SCHEDULE 14A

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EATON CORPORATION

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NOTICE OF MEETING

The 2006 annual meeting of Eaton Corporation shareholders will be held Wednesday, April 26, at 10:30 a.m. local time at Eaton Center, 1111 Superior Avenue, Cleveland, Ohio, for the purpose of:

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 27, 2006. Shareholders of record at that time are entitled to vote at the meeting.

By order of the Board of Directors

/s/ Earl R. Franklin

Earl R. Franklin

March 17, 2006

Your Vote Is Important

You may vote your shares by using a toll-free telephone number or electronically on the Internet, as described on the proxy form. We encourage you to file your proxy using either of these options if they are available to you. Alternatively, you may mark, sign, date and mail your proxy form in the postage-paid envelope provided. The method by which you vote will not limit your right to vote in person at the annual meeting.

Eaton Corporation

This proxy statement, the accompanying proxy form and Eaton’s annual report for the year ended December 31, 2005 are scheduled to be sent to shareholders on or about March 17, 2006.

Proxy Solicitation

Eaton’s Board of Directors solicits your proxy, in the form enclosed, for use at the 2006 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, and for ratification of the appointment of Ernst & Young LLP as Eaton’s independent auditor. These matters are described in the following sections of this proxy statement.

Any shareholder giving a proxy may revoke it by giving Eaton notice in writing or by fax, E-mail or other verifiable communication before the meeting or by revoking it at the meeting. All properly executed or transmitted 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 fax. Eaton has retained The Proxy Advisory Group, LLC, 575 Madison Avenue, 10th Floor, New York, New York 10022, to assist in the solicitation of proxies, primarily from brokers, banks and other nominees, for a fee of $8,500, plus reasonable out-of-pocket expenses. 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 27, 2006 is entitled to one vote for each share then held. On February 27, 146,883,635 Eaton common shares (par value, 50¢ each) were outstanding and entitled to vote.

At the 2006 annual meeting, the inspector 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 inspector of election intends to treat as “present” for these purposes shareholders who have submitted properly executed or transmitted proxies that are marked “abstain.” The inspector 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 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

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1. ELECTION OF DIRECTORS

The Board of Directors is presently composed of ten members. The terms of three directors will expire in April 2006, and those directors have been nominated for re-election. Each of those nominees was elected at the 2003 annual meeting. Kiran M. Patel, a director since 2003, will resign as a director at the conclusion of the annual meeting of shareholders on April 26 due to schedule conflicts between Eaton Board and Committee meetings and his duties in his new position as Senior Vice President and Chief Financial Officer of Intuit Inc. Christopher M. Connor, who was recommended to the Governance Committee by its third-party executive search firm, and is known to several Eaton directors, has been nominated to fill this vacancy. (See pages 5 and 6.)

If any of the nominees become unable or decline to serve, the individuals named as proxies in the enclosed proxy form will have the authority to appoint substitute nominees. Eaton’s management, however, has no reason to believe that this will occur.

Following is biographical information about each nominee and each director.

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Alexander M. Cutler, 54, is Chairman, Chief Executive Officer and President of Eaton Corporation. Mr. Cutler joined Cutler-Hammer, Inc. in 1975, which was subsequently acquired by Eaton, and became President of Eaton’s Industrial Group in 1986 and President of the Controls Group in 1989. He advanced to Executive Vice President — Operations in 1991, was elected Executive Vice President and Chief Operating Officer — Controls in 1993, President and Chief Operating Officer in 1995, and assumed his present position in 2000. Mr. Cutler is a director of Axcelis Technologies, Inc. and KeyCorp. Director since 1993		Gary L. Tooker, 66, is an independent consultant and former Chairman of the Board, Chief Executive Officer and Director of Motorola, Inc., a manufacturer of electronics equipment. Mr. Tooker became Motorola’s President in 1990, Vice Chairman and Chief Executive Officer in 1993, Chairman in 1997, and retired from Motorola in 1999. Mr. Tooker is a director of Avnet, Inc. Director since 1992		Deborah L. McCoy, 51, retired from Continental Airlines, Inc. in 2005, where she had served as Senior Vice President, Flight Operations since 1999. During part of 2005, Ms. McCoy also briefly served as the Chief Executive Officer of DJ Air Group, a start-up commercial airline company. Director since 2000

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Christopher M. Connor, 49, is Chairman, President and Chief Executive Officer of The Sherwin-Williams Company, a manufacturer of paint, architectural coatings, industrial finishes and associated supplies. Mr. Connor has held a number of executive positions at Sherwin- Williams since 1983. He became Vice Chairman and Chief Executive Officer in 1999, Chairman and Chief Executive Officer in 2000, and Chairman, President and Chief Executive Officer in 2005. Mr. Connor is a director of Diebold, Inc. (leaving the Diebold Board on April 27, 2006) and National City Corporation. Mr. Connor also serves as non-executive Chairman of University Hospitals Health System. Nominee		Michael J. Critelli, 57, is Chairman and Chief Executive Officer of Pitney Bowes Inc., a provider of mailstream solutions. Mr. Critelli is non-executive Chairman of the National Urban League. Director since 1998		Ernie Green, 67, is founder, President and Chief Executive Officer of Ernie Green Industries, Inc., a manufacturer of automotive components. He is also President of Florida Production Engineering, Inc., a subsidiary of Ernie Green Industries. He is a director of DP&L Inc., Pitney Bowes Inc., and Amantea Nonwovens LLC, and non-executive Chairman of the Foundation Board of Central State University. Director since 1995

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Ned C. Lautenbach, 62, is a partner at Clayton, Dubilier & Rice, Inc., a private equity investment firm specializing in management buyouts. Before joining Clayton, Dubilier, Mr. Lautenbach was associated with IBM from 1968 until his retirement in 1998. At IBM, he held several executive positions and was a member of IBM’s Corporate Executive Committee. From 1999 to 2003, Mr. Lautenbach served as Chief Executive Officer of Acterna Corporation, a global provider of communications test equipment, software and services, which filed and had approved in 2003 a voluntary plan of reorganization under Chapter 11. He also served from 2000 to 2004 as Co-Chairman of Covansys, Inc., a global provider of business and technology solutions. Mr. Lautenbach is a member of the Board of Italtel s.p.a., whose core business is the design, development and installation of new-generation integrated multi-service networks (voice/data/video). He is also a member of the Boards of Trustees of Fidelity Investments and Fairfield University, and a member of the Council on Foreign Relations. Director since 1997		John R. Miller, 68, is Chairman of the Board of SIRVA, Inc., a global provider of moving and relocation services. He is also a Director of Cambrex Corporation and Graphic Packaging Corporation. Mr. Miller was formerly President, Chief Operating Officer and a director of The Standard Oil Company from 1980 to 1986, where he held a number of other executive positions including that of Vice President, Finance. Mr. Miller was a member of the Board of the Federal Reserve Bank of Cleveland from 1986 to 1993, serving as its Chairman during the last two of those years. From 2002 to 2003 he was Chairman, President and Chief Executive Officer of Petroleum Partners, Inc., a provider of outsourcing services to the petroleum industry. Director since 1985		Gregory R. Page, 54, is President and Chief Operating Officer of Cargill, Incorporated, an international marketer, processor and distributor of agricultural, food, financial and industrial products and services. He was Corporate Vice President & Sector President, Financial Markets and Red Meat Group of Cargill in 1998, Corporate Executive Vice President, Financial Markets and Red Meat Group in 1999, and became President and Chief Operating Officer in 2000. Mr. Page is a director of Cargill, Incorporated. Director since 2003		Victor A. Pelson, 68, is a Senior Advisor to UBS Securities LLC, investment bankers. Before becoming associated with UBS Securities and its predecessors in 1996, Mr. Pelson was an employee of AT&T from 1959 to 1996, where he held a number of executive positions, including Group Executive and President responsible for the Communications Services Group, Executive Vice President and member of the Management Executive Committee. At the time of his retirement from AT&T, Mr. Pelson was Chairman of Global Operations and a member of the Board of Directors. Mr. Pelson is a director of Dun & Bradstreet and United Parcel Service. Director since 1994

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Director Nomination Process — The Governance Committee of the Board, comprised entirely of directors who meet the independence standards of the Board of Directors and the New York Stock Exchange, is responsible for overseeing the process of nominating individuals to stand for election as directors. The Governance Committee charter is available on the Company’s website (www.eaton.com) under “Who We Are” and then “Corporate Governance” and is included in this proxy statement as Appendix A.

Any director candidates recommended by the Company’s security holders are given consideration by the Governance Committee, consistent with the process used for all candidates. Security holders may submit recommendations in the manner described on this page under the heading “Security Holder Recommendations of Director Candidates.”

All potential director candidates are reviewed by the Governance Committee in consultation with the Chairman and Chief Executive Officer, typically with the assistance of a professional search firm retained by the Committee. The Committee decides whether to recommend one or more candidates to the Board of Directors for nomination. Candidates who are ultimately nominated by the Board stand for election by the shareholders at the annual meeting. (Between annual meetings, in rare cases, nominees may be elected by the Board itself.)

In order to be recommended by the Governance Committee, a candidate must have the following minimum qualifications, as described in the Board of Directors Governance Policies: personal ability, integrity, intelligence, relevant business background, independence, expertise in areas of importance to the Company’s objectives, and a sensitivity to the Company’s corporate responsibilities. In addition, the Governance Committee from time to time looks for individuals with specific qualifications so that the Board as a whole may maintain an appropriate mix both of experience, background, expertise and skills, and of age, gender, ethnic and racial diversity. These specific qualifications may vary from one year to another, depending upon the composition of the Board at that time.

The Board of Directors Governance Policies are available on the Company’s website (www.eaton.com) under “Who We Are” and then “Corporate Governance” and are included in this proxy statement as Appendix B. Printed copies will also be provided free of charge upon request. Requests for printed copies should be directed to the Company’s Investor Relations Office, Eaton Corporation, 1111 Superior Avenue, Cleveland, Ohio 44114-2584.

Security Holder Recommendations of Director Candidates — The Governance Committee will consider individuals for nomination to stand for election as directors who are recommended to it in writing by any Eaton security holder. Any security holder wishing to recommend an individual as a nominee for election at the annual meeting of shareholders to be held in 2007 should send a signed letter of recommendation, to be received before November 3, 2006, to the following address: Eaton Corporation, 1111 Superior Avenue, 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 written statement from the proposed nominee consenting to be named as a candidate and, if nominated and elected, consenting to serve as a director.

Director Independence — The Board of Directors Governance Policies, which are available on the Company’s website (www.eaton.com) under “Who We Are” and then “Corporate Governance” and are attached as Appendix B to this proxy statement, provide that all of the Company’s outside directors should be independent. The listing standards of the New York Stock Exchange state that no director can qualify as independent unless the Board of Directors affirmatively determines that the director has no material relationship with the Company, and the Board’s determination in that regard, along with the basis for that determination, is disclosed in the Company’s annual proxy statement. Additional, and more stringent, standards of independence are

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As permitted by the New York Stock Exchange listing standards, the Board of Directors has determined that certain relationships between an outside director and the Company will be treated as categorically immaterial for purposes of determining a director’s independence. These categorical standards are included in the Board of Directors’ independence criteria. The independence criteria for outside directors and members of the Audit Committee are available on the Company’s website (www.eaton.com) under “Who We Are” and then “Corporate Governance” and are included as Appendix C to this proxy statement.

Since directors’ independence might be influenced by their use of Company planes and other Company-paid transportation, the Board has adopted a policy on this subject. This policy is also available on the Company’s website (www.eaton.com) under “Who We Are” and then “Corporate Governance” and is included in Appendix C to this proxy statement.

In their review of director independence, the Board of Directors and its Governance Committee have considered the following:

After reviewing the circumstances described above (which are the only relevant circumstances known to the Board of Directors), the Board has affirmatively determined that none of the Company’s outside directors has a material relationship with the Company and that each of the following directors, and director nominee C. M. Connor, qualify as independent under the Board’s independence criteria and the New York Stock Exchange criteria: M. J. Critelli, E. Green, N. C. Lautenbach, D. L. McCoy, J. R. Miller, G. R. Page, K. M. Patel, V. A. Pelson and G. L. Tooker. The basis of the Board’s independence determination was that, for each director and director nominee, none of their relationships with the Company would likely be sufficient to compromise their independence as directors.

The Board has also affirmatively determined that each member of the Audit Committee, i.e., V. A. Pelson, J. R. Miller, K. M. Patel and G. L. Tooker, meets the special standards of independence required of them under the criteria of the New York Stock Exchange and the Company’s Board of Directors.

Board Committees — The Board of Directors has the following standing committees: Audit, Compensation and Organization, Executive, Finance and Governance.

Audit Committee. The functions of the Audit Committee include assisting the Board in overseeing the integrity of the Company’s financial statements and its systems of internal accounting and financial controls; the independence, qualifications and performance of the Company’s independent auditor; the performance of the internal auditors; and the

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Each Committee member meets the independence requirements, and all Committee members collectively meet the other requirements, of the New York Stock Exchange, the Sarbanes-Oxley Act of 2002, and rules adopted thereunder by the Securities and Exchange Commission. Further, Committee members are prohibited from serving on more than two other public company audit committees. The Board of Directors has determined that each member of the Audit Committee is financially literate and that at least one member, J. R. Miller, qualifies as an audit committee financial expert (as defined in Item 401(h) of Regulation S-K under the Securities Exchange Act of 1934) and has accounting or related financial management expertise. The Audit Committee held ten meetings in 2005. Present members are Messrs. Miller, Patel, Pelson (Chair) and Tooker.

Compensation and Organization Committee. The functions of the Compensation and Organization Committee include reviewing proposed organization or responsibility changes at the officer level; with input from all outside directors, 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; recommending the individual to assume the position of Chief Executive Officer if that position becomes vacant, until such time as the Board of Directors elects a successor; and reviewing the Company’s practices for the recruitment and development of a diverse talent pool. The Committee is also responsible for determining the salary of each elected officer of the Company, subject to discussion by the Board and endorsement by the independent 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 short-term and long-term incentive compensation plans; annually reviewing awards to elected officers under the Company’s long-term incentive compensation plans; administering stock option plans and reviewing compensation practices as they relate to key employees to confirm that those plans remain equitable and competitive, as well as reviewing significant new employee benefit plans or significant changes in such plans or changes with a disproportionate effect on the Company’s officers or primarily benefiting key employees; and preparing an annual report for the Company’s proxy statement regarding executive compensation. The Compensation and Organization Committee held five meetings in 2005. Present members are Ms. McCoy and Messrs. Critelli (Chair), Green, Lautenbach and Page.

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. The Executive Committee held three meetings during 2005. Mr. Cutler is a member of the Committee for the full twelve-month term and serves as Committee Chair. 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 to the Board; analyzing Company policy regarding its debt-to-equity relationship; reviewing and making recommendations to the Board

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Governance Committee. The responsibilities of the Governance Committee include recommending to the Board improvements in the Company’s corporate governance processes and any changes in the Board Governance Policies; advising the Board on changes in the size and composition of the Board; making recommendations to the Board regarding the structure and responsibilities of Board committees; and annually submitting to the Board candidates for members and chairs of each standing Board committee. The Governance Committee, in consultation with the Chief Executive Officer, identifies and recommends to the Board candidates for Board membership, reviews the nomination of directors for re-election; oversees the orientation of new directors and the ongoing education of the Board; recommends to the Board compensation of non-employee directors; administers the Board’s policy on director retirements and resignations; administers the directors’ stock ownership guidelines; and recommends to the Board guidelines and procedures to be used by the directors to evaluate the Board’s performance. The responsibilities of the Governance Committee also include providing oversight regarding significant public policy issues with respect to the Company’s relationships with shareholders, employees, customers, competitors, suppliers and the communities in which the Company operates, including such areas as ethics compliance, environmental, health and safety issues, diversity and equal employment opportunity, community relations, government relations, charitable contributions, shareholder and investor relations and the Eaton Philosophy — Excellence through People. The Governance Committee held four meetings in 2005. Present members are Ms. McCoy and Messrs. Critelli, Miller (Chair), Patel and Pelson.

Committee Charters and Policies — The Board of Directors most recently revised the charter of the Governance Committee in October 2005 (attached as Appendix A), the charter of the Audit Committee in February 2006 (attached as Appendix D), the charter of the Compensation and Organization Committee in January 2006 (attached as Appendix E), and the charter of the Finance Committee in September 2005 (attached as Appendix F). These charters also are available on the Company’s website (www.eaton.com) under “Who We Are” and then “Corporate Governance.” Printed copies will also be provided free of charge upon request. Requests for printed copies should be directed to the Company’s Investor Relations Office, Eaton Corporation, 1111 Superior Avenue, Cleveland, Ohio 44114-2584.

In addition to the Board of Directors Governance Policies, certain other policies relating to corporate governance matters have been adopted by several Board Committees, or by the Board itself upon the Committees’ recommendation. Summaries of these policies are included in Appendices A and C.

The Board of Directors held eleven meetings in 2005. Each of the directors attended at least 75% of the meetings of the Board and its committees. The average rate of attendance for all directors was 97%.

Audit Committee Report — The Audit Committee of the Board of Directors is responsible to assist the Board in overseeing (1) the integrity of the Company’s financial statements and its systems of internal accounting and financial controls, (2) the independence, qualifications and performance of the Company’s independent auditor, (3) the performance of the Company’s internal auditors and (4) the Company’s compliance with legal and regulatory requirements. The Committee’s specific responsibilities, as described in its charter, include the sole authority to appoint, terminate and compensate the Company’s independent auditor, and to pre-approve all audit services and other services to be provided

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The Board of Directors amended the Committee’s charter most recently on February 22, 2006. A copy of the charter is attached as Appendix D to this proxy statement.

In carrying out its responsibilities, the Audit Committee has reviewed, and has discussed with the Company’s management, the Company’s 2005 audited financial statements.

The Committee has discussed with Ernst & Young LLP, the Company’s independent auditor, the matters required to be discussed by generally accepted auditing standards.

The Committee has also received the written disclosures from Ernst & Young regarding their independence from the Company that are required by Independence Standards Board Standard No. 1, has discussed with Ernst & Young their independence and has considered the compatibility of their services, other than their audit services, with their independence.

For 2004 and 2005, Ernst & Young’s fees for various types of services to the Company were as shown below:

The Audit Committee did not approve any of the services shown in the above four categories through the use of the “de minimis” exception permitted by Securities and Exchange Commission rules.

The Audit Committee has adopted the following procedure for pre-approving audit services and other services to be provided by the Company’s independent auditor: specific services are pre-approved from time to time by the Committee or by the Committee Chair on its behalf. As to any services approved by the Committee Chair, the approval is made in writing and is reported to the Committee at the following meeting of the Committee.

Based upon the Committee’s reviews and discussions referred to above, and in reliance upon them, the Committee has recommended to the Board of Directors that the Company’s audited financial statements for 2005 be included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission, and the Board has approved their inclusion.

Respectfully submitted to the Company’s shareholders by the Audit Committee of the Board of Directors.

Victor A. Pelson, Chair

Compensation of Directors — Employee directors are not compensated for their services as directors. Non-employee directors receive an annual retainer of $60,000. The Chairs of Board Committees each receive an additional annual retainer as follows: Finance Committee, $5,000; Compensation and Organization Committee and Governance Committee, $7,500; and Audit Committee, $10,000. Non-employee directors also receive a fee of $2,000 for each Board, Board Committee or shareholder meeting attended and for attending any special presentation on non-board meeting days.

Non-employee directors first elected before 1996 may defer payment of their annual fees, not to exceed $30,000 per year, at a rate of interest specified in their deferred compensation agreements. The rate of interest is based upon the number of years until the annual meeting following a director’s 68th birthday and is higher than prevailing market rates. Under a separate deferral plan, all non-employee directors may defer payment of their fees at a rate of return

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Under the Company’s Stock Plans, as approved by the shareholders, each newly-elected non-employee director automatically is granted a stock option for 10,000 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. Options granted to non-employee directors have an exercise price equal to the fair market value of the shares on the date of the grant, vest in six months, and expire ten years after the date of grant.

Upon leaving the Board, non-employee directors who were first elected to the Board 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. 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.

Board of Directors Governance Policies — The Board of Directors revised the Board of Directors Governance Policies most recently in October 2005, as recommended by the Governance Committee of the Board. The revised Governance Policies are available on the Company’s website (www.eaton.com) under “Who We Are” and then “Corporate Governance” and are attached as Appendix B to this proxy statement.

Executive Sessions of the Outside Directors — The policy of the Board of Directors is that the outside directors meet in Executive Session at each regular Board meeting, without the Chairman and Chief Executive Officer or other members of management present, to discuss whatever topics they may deem appropriate. The outside directors who chair the Audit Committee, Compensation and Organization Committee, Finance Committee and Governance Committee chair the Executive Sessions on a rotating basis. Shown below are the months when Board meetings are held and the outside director who chairs each Executive Session:

The policy of the Board of Directors is that at least one such Executive Session is held every year attended only by directors who meet the independence criteria of the Board of Directors and of the New York Stock Exchange. At the present time, all outside directors meet these criteria.

At each meeting of the Audit, Compensation and Organization, Finance and Governance Committees, an Executive Session is held at which only the Committee members (all of whom qualify as independent) are in attendance, without any members of the

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Security Holder Communications to the Board — The Board of Directors provides the following process for security holders and other interested parties to send communications to the Board or outside directors:

Security holders and other interested parties may send such communications by mail or courier delivery addressed as follows:

In general, the Vice President and Secretary forwards all such communications to the Chair of the Governance Committee. The Governance Committee Chair in turn determines whether the communications should be forwarded to other members of the Board and, if so, forwards them accordingly. However, for communications addressed to a particular member of the Board (e.g., the director who will chair a particular Executive Session), the Chair of a particular Board Committee or the outside directors as a group, the Vice President and Secretary forwards those communications directly to the director or directors in question.

Director Attendance at Annual Meetings — The policy of the Board of Directors is that all directors should attend annual meetings, and all outside directors are compensated for their attendance. At the Company’s 2005 annual meeting, held April 27, 2005, all ten members of the Board were in attendance.

Code of Ethics — The Company has a Code of Ethics that was approved by the Board of Directors. The Company provides training globally for all employees on its Code of Ethics. Eaton requires that all directors, officers and employees of Eaton, its subsidiaries and affiliates abide by the Company’s Code of Ethics, which is available on the Company’s website (www.eaton.com) under “Who We Are” and then “Global Ethics” and is attached as Appendix G to this proxy statement. Printed copies will be provided free of charge upon request. Requests for printed copies should be directed to the Company’s Investor Relations Office, Eaton Corporation, 1111 Superior Avenue, Cleveland, Ohio 44114-2584.

Executive Compensation — The following table summarizes the total compensation of the Chairman and Chief Executive Officer of Eaton and the five other most highly compensated executive officers for fiscal year 2005. The table also summarizes compensation of the named executive officers for fiscal years 2004 and 2003.

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SUMMARY COMPENSATION TABLE

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Aggregated Option Exercises and Fiscal Year-End Values — The following table provides information concerning the exercise of stock options during fiscal year 2005 and the value of unexercised stock options at the end of fiscal year 2005 with respect to the named executive officers.

Option Grants — The following table provides information concerning grants of stock options made during fiscal year 2005 to each of the named executive officers. For a number of years, the Company has established its annual guidelines for stock option grants by referencing the average percentage Black-Scholes values (or comparable market pricing models) ascribed to the Company’s most recent actual stock option grant by the three separate nationally recognized compensation consulting firms used for annual market analysis and by applying this average percentage to the average price for an Eaton common share over a specified number of years. For 2005, the number of years utilized was three, and for 2003 and 2004, the number of years utilized was five. The resulting dollar value is then divided into the median long-term incentive compensation values as reported in the most recent surveys to establish the recommended median grant sizes for the next stock option grant cycle. This process was established to provide a more stable basis for making annual stock option grants with less year-to-year variability in overall grant sizes and share usage, particularly taking into account the historic variability of the Company’s stock price. No stock appreciation rights were granted during fiscal year 2005.

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Long-Term Incentive Plan Awards — The following table provides information regarding long-term incentive plan awards made during fiscal year 2005 to each of the named executive officers.

Stock Ownership Guidelines — The Company maintains stock ownership guidelines for senior executives for the purpose of aligning their motivations with the interests of the Company’s owners and assuring that the individuals principally responsible for the Company’s stewardship and growth have a significant personal stake in its progress.

The guidelines call for executives to reach the following levels of Eaton stock ownership over a five-year period:

For purposes of achieving these guideline levels, the following shares are included: Eaton shares owned outright by the executive, Eaton share units credited to the executive’s Eaton Savings Plan account, and Eaton share units credited to the executive’s deferred compensation accounts. All of the officers named in the Summary Compensation Table on pages 15-16 are in compliance with these stock ownership guidelines.

Compensation and Organization Committee Report — The Compensation and Organization Committee determines the compensation for the Company’s elected officers and oversees the administration of the Company’s executive compensation programs. The Committee consists of five independent non-employee directors and is advised by independent compensation consultants retained and directed by the Committee. For more information about the Committee’s charter and key responsibilities, visit the corporate governance section of the Eaton website at www.eaton.com or see the Committee’s Charter attached as Appendix E to this Proxy Statement.

Executive Compensation Philosophy

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The Company’s executive compensation policies are consistent with this philosophy and are validated by periodic comprehensive studies conducted with the assistance of nationally recognized consulting firms retained by the Committee.

Components of Executive Compensation

Factors Considered in Making Compensation Decisions in 2005

Salary — In setting officer salaries, the Committee uses input from outside survey sources along with management

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Short-Term Incentives — Annual bonus payouts for 2005 for officers were based on individual target opportunities expressed as a percentage of the participant’s base salary, the level of achievement of pre-established financial goals, and individual performance ratings that reflected a discretionary assessment by the Committee of each officer’s contributions during the year. In 2005, the goals were based on the Company’s earnings per share (“EPS”) and cash flow return on gross capital employed in the business (“CFR”), weighted equally, in addition to individual and business unit performance. The Committee believes that consistent high performance in EPS and CFR provides a good statistical correlation with sustained high stock market valuation. No incentive payments are made unless the Company achieves the predetermined minimum levels of CFR. If the Company achieves the predetermined minimum levels of CFR, but does not achieve the predetermined minimum levels of EPS, payments would be limited to the minimum level. In setting demanding annual EPS and CFR goals under this plan, the Committee reviews market analyses, the Company’s profit plan that has been approved by the full Board, external research reports and comparative analyses of a select group of diversified industrial companies. The Committee, in its sole discretion, may increase or decrease the total amount available for payment under the plan by up to 20%, based upon its assessment of the Company’s performance against other financial and non-financial metrics and it retains the right to pay up to 20% of the target incentive fund to recognize contributions to the Company in a year when awards would not otherwise be payable. The Committee did not exercise this discretion for the 2005 plan year.

Final awards are also based on individual performance ratings. Individual performance ratings take into account factors such as unanticipated challenges and opportunities, actual performance against profit plan, personal objectives and general economic conditions. Individual ratings may result in payments ranging from zero to 150% of the amount otherwise payable to any given participant, except that the total aggregate awards payable to all eligible incentive plan participants cannot exceed 100% of the CFR and EPS performance adjusted incentive fund. For 2005, as a result of actual CFR and EPS as compared to the pre-established targeted goals for such measures, the performance-adjusted incentive fund equaled 135% of the base-line target for such fund. Under the plan terms, any award to an “employee director” (limited to the Chairman and Chief Executive Officer) is not included within the incentive fund for purposes of this “zero sum” calculation.

Executives may defer payment of their bonuses. Amounts deferred until retirement earn the greater of Eaton share price appreciation and dividend equivalents or 13-week Treasury bill returns. Amounts deferred for shorter periods earn Treasury bill returns.

In 2005, the executive officers named in the Compensation Table on pages 15-16 earned average bonus awards at approximately 147% of their respective target incentives as a result of the product of 135% (the 2005 EPS and CFR performance adjusted incentive fund amount) and the average of their individual performance ratings.

Stock Options — In 2005, the Committee continued its long-standing practice of providing long-term incentive compensation grants to executives in two components: approximately 50% in stock options and 50% in a four-year performance-based cash incentive compensation plan. For a number of years and again in 2005, the Company established its annual guidelines for stock option grants by referencing the average percentage Black-Scholes values (or comparable market pricing models) ascribed to the Company’s most recent actual stock option grant used in the

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Long-Term Cash Performance Plan — Awards under this plan are based on the Company’s success in achieving aggressive growth in EPS and CFR goals over a four-year period, and include a discretionary assessment of each participant’s individual performance. Performance goals are established by the Committee at the beginning of each four-year award period based on a review with management of the Company’s past performance in comparison to that reported for the top quartile of its diversified industrial peer group, and a review of the Company’s strategic objectives and annual business plans. Beginning with grants for the 2005-2008 award period, the Committee approved a plan amendment under which a cash incentive target payment is established by the Committee for each participating officer, and any final awards will be paid in cash. Incentive target payments for prior open award periods under the Plan are expressed as contingent share units, although any final awards are paid in cash.

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 Eaton share price appreciation and dividend equivalents. The balance earns 10-year Treasury note returns plus 300 basis points. Short-term deferrals earn 13-week Treasury bill returns.

In 2005, target incentive grants to officers for the 2005-2008 performance cycle were based on median market data as described above. The executive officers named in the compensation table on pages 15-16 earned maximum payouts from the four-year award period ending in 2005 based on achievement of above maximum levels of EPS growth and CFR. Aggregate awards were capped at 200%, and adjusted to reflect individual performance.

Restricted Stock — In limited circumstances, the Company grants restricted stock to elected officers or other executives. Such grants are typically made for retention purposes and, in years that such grants are made to an executive, would result in total compensation that would be above median when added to the executive’s other compensation. Restricted stock generally vests over four or five years. Under the 2002 Stock Plan, no more than 10% of the shares authorized for delivery may be granted as restricted shares, stock appreciation rights or share awards (other than stock options). In addition, no more than 5% of the total number of shares authorized for delivery under the 2002 Stock Plan may be granted as restricted shares, performance shares, stock appreciation rights or other share-based awards (other than stock options) that vest within less than one year after the date of grant. With respect to such awards in excess of 5% of the total number of authorized shares in the 2002 Stock Plan, the vesting period must exceed one year, with no more than one-third of those shares vesting at the end of the twelve-month periods following the date of grant. While the 10% limit noted above was appropriate for the 2002 Stock Plan, as approved by the shareholders at the 2002 Annual Meeting, circumstances had changed by the time of the 2004 Annual Meeting, when the shareholders, at the recommendation of the Board of Directors, approved the 2004 Stock Plan. Instead of a 10% limit, the shareholder approved 2004 Stock Plan contains a 40% limit on the total number of shares authorized by the Plan that can be used for grants of restricted shares, performance shares, stock appreciation rights or other forms of equity grants (other than stock options). The Committee supported the use of more shares

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Stock Ownership Guidelines — Depending on their level in the organization, all officers and key executives of the Company are expected to hold a multiple of their base salaries in Company shares. These ownership guidelines range from a multiple of one times base salary in the case of the Company’s General Managers and key non-officer staff executives to five times base salary for the CEO. The Committee annually reviews progress of individual elected officers toward these ownership goals and the CEO annually reviews the progress of other non-officer Company executives. The CEO and other executive officers named in the compensation table on pages 15-16 own Company shares that are well in excess of their individual ownership guidelines.

Trends — The Committee continued to monitor the competitive environment in executive compensation, with a particular emphasis on long-term incentive practices. These practices are expected to continue to evolve as a result of a number of factors, including the mandated expensing of stock options. During 2005 the Committee also reviewed marketplace practices in the area of executive severance including a review of the total compensation and benefits that would be payable to the CEO and other key officers under the Company’s typical practices in the event of a separation from employment including one that followed a change in control. As a result of this review, the Committee concluded that the Company’s typical severance practices were fair, reasonable and in line with competitive practice. The Committee also reconfirmed the Company’s long-standing practice of not entering into employment contracts (other than the change of control agreements) with its officers and executives. In addition to conducting its annual review and update of its charter, in 2005 the Committee reviewed and suggested changes to the Board of Directors performance self-appraisal process, including appraisal criteria that capture the Committee’s unique roles and responsibilities.

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Chief Executive Officer Compensation in 2005

The pie chart to the right illustrates that, including his base salary, annualized incentive opportunities at target, stock option grant and retention-based restricted share grant, 87% of Mr. Cutler’s total compensation package (excluding benefits and perquisites) is at risk, i.e., either based on incentives or at a risk of forfeiture if he were to leave the Company, and 35% is based on the achievement of pre-established financial goals. Of the total compensation opportunities, including the restricted shares provided to Mr. Cutler in 2005, 75% is based on long-term service and/or performance. The mix of compensation elements is 47% cash-based and 53% equity-based. The pie chart shows his 2005 bonus and long-term performance plan target opportunities, the value of his stock option grant in 2005 (as calculated under the provisions of FAS 123(r)) and the market value of his restricted stock on the date of grant.

The 2005 compensation for Mr. Cutler was earned pursuant to the procedures and factors described in the previous sections. Prior to taking any annual compensation actions with respect to Mr. Cutler, each year the Committee conducts a comprehensive CEO performance evaluation. This overall performance evaluation is a primary component used by the Committee when reviewing and approving any incentive awards and when developing and approving annual compensation adjustments, awards and grants for the CEO. This process is supported by an independent outside consultant who is chosen by the Committee and who, independent of management, collects and compiles input from each non-employee Director. After reviewing a comprehensive annual goal report and self-evaluation provided by Mr. Cutler, each Director provides his or her independent rating recommendations, comments and performance improvement suggestions in performance areas including: Company operations and financial results, long-term strategy development and progress, success in building organizational depth, capability and diversity, personal leadership style, community and industry involvement, Board support and the development and execution of corporate governance practices. The Directors’ inputs on these performance areas, along with any narrative commentary, are compiled anonymously by the independent outside consultant who prepares a draft consensus evaluation for final review and approval by the Committee. This final evaluation is also reviewed in an executive session of the Board of Directors and shared with Mr. Cutler prior to a formal performance evaluation discussion with the Chair of the Committee.

Mr. Cutler’s base salary was increased by 4% in 2005 to reflect his consistent effective performance as Chairman and CEO. After this 2005 adjustment, Mr. Cutler’s base salary is positioned just above the median salary level as reported in surveys of comparably-sized industrial companies.

Mr. Cutler’s short-term incentive target opportunity of 105% of salary approved by the Committee for 2005 positioned him at approximately the market median. Mr. Cutler’s 2005 short-term incentive payout was based on the Company’s EPS and CFR results compared to the targets set by the Committee for 2005, along with the Committee’s evaluation of

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For 2005 Mr. Cutler earned 155% of his target annual bonus opportunity, which is based on the product of 135% (the 2005 EPS and CFR performance adjusted incentive fund amount), and an individual performance multiplier of 115% resulting from his strong individual rating for 2005. This percentage, when applied to his 2005 approved incentive target opportunity of 105%, resulted in a bonus payout of 163% of his base salary.

In 2005, the Committee approved the CEO’s target long-term performance opportunity of 177% of salary for the 2005 to 2008 performance period which, together with his Committee-approved stock option grant, positioned the value of Mr. Cutler’s total long-term incentive compensation elements just above the market median.

At year-end 2005, Mr. Cutler earned a payout from the long-term performance plan for the performance period ending in 2005 based on the Company’s CFR and cumulative EPS performance as described above and Mr. Cutler’s individual performance over that period. As a result, Mr. Cutler earned 225% of his target opportunity based on actual CFR and EPS growth over the 2002 to 2005 period which exceeded the maximum pre-established EPS growth and CFR goals for the period. His final award for this period also reflected an individual performance rating of 110% since the Committee believes this rating appropriately reflected Mr. Cutler’s strong sustained individual performance and contributions over this performance period.

Mr. Cutler received a restricted stock grant worth $1,036,350 to provide an additional level of retention. The award, which is approximately equal to his annual base salary, vests over a five year period with none of the shares vesting after one year, 20% of the shares vesting after, respectively, two and three years of continued Company service and 30% of the shares vesting after, respectively, four and five years of service.

The total of Mr. Cutler’s 2005 base salary, annual incentive target opportunity, long-term incentive target opportunity, and stock option grant was set just above the median of the market for industrial companies of a similar size.

$1 Million Tax Deduction Limit

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

Michael J. Critelli, Chair

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Company Stock Performance — The following graph compares the cumulative total shareholder return for the five years ended December 31, 2005 for Eaton common shares, the S&P 1500 Industrial Machinery, and the S&P 500. These figures assume all dividends are reinvested when received, and are based on $100 invested in Eaton common shares on December 31, 2000.

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Retirement Plans — Effective January 1, 2003, employees who were then earning benefits under the “Average Final Annual Compensation” (AFAC) benefit formula under the Company’s retirement plan were given the option to either: (a) continue earning benefits under the AFAC benefit formula; or (b) commence earning benefits under the Eaton Personal Pension Account (EPPA) formula. Salaried employees hired on or after January 1, 2002 automatically earn benefits under the EPPA formula upon becoming eligible for participation in the retirement plan.

Average Final Annual Compensation Formula — The following table shows the annual normal retirement benefits payable to officers and other employees of the Company under the AFAC benefit formula upon retirement at age 65 at the compensation and years 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.

The information contained in the preceding table is based on the assumption that the AFAC formula in the retirement plan will be continued in its present form.

Under the AFAC benefit formula, annual normal retirement benefits are computed at the rate of 1% of average final annual compensation up to the applicable Social Security integration level ($43,992 for 2005 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 (consisting of salary plus bonus as so identified in the Summary Compensation Table on pages 15-16) 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

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Eaton Personal Pension Account Formula — Under this benefit formula, a participant’s single sum retirement benefit is accumulated throughout his or her career with the Company. This single sum amount is represented as a nominal account balance that is regularly credited with a percentage of his or her total compensation (consisting of salary plus bonus as so identified in the Summary Compensation Table on pages 15-16) plus interest at a specified rate. The percentage of total compensation credited to the participant’s nominal account balance varies over his or her career based on the sum of the participant’s age and service with the Company. For the period when that sum is less than 50, 5.0% of compensation is credited. For the period when the sum is between 50 and 59 (inclusive), 6.0% is credited. When the sum is between 60 and 69 (inclusive), 7.0% of compensation is credited. When the sum is 70 or greater, 8.0% of compensation in credited. Upon termination of employment, the nominal account balance is available as a single sum or may be converted to one of several annuity forms. As with the AFAC benefit formula, under the standard post-retirement surviving spouse option, a participant receives a reduced pension, and a pension equal to 50% of the reduced pension is payable to his or her surviving spouse. For example, the benefit for an employee electing that option whose spouse is three years younger would be approximately 11% less than the amount of the participant’s annual benefit. This information assumes that the EPPA formula in the retirement plan will be continued in its present form.

Having been hired in 2002, R. H. Fearon automatically began earning pension benefits under the EPPA benefit formula. The estimated annual benefit payable to Mr. Fearon at normal retirement age under the EPPA benefit formula is $206,433. The assumed interest rate credited to his account, as well as the annuity conversion rate, is 6%. The calculation uses 4% as the rate for annual increases in compensation. As of January 31, 2006, the number of years of service for Mr. Fearon was 3.8 years.

Other Retirement and Compensation Arrangements — 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 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 accrued prior to January 1, 2006 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 plans which provide supplemental annual retirement income to certain executives who do not have the opportunity to accumulate significant credited service with Eaton, provided that they either retire at age 55 or older and have at least ten years of service with Eaton or retire at age 65 or older regardless of the years of service. 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). 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 25% (for retirements at age 55 with less than 15 years of service) to 50% (for retirements at age 62 or older with 15 years or more of service). Benefits under the plans generally are paid in one of the forms available under the Company’s qualified pension plans as elected by the participant, except that the present value of the benefit will be paid in a single installment upon a change of control of the Company. Currently, it is expected that fifteen officers would receive a benefit under the plans, including C. Arnold, R. W. Carson,

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The Company has entered into agreements with its officers, including those named in the Summary Compensation Table on pages 15-16, 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 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 $3.2 million of marketable securities and 784,715 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.

The Audit Committee of the Board of Directors has appointed the accounting firm of Ernst & Young LLP as Eaton’s independent auditor to conduct the annual audit of Eaton’s books and records for 2006. The submittal of this matter to the shareholders at the annual meeting is not required by law or by Eaton’s Amended Regulations. This matter is nevertheless being submitted 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 Audit Committee intends to reconsider its appointment of Ernst & Young LLP as independent auditor.

A representative of Ernst & Young LLP will be present at the annual meeting to answer any questions concerning the independent auditor’s areas of responsibility, and will have an opportunity to make a statement if he or she desires to do so.

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

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3. OTHER BUSINESS

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

Share Ownership Tables — 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.

The following table shows the beneficial ownership, reported to the Company as of January 31, 2006, of Company common shares by each director, each executive officer named in the Summary Compensation Table on pages 15-16 and all directors and executive officers as a group, and also sets forth the number of share units held under various deferred compensation plans. Christopher M. Connor, who was nominated on January 25, 2006 to stand for election to the Board, owns 500 common shares.

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