Financial overview

Factors
1)-The Company experienced continuing strong economic conditions in 2006 in most of its end markets and posted record financial results. Sales of the Electrical, Fluid Power and Truck business segments improved in 2006 compared to 2005, setting new records. Sales of the Automotive segment were lower than 2005 due to declines in the North American and European automotive markets.
- Net sales in 2006 were a new record for the Company, surpassing the previous record set in 2005. Sales growth of 12% in 2006 consisted of 6% from organic growth, 5% from acquisitions of businesses, and 1% from foreign exchange rates. Organic growth included 5% from end-market growth and 1% from outgrowing end markets.

2)-Sales of the Automotive segment decreased 3% in 2006. The reduction in sales reflected a 6% drop in sales volume, offset by a 2% increase from acquisitions of businesses and a 1% increase due to foreign exchange rates. The decline in sales was primarily due to automotive production for NAFTA declining by 3% in 2006 compared to 2005, while European production was down 1%. Sales were also affected by the continued loss in market share of domestic automobile manufacturers.

3)-The 39% decrease in operating profit in 2006 was largely due to net costs of $52
related to the Excel 07 program, which reduced the operating margin by 3.1%. The
decline in operating profit also reflected lower automotive production volumes in North America and Europe

4)-The Truck segment posted record sales in 2006, growing 10% compared to 2005. Of the sales increase in 2006, 8% was due to organic growth and 2% from foreign exchange rates. Organic growth was attributable to strong end-market demand, primarily in NAFTA heavy-duty truck production, which rose 11% in 2006 to 378,000 units. NAFTA medium-duty production was up 9% compared to 2005, European truck production was up 5%, and Brazilian vehicle production was up 2%.

5)-Operating profit decreased 1% in 2006 primarily due to net costs of the Excel 07 program, partially offset by operating profit generated by growth in sales.

Contracts
-In Mar. 2006, the Company announced it has been selected to provide hybrid power systems for a total of 50 step-van delivery vehicles made by International Truck and Engine and Freightliner Custom Chassis Corporation, to be purchased by UPS, the world's largest package delivery company. UPS expects the vehicles to deliver up to a 35 percent improvement in fuel economy over its conventionally-powered vehicles, in addition to dramatic decreases in vehicle emissions.

-The Company awarded long term type II valve actuation contract with Chery.
-The Company introduced high efficiency TVS supercharger and signed a contract with a major European OEM >>See "R&D"

Business Alliance
-In Mar. 2006, the Company announced that @Road, Inc., a global provider of next-generation solutions for Mobile Resource Management (MRM), has entered into a strategic agreement with Eaton's Vehicle Solutions business unit. Under the terms of the agreement, @Road and Eaton will cooperate on the development of a comprehensive Field Asset Management (FAM) solution as well as co-marketing and distribution initiatives within the global commercial vehicle market.

Acquisitions
In October 2006, the Company announced it has acquired the diesel fuel processing technology and associated business assets of Catalytica Energy Systems Inc. for $2.4 million. Under the terms of the Asset Purchase Agreement, Eaton will receive the assignment and license of intellectual property relating to Catalytica's diesel fuel processing system and the transfer of certain assets. Additionally, Eaton will take over Catalytica Energy Systems' research and development facility in Mountain View, Calif., which employs 12 people engaged in the design and development of emissions control solutions.

Restructuring
In the first quarter 2006, the Company announced and began to implement, its Excel 07 program. This program was a series of actions concluded in 2006 intend to address resource levels and operating performance in businesses that underperformed in 2005, and businesses that were expected to weaken during second half 2006 and in 2007.
As part of the Excel 07 program, the Company announced three significant plant closure for the heavy-duty truck transmission manufacturing plant in Manchester, UK; the engine valve actuation manufacturing plant in Saginaw, Michigan; and the engine valve manufacturing plant in Montornes del Valles, Spain. And In October 2006, the Company sold its European Transmission and Engine Controls product lines to BorgWarner, Inc. The Monaco-based transmission and engine controls operation, with 2006 sales anticipated at $57 million, specializes in high pressure control solenoids for automated transmissions, common rail diesel and gas engines and other applications.


Outlook for 2007
In the Truck segment, the Company expects that production of NAFTA heavy-duty trucks in 2007 will be between 205,000 and 210,000 units, down approximately 44% from 2006. Truck operating margins will be lower due to the expected reduction in the end market for heavy duty trucks in NAFTA, but the benefits from the Excel 07 actions taken in 2006 will help to cushion the overall sales reduction. For the Automotive segment, NAFTA automotive production is expected to waken, and production in Europe is expected to be flat. Margins for the Automotive segment are expected to improve as a result of the substantial benefits from the Excel 07 actions taken in 2006.