning in the year following the initial
grant, each non-employee director receives an option for 1,000 shares annually
during his or her service on the Board.

In connection with his serving on the Board of Directors of a subsidiary of the
Company, Mr. Armstrong received $36,000 from the subsidiary for attendance fees
and annual retainers for 1996. During 1996, he was granted by the subsidiary
10,000 "phantom" stock options under which cash payments may be provided based
upon any increases in the book value per common share of the subsidiary.

Upon leaving the Board, non-employee directors who were first elected prior to
1996 are eligible to receive an annual benefit, as described
below. Directors who are first elected in 1996 or thereafter are not eligible to
receive the annual benefit. For Board service of at least five years, eligible
directors receive an annual benefit equal to the annual retainer in effect at
the time such directors leave the Board. Eligible directors having fewer than
five years but more than one year of Board service at the time of their Board
retirement receive a proportionately reduced annual benefit. The annual benefit
is paid for the lesser of ten years or life. The present value of payments under
this plan will be paid in a lump sum upon a "proposed change in control" of the
Company, unless otherwise determined by a committee of the Board.

EXECUTIVE COMPENSATION -- The following table summarizes the total compensation
of the Chief Executive Officer and the four other most highly compensated
executive officers of Eaton for fiscal years 1996, 1995 and 1994.

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SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------
AWARDS PAYOUTS
-------- ---------
ANNUAL COMPENSATION OTHER STOCK LONG-TERM ALL OTHER
-------------------------------- ANNUAL OPTIONS INCENTIVE COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (SHARES) PAYOUTS (1)
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------

S. R. Hardis 1996 $721,680 $1,023,925 $ 0 48,000 $654,240 $298,732
Chairman and Chief 1995 580,020 867,720 0 26,300 470,912 499,251
Executive Officer 1994 483,000 613,941 0 26,300 258,108 431,343

A. M. Cutler 1996 $540,000 $ 672,290 $ 0 32,000 $496,520 $ 14,125
President and Chief Operating 1995 470,170 626,980 0 26,300 385,259 20,554
Officer 1994 388,700 613,941 0 26,300 226,876 20,819

B. R. Bachman(2) 1996 $310,020 $ 344,033 $9,456 18,000 $ 0 $ 19,380
Senior Vice President --
Semiconductor and Specialty
Systems

R. J. McCloskey 1996 $311,040 $ 329,046 $ 0 18,000 $159,658 $ 25,116
Senior Vice President -- 1995 252,040 271,606 0 8,000 128,446 26,169
Controls and Hydraulics 1994 214,396 232,482 0 7,300 126,960 21,747

L. M. Oman 1996 $311,040 $ 314,090 $ 0 18,000 $158,485 $ 21,817
Senior Vice President -- 1995 253,040 297,473 0 8,000 148,998 23,082
Automotive Components 1994 217,520 230,472 0 7,300 120,914 19,263
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) All Other Compensation contains several components. The Eaton Corporation
Share Purchase and Investment Plan permits an employee to contribute from 1%
to 6% of his or her salary to the matching portion of the plan. Eaton makes
a matching contribution which, except in special circumstances, ranges
between $.25 and $1.00 for each dollar contributed by the participating
employee, as determined under a formula designed to reflect Eaton's
quarterly earnings per share. The amount the Company contributed during 1996
for the named executive officers was as follows: S. R. Hardis, $8,614; A. M.
Cutler, $7,718; B. R. Bachman, $7,273; R. J. McCloskey, $7,686; and L. M.
Oman, $7,267. The Company maintains plans pursuant to which incentive
compensation may be deferred. Earnings on such deferrals which are above
rates established by the Internal Revenue Service must be disclosed in this
table. Those earnings during 1996 for each of the named executive officers
were as follows: S. R. Hardis, $243,417; A. M. Cutler, $1,931; B. R.
Bachman, $0; R. J. McCloskey, $0; and L. M. Oman, $696. Under a Company
program, each executive officer may acquire an automobile at an approximate
cost to the Company for each of the named executive officers for 1996 as
follows: S. R. Hardis, $11,011; A. M. Cutler, $0; B. R. Bachman, $9,032; R.
J. McCloskey, $11,033; and L. M. Oman, $9,372. The Company provides certain
executives, including the named executive officers, with the opportunity to
acquire individual whole-life insurance. The annual premiums paid by the
Company during 1996 for each of the named executive officers were as
follows: S. R. Hardis, $13,463; A. M. Cutler, $3,406; B. R. Bachman, $3,075;
R. J. McCloskey, $3,244; and L. M. Oman, $2,716. Each executive officer is
responsible for paying individual income taxes due with respect to the
Company's automobile and insurance programs.

(2) Mr. Bachman became an executive officer of the Company in January, 1996. In
connection with the employment of Mr. Bachman, the Company agreed to provide
a replacement loan for an interest-free loan in the amount of $160,000 which
Mr. Bachman had with his previous employer. The new loan is payable by Mr.
Bachman over a four-year period. The Company also has agreed to reimburse
Mr. Bachman for the expense of income taxes imposed with respect to the
loan. The amount of such reimbursement for 1996 is shown under "Other Annual
Compensation".

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AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES -- The following table
contains information concerning the exercise of stock options during fiscal year
1996 and the value of unexercised stock options at the end of fiscal year 1996
with respect to the named executive officers.

<TABLE>
<CAPTION>
TOTAL VALUE OF
TOTAL NUMBER OF UNEXERCISED,
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES HELD AT HELD AT
ACQUIRED ON FISCAL YEAR END FISCAL YEAR END
EXERCISE VALUE ----------------------------- ----------------------------
NAME (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------

S. R. Hardis 1,462 $ 85,301 184,226 0 $4,821,370 $ 0
A. M. Cutler 7,267 257,982 163,740 0 4,347,778 0
B. R. Bachman 0 0 20,000 0 335,000 0
R. J. McCloskey 0 0 40,000 0 762,805 0
L. M. Oman 0 0 65,200 0 1,759,899 0
- --------------------------------------------------------------------------------------------------------------
</TABLE>

OPTION GRANTS -- The following table gives information concerning grants of
stock options made during fiscal year 1996 to each of the named executive
officers. No stock appreciation rights were granted during fiscal year 1996.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS POTENTIAL REALIZABLE VALUE AT ASSUMED
SECURITIES GRANTED TO ANNUAL RATES OF STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL OR BASE EXPIRATION -----------------------------------------
NAME GRANTED (#) YEAR(1) PRICE DATE 0% 5% 10%
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------

S. R. Hardis 48,000 4.47% $53.00 1/23/2006 $0 $ 1,602,720 $ 4,044,960
A. M. Cutler 32,000 2.98% 53.00 1/23/2006 0 1,068,480 2,696,640
B. R. Bachman 18,000 1.67% 53.00 1/23/2006 0 601,020 1,516,860
R. J. McCloskey 18,000 1.67% 53.00 1/23/2006 0 601,020 1,516,860
L. M. Oman 18,000 1.67% 53.00 1/23/2006 0 601,020 1,516,860
- --------------------
All Shareholders(2) N/A N/A N/A N/A 0 2,578,886,065 6,508,617,214
</TABLE>

(1) Based on a total of 1,064,600 options granted to all employees. All options
granted to the named executive officers were granted on January 23, 1996 and
became exercisable on July 23, 1996.

(2) At the assumed annual rates of stock price appreciation of 0%, 5% and 10%,
the value of all 77,235,282 outstanding shares would increase by the amounts
shown. There can be no assurance that the market price of Eaton shares will
increase in the future.

- --------------------------------------------------------------------------------

12
<PAGE> 15

LONG-TERM INCENTIVE PLAN AWARDS -- The following table gives information
regarding Long-Term Incentive Plan awards made during fiscal year 1996 to each
of the named executive officers.

<TABLE>
<CAPTION>
PERFORMANCE
NUMBER OF OR OTHER ESTIMATED FUTURE PAYOUTS UNDER
SHARES, PERIOD UNTIL NON-STOCK PRICE BASED PLANS
UNITS OR MATURATION -------------------------------------
NAME OTHER RIGHTS(1) OR PAYOUT THRESHOLD TARGET MAXIMUM
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
S. R. Hardis N/A 4 years $300,870 $601,740 $1,203,480
A. M. Cutler N/A 4 years 210,504 421,008 842,016
B. R. Bachman N/A 4 years 110,790 221,580 443,160
R. J. McCloskey N/A 4 years 110,790 221,580 443,160
L. M. Oman N/A 4 years 110,790 221,580 443,160
- ----------------------------------------------------------------------------------------------------
</TABLE>

(1) The awards made during 1996 were not based on units or shares. Rather, the
estimated future payouts are predicated upon the achievement of corporate
performance goals, specifically, cash flow return on gross capital, measured
at the end of the four-year award period. The achievement of approximately
76% of the goal will result in payment of the threshold amount, while
attaining approximately 118% of the goal will result in payment of the
maximum amount. All future payouts, if any, will be made in cash.

COMPENSATION AND ORGANIZATION COMMITTEE REPORT -- Executive compensation plays a
critically important role in furthering the interests of the shareholders by
helping the Company to achieve its goals and to maintain its values.
Consequently, the Committee has adopted several fundamental compensation
policies which have been endorsed by the Board of Directors. It is Committee
policy that executive compensation must to a large extent be at risk, in the
sense of being dependent on achieving corporate and individual performance
objectives which are designed to enhance shareholder value. It is also Committee
policy that executive compensation must be competitive in the employment
marketplace in order to allow the Company to attract, motivate and retain highly
qualified executives, and that it must fairly reflect, in the judgment of the
Committee, accomplishments and responsibilities within the Company.

The administration of the Company's executive compensation is consistent with
these policies. This is confirmed by studies conducted for the Committee at
least every two years with the assistance of a nationally recognized consulting
firm, the results of which are summarized for the Board of Directors.
Sixty-five percent of the 1996 aggregate cash compensation to the executive
officers named in the compensation table was based directly on specific
financial performance objectives. For 1996 the Committee established target
levels of base salary, short-term incentive awards and stock options for
executive officers at approximately the median range of compensation paid by
similar companies included in the survey data bases of several nationally
recognized compensation consulting firms. Target levels for long-term cash
incentive compensation were set at approximately the 75% range. Actual
compensation is comparable to that of those companies and of others included in
the peer group whose financial performance is graphed on page 17. All elements
of the Company's executive compensation arrangements are based on these
policies and procedures.

13
<PAGE> 16

Salary. At the request of the Committee, management recommends individual
salary adjustments within salary ranges. In reviewing these recommendations, the
Committee uses its judgment to evaluate individual performance in terms of
annual plans, accomplishment of other objectives and the performance of similar
companies. The Committee also normally considers other important factors such as
initiative and leadership, as well as time in position, experience, knowledge
and level of the compensation with respect to the marketplace. Consistently
effective individual performance is a threshold requirement for any salary
increase. When executives are promoted, they are placed in higher salary ranges
and thus typically receive greater than ordinary salary increases. The
Committee's recommendations for 1996 salary adjustments were based upon these
considerations and were accepted by the Board of Directors.

Short-Term Incentives. Annual performance bonuses, including those paid in
1996, are based on percentages of salary range midpoints and depend upon whether
the Company has achieved predetermined levels of cash flow return on the gross
capital employed in the business ("CRC"), individual performance ratings and
Committee discretion. CRC essentially reflects the relationship between cash
flows and capital resources (with fixed assets stated at cost), while
eliminating the effects of significant accounting charges that do not affect
cash flow. The Committee believes that, over time, consistently high CRC
provides a good statistical correlation with sustained high stock market
valuation. It also reflects management's contributions without discouraging the
strategic acquisitions or capital investments necessary to achieve long-range
goals. No payments are made unless the Company achieves, as it did in 1996, the
predetermined CRC levels. Individual performance ratings are established for all
elected officers after a review by the Committee of management's
recommendations. Ratings take into account factors such as unanticipated
challenges and opportunities, actual performance against profit plan, general
economic conditions and the performance of other large industrial corporations.
Variations in actual bonuses attributable to individual ratings may range from
complete elimination to 150% of the bonus otherwise payable. The Committee may
adjust the total amount available for bonuses by up to 10%. When the Committee
exercises this subjective discretion, it takes into account the ease or
difficulty of the task confronting the Company, general economic conditions, the
performance of other large industrial corporations and significant corporate
accomplishments or disappointments. In 1996, the Committee reduced the available
amount by 10%. Executive officers may defer payment of their bonuses. Amounts
deferred until retirement earn the greater of share price appreciation and
dividend equivalents or 13-week Treasury bill returns. Amounts deferred for
shorter periods earn Treasury bill returns.

Long-Term Cash Incentives. The value of long-term cash incentives, which are
granted annually, depends on whether the Company achieves aggressive performance
objectives during the four years following each grant. This was the case, for
example, for the 1993-1996 award period. These objectives are expressed in terms
of CRC. They are established annually by the Committee based upon a review with
management of the Company's past performance in comparison to that of its peer
group companies and the Company's strategic plans. Executive officers may defer
payment of their awards. The return on deferrals varies, depending on whether
the officer has deferred the award as retirement compensation, variable-term
compensation or short-term compensation. At least 50% of retirement
compensation, or any greater portion which the officer elects, is converted to
share units and earns share price appreciation and dividend equivalents. The

14
<PAGE> 17

balance of retirement compensation and all variable-term compensation earns
10-year Treasury note returns plus 300 basis points. Short-term compensation
earns 13-week Treasury bill returns.

Stock Options. Stock options directly align the interests of the Company's
executive officers with those of its shareholders by affording those officers an
opportunity to buy and maintain an equity interest in the Company. Options
traditionally are granted annually, have an exercise price equal to the fair
market value of the shares on the date of grant and, to encourage a long-term
perspective, have an exercise period of ten years. The relationship of corporate
performance to stock option compensation is that, over the long run, share price
appreciation generally reflects corporate performance, and without that the
options are of no value. The Company has not "repriced" stock options after they
have been granted and no longer grants stock appreciation rights. For 1996, the
Committee approved regular grants at levels consistent with those made in 1995.

Chief Executive Officer Compensation. The Chief Executive Officer's 1996
compensation was earned pursuant to the arrangements described above. In
evaluating Mr. Hardis' performance, the Committee took into account the
Company's 1996 operating performance. In particular, 1996 earnings per share
were $4.50, most of the Company's businesses showed good performance given
market conditions and the Company continued to improve those operations which
have fallen short of performance objectives in prior years. The Committee also
took into account Mr. Hardis' role in establishing aggressive growth targets for
the Company and his leadership in implementing the growth initiative. The
initiative involves four targeted areas: internal improvement, global expansion,
development of new products and business acquisitions. The implementation
process to date includes the focusing of management's attention on the growth
initiative, the Company's acquisition of CAPCO, the progress that the Company is
making in negotiating arrangements in countries undergoing relatively rapid
industrialization and accelerated internal progress. Mr. Hardis' personal
efforts in communicating this long-term strategy to investors and employees and
in encouraging management to achieve more aggressive goals were especially
important contributions.

Special 1997 Performance Stock Options. Following extensive review and
discussions among the Committee, management and the Board of Directors, special
performance-based stock options were granted in January, 1997. These grants are
intended to support management's focus on reaching the Company's aggressive
growth goals. They were made in lieu of more standard 1997 option grants to the
fifty-one individuals, comprised of executive officers and key operating
managers, who are positioned to lead the Company's progress in achieving those
goals. These performance-based options have an exercise price equal to the fair
market value of a Company share on the date of grant ($71.81) and have an
exercise period of ten years. The size of these grants is approximately three to
five times that of the standard grants made to these executives in recent years.
Vesting is linked to the Company's success in achieving aggressive earnings and
share price targets. Half of each option will become exercisable if the Company
earns $8.00 per share by the end of the year 2000. The other half will become
exercisable if the Company achieves a market price per share of $85.00 by the
end of 1998, $92.50 by the end of 1999 or $100.00 by the end of 2000, in each
case for 10 consecutive trading dates beginning no later than the end of each of
those years. If either the earnings or share price target is not met by the end
of 2000, the unmet target for that year will increase at a compound annual rate
of 10%. The options will become fully exercisable upon a

15
<PAGE> 18

change in control of the Company. They also will become fully exercisable 10
days before the expiration of their 10-year term in order to ensure that the
Company is not required to charge earnings for any price appreciation of the
option shares after the date of grant.

Tax Deduction. Any non-deferred annual compensation of more than $1 million for
the Company's Chief Executive Officer and each of its four other most
highly-compensated officers is not tax deductible unless paid pursuant to
formula-driven, performance-based arrangements which preclude Committee
discretion to adjust compensation after the beginning of the period in which the
compensation is earned. The Committee preserves deductibility by requiring
deferrals of otherwise non-deductible payments.

Respectfully submitted to the Company's shareholders by the Compensation and
Organization Committee of the Board of Directors, each member of which is a non-
employee director.

John R. Miller, Chairman
Phyllis B. Davis
Furman C. Moseley
Victor A. Pelson
Gary L. Tooker

16
<PAGE> 19

COMPANY STOCK PERFORMANCE -- The following graph compares the cumulative total
return for Eaton common shares with the S&P 500 Index and a group of 20 peer
companies: Allied-Signal Inc., Arvin Industries, Inc., Cummins Engine Company,
Inc., Dana Corporation, Emerson Electric Co., General Signal Corporation, GTE
Corporation, Honeywell Inc., Johnson Controls, Inc., Motorola, Inc., Navistar
International Corporation, PACCAR Inc., Parker-Hannifin Corporation, Rockwell
International Corporation, SPX Corporation, Sundstrand Corporation, TRINOVA
Corporation, TRW Inc., United Technologies Corporation and Westinghouse
Electric Corporation.

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG EATON, S&P 500 INDEX AND PEER COMPANIES

<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) PEER GROUP EATON S&P 500
<S> <C> <C> <C>
1991 100 100 100
1992 112 129 108
1993 138 162 118
1994 139 162 120
1995 181 179 165
1996 217 237 203
</TABLE>

Assumes $100 invested on December 31, 1991 in Eaton common shares, the S&P 500
Index and stock of the peer companies. Total return assumes that all dividends
are reinvested when received. The returns of each company in the group of peer
companies are weighted based on the company's relative stock market
capitalization.

17
<PAGE> 20

RETIREMENT PLANS -- The following table shows the annual normal retirement
benefits payable to officers and other employees of the Company pursuant to the
Company's retirement plans upon retirement at age 65 at the compensation levels
and years of service specified. The table assumes retirement under the standard
post-retirement single life annuity option. Under the standard post-retirement
surviving spouse option, the participant receives a reduced pension, and a
pension equal to 50% of his or her reduced pension is payable to his or her
surviving spouse. The benefit for an employee electing that option whose spouse
is three years younger would be approximately 11% less than the amounts shown
in the table.

PENSION PLAN TABLE

<TABLE>
<CAPTION>
AVERAGE ANNUAL NORMAL RETIREMENT BENEFITS PURSUANT TO STANDARD
FINAL SINGLE LIFE ANNUITY OPTION FOR YEARS OF CREDITED SERVICE INDICATED
ANNUAL -------------------------------------------------------------------------------
COMPENSATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS 40 YEARS
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
$ 200,000 $ 43,056 $ 57,408 $ 71,760 $ 86,112 $ 100,464 $ 114,816
300,000 65,556 87,408 109,260 131,112 152,964 174,816
400,000 88,056 117,408 146,760 176,112 205,464 234,816
500,000 110,556 147,408 184,260 221,112 257,964 294,816
600,000 133,056 177,408 221,760 266,112 310,464 354,816
700,000 155,556 207,408 259,260 311,112 362,964 414,816
800,000 178,056 237,408 296,760 356,112 415,464 474,816
900,000 200,556 267,408 334,260 401,112 467,964 534,816
1,000,000 223,056 297,408 371,760 446,112 520,464 594,816
1,100,000 245,556 327,408 409,260 491,112 572,964 654,816
1,200,000 268,056 357,408 446,760 536,112 625,464 714,816
1,300,000 290,556 387,408 484,260 581,112 677,964 774,816
</TABLE>

The information contained in the preceding table is based on the assumption that
the retirement plans will be continued in their present form.

Annual normal retirement benefits are computed at the rate of 1% of average
final annual compensation up to the applicable Social Security integration level
($25,920 for 1996 retirements) plus 1 1/2% of average final annual compensation
in excess of the Social Security integration level, multiplied by the employee's
years of credited service.

An employee's average final annual compensation is the average annual amount of
his or her total compensation (which includes salary and bonus as so identified
in the Summary Compensation Table on page 11) for service during the five
consecutive years within the last ten years of employment for which the
employee's total compensation was greatest. Years of credited service is the
number of years of employment between age 21 and retirement, with a maximum of
44 years. As of January 31, 1997, the number of years of credited service for
each of the individuals named in the Summary Compensation Table on page 11 was
as follows: B. R. Bachman, 1.2; A. M. Cutler, 21.4; S. R. Hardis, 17.4; R. J.
McCloskey, 27.8; and L. M. Oman, 28.6.
---------------

Certain provisions of the Internal Revenue Code, as amended, limit the annual
benefits which may be paid from a tax-qualified retirement plan. As permitted
under the Code, the Board of Directors has authorized the payment from Eaton's
general funds of any benefits calculated under the provisions of the applicable
retirement plan which may exceed those limits. The present value of these
benefits will be paid in a single installment upon a proposed change in

18
<PAGE> 21

control of the Company unless otherwise determined by the Board of Directors.

---------------

The Board of Directors has adopted a plan which provides supplemental annual
retirement income to certain executives who do not have the opportunity to
accumulate significant credited service with Eaton, provided that they retire
at age 55 or older and have at least five years of service with Eaton. The
amount of the annual supplement is generally equal to the amount by which a
percentage (described below) of the executive's average final annual
compensation exceeds his or her earned retirement income (which includes
amounts receivable pursuant to the retirement plans described above as well as
retirement plans maintained by the executive's previous employers). The
percentage of average final annual compensation used for this purpose depends
upon an executive's age and years of service at retirement. The percentage
ranges from 20% (for retirements at age 55 with less than 15 years of service)
to 45% (for retirements at age 65 with 15 years or more of service). Under the
plan, the present value of payments will be paid in a single installment upon a
proposed change in control of the Company unless otherwise determined by the
Board of Directors. Four executive officers currently are participating in the
plan, of whom two, S. R. Hardis and B. R. Bachman, are named in the Summary
Compensation Table on page 11. The estimated annual benefits payable under this
plan are $167,076 to Mr. Hardis and $140,759 to Mr. Bachman, based on the
assumptions that Mr. Hardis and Mr. Bachman retire at age 65 and that their
base salary and target incentive compensation increase at 4% per annum.

---------------

The Company has entered into agreements with its executive officers, including
those named in the Summary Compensation Table on page 11, which provide for
payments and benefits in the event of a termination of employment in the context
of a change of control of the Company. The purpose of these agreements is to
assure continued dedication, and to diminish the inevitable distraction caused
by personal uncertainties and risks, in the event of a corporate change of
control.

The agreements provide that each officer, for three years following a change of
control, will have duties, salary, bonus, fringe benefits and opportunities for
savings, incentive earnings and retirement compensation, no less favorable than
was previously the case. If the Company were to terminate an officer's
employment during this three-year period for reasons other than cause or
disability, or if the officer were to terminate employment for reasons relating
to changed circumstances, then the amounts and benefits that the officer would
be entitled to receive include (i) long-term incentive compensation reflective
of the portion of the award periods completed prior to termination, (ii) salary
and bonus multiplied by three (or any lesser number of years and portions
thereof until age 65), and (iii) continuation of medical, life insurance and
other welfare benefits for two years (or any lesser number of years and portions
thereof until age 65), subject to reduction for comparable benefits received in
any subsequent employment. The officer would be entitled to receive an
additional payment, net of taxes, to compensate for the excise tax imposed on
these and other payments if they are determined to be excess parachute payments
under the Internal Revenue Code.

The agreements provide that, upon the occurrence of a proposed change of
control, the Company would deposit in trust a cash amount sufficient to provide
the benefits and payments to which the officers would be entitled under the
agreements upon a change of control and termination of employment. The
agreements also provide that the Company would reimburse the officers for any
enforcement costs.

19
<PAGE> 22

---------------

The Company has transferred $22 million of marketable securities and 105,000
Company shares to grantor trusts in order to provide for a portion of its
deferred compensation obligations. The trust assets, which are subject to the
claims of the Company's creditors, will be used to pay those obligations in
proportion to trust funding. The trusts provide for full funding upon a change
in control of the Company and for accelerated lump sum or installment payments
upon a failure by the Company to pay amounts due under the plans or upon a
termination of employment in the context of a change in control.

2. RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS

Upon the recommendation of its Audit Committee, the Board of Directors has
appointed the accounting firm of Ernst & Young LLP as independent auditors to
conduct the annual audit of Eaton's books and records for 1997. The submittal of
this matter to the shareholders at the annual meeting is not required by law or
by Eaton's Amended Regulations. The Board of Directors is, nevertheless,
submitting it to the shareholders to ascertain their views. If this proposal is
not approved at the annual meeting by the affirmative vote of holders of the
majority of the outstanding common shares of the Company entitled to vote at the
meeting, the Board intends to reconsider its appointment of Ernst & Young LLP as
independent auditors.

A representative of Ernst & Young LLP will be present at the annual meeting to
make a statement, should he or she desire to do so, and to answer any questions
concerning the independent auditors' areas of responsibility.

The Board of Directors recommends a vote FOR ratification of the appointment of
Ernst & Young LLP.

3. OTHER BUSINESS

Management does not know of any other matters requiring shareholder action that
may come before the meeting; but, if any are properly presented, the individuals
named in the enclosed form of proxy have discretionary authority to act on such
matters and will vote thereon according to their best judgment.

OWNERSHIP OF OUTSTANDING VOTING SHARES -- Set forth below is certain information
concerning persons who are known by Eaton to have reported owning beneficially
more than 5% of the common shares of the Company's voting shares as of the most
recent practicable date.

<TABLE>
<CAPTION>
Title of Class: Common Shares
- -------------------------------------------------------
Percent
Name and Address of of
Beneficial Owner Class
- -------------------------------------------------------
<S> <C> <C>
FMR Corp. 8,600,578(1) 11.16%
82 Devonshire Street
Boston, Massachusetts 02109
Putnam Investments, Inc. 4,433,665(2) 5.80%
One Post Office Square
Boston, Massachusetts 02109
</TABLE>

- ---------------

(1) FMR Corp. has filed with the Securities and Exchange Commission a Schedule
13G dated February 14, 1997, which reports the beneficial ownership of
8,600,578 common shares by it and certain affiliated entities and
individuals. As reported in the Schedule 13G, FMR Corp. and such entities
and individuals have the sole power to vote or to direct the vote of
1,681,676 shares and sole power to dispose or to direct the disposition of
8,600,578 shares.

(2) Putnam Investments, Inc., a subsidiary of Marsh & McLennan Companies, Inc.,
has filed with the Securities and Exchange Commission a Schedule 13G dated
January 27, 1997, which reports beneficial ownership of 4,433,665 common
shares by two subsidiaries. As reported in the Schedule 13G, Putnam
Investment Management, Inc. has shared power to dispose or direct the
disposition of 4,361,750 common shares but no power to vote or to direct the
vote of those shares. The Putnam Advisory Company, Inc. has shared power to
vote or to direct the vote of 47,890 shares and shared power to dispose or
to direct the disposition of 71,915 shares.

20
<PAGE> 23

The following table shows the beneficial ownership, reported to the Company as
of January 31, 1997 of common shares of the Company, including shares as to
which a right to acquire ownership within 60 days after January 31, 1997 exists
through the exercise of stock options, of each director and nominee, each
executive officer named in the Summary Compensation Table on page 11 and, as a
group, of such persons and all other executive officers.

<TABLE>
<CAPTION>
Title of Class: Common Shares
- ---------------------------------------------
Name of Number Percent
Beneficial of Shares of
Owner Owned(1,2) Class(3)
- ---------------------------------------------
<S> <C> <C>
N. A. Armstrong 7,800 --
B. R. Bachman 20,317 (5) --
A. M. Cutler 183,130 (4,5) --
P. B. Davis 7,238 --
E. Green 6,500 --
S. R. Hardis 236,862 (5) --
C. E. Hugel 12,000 --
N. C. Lautenbach 1,000 --
R. J. McCloskey 44,359 (5) --
J. R. Miller 10,500 --
F. C. Moseley 20,000 (4) --
L. M. Oman 78,950 (5) --
V. A. Pelson 8,000 (4) --
A. W. Reynolds 12,000 --
G. L. Tooker 9,000 (4) --
Directors, Nominees
and Executive
Officers as a
group of 30 2,002,058(4,5) 2.54%
</TABLE>

- ---------------
(1) Each person has sole voting and investment power with respect to the shares
listed, unless otherwise indicated.

(2) Includes shares which may be acquired within 60 days after January 31, 1997
upon the exercise of outstanding stock options as follows: B. R. Bachman,
20,000; A. M. Cutler, 160,566; S. R. Hardis, 181,294; R. J. McCloskey,
40,000; L. M. Oman, 65,200; and all directors, nominees and executive
officers as a group, 1,694,652 shares.

(3) Less than 1% unless otherwise indicated.

(4) Includes shares held jointly or in other capacities, such as by trust.

(5) Includes shares held under the Eaton Corporation Share Purchase and
Investment Plan as of January 31, 1997. Participants in the plan are
entitled to direct the plan trustee's voting of shares which are not
allocated to any participant's account. None of those shares are included
among the shares beneficially owned by the executive officers.

In addition, certain of the named executive officers hold a number of units,
each of which is equal to the value of a common share of the Company, under
various deferred compensation plans as follows: A. M. Cutler, 12,911; S. R.
Hardis, 108,037; and L. M. Oman, 4,354. (These units are discussed on page 14.)

Employee benefit plans of the Company and its subsidiaries on January 31, 1997
held 9,506,935 common shares for the benefit of participating employees, or
12.3% of common shares outstanding.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE -- Section 16(a) of the
Securities Exchange Act of 1934 requires the Company's directors and officers to
file reports of holdings and transactions in the Company's equity securities
with the Securities and Exchange Commission and the New York Stock Exchange.
Based on Company records and except as otherwise described below, the Company
believes that there was compliance with all such filing requirements with
respect to 1996 and prior years. J. M. Carmont, A. M. Cutler, A. T. Dillon, G.
L. Gherlein, S. R. Hardis and R. L. Leach were not apprised of the requirement
to report the acquisition of phantom share units resulting from their deferrals,
under a shareholder approved plan, of long-term incentive compensation. As a
result, each of these officers had one late report of one such acquisition. Mr.
Cutler also had two late reports of two exercises of employee stock options and
related open market sale transactions.

21
<PAGE> 24

FUTURE SHAREHOLDER PROPOSALS -- Shareholders who wish to submit proposals for
inclusion in the proxy statement and for consideration at the annual meeting
must do so on a timely basis. In order to be included in the proxy statement for
the 1998 annual meeting, proposals must relate to proper subjects and must be
received by the Corporate Secretary, Eaton Corporation, Eaton Center, Cleveland,
Ohio 44114-2584, before November 18, 1997.

By order of the Board of Directors

E. R. FRANKLIN SIGNATURE

Earl R. Franklin
Secretary

March 17, 1997

22
<PAGE> 25
Admission to the Annual Meeting

Shareholders who plan to attend the 1997 annual meeting of shareholsers may
apply for admission tickets at the Registration Desk immediately prior to the
meeting. Shareholders whose shares are registered in the name of a broker or
bank name should obtain certification of ownership to bring to the meeting.

Eaton Corporation
Eaton Center
Cleveland, Ohio 44114-2584
- ----------------------------------------------------------------------------
EATON LOGO

<PAGE> 26

EATON CORPORATION
EATON CENTER
P CLEVELAND, OHIO 44114-2584
R
0 -------------------------------------------------------------------
X [LOGO]
Y
The undersigned hereby appoints S. R. Hardis, G. L. Gherlein and
E. R. Franklin as proxies, each with the power to appoint his
substitute, and hereby authorizes them to represent and to vote, as
designated on the reverse side of this card, all of the Eaton
common shares, including reinvestment shares, if any, held by the
undersigned on February 24, 1997, at the annual meeting of
shareholders to be held at The Forum Conference and Education
Center, One Cleveland Center, Cleveland, Ohio on April 23, 1997, at
10:30 a.m. local time and at any adjournments thereof.

Election of Directors: A. M. Cutler, P. B. Davis, S. R. Hardis,
N. C. Lautenbach and G. L. Tooker

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
WHEN PROPERLY EXECUTED, IT WILL BE VOTED FOR ITEMS #1 AND #2
UNLESS CONTRARY INSTRUCTIONS ARE INDICATED ON THE REVERSE SIDE.

PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.

SEE REVERSE
SIDE
<PAGE> 27

<TABLE>
X PLEASE MARK YOUR
VOTES AS IN THIS SHARES IN YOUR NAME REINVESTMENT SHARES
EXAMPLE.

<S> <C> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN

1. Election of / / / / 2. Ratify Appointment / / / / / /
Directors of Independent
(see reverse) Auditors

For, except vote withheld from the
following nominee(s):
___________________________________ BOARD RECOMMENDS A VOTE FOR
#1 AND #2.

3. In their discretion, the
proxies are authorized
to vote upon such other
business as may properly
come before the meeting.

</TABLE>

SIGNATURE(S)____________________________DATE_____________
SIGNATURE(S)____________________________DATE_____________
NOTE: Please sign exactly as name appears hereon. Joint
owners should each sign. When signing as attorney,
executor, administrator, trustee or guardian,
please give full title as such.

<PAGE> 28

CONFIDENTIAL VOTING INSTRUCTIONS

To Key Trust Company of Ohio, N.A., Trustee for the Eaton
Corporation Winamac Plant Hourly Investment Plan and Trust
("Plan"):

The undersigned, as a participant in the above Plan, hereby directs
the Trustee to vote in person or by proxy all common shares of
Eaton Corporation credited to the undersigned's account under the
Plan (and the undersigned's proportionate share of the unallocated
or undirected common shares as described below) on the record date
for the annual meeting of shareholders of Eaton Corporation to be
held at The Forum Conference and Education Center, One Cleveland
Center, Cleveland, Ohio, on April 23, 1997, at 10:30 a.m. local
time and at any adjournments thereof. The Trustee is hereby
instructed to vote FOR Items #1 and #2 unless contrary voting
instructions are indicated on the reverse side of this card. Under
the Plan, a proportionate share of the common shares not allocated
to any account and shares for which the Trustee does not receive
timely voting directions is voted by participants who submit signed
voting instructions.

Election of Directors: A. M. Cutler, P. B. Davis, S. R. Hardis,
N. C. Lautenbach and G. L. Tooker

SEE REVERSE
SIDE
<PAGE> 29

<TABLE>
X PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.

<S> <C> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of / / / / 2. Ratify Appointment / / / / / /
Directors of Independent
(see reverse) Auditors

For, except vote withheld
from the following nominee(s):
__________________________________________ BOARD RECOMMENDS A VOTE FOR
#1 AND #2.

3. In their discretion, the
proxies are authorized
to vote upon such other
business as may properly
come before the meeting.

</TABLE>

PARTICIPANT'S SIGNATURE_______________________________________DATE____________

NOTE: Please sign, date and return promptly to Key Trust Company of Ohio,
N.A. in the enclosed envelope to protect confidentiality.

<PAGE> 30

CONFIDENTIAL VOTING INSTRUCTIONS

To Key Trust Company of Ohio, N.A., Trustee for the AIL Systems
Inc. Employee Investment Plan and Trust ("Plan"):

Election of Directors: A. M. Cutler, P. B. Davis, S. R. Hardis,
N. C. Lautenbach and G. L. Tooker

SEE REVERSE
SIDE
<PAGE> 31

<TABLE>
X PLEASE MARK YOUR PLAN SHARES
VOTES AS IN THIS
EXAMPLE.

<S> <C> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN

1. Election of / / / / 2. Ratify Appointment / / / / / /
Directors of Independent
(see reverse) Auditors

For, except vote withheld
from the following
nominee(s):
____________________________________ BOARD RECOMMENDS A VOTE FOR
#1 AND #2.
3. In their discretion, the
proxies are authorized
to vote upon such other
business as may properly come
before the meeting.

PARTICIPANT'S SIGNATURE______________________________DATE______________
NOTE: Please sign, date and return promptly to Key Trust Company of Ohio,
N.A. in the enclosed envelope to protect confidentiality.

</TABLE>

<PAGE> 32

CONFIDENTIAL VOTING INSTRUCTIONS

To Key Trust Company of Ohio, N.A., Trustee for the Eaton
Corporation Lincoln Plant Share Purchase and Investment Plan and
Trust ("Plan"):

Election of Directors: A. M. Cutler, P. B. Davis, S. R. Hardis,
N. C. Lautenbach and G. L. Tooker

SEE REVERSE
SIDE
<PAGE> 33

<TABLE>
X PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.

<S> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of / / / / 2. Ratify Appointment / / / / / /
Directors of Independent
(see reverse) Auditors

For, except vote withheld
from the following
nominee(s):
_______________________________________ BOARD RECOMMENDS A VOTE FOR
#1 AND #2.
3. In their discretion, the
proxies are authorized
to vote upon such other
business as may properly
come before the meeting.

</TABLE>

PARTICIPANT'S SIGNATURE_______________________________DATE________________

NOTE: Please sign, date and return promptly to Key Trust Company of Ohio,
N.A. in the enclosed envelope to protect confidentiality.

<PAGE> 34

CONFIDENTIAL VOTING INSTRUCTIONS

To Key Trust Company of Ohio, N.A., Trustee for the Eaton
Corporation Wauwatosa Union Plan and Trust ("Plan"):

Election of Directors: A. M. Cutler, P. B. Davis, S. R. Hardis,
N. C. Lautenbach and G. L. Tooker

SEE REVERSE
SIDE
<PAGE> 35

<TABLE>
X PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.

<S> <C> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of / / / / 2. Ratify Appointment / / / / / /
Directors of Independent
(see reverse) Auditors

For, except vote withheld
from the following
nominee(s): BOARD RECOMMENDS A VOTE FOR
_________________________ #1 AND #2.

3. In their discretion, the
proxies are authorized
to vote upon such other
business as may properly
come before the meeting.

</TABLE>

PARTICIPANT'S SIGNATURE______________________DATE___________________
NOTE: Please sign, date and return promptly to Key Trust Company of Ohio,
N.A. in the enclosed envelope to protect confidentiality.

<PAGE> 36

CONFIDENTIAL VOTING INSTRUCTIONS

To Key Trust Company of Ohio, N.A., Trustee for the Eaton
Corporation 401K Savings Plan for Hourly Employees of the Airflex
Division ("Plan"):

Election of Directors: A. M. Cutler, P. B. Davis, S. R. Hardis,
N. C. Lautenbach and G. L. Tooker

SEE REVERSE
SIDE
<PAGE> 37

<TABLE>
X PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.

<S> <C> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of / / / / 2. Ratify Appointment / / / / / /
Directors of Independent
(see reverse) Auditors

For, except vote withheld
from the following
nominee(s):
___________________________________ BOARD RECOMMENDS A VOTE FOR
#1 AND #2.

3. In their discretion, the
proxies are authorized
to vote upon such other
business as may properly come
before the meeting.

</TABLE>

PARTICIPANT'S SIGNATURE______________________DATE_________
NOTE: Please sign, date and return promptly to Key Trust Company of Ohio, N.A.
in the enclosed envelope to protect confidentiality.

<PAGE> 38

CONFIDENTIAL VOTING INSTRUCTIONS

To Key Trust Company of Ohio, N.A., Trustee for the Eaton
Corporation Investment Plan for Hourly Employees of the Hydraulics
Division Hutchinson Plant ("Plan"):

Election of Directors: A. M. Cutler, P. B. Davis, S. R. Hardis,
N. C. Lautenbach and G. L. Tooker

SEE REVERSE
SIDE
<PAGE> 39
<TABLE>
X PLEASE MARK YOUR PLAN SHARES
VOTES AS IN THIS
EXAMPLE.

<S> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of / / / / 2. Ratify Appointment / / / / / /
Directors of Independent
(see reverse) Auditors

For, except vote withheld
from the following
nominee(s):
_________________________ BOARD RECOMMENDS A VOTE FOR
#1 AND #2.

3. In their discretion, the
proxies are authorized
to vote upon such other
business as may properly
come before the meeting.

</TABLE>

PARTICIPANT'S SIGNATURE_______________________DATE___________
NOTE: Please sign, date and return promptly to Key Trust Company of Ohio, N.A.
in the enclosed envelope to protect confidentiality.

<PAGE> 40

CONFIDENTIAL VOTING INSTRUCTIONS

To Key Trust Company of Ohio, N.A., Trustee for the Eaton
Corporation Savings Plan for Certain Cutler-Hammer Represented
Employees ("Plan"):

The undersigned, as a participant in the Plan, hereby directs the
Trustee to vote in person or by proxy all common shares of Eaton
Corporation credited to the undersigned's account under the Plan on
the record date for the annual meeting of shareholders of Eaton
Corporation to be held at The Forum Conference and Education
Center, One Cleveland Center, Cleveland, Ohio, on April 23, 1997,
at 10:30 a.m. local time and at any adjournments thereof. The
Trustee is hereby instructed to vote FOR Items #1 and #2 unless
contrary voting instructions are indicated on the reverse side of
this card. Under the Plan, shares for which the Trustee does not
receive directions in the form of a signed voting instruction card
are voted by the Trustee in accordance with and in the same
proportion as the shares for which it receives voting instructions.

Election of Directors: A. M. Cutler, P. B. Davis, S. R. Hardis,
N. C. Lautenbach and G. L. Tooker

SEE REVERSE
SIDE
<PAGE> 41

<TABLE>
X PLEASE MARK YOUR PLAN SHARES
VOTES AS IN THIS
EXAMPLE
<S> <C> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of / / / / 2. Ratify Appointment / / / / / /
Directors of Independent
(see reverse) Auditors

For, except vote withheld
from the following
nominee(s):
_________________________________ BOARD RECOMMENDS A VOTE FOR
#1 AND #2.

3. In their discretion, the
proxies are authorized
to vote upon such other
business as may properly
come before the meeting.

</TABLE>

PARTICIPANT'S SIGNATURE_____________________________DATE_________
NOTE: Please sign, date and return promptly in the enclosed envelope to protect
confidentiality.

<PAGE> 42

CONFIDENTIAL VOTING INSTRUCTIONS

To Fidelity Management Trust Company, Trustee for the Eaton
Corporation Consolidated Controls Profit Sharing Plan Trust
("Plan"):

Election of Directors: A. M. Cutler, P. B. Davis, S. R. Hardis,
N. C. Lautenbach and G. L. Tooker

SEE REVERSE
SIDE
<PAGE> 43

<TABLE>
X PLEASE MARK YOUR PLAN SHARES
VOTES AS IN THIS
EXAMPLE.

<S> <C> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of / / / / 2. Ratify Appointment / / / / / /
Directors of Independent
(see reverse) Auditors

For, except vote withheld
from the following
nominee(s):
________________________________ BOARD RECOMMENDS A VOTE FOR
#1 AND #2.

3. In their discretion, the
proxies are authorized
to vote upon such other
business as may properly
come before the meeting.

</TABLE>

PARTICIPANT'S SIGNATURE__________________________DATE ___________
NOTE: Please sign, date and return promptly in the enclosed envelope to protect
confidentiality.

<PAGE> 44

CONFIDENTIAL VOTING INSTRUCTIONS

To Key Trust Company of Ohio, N.A., Trustee for the Cutler-Hammer
de Puerto Rico, Inc. Retirement Savings Plan ("Plan"):

Election of Directors: A. M. Cutler, P. B. Davis, S. R. Hardis,
N. C. Lautenbach and G. L. Tooker

SEE REVERSE
SIDE
<PAGE> 45

<TABLE>
X PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.

<S> <C> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of / / / / 2. Ratify Appointment / / / / / /
Directors of Independent
(see reverse) Auditors

For, except vote withheld
from the following
nominee(s):
______________________________ BOARD RECOMMENDS A VOTE FOR
#1 AND #2.
3. In their discretion, the
proxies are authorized
to vote upon such other
business as may properly
come before the meeting.

</TABLE>

PARTICIPANT'S SIGNATURE__________________________DATE_____________
NOTE: Please sign, date and return promptly to Key Trust Company of Ohio, N.A.
in the enclosed envelope to protect confidentiality.

<PAGE> 46

CONFIDENTIAL VOTING INSTRUCTIONS (UNALLOCATED SHARES ONLY)

To Key Trust Company of Ohio, N.A., Trustee for the Eaton
Corporation Share Purchase and Investment Plan ("Plan"):

The undersigned, as a participant in the above Plan, hereby directs
the Trustee to vote in person or by proxy the number of common
shares of Eaton Corporation which are not allocated to the account
of any participant in the Plan (the "unallocated shares") as to
which the undersigned is entitled to direct the voting in
accordance with the provisions of the Plan at the annual meeting of
shareholders of Eaton Corporation to be held at The Forum
Conference and Education Center, One Cleveland Center, Cleveland,
Ohio, on April 23, 1997, at 10:30 a.m. local time and at any
adjournments thereof. The Trustee is hereby instructed to vote FOR
Items #1 and #2 unless contrary voting instructions are indicated
on the reverse side of this card. Unallocated shares are voted by
the Trustee as directed by the participants who return signed
voting instruction cards.

Election of Directors: A. M. Cutler, P. B. Davis, S. R. Hardis,
N. C. Lautenbach and G. L. Tooker

SEE REVERSE
SIDE
<PAGE> 47

<TABLE>
X PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.

<S> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of / / / / 2. Ratify Appointment / / / / / /
Directors of Independent
(see reverse) Auditors

For, except vote withheld
from the following
nominee(s):
_______________________________ BOARD RECOMMENDS A VOTE FOR
#1 AND #2.

3. In their discretion, the
proxies are authorized
to vote upon such other
business as may properly
come before the meeting.

</TABLE>

PARTICIPANT'S SIGNATURE_____________________________DATE_______________
NOTE: Please sign, date and return promptly to Key Trust Company of Ohio, N.A.
in the enclosed envelope to protect confidentiality.
<PAGE> 48

CONFIDENTIAL VOTING INSTRUCTIONS

To Key Trust Company of Ohio, N.A., Trustee for the Eaton
Corporation Share Purchase and Investment Plan ("Plan"):

The undersigned, as a participant in the above Plan, hereby directs
the Trustee to vote in person or by proxy (a) all common shares of
Eaton Corporation credited to the undersigned's account under the
Plan on the record date ("allocated shares") and (b) the
proportionate number of common shares of Eaton Corporation which
are not allocated to the account of any participant ("unallocated
shares") as to which the undersigned is entitled to direct the
voting in accordance with the Plan provisions, in each case at the
annual meeting of shareholders of Eaton Corporation to be held at
The Forum Conference and Education Center, One Cleveland Center,
Cleveland, Ohio, on April 23, 1997, at 10:30 a.m. local time and at
any adjournments thereof. The Trustee is hereby instructed to vote
FOR Items #1 and #2 unless contrary voting instructions are
indicated on the reverse side of this card. Under the Plan,
allocated shares for which the Trustee does not receive directions
in the form of a signed voting instruction card are voted by the
Trustee in accordance with and in the same proportion as the
allocated shares for which it receives voting instructions.
Unallocated shares are voted by the Trustee as directed by the
participants who return signed voting instruction cards. (Any
participant wishing to vote the unallocated shares differently from
the allocated shares may do so by requesting a separate voting
instruction card from Key Trust Company of Ohio, N.A. at P.O. Box
91037, Cleveland, Ohio 44101-3037 (216) 813-6152.)

Election of Directors: A. M. Cutler, P. B. Davis, S. R. Hardis,
N. C. Lautenbach and G. L. Tooker

SEE REVERSE
SIDE
<PAGE> 49

<TABLE>
X PLEASE MARK YOUR PLAN SHARES
VOTES AS IN THIS
EXAMPLE.

<S> <C> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of / / / / 2. Ratify Appointment / / / / / /
Directors of Independent
(see reverse) Auditors

For, except vote withheld
from the following
nominee(s):
____________________________ BOARD RECOMMENDS A VOTE FOR
#1 AND #2.

3. In their discretion, the
proxies are authorized
to vote upon such other
business as may properly
come before the meeting.

</TABLE>

PARTICIPANT'S SIGNATURE___________________________DATE____________
NOTE: Please sign, date and return promptly to Key Trust Company of Ohio, N.A.
in the enclosed envelope to protect confidentiality.