2008 was a watershed year from many perspectives. An economy that began the year promising robust growth slid precipitously into the deepest recession since the Great Depression during the fourth quarter. Daily liquidity replaced growth as the No. 1 priority for businesses. And business leaders struggled to demonstrate that their enterprises were adaptive, their balance sheets strong, their technologies compelling and their global workforces capable of managing the turbulent economic environment — all in a span of 12 short months.

In the face of these challenges, I could not be more proud of our global team. Eaton people were ON their game every day around the world. As a result of their efforts, we were not only able to adapt quickly to the economic crisis; we were also able to build for the future by expanding the breadth of our business portfolio. By acquiring — and successfully integrating — The Moeller Group and Phoenixtec Technologies, we have expanded our Electrical business to be approximately half of our corporation, making Eaton a global leader in both the power distribution and power quality markets.

Staying ON course in volatile times
Among the year’s financial and operating highlights:

• Our sales surpassed $15 billion for the first time in Eaton’s history, growing by 18 percent to $15.4 billion.
  For the eighth consecutive year, our revenue growth outpaced the growth in our end
  markets — by $120 million in 2008.
• We completed or announced six acquisitions and one joint venture during the year, highlighted by our acquisitions of Moeller and Phoenixtec and our enhanced strategic alliance with Nittan Valve Company in Japan.
• We completed a $1.5 billion equity offering in April as part of the financing of our acquisitions of Moeller and Phoenixtec, returning our balance sheet to our targeted financing ratios by year’s end.
• Our operating earnings grew 7 percent to a record $1.1 billion; operating earnings per share dipped slightly to $6.83 as a result of the April equity offering.
• We generated $1.4 billion in cash from operations.
• We increased our dividend by 16 percent.
• We delivered a 17 percent return on shareholders equity, again placing our return near the top of diversified industrial companies.
• Unfortunately, despite these outstanding achievements, our total shareholder return was significantly impacted during the year — declining 47 percent compared to 37 percent for the S&P 500, after entering 2008 at near-record stock price levels.

Diversification is ON track
Business balance. Eaton continues to grow in size, breadth and diversification. Approximately three-quarters of Eaton’s sales and profits now come from our Electrical, Hydraulics and Aerospace businesses, illustrating the dramatic transformation of our business balance toward faster-growing industries.

To continue to facilitate this growth, we reorganized our business on February 1, 2009 into two sectors: Electrical, headed by new Vice Chairman and Chief Operating Officer Tom Gross; and Industrial (our Aerospace, Automotive,
Hydraulics and Truck businesses), headed by new Vice Chairman and Chief Operating Officer Craig Arnold. In addition, Richard Fearon has been named to the new position of Vice Chairman and Chief Financial and Planning Officer for Eaton. To provide further transparency into the performance of our businesses, we will begin
to break out our financial results into six segments in 2009: Electrical Americas, Electrical Rest of World, Hydraulics, Aerospace, Truck and Automotive.

Geographic balance. Eaton now does business in more than 150 countries. Furthermore, 2008 was the first year in which 55 percent of our revenues were driven from economies outside of the U.S. — another significant milestone in the increasing globalization of our franchise. We are also pleased that more than 20 percent of our revenues now come from the developing economies of the world, where the growth in infrastructure projects is particularly advantageous to Eaton.

Balance through the economic cycle. A year ago, we noted that our early-, mid- and late-cycle businesses each generated approximately one-third of our revenues. The benefits of this balance throughout the entire economic cycle have never been more important. Our late-cycle businesses in Aerospace and portions of our Electrical business held up very well during 2008 and we expect them to be strong in 2009. A number of early-cycle businesses such as our Truck and Automotive groups are currently experiencing weakness but should see increased demand for their technologies in the 2010 – 2011 time frame. We also believe that as the global economy emerges from this period of deep recession, the demand for capital goods will increase, since the current environment has artificially depressed sales.

Building ON our strengths
Electrical. It has been a year of integration. Our successful acquisitions of The Moeller Group and Phoenixtec, combined with the earlier acquisition of MGE Office Protection Systems, make Eaton the world’s second-largest supplier of uninterruptible power systems (UPS) and a global leader in power distribution equipment. Our industry-leading energy-efficient products have earned the respect of many global customers, leading to a number of new strategic relationships. In October, we opened a new R&D center in Suzhou, China, adding
to our global product development and support capabilities in China and throughout the Asia Pacific region.

Hydraulics. The acquisition of Integrated Hydraulics Ltd. in the U.K. brings to Eaton a greatly enhanced set of capabilities in cartridge valves and hydraulic integrated circuits, one of the fastest growing product segments in the hydraulics market. It also expands our product and applications offerings for European customers. Among significant wins: Transportation and logistics leader UPS purchased new delivery vehicles powered by Eaton’s new clean and fuel-efficient hybrid hydraulic system.

Aerospace. Our fuel, hydraulics and pneumatic fluids capabilities are delivering real value and key customer wins in 2008, including the new Sikorsky CH-53K™ military heavy-lift helicopter and the Rolls-Royce Trent XWB.™ Many of the new programs awarded in past years have now completed development and are in the ramp-up phase of production.

Truck. While continuing our leadership in traditional heavy-duty and medium-duty truck applications, we notched significant new wins with our industry-leading hybrid electric powertrain systems in the U.S., China and Europe.
In India, we have been awarded the new Tata world truck program with a projection of more than $450 million of volume over the next five years. Globally, major light transmission customers have come on board with significant new business commitments using Eaton’s technology to serve emerging countries.

Automotive. While fuel prices continue to oscillate broadly, the long-term trend for higher energy costs has led global automotive manufacturers to select Eaton for its leadership in engine air management. Our innovative next-generation superchargers and patented valve actuation technologies continue to be the first choice of major automotive brands. During the year, we also enhanced our partnership with Nittan Valve Company, significantly expanding our ability to serve leading Japanese and Korean global customers.

Capitalizing ON our values
Through this period of tumultuous change, our commitment to being a values-based organization has remained constant. In fact, this strong foundation has continued to provide a steady source of strength and confidence that has so long differentiated Eaton. While the behavior of several high-profile organizations has demonstrated the hazards of adhering to a different set of ethical standards, we know that “Doing Business Right” pays dividends both in the short term and the long term. It is why so many people have chosen to make Eaton their chosen employer and supplier. We have maintained our commitments to our customers, our suppliers, our employees and the communities with whom we are fortunate to do business. To each, we owe our thanks.

We enter 2009 respecting its challenges. We believe economies in the U.S. and Europe will continue to decline and it will be a number of quarters before we are likely to see our end markets stabilize and begin to resurge. As a
result, we have resized our company — lowering overall expense and investment levels — and focused our efforts on activities and opportunities that are likely to create real value in a business environment that will be remarkably different than the last five years. Certainly one of the most painful elements of this resizing has been the need to reduce our global full- time employment by nearly 9,000 people. These Eaton associates made lasting contributions
to our enterprise — and I would once again like to thank them for their contributions.

As economic conditions deteriorate around the world, companies must be careful to avoid becoming inwardly focused and indecisive, actually contributing to the downward spiral. At Eaton, we remain focused instead on implementing the important elements of our “power management company” strategy. Under virtually any scenario, we believe the sources of energy and the increased legislation surrounding carbon usage will increase the cost of the energy that powers our homes, businesses and communities.

Only through the effective combination of the types of power management technologies that Eaton delivers today — and that we are designing for tomorrow — can the negative economic impact of the dual drivers of higher energy costs and a carbon-constrained world be contained. In this environment, our opportunities are not reduced; in fact, they are measurably enhanced.

For all these reasons, Eaton remains “always ON” — on our strategy, on in terms of delivering real value for our customers, on in providing a compelling and rewarding workplace, on in living our values-based culture and on in recognizing our accountability for delivering premium shareholder return throughout the economic cycle.

On behalf of our entire Eaton team, thank you for your continued support.

Alexander M. Cutler
Chairman and Chief Executive Officer