EATON CORP
PRE 14A, 2000-02-04
ELECTRONIC & OTHER ELECTRICAL EQUIPMENT (NO COMPUTER EQUIP)
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<PAGE>   1

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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>
[X]  Preliminary Proxy Statement               [ ]  CONFIDENTIAL, FOR USE OF THE COMMISSION
                                                    ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[ ]  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

                                                                            LOGO

                PROXY
                STATEMENT
                                &
                NOTICE of MEETING
                2000 ANNUAL MEETING OF SHAREHOLDERS

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

                                                                            LOGO
<PAGE>   3

NOTICE OF MEETING

The 2000 annual meeting of Eaton Corporation shareholders will be held
Wednesday, April 26, at 10:30 a.m. local time at the Company's Cutler-Hammer
Headquarters, 1000 Cherrington Parkway, Moon Township, PA, for the purpose of:

1. Electing directors;

2. Adopting Amended Regulations;

3. Ratifying the appointment of independent auditors; and

4. 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 28, 2000. 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, 2000

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

Adoption of Amended Regulations ................    19

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, the accompanying proxy form and Eaton's annual report for
the year ended December 31, 1999 are scheduled to be sent to shareholders on or
about March 17, 2000.

PROXY SOLICITATION

Eaton's Board of Directors solicits your proxy, in the form enclosed, for use at
the 2000 annual meeting of shareholders and any adjournments thereof. The
individuals named in the enclosed form of proxy have advised the Board of 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 individuals nominated to serve as
directors, for amending the Amended Regulations, 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 may 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., 445 Park 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 asked to forward proxy soliciting material to the beneficial
shareholders. 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 28, 2000
is entitled to one vote for each share then held. On February 28,
          Eaton common shares (par value, 50c each) were outstanding and
entitled to vote.

At the 2000 annual meeting, the inspectors of election appointed by the Board of
Directors for the meeting will determine the presence of a quorum and 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 meeting
will constitute a quorum. 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 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 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 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

                                        3
<PAGE>   6

voted in respect of those proposals will be treated the same as votes cast
against those 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, requesting cumulative voting, and if an
announcement of that 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 shares, or by
distributing his or her votes on the same principle among two or more nominees,
as the shareholder sees fit. If cumulative voting is in effect with respect to
an election of directors, the individuals named in the proxy will vote the
shares represented by the proxy cumulatively for those nominees that they may
determine in their discretion, except that no votes will be cast for any nominee
as to whom the shareholder giving 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, 2000. One of these directors is Phyllis B.
Davis. Mrs. Davis, a director since 1991, having attained the normal retirement
age, will resign as director at the conclusion of the annual meeting of
shareholders on April 26.

The remaining three directors whose terms are expiring have been nominated for
re-election. Each of the nominees was elected at the 1997 annual meeting. (See
page 5.)

If any of the nominees become unable or decline to serve, the individuals named
in the enclosed proxy will have the authority to vote for substitutes. But
Eaton's management has no reason to believe that this will occur.

Following the annual meeting, the Board of Directors will be composed of ten
members.

Following is biographical information about each nominee and each director.

                                        4
<PAGE>   7

NOMINEES FOR ELECTION TO TERMS ENDING IN 2003 OR WHEN THEIR SUCCESSORS ARE
ELECTED AND HAVE QUALIFIED:

<TABLE>
<S>                           <C>                           <C>                           <C>

A. M. CUTLER PHOTO            S. R. HARDIS PHOTO            G. L. TOOKER PHOTO


ALEXANDER M. CUTLER, 48, is   STEPHEN R. HARDIS, 64, is     GARY L. TOOKER, 60, is
President and Chief           Chairman and Chief Executive  former Chairman and Chief
Operating Officer of Eaton    Officer of Eaton              Executive Officer and a
Corporation. Mr. Cutler       Corporation. Mr. Hardis       director of Motorola, Inc.,
joined Cutler-Hammer, Inc.    joined Eaton in 1979 as       a manufacturer of
in 1975, which was            Executive Vice                electronics equipment. Mr.
subsequently acquired by      President - Finance and       Tooker joined Motorola in
Eaton, and became President   Administration. He was        1962 and advanced to the
of Eaton's Industrial Group   elected Vice Chairman in      position of Senior Executive
in 1986 and President of the  1986 and designated Chief     Vice President and Chief
Controls Group in 1989. He    Financial and Administrative  Corporate Staff Officer in
advanced to Executive Vice    Officer. He became Chief      1986. He became Chief
President - Operations in     Executive Officer in          Operating Officer in 1988,
1991, was elected Executive   September, 1995 and Chairman  President in 1990, Vice
Vice President and Chief      in January, 1996. Mr. Hardis  Chairman and Chief Executive
Operating Officer - Controls  is a director of American     Officer in December, 1993,
in September, 1993 and        Greetings, KeyCorp, Lexmark   Chairman in 1997, and Vice
assumed his present position  International Group, Inc.,    Chairman in 1999. Mr. Tooker
in September, 1995.           Marsh & McLennan Companies,   is a director of the
DIRECTOR SINCE 1993           Nordson Corporation and       Atlantic Richfield Company.
                              Progressive Corporation.      DIRECTOR SINCE 1992
                              DIRECTOR SINCE 1983
</TABLE>

                                        5
<PAGE>   8

DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL APRIL 2002

<TABLE>
<S>                           <C>                           <C>                           <C>

N. C. LAUTENBACH PHOTO        J. R. MILLER PHOTO            F. C. MOSELEY PHOTO           V. A. PELSON PHOTO

NED C. LAUTENBACH, 56, is a   JOHN R. MILLER, 62, is        FURMAN C. MOSELEY, 65, is     VICTOR A. PELSON, 62, is a
partner of Clayton, Dubilier  Chairman and Chief Executive  Chairman of Sasquatch         Senior Advisor to Warburg
& Rice, Inc., an investment   Officer of The Linden Group,  Publishing Company. He is     Dillon Read LLC, investment
firm specializing in          a buyout firm, and is a       former President of Simpson   bankers. Before joining
structuring leveraged         director of Cambrex           Investment Company, holding   Warburg Dillon Read in
buyouts. Before joining       Corporation and Waterlink,    company for Simpson Paper     April, 1996, Mr. Pelson was
Clayton, Dubilier, Mr.        Inc. He was President, Chief  Company and Simpson Timber    associated with AT&T from
Lautenbach was associated     Operating Officer and a       Company. He was Chairman of   1959 to March, 1996, where
with IBM from 1968 until his  director of The Standard Oil  Simpson Paper from 1969 to    he held a number of
retirement in 1998. At IBM,   Company from 1980 to 1986.    January, 1995 and retired as  executive positions,
he held several executive     Mr. Miller was a self-        President of Simpson          including Group Executive
positions, including Vice     employed business consultant  Investment in July, 1995.     and President responsible
President, President of IBM   from 1986 to 1988, Managing   Mr. Moseley is a director of  for the Communications
Asia Pacific, Senior Vice     Director of TBN Holdings      Owens Corning.                Services Group, Executive
President, Chairman of IBM    Inc. from 1988 to 1993 and    DIRECTOR SINCE 1975           Vice President and member of
World Trade Corporation,      served as President and                                     the Management Executive
Senior Vice President and     Chief Executive Officer of                                  Committee. At the time of
Group Executive, Sales and    TBN Holdings from 1993 until                                his retirement from AT&T,
Distribution, and was a       1999, when he assumed his                                   Mr. Pelson was Chairman of
member of IBM's Corporate     present position. Mr. Miller                                Global Operations and a
Executive Committee. He is a  formerly served as Chairman                                 member of the Board of
director of ChoicePoint,      of the Federal Reserve Bank                                 Directors. Mr. Pelson is a
Inc., Dynatech Corporation,   of Cleveland.                                               director of Dun &
Fidelity Mutual Funds, and    DIRECTOR SINCE 1985                                         Bradstreet, Dynatech Corp.,
PPG Industries, Inc.                                                                      United Parcel Service and
DIRECTOR SINCE 1997                                                                       Carrier 1 International,
                                                                                          S.A.
                                                                                          DIRECTOR SINCE 1994
</TABLE>

                                        6
<PAGE>   9

DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL APRIL 2001:

<TABLE>
<S>                           <C>                           <C>                           <C>

                              E. GREEN PHOTO                A. WILLIAM REYNOLDS PHOTO
M. J. Critelli PHOTO

MICHAEL J. CRITELLI, 51, is   ERNIE GREEN, 61, is founder,  A. WILLIAM REYNOLDS, 66, is
Chairman and Chief Executive  President and Chief           Chief Executive of the Old
Officer of Pitney Bowes       Executive Officer of EGI,     Mill Group, a private
Inc., a provider of           Inc., a manufacturer of       investment firm. Mr.
messaging and advanced        automotive components. He is  Reynolds is former Chairman
business communications       also President of Florida     of GenCorp Inc. He was
solutions. He was elected     Production Engineering,       Chairman of GenCorp from
Vice Chairman of Pitney       Inc., subsidiary of EGI. He   1987 through March, 1995 and
Bowes in 1994. He was         is a director of DP&L Inc.,   Chief Executive Officer from
promoted to Vice Chairman     and Pitney Bowes Inc.         August, 1985 to July, 1994.
and Chief Executive Officer   DIRECTOR SINCE 1995           Mr. Reynolds is a director
of the corporation in 1996,                                 of Boise Cascade Corporation
and Chairman and Chief                                      and Boise Cascade Office
Executive Officer in 1997.                                  Products Corp.
Mr. Critelli is a trustee of                                DIRECTOR SINCE 1987
the National Urban League.
DIRECTOR SINCE 1998
</TABLE>

                                        7
<PAGE>   10

BOARD COMMITTEES -- The Board of Directors has the following standing
committees: Audit, Compensation and Organization, Corporate Responsibility and
Public Policy, Executive and Finance.

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 of the audit, 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 1999. Present members are
Messrs. Critelli, Green, Moseley 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 seven meetings in 1999. Present members are Mrs.
Davis and Messrs. Lautenbach, Miller, Pelson and Tooker.

The Compensation and Organization Committee will consider individuals for
nomination to stand for election as directors who are recommended to it in
writing by any Eaton shareholder. Any shareholder wishing to recommend an
individual as a nominee for election at the annual meeting of shareholders to be
held in 2001 should send a signed letter of recommendation, to be received
before November 3, 2000, to the following address: Eaton Corporation, Eaton
Center, Cleveland, Ohio 44114-2584, attention Corporate Secretary.
Recommendation letters must state 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
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<PAGE>   11

written statement from the proposed nominee consenting to be named as a
candidate and, if nominated and elected, consenting 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, environmental, health and safety issues, diversity and equal employment
opportunity, community relations, government relations, charitable
contributions, shareholder and investor relations and the Eaton Philosophy --
Excellence through People. The Corporate Responsibility and Public Policy
Committee held two meetings in 1999. Present members are Mrs. Davis and Messrs.
Critelli, Green, Miller 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 met once in 1999. 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 two
meetings in 1999. Present members are Messrs. Critelli, Green, Lautenbach,
Moseley, Pelson and Reynolds.

The Board of Directors held eight meetings in 1999. Two directors, Phyllis B.
Davis and Furman C. Moseley attended fewer than 75% of the meetings of the Board
and its committees. The average rate of attendance for all directors was 93%.

COMPENSATION OF DIRECTORS -- Employee directors are not compensated for their
services as directors. Non-employee directors receive an annual retainer of
$40,000, an annual retainer of $5,000 for each non-employee director who serves
as chairman of any standing committee of the Board, a fee of $1,500 for each
Board meeting attended and for attendance at any special presentation on
non-Board meeting days, and a fee of $1,000 for each Board committee and
shareholder meeting attended.

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

                                        9
<PAGE>   12

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.

Under the Company's 1998 Stock Plan, as approved by the shareholders, each
person who on April 22, 1998 or thereafter becomes a non-employee director
automatically is granted an option for 5,000 shares upon the date of his or her
election. So long as each non-employee director continues to serve in that
capacity, beginning in the year after the director receives his or her initial
grant, he or she is automatically granted an option for a number of shares equal
to the quotient resulting from dividing (i) four times the annual retainer for
each non-employee director in effect on the granting date, by (ii) the closing
price of an Eaton common share on the New York Stock Exchange Composite
Transactions on the last business day immediately preceding the granting date.
The granting date is the Tuesday immediately before the fourth Wednesday of each
January.

Upon leaving the Board, non-employee directors who were first elected prior to
1996 are eligible to receive an annual benefit, as described below. For Board
service of at least five years, eligible directors receive an annual benefit
equal to the annual retainer in effect at the time the 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. Directors who are first elected in 1996
or later are not eligible to receive the annual benefit.

EXECUTIVE COMPENSATION -- The following table summarizes the total compensation
of the Chief Executive Officer of Eaton and the four other most highly
compensated executive officers for fiscal year 1999. The table also summarizes
compensation of the named executive officers for fiscal years 1998 and 1997.

                                       10
<PAGE>   13

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                     LONG-TERM
                                                                                   COMPENSATION
                                                                               ---------------------
                                                                                AWARDS     PAYOUTS
                                                                               --------   ----------
                                                                                            LONG-
                                     ANNUAL COMPENSATION           OTHER        STOCK        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                     1999   $946,700   $1,345,612      $    0      125,000    $                $777,437
  Chairman and Chief             1998    866,680    1,053,531           0       60,000     1,130,481        449,931
  Executive Officer              1997    790,000    1,534,680           0      250,000       973,409        748,410

A. M. Cutler                     1999   $695,040   $  914,250      $    0       75,000    $                $ 26,944
  President and Chief Operating  1998    640,040      715,479           0       36,000       793,221         26,034
  Officer                        1997    586,680      990,031           0      175,000       709,458         22,733

B. R. Bachman                    1999   $380,040   $  364,657      $    0       35,000    $                $ 14,560
  Senior Vice President          1998    355,020      299,495           0       17,000             0         24,788
  and Group Executive --         1997    332,040      418,044           0       90,000       225,000         18,844
  Hydraulics, Semiconductor
    Equipment and Specialty
    Controls

R. J. McCloskey                  1999   $377,360   $  422,234      $    0       30,000    $                $ 16,985
  Senior Vice President          1998    354,020      346,783           0       15,000       348,331         49,962
                                 1997    330,700      437,046           0       90,000       310,938         21,887

T.W. O'Boyle                     1999   $400,340   $  441,427      $    0       30,000    $                $ 21,489
  Senior Vice President and      1998    366,000      394,072           0       15,000       348,331         25,443
  Group Executive --             1997    338,680      494,052           0       90,000       310,938         29,604
  Truck Components
- -----------------------------------------------------------------------------------------------------------------------
</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 1999
    for each of the named executive officers was as follows: S. R. Hardis,
    $8,804; A. M. Cutler, $8,060; B. R. Bachman, $4,392; R. J. McCloskey, $2,822
    and T. W. O'Boyle, $5,579. The Company maintains plans pursuant to which
    incentive compensation may be deferred. Earning on such deferrals which are
    above rates established by the Internal Revenue Service are disclosed in
    this table. Those earnings during 1999 for each of the named executive
    officers were as follows: S. R. Hardis, $735,725; A. M. Cutler, $3,405; B.
    R. Bachman, $0; R. J. McCloskey, $4,795; and T. W. O'Boyle, $1,733. Under a
    Company program, each executive officer may acquire an automobile. Under
    this program for 1999, the approximate cost to the Company for each of the
    named executive officers was as follows: S. R. Hardis, $13,020; A. M.
    Cutler, $10,522; B. R. Bachman, $9,486; R. J. McCloskey, $5,613; T. W.
    O'Boyle, $12,366. 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 1999
    for each of the named executive officers were as follows: S. R. Hardis,
    $19,888; A. M. Cutler, $4,957; B. R. Bachman, $682; R. J. McCloskey, $3,755;
    and T. W. O'Boyle, $1,811. Each executive officer is responsible for paying
    individual income taxes due with respect to the Company's automobile and
    insurance programs.

                                       11
<PAGE>   14

AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES -- The following table
contains information concerning the exercise of stock options during fiscal year
1999 and the value of unexercised stock options at the end of fiscal year 1999
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           11,478      $681,033     287,136        310,000      $4,689,414      $300,625
A. M. Cutler            4,140       247,057     239,926        198,500       4,462,134       192,906
B. R. Bachman               0             0      64,000         97,000         429,475        94,200
R. J. McCloskey         2,540       147,409      82,460         90,000         845,397        87,188
T. W. O'Boyle          11,104       601,974      85,416         90,000         953,505        87,188
- -------------------------------------------------------------------------------------------------------
</TABLE>

OPTION GRANTS -- The following table gives information concerning grants of
stock options made during fiscal year 1999 to each of the named executive
officers. No stock appreciation rights were granted during fiscal year 1999.

<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           125,000        5.73       $71.41      1/26/09     $0    $    5,623,538    $    14,192,738
A. M. Cutler            75,000        3.44        71.41      1/26/09      0         3,374,123          8,515,643
B. R. Bachman           35,000        1.60        71.41      1/26/09      0         1,574,591          3,973,967
R. J. McCloskey         30,000        1.37        71.41      1/26/09      0         1,349,649          3,406,257
T. W. O'Boyle           30,000        1.37        71.41      1/26/09      0         1,349,649          3,406,257
- -------------------
All Shareholders(2)        N/A         N/A          N/A          N/A      0     3,278,102,081      8,273,305,252
                                                                                -------------      -------------
</TABLE>

(1) Based on a total of 2,182,900 options granted to all employees. All options
    granted to the named executive officers were granted on January 26, 1999. As
    granted, one-third of the options become exercisable upon each of the first,
    second and third anniversary of the date of grant.

(2) At the assumed annual rates of stock price appreciation of 0%, 5% and 10%,
    the value of all 72,865,658 shares outstanding on January 31, 2000 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 1999 to each
of the named executive officers.

<TABLE>
<CAPTION>
                                            PERFORMANCE
                                              OR OTHER
                             NUMBER OF         PERIOD      ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK
                              SHARES,          UNTIL                  PRICE BASED PLANS
                             UNITS OR        MATURATION    ----------------------------------------
          NAME            OTHER RIGHTS(1)    OR PAYOUT       THRESHOLD       TARGET       MAXIMUM
- ---------------------------------------------------------------------------------------------------
<S>                       <C>               <C>            <C>             <C>          <C>
S. R. Hardis                  10,200          4 years          5,100         10,200        20,400
A. M. Cutler                   7,100          4 years          3,550          7,100        14,200
B. R. Bachman                  3,700          4 years          1,850          3,700         7,400
R. J. McCloskey                3,700          4 years          1,850          3,700         7,400
T. W. O'Boyle                  3,700          4 years          1,850          3,700         7,400
- ---------------------------------------------------------------------------------------------------
</TABLE>

(1) These units were awarded during 1999 under the Company's long term incentive
    plan at a target price per unit of $70.93. The actual, final value of the
    units will be determined after the completion of the four-year award period
    based upon the achievement of corporate and individual performance goals.
    The corporate goals relate to cash flow return on gross capital and growth
    in earnings per Company common share. Any future payouts will be made in
    Company common shares, unless the executive has elected to defer receipt of
    the payment under the Company's long term deferral plan or to the extent
    necessary to satisfy tax withholding requirements.

COMPENSATION AND ORGANIZATION COMMITTEE REPORT -- The Committee, consisting of
five non-employee directors, met seven times in 1999. 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 rigorous
Company, business unit and individual performance objectives that 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 of Company and industry practices
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. Based on the study conducted during
1999 and the consulting firm's recommendations, the Committee has established
annual guidelines designed to limit the dilutive effect of the Company's stock
option grants. Further, the Committee will review the Company's short-term
incentive plan to confirm that its performance metrics are aligned with the
Company's earnings growth objectives. Sixty-six percent of the 1999 aggregate
cash compensation of the executive officers named in the compensation table was
based directly on specific financial performance objectives. For 1999, the
Committee established base salary at approximately the median range of
compensation paid by similar companies included in the survey data bases of
several nationally recognized compensation consulting firms. The Committee also
established short-term and long-term incentive opportunities and stock option
grants at approximately the median
                                       13
<PAGE>   16

range, with opportunities for larger payments if the Company achieves superior
performance.

SALARY -- In setting executive salaries, the Committee uses input from outside
sources as noted above and management recommendations for individual
adjustments. In judging performance, the Committee considers performance against
annual plans, accomplishment of other objectives and the financial results of
similar companies. The Company also normally considers factors such as
initiative and leadership, as well as time in position, experience, knowledge
and level of competitive compensation in the marketplace. Consistently effective
individual performance is a threshold requirement for any salary increase. The
Committee considers these same factors when preparing its recommendations for
base salary adjustments for the Company's Chairman and Chief Executive Officer.
The Committee's recommendations for 1999 salary adjustments were based upon
these considerations and accepted by the Board of Directors.

SHORT-TERM INCENTIVES -- Annual performance awards, including those paid in
1999, are based on percentages of salary range midpoints and depend on whether
the Company has achieved predetermined levels of cash flow return on gross
capital employed in the business ("CFR"), individual performance ratings,
business unit performance (for operating managers) and Committee discretion. CFR
correlates well with corporate performance and is a measure easily understood by
incentive compensation plan participants. The Committee also believes that, over
time, consistently high CFR provides a good statistical correlation with
sustained high stock market valuation. No payments are made unless the Company
achieves the predetermined CFR levels, as it did in 1999. Individual performance
ratings take into account factors such as unanticipated challenges and
opportunities, actual performance against profit plan, personal objectives,
general economic conditions and the performance of other large industrial
corporations. Individual ratings emphasize pay for performance, and may result
in payments ranging from zero to 150% of the amount otherwise payable. The
Committee may adjust the total amount available for payment under the plan up or
down by 20%. Payments to executive officers for 1999 were made at levels
generated by the plan metrics and were not affected by the exercise of this
discretion. Executives 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 INCENTIVES -- Long-term incentives are granted annually. Their value
depends on whether the Company achieves aggressive performance objectives during
the four years following a grant. For award periods beginning before 1998, these
objectives were expressed in terms of CFR. For award periods beginning in 1998,
the Committee significantly raised the performance hurdle, which is now
expressed as a combination of CFR, growth in earnings per share and a
discretionary assessment of individual performance. The performance objectives
are established 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 objectives and annual business plans. For the 1996-1999
award period, the Company substantially exceeded the target objectives
established for that period. Payments are made in cash for award periods
beginning before 1998. For later award periods, payments will be made in Eaton
shares except to the extent necessary to satisfy tax-withholding obligations.
Executive officers may defer payment of their awards. At least 50% of any
deferrals that will be paid after retirement are converted to share units and
earn share price appreciation and dividend equivalents. The
                                       14
<PAGE>   17

balance earns 10-year Treasury note returns plus 300 basis points. Short-term
deferrals earn 13-week Treasury bill returns.

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 that 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.

STOCK OPTIONS -- Stock options align the interests of the Company's officers and
other executives with those of its shareholders by having a significant
component of their compensation tied directly to increases in shareholder value.
All officers of the Company are expected to hold a multiple of from two to five
times their base salary in Company shares depending on their level in the
organization. Options typically have been granted annually, have an exercise
price equal to the fair market value of the shares on the date of the grant and,
to encourage a long-term perspective, have an exercise period of ten years. The
Company does not "reprice" stock options after they have been granted and does
not grant stock appreciation rights. Based upon its 1999 review of compensation
practices, the Committee has adopted guidelines that limit the Company's regular
total stock option grants, during any five-year period, to a maximum of 10% of
the Company's outstanding shares.

CHIEF EXECUTIVE OFFICER COMPENSATION -- The 1999 compensation of S.R. Hardis,
the Company's Chief Executive Officer, was earned pursuant to the arrangements
described above. The Committee recommended, and the Board of Directors approved,
a 1999 adjustment to Mr. Hardis' base salary to reflect his overall performance
in this key strategic leadership role, to position his salary competitively in
the marketplace, and to reflect his time in this position. Mr. Hardis' 1999
short-term incentive payout reflected the award formula of the Company's
incentive compensation plan, which was based primarily on the Company's
financial performance, as measured by CFR compared to targets set by the
Committee for 1999. Consistent with the plan's design, this formula-driven
payout was further adjusted to reflect the Committee's evaluation of Mr. Hardis'
performance. In addition to the Company's financial performance that achieved
the Board approved 1999 Profit Plan, this evaluation took into account the
Company's $2.1 billion acquisition of Aeroquip-Vickers, Inc., the largest
acquisition in the Company's history. This complementary acquisition
fundamentally repositions the Company's hydraulics businesses among the world
leaders. Under Mr. Hardis' leadership, the Company has made significant progress
in integrating the Aeroquip-Vickers' operations during 1999, while successfully
divesting several business units on terms that created value for shareholders
and restored strength to the balance sheet. This evaluation also took into
account Mr. Hardis' continued focus on the Company's strategic direction, his
management of succession issues and his effectiveness as the Company's principal
spokesman. Mr. Hardis also earned a 1996-1999 payout from the Executive
Strategic Incentive Plan, which was based on the Company's four-year CFR
performance against stretch objectives established by the Committee for this
period. The grants of stock options and long-term incentives were based on the
factors described in earlier sections of this report.

Respectfully submitted to the Company's shareholders by the Compensation and
Organization Committee of the Board of Directors.

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

                                       15
<PAGE>   18

COMPANY STOCK PERFORMANCE -- The following graph compares the cumulative total
return for Eaton common shares with the S&P 500 Index and with a group of 20
peer companies: Aeroquip-Vickers, Inc., Applied Materials, Inc., Borg-Warner
Automotive, Inc., Cooper Industries, Inc., Cummins Engine Company, Inc., Dana
Corporation, Detroit Diesel Corporation, Emerson Electric Co., Honeywell Inc.,
Hubbell Incorporated, Johnson Controls, Inc., Meritor Automotive, Inc., Navistar
International Corporation, PACCAR Inc., Parker-Hannifin Corporation, Rockwell
International Corporation, SPX Corporation, TRW Inc., Thomas & Betts Corporation
and Varian Associates, Inc.

The company expressed disappointment with its relative stock performance,
especially over the past two years as the stock market has narrowed its focus
almost exclusively to the "high tech" sector. It noted that, among its peers,
only Applied Materials ("high tech" semiconductor equipment) and Honeywell
(acquired by Allied-Signal near year-end 1999) had outperformed the S&P 500
index over the past half decade. Excluding those two firms from the index, the
cumulative total return of the revised peer group dropped from $269 to $191.

<TABLE>
<CAPTION>
                                                       EATON                       PEERS                      S&P 500
                                                       -----                       -----                      -------
<S>                                             <C>                         <C>                         <C>
1994                                                   100.00                      100.00                      100.00
1995                                                   111.00                      132.00                      138.00
1996                                                   147.00                      158.00                      169.00
1997                                                   191.00                      190.00                      226.00
1998                                                   154.00                      194.00                      290.00
1999                                                   160.00                      253.00                      351.00
</TABLE>

Assumes $100 invested on December 31, 1994 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 relative stock market capitalization of
those companies.

                                       16
<PAGE>   19

RETIREMENT PLANS -- The following table shows the annual normal retirement
benefits payable to officers and other employees of the Company under 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 the 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>
                              ANNUAL NORMAL RETIREMENT BENEFITS PURSUANT TO STANDARD
   AVERAGE 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>
- ---------------------------------------------------------------------------------------------
    $  300,000        $ 65,165    $ 86,887    $108,609    $130,331    $152,053    $  173,774
       400,000          87,665     116,887     146,109     175,331     204,553       233,774
       500,000         110,165     146,887     183,609     220,331     257,053       293,774
       600,000         132,665     176,887     221,109     265,331     309,553       353,774
       700,000         155,165     206,887     258,609     310,331     362,053       413,774
       800,000         177,665     236,887     296,109     355,331     414,553       473,774
       900,000         200,165     266,887     333,609     400,331     467,053       533,774
     1,000,000         222,665     296,887     371,109     445,331     519,553       593,774
     1,100,000         245,165     326,887     408,609     490,331     572,053       653,774
     1,200,000         267,665     356,887     446,109     535,331     624,553       713,774
     1,300,000         290,165     386,887     483,609     580,331     677,053       773,774
     1,400,000         312,665     416,887     521,109     625,331     729,553       833,774
     1,500,000         335,165     446,887     558,609     670,331     782,053       893,774
     1,600,000         357,665     476,887     596,109     715,331     834,553       953,774
     1,700,000         380,165     506,887     633,609     760,331     887,053     1,013,774
     1,800,000         402,665     536,887     671,109     805,331     939,553     1,073,774
     1,900,000         425,165     566,887     708,609     850,331     992,053     1,133,774
</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
($31,128 for 1999 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 means the
number of years of employment between age 21 and retirement, with a maximum of
44 years. As of January 31, 2000, the number of years of credited service for
each of the individuals named in the Summary Compensation Table on page 11 was
as follows: S. R. Hardis, 20.4; A. M. Cutler, 24.4; B. R. Bachman, 4.1; R. J.
McCloskey, 30.8; and T. W. O'Boyle, 33.3.

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

Certain provisions of the Internal Revenue Code, as amended, limit the annual
benefits that may be paid from a tax-qualified retirement plan. As permitted
under the Code, the Board of

                                       17
<PAGE>   20

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 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. Five executive officers
currently are participating in the plan, including S. R. Hardis and B. R.
Bachman, who are named in the Summary Compensation Table on page 11. The
estimated annual benefits payable under this plan are $261,202 to Mr. Hardis,
and $161,481 to Mr. Bachman, based on the assumptions that both 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 because of changed
circumstances, then the officer would be entitled to receive certain amounts and
benefits under these agreements. These amounts and benefits would 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

                                       18
<PAGE>   21

agreements upon a change of control and termination of employment. The
agreements also provide that the Company would reimburse the officers for any
costs incurred to enforce the agreements.

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

Certain grantor trusts established by the Company hold approximately $36 million
of marketable securities and 493,000 Company shares in order to provide for a
portion of the Company's 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. ADOPTION OF AMENDED REGULATIONS

THIS DESCRIPTION OF PROPOSED AMENDMENTS TO ARTICLE I, SECTION 8 OF THE COMPANY'S
AMENDED REGULATIONS IS A SUMMARY ONLY AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE COPY OF PROPOSED NEW ARTICLE I, SECTION 8 INCLUDED AS EXHIBIT A
TO THIS PROXY STATEMENT. SHAREHOLDERS ARE URGED TO READ EXHIBIT A IN ITS
ENTIRETY.

The ability of the Company's shareholders to exercise their rights as
shareholders through the use of proxies is governed by Section 1701.48 of the
Ohio Revised Code (the "Ohio Law") and Section 8 of Article I ("Section 8") of
the Company's Amended Regulations (the "Amended Regulations"). Historically, the
Ohio Law and Section 8 have required that a proxy be in the form of a writing
signed by the shareholder, a photographic, photostatic or equivalent
reproduction of such a writing, or a telegram or cablegram appearing to have
been transmitted by the shareholder. Neither the Ohio Law nor Section 8 have
contemplated or permitted other means of appointing a proxy that modern
technology have made possible in recent years.

In 1999, the Ohio legislature adopted amendments to Section 1701.48 of the Ohio
Law that expand the permitted means of appointing a proxy to take advantage of
these modern technologies. In particular, the Ohio Law was amended to provide
that, in addition to other permitted means of appointing a proxy, a shareholder
may also appoint a proxy through specified types of "verifiable communication"
authorized by the shareholder. The Ohio Law defines verifiable communication as
"any transmission that creates a record capable of authentication, including,
but not limited to, a telegram, a cablegram, electronic mail, or an electronic,
telephonic, or other transmission, that appears to have been transmitted" by a
shareholder and that appoints a proxy. The amendments to Section 1701.48 also
provide that, in addition to other types of copies of signed proxies previously
permitted by the Ohio Law, facsimile transmission of a signed writing that
appoints a proxy is sufficient to appoint a proxy.

The current version of Section 8 in general follows the language of Section
1701.48 of the Ohio Law as it existed prior to the adoption of the amendments
summarized above. Accordingly, in its present form, Section 8 does not permit
shareholders to appoint proxies in the additional ways now permitted by the Ohio
Law. The proposed amendments to Section 8 would, if adopted, permit the
Company's shareholders to take advantage of the expanded means of appointment
proxies now permitted by the Ohio Law.

It is also proposed that the current Amended Regulations be changed to
substitute gender-neutral language for masculine pronouns wherever appearing
throughout the document. Except for the changes described above, the proposed
Amended Regulations would in all

                                       19
<PAGE>   22

respects be identical to the existing Amended Regulations.

Adoption of Amended Regulations requires the affirmative vote of the
shareholders of record entitled to exercise a majority of the voting power on
such proposal.

The Board of Directors of the Company unanimously recommends a vote FOR the
proposal to adopt Amended Regulations.

3. 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 2000. 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 a
majority of the outstanding shares, 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
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.

4. 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 will vote on those matters 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 Company's common shares as of the most recent practicable
date.

                         Title of Class: Common Shares

<TABLE>
<CAPTION>
     NAME AND ADDRESS OF        NUMBER     PERCENT
      BENEFICIAL OWNER         OF SHARES   OF CLASS
- ---------------------------------------------------
<S>                            <C>         <C>
FMR Corporation                7,426,974    10.343%
82 Devonshire Street
Boston, Massachusetts 02109
- ---------------------------------------------------
</TABLE>

FMR Corporation has filed with the Securities and Exchange Commission a Schedule
13G dated July 10, 1999, which reports the beneficial ownership of 7,426,974
common shares by it and certain affiliated entities and individuals. As reported
in the Schedule 13G, FMR Corporation and these affiliated entities and
individuals have sole voting power with respect to 526,224 common shares and
sole power to dispose or to direct the disposition of 7,426,974 common shares.

                                       20
<PAGE>   23

The following table shows the beneficial ownership, reported to the Company as
of January 31, 2000, of Company common shares by each director and nominee, each
executive officer named in the Summary Compensation Table on page 11 and all of
those individuals and all other executive officers as a group and also sets
forth the number of share units held under various deferred compensation plans.

                         TITLE OF CLASS: COMMON SHARES

<TABLE>
<CAPTION>
            NAME OF                NUMBER      PERCENT                       TOTAL NUMBER OF
          BENEFICIAL              OF SHARES       OF         DEFERRED           SHARES AND
             OWNER               OWNED(1,2)    CLASS(3)   SHARE UNITS(4)   DEFERRED SHARE UNITS
<S>                              <C>           <C>        <C>              <C>
- -----------------------------------------------------------------------------------------------

B. R. Bachman                        77,993(5)    --           6,354               84,347
M. J. Critelli                        7,062       --               0                7,062
A. M. Cutler                        289,899(5,6)    --        46,907              336,806
P. B. Davis                          10,943       --             479               11,422
E. Green                             10,122       --             722               10,844
S. R. Hardis                        386,543(5)    --         182,877              569,420
N. C. Lautenbach                      9,622       --           1,794               11,416
R. J. McCloskey                     102,407(5)    --           7,472              109,879
J. R. Miller                         14,122       --               0               14,122
F. C. Moseley                        23,622(6)    --             807               24,429
T. W. O'Boyle                       111,036(5)    --           6,053              117,089
V. A. Pelson                         11,622(6)    --           1,928               13,550
A. W. Reynolds                       15,622       --             925               16,547
G. L. Tooker                         12,622(6)    --           1,063               13,685
Directors, Nominees and
  Executive Officers as a group
  of 31                           2,102,239                  345,315            2,447,554
- -----------------------------------------------------------------------------------------------
</TABLE>

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

(2) Includes shares which the person has the right to acquire within 60 days
    after January 31, 2000 upon the exercise of outstanding stock options as
    follows: S. R. Hardis, 328,386; A. M. Cutler, 264,676; B. R. Bachman,
    75,950; R. J. McCloskey, 92,360; T. W. O'Boyle, 95,316; and all directors,
    nominees and executive officers as a group, 1,713,960 shares.

(3) Each of the individuals listed holds less than 1% of outstanding common
    shares.

(4) For descriptions of these units, see pages 9-10 and 14-15.

(5) Includes shares held under the Eaton Corporation Share Purchase and
    Investment Plan as of January 31, 2000. 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 the unallocated shares are
    included among the shares beneficially owned by the executive officers.

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

                                       21
<PAGE>   24

Employee benefit plans of the Company and its subsidiaries on January 31, 2000
held 7,972,985 common shares for the benefit of participating employees, or 11%
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. The
Company believes that there was compliance with all such filing requirements
with respect to 1999, except that J. J. Mikelonis, a former officer of the
Company, had one late report, and B. K. Rawot, Vice President and Controller,
had one late report.

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 2000 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 16, 2000.

By order of the Board of Directors

/s/ E. R. FRANKLIN

Earl R. Franklin
Secretary

March 17, 2000

                                   EXHIBIT A
                          PROPOSED AMENDED REGULATIONS

ARTICLE I, SECTION 8 -- PROXIES

A. A person who is entitled to attend a shareholders' meeting, to vote at a
shareholders' meeting, or to execute consents, waivers, or releases, may be
represented at the meeting or vote at the meeting, may execute consents,
waivers, and releases, and may exercise any of the person's other rights, by
proxy or proxies appointed by a writing signed by the person, appointed by a
verifiable communication authorized by the person, or appointed by any other
means or in any other form now or hereafter permitted by Ohio Revised Code
Chapter 1701 or any successor statute.

B. Any transmission that creates a record capable of authentication, including,
but not limited to, a telegram, a cablegram, electronic mail, or an electronic,
telephonic, or other transmission, that appears to have been transmitted by a
person described in subsection A of this Section 8, and that appoints a proxy is
a sufficient verifiable communication to appoint a proxy. A photographic,
photostatic, facsimile transmission, or equivalent reproduction of a writing
that is signed by a person described in subsection A of this Section 8 and that
appoints a proxy is a sufficient writing to appoint a proxy.

C. No appointment of a proxy is valid after the expiration of eleven months
after it is made unless the writing or other form of proxy appointment specifies
the date on which it is to expire or the length of time it is to continue in
force.

D. Unless the writing or other form of proxy appointment otherwise provides:

          (1) Each proxy has the power of substitution, and, if three or more
     proxies are appointed, a majority of them or of their substitutes may
     appoint one or more substitutes to act for all;

                                       22
<PAGE>   25

          (2) If more than one proxy is appointed, then (a) with respect to
     voting or executing consents, waivers, or releases, or objections to
     consents at a shareholders' meeting, a majority of the proxies that attend
     the meeting, or if only one attends then that one, may exercise all the
     voting and consenting authority at the meeting; and if one or more attend
     and a majority do not agree on any particular issue, each proxy so
     attending shall be entitled to exercise that authority with respect to an
     equal number of shares; (b) with respect to exercising any other authority,
     a majority may act for all;

          (3) A revocable appointment of a proxy is not revoked by the death or
     incompetency of the maker unless, before the vote is taken or the authority
     granted is otherwise exercised, written notice of the death or incompetency
     of the maker is received by the Corporation from the executor or
     administrator of the estate of the maker or from the fiduciary having
     control of the shares in respect of which the proxy was appointed;

          (4) The presence at a meeting of the person appointing a proxy shall
     not revoke the appointment. Without affecting any vote previously taken,
     the person appointing a proxy may revoke a revocable appointment by a later
     appointment received by the Corporation or by giving notice of revocation
     to the Corporation in writing, by a verifiable communication, by other
     statutorily permissible means, or in open meeting.

Any signature on any instrument, or any reproduction of a signature on any
photographic, photostatic, facsimile transmission or equivalent reproduction of
any instrument, approved by the inspectors hereinafter provided for as genuine,
or as a reproduction of a genuine signature, shall be deemed to be the signature
of the shareholder whose name is signed thereon, or a reproduction of the
genuine signature of such shareholder, as the case may be, and the falsity of
such signature or of such reproduction shall in no manner impair the validity of
such instrument or such reproduction of such instrument, or of any vote or
action taken at such meeting, provided that such shareholder shall not have
previously filed with the Corporation his or her authorized signature guaranteed
by a reputable bank or trust company. Any record of a verifiable communication,
or other statutorily permissible means of proxy appointment, approved by such
inspectors as authentic shall be deemed to be authentic, and the falsity of such
record shall in no manner impair the validity of such verifiable communication,
or other statutorily permissible means of proxy appointment, or of any vote or
action taken at such meeting.

                                       23
<PAGE>   26

                                                                            LOGO

                          Admission to the Annual Meeting

                          Shareholders who plan to attend the 2000 annual
                          meeting of shareholders 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 should obtain
                          certification of ownership to bring to the meeting.

                          Eaton Corporation
                          Eaton Center
                          Cleveland, Ohio 44114-2584

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

                                                                            LOGO
<PAGE>   27
         EATON CORPORATION

         EATON CENTER
P        CLEVELAND, OHIO 44114-2584
         -------------------------------------------------------------------
R                                             Eaton Logo

O        The undersigned hereby appoints S. R. Hardis, J. R. Horst and E. R.
         Franklin as proxies, each with the power to appoint his substitute,
X        and hereby authorizes them to represent and to vote, as designated
         on the reverse side of this card, all of the Eaton common shares,
Y        including reinvestment shares, if any, held by the undersigned on
         February 28, 2000, at the annual meeting of shareholders to be held
         at the Company's Cutler-Hammer Headquarters, 1000 Cherrington
         Parkway, Moon Township, PA, on April 26, 2000, at 10:30 a.m. local
         time and at any adjournments thereof.

         Election of Directors:  A. M. Cutler, S. R. Hardis, G. L. Tooker

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

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

- --------------------------------------------------------------------------------
                              FOLD AND DETACH HERE
<PAGE>   28
<TABLE>
      <S>         <C>                                                <C>
           X      PLEASE MARK YOUR                                     954
                  VOTES AS IN THIS
                  EXAMPLE.
</TABLE>

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" ALL OF THE BOARD OF
DIRECTORS' NOMINEES AND "FOR" ITEMS #2 AND #3.

        THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS #1, #2 AND #3.


<TABLE>
<S>             <C>   <C>        <C>             <C>  <C>      <C>       <C>                  <C>   <C>      <C>
                  FOR  WITHHELD                   FOR  AGAINST  ABSTAIN                         FOR  AGAINST  ABSTAIN
1. Election of    [ ]    [ ]      2. Adoption of  [ ]    [ ]      [ ]     3. Ratification of    [ ]    [ ]      [ ]
   Directors                         Amended                                 appointment of
   (see reverse)                     Regulations                             Independent Auditors

For, except vote withheld from
the following nominee(s):
______________________________
</TABLE>

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


                                               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.

                                               _______________________________

                                               _______________________________
                                               SIGNATURE(S)         DATE


- --------------------------------------------------------------------------------
                           FOLD AND DETACH HERE



                               EATON CORPORATION

                         ANNUAL MEETING OF SHAREHOLDERS
                     WEDNESDAY, APRIL 26, 2000, 10:30 A.M.

                           CUTLER-HAMMER HEADQUARTERS
                            1000 CHERRINGTON PARKWAY
                               MOON TOWNSHIP, PA



<PAGE>   29

         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 in connection with (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 Company's Cutler-Hammer
         Headquarters, 1000 Cherrington Parkway, Moon Township, PA, on April
         26, 2000, at 10:30 a.m. local time and at any adjournments thereof.
         The Trustee is hereby instructed to vote FOR Items #1, #2 and #3
         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, acting as a Named Fiduciary, 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 127 Public Square, Mail Code:
         OH-01-27-1402, Cleveland, Ohio 44114-1306, (216) 689-3728.)

         Election of Directors:  A. M. Cutler, S. R. Hardis, G. L. Tooker

                                                                SEE REVERSE
                                                                   SIDE

- --------------------------------------------------------------------------------
                              FOLD AND DETACH HERE
<PAGE>   30

           X      PLEASE MARK YOUR                               2826
                  VOTES AS IN THIS
                  EXAMPLE.


THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" ALL OF THE BOARD OF
DIRECTORS' NOMINEES AND "FOR" ITEMS #2 AND #3.

        THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS #1, #2 AND #3.

<TABLE>
<S>             <C>   <C>        <C>             <C>  <C>      <C>       <C>                  <C>   <C>      <C>
                  FOR  WITHHELD                   FOR  AGAINST  ABSTAIN                         FOR  AGAINST  ABSTAIN
1. Election of    [ ]    [ ]      2. Adoption of  [ ]    [ ]      [ ]     3. Ratification of    [ ]    [ ]      [ ]
   Directors                         Amended                                 appointment of
   (see reverse)                     Regulations                             Independent Auditors

For, except vote withheld from
the following nominee(s):
______________________________
</TABLE>

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

                                               Please sign, date and return
                                               promptly in the enclosed
                                               envelope to protect
                                               confidentiality.

                                               ______________________________
                                               SIGNATURE                DATE

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

                            FOLD AND DETACH HERE

                               EATON CORPORATION

                         ANNUAL MEETING OF SHAREHOLDERS
                     WEDNESDAY, APRIL 26, 2000, 10:30 A.M.

                           CUTLER-HAMMER HEADQUARTERS
                            1000 CHERRINGTON PARKWAY
                               MOON TOWNSHIP, PA
<PAGE>   31
         CONFIDENTIAL VOTING INSTRUCTIONS

         To Key Trust Company of Ohio, N.A., Trustee for the Plans listed
         below ("Plans"):

         The undersigned, as a participant in the (a) Eaton Corporation
         401(k) Savings Plan for Hourly Employees of the Airflex Division,
         (b) Eaton Corporation Investment Plan for Hourly Employees of the
         Hydraulics Division Hutchinson Plant, (c) Eaton Corporation
         Wauwatosa Union Plan and Trust, and/or (d) Eaton Corporation 401(k)
         Savings Plan and Trust ((a) through (d) being the "Group A
         Participants"), and/or (e) Cutler-Hammer de Puerto Rico, Inc.
         Retirement Savings Plan (the "Cutler-Hammer Group Participants")
         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 Plans on the record date (the "Credited Eaton Shares")
         for the annual meeting of shareholders of Eaton Corporation to be
         held at the Company's Cutler-Hammer Headquarters, 1000 Cherrington
         Parkway, Moon Township, PA, on April 26, 2000, at 10:30 a.m. local
         time and at any adjournments thereof. The Group A Participants and
         the Cutler-Hammer Group Participants, by issuing their instructions
         on this card, confirm that they have received a copy of the
         Supplemental Voting Directions Statement which accompanies this
         card, that they are acting as a Named Fiduciary and that their vote
         is amended to incorporate the additional shares described on the
         Supplemental Voting Directions Statement. The Trustee is hereby
         instructed to vote FOR items #1, #2 and #3 unless contrary voting
         instructions are indicated on the reverse side of this card.

         Election of Directors:  A. M. Cutler, S. R. Hardis, G. L. Tooker

                                                                SEE REVERSE
                                                                   SIDE

- --------------------------------------------------------------------------------
                              FOLD AND DETACH HERE
<PAGE>   32
           X      PLEASE MARK YOUR                          2840
                  VOTES AS IN THIS
                  EXAMPLE.

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" ALL OF THE BOARD OF
DIRECTORS' NOMINEES AND "FOR" ITEMS #2 AND #3.


        THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS #1, #2 AND #3.

<TABLE>
<S>             <C>   <C>        <C>             <C>  <C>      <C>       <C>                  <C>   <C>      <C>
                  FOR  WITHHELD                   FOR  AGAINST  ABSTAIN                         FOR  AGAINST  ABSTAIN
1. Election of    [ ]    [ ]      2. Adoption of  [ ]    [ ]      [ ]     3. Ratification of    [ ]    [ ]      [ ]
   Directors                         Amended                                 appointment of
   (see reverse)                     Regulations                             Independent Auditors

For, except vote withheld from
the following nominee(s):
______________________________
</TABLE>


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


                                               Please sign, date and return
                                               promptly in the enclosed
                                               envelope to protect
                                               confidentiality.


                                               _______________________________
                                               SIGNATURE                  DATE

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

                              FOLD AND DETACH HERE


                               EATON CORPORATION

                         ANNUAL MEETING OF SHAREHOLDERS
                     WEDNESDAY, APRIL 26, 2000, 10:30 A.M.

                           CUTLER-HAMMER HEADQUARTERS
                            1000 CHERRINGTON PARKWAY
                               MOON TOWNSHIP, PA


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