Full title of the plan and the address of the plan, if different from that of the issuer named below:

Name of issuer of the securities held pursuant to the plan and the address of its principal executive office:

 

Financial Statements:

 

 

 

 

Supplemental Schedule:

 

Receivable — Employer contributions

Receivable — Employee contributions

Receivable — Interest

 

 

Total Receivables

 

Investments:

Plan interest in Eaton Employee Savings Trust

Plan interest in Eaton Employee Savings Trust — Eaton Stable Value Fund

 

 

Total Master Trust Investments

Participant Loans

 

 

Total Investments

 

 

Net Assets Available for Benefits, at Fair Value

 

Adjustment from fair value to contract value for fully benefit- responsive investment contract

 

 

Net Assets Available for Benefits

 

Additions to Net Assets Attributed to:

Contributions:

Employer

Employee

Rollover

 

 

 

Plan interest in Eaton Employee Savings Trust investment gain

Interest and dividend income

 

 

Total Additions before Transfers

Transfers from other plans

 

 

Total Additions

 

Deductions from Net Assets Attributed to:

Benefits paid to participants

Administrative expenses

Transfers to other plans

 

 

Total Deductions

 

 

Net Increase

 

Net Assets Available for Benefits:

Beginning of Year

 

 

End of Year

 

The following description of The Eaton Savings Plan provides only general information. Participants should refer to the Plan document and summary plan desription, which is available from the Company’s Human Resources Department upon request, for a complete description of the Plan’s provisions.

Effective July 1, 1974, Eaton Corporation (Eaton, the Company, or the Plan Sponsor) established the Plan. The Plan was established to encourage eligible employees to make systematic savings through payroll deductions, to provide additional security at retirement and to acquire a proprietary interest in the Company. Effective July 5, 1989, the portion of the Plan attributable to Company contributions was designed to be invested primarily in Eaton Common Shares and constitute an employee stock ownership plan within the meaning of Code Section 4975(e)(7). Effective January 1, 2002, the Plan was amended and restated. In conjunction with the amendment and restatement, the Plan was renamed the Eaton Savings Plan.

An Eaton employee who is in the regular service of a class of an employee in a division or group to which Eaton Corporation has extended eligibility for membership in the Plan (other than a temporary employee who is hired for a specific, limited period of time or for the performance of a specific, limited assignment or employees covered by a collective bargaining agreement that does not specify coverage under the Plan) will be eligible to participate on any date established in accordance with administrative procedure which follows the date an employee first incurs an hour of service.

Employee Contributions — Employees may make a combination of before-tax and after-tax contributions ranging from 1% to 30% of their compensation. Catch-up contributions are permitted in the Plan, allowing participants age 50 and older to defer an additional amount of their compensation as prescribed by the Internal Revenue Code.

Employer Contributions — Participants of the Plan receive a Company matching contribution of 100% of the first 3% of their compensation, plus 50% of the next 2% of compensation.

Contributions are subject to limitations on annual additions and other limitations imposed by the Internal Revenue Code as defined in the Plan agreement.

Each participant’s account is credited with the participant’s contributions, Company matching contributions, and an allocation of the Plan’s earnings and is charged with an allocation of administrative expenses. Allocations are based on participant account balances. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s account.

Rollover contributions from other Plans are also accepted, providing certain specified conditions are met.

All participants are 100% vested, subject to certain provisions as defined by the plan, in elective deferrals, company contributions, and rollover contributions made to the Plan, and actual earnings thereon.

Participants may borrow from their fund accounts up to a maximum equal to the lesser of $50,000 or 50% of their account balance (excluding any contributions made under a Savings Plan, Individual Retirement Account or Company contributions made in the previous 24 months), reduced by their highest outstanding loan balance during the preceding 12 months. Loan terms range from 1-5 years except for loans used for the purchase of a primary residence. The loans are secured by the balance in the participant’s account and bear interest at a rate based on the prime interest rate as determined by the Trustee. Principal and interest are paid through payroll deduction.

Hardship withdrawals are permitted in accordance with Internal Revenue Service guidelines.

Upon termination of service, retirement, death or total and permanent disability, a participant is eligible to receive a lump sum amount equal to the value of his or her account. A participant may choose to take partial withdrawals.

Contributions may be invested in any of the fund options available under the Plan.

The financial statements of the Eaton Savings Plan (the Plan) are prepared on the accrual basis of accounting.

The Plan’s trustee is Fidelity Management Trust Company, and the Plan’s investments, excluding participant loans, were invested in the Eaton Employee Savings Trust (Master Trust), which was established for the investment of assets of the Plan and the Eaton Personal Investment Plan. The fair value of the Plan’s interest in the individual funds of the Master Trust is based on the value of the Plan’s interest in the fund as of January 1, 2002 plus actual contributions and allocated investment income (loss) less actual distributions.

Securities traded on a national securities exchange are valued at the last reported sales price on the last business day of the Plan year. Investments traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the average of the last reported bid and asked prices. Common/collective trust funds and pooled separate accounts are valued at the redemption value of the units held at year-end. Participant loans are valued at cost, which approximates fair value. The Eaton Stable Value Fund invests primarily in investment contracts issued by insurance companies, banks or other financial institutions, including investment contracts backed by high-quality fixed income securities.

As described in Financial Accounting Standards Board Staff Position, FSP AAG INV-1 and SOP 94-4-1, Reporting of Fully Benefit-Responsive Investment Contracts Held by Certain Investment Companies Subject to the AICPA Investment Company Guide and Defined-Contribution Health and Welfare and Pension Plans (the FSP), investment contracts held by a defined-contribution plan are required to be reported at fair value. However, contract value is the relevant measurement attribute for that portion of the net assets available for benefits of a defined-contribution plan attributable to fully benefit-responsive investment contracts because contract value is the amount participants would receive if they were to initiate permitted transactions under the terms of the plan. As required by the FSP, the Statement of Net Assets Available for Benefits presents the fair value of the investment contracts as well as the adjustment of the fully benefit-responsive investment contracts from fair value to contract value. The Statement of Changes in Net Assets Available for Benefits is prepared on a contract value basis.

Purcases and sales of securities are recorded on a trade-date basis.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

All administrative and transaction costs, management fees and expenses of the Plan are paid by the trustee from the Master Trust unless such costs, fees and expenses are paid by the Company. The Company elected to pay certain administrative costs during 2007 and 2006 on behalf of the Plan.

The Company may amend, modify, suspend, or terminate the Plan. No amendment, modification, suspension, or termination of the Plan shall have the effect of providing that any amounts then held under the Plan may be used or diverted to any purpose other than for the exclusive benefit of members or their beneficiaries.

The Master Trust’s investments include investments, as listed in Footnote 4, with varying degrees of risk, such as interest rate, credit and overall market volatility risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and such changes could materially affect the amounts reported in the statement of net assets available for Plan benefits.

On May 16, 2003, the Internal Revenue Service stated that the Plan, as then designed, was in compliance with the applicable requirements of the Internal Revenue Code. The Plan has been amended; however, the Plan Administrator and the Plan’s tax counsel believe that the Plan is currently designed and being operated in compliance with the applicable requirements of the Internal Revenue Code. Therefore, they believe that the Plan was qualified and the related trust was tax-exempt as of the financial statement date.

Fidelity Management Trust Company, trustee and recordkeeper of the Plan, holds the Plan’s investment assets and executes investment transactions, and all investment assets of the Plan, except for participant loans, are pooled for investment purposes in the Master Trust.

A summary of the investments of the Master Trust is as follows:

Registered investment companies

Eaton common shares

Guaranteed investment contracts

Common collective trusts

U.S. government securities

Corporate debt instruments

Interest-bearing cash

Non interest-bearing cash

Receivables

Pooled separate accounts

Adjustment from fair value to contract value for fully benefit-responsive investment contract

 

Total Investments

 

Interest and dividend income

Net Appreciation in Fair Value of Investments:

Eaton Common Shares Fund

Registered investment companies

Eaton Fixed Income Fund

 

 

 

At December 31, 2007 and 2006, respectively, the Eaton Fixed Income Fund was comprised of U.S. government securities (47% and 75%), corporate debt instruments (46% and 21%), interest-bearing and non interest-bearing cash (7% and 3%), and pooled separate accounts (0% and 1%).

The Master Trust funds are invested in various investments through the Fidelity Management Trust Company. Investments which constitute more than 5% of the Master Trust’s net assets are:

Fidelity Contrafund

EB Money Market Fund

Vanguard Institutional Index

Vanguard Windsor Fund

Eaton Fixed Income Fund

Eaton Common Shares Fund (A unitized fund of Eaton Shares and cash)

Party-in-interest transactions included the investments in the common stock of Eaton and the investment funds of the trustee and the payments of administrative expenses by the Company. Such transactions are exempt from being prohibited transactions.

During 2007 and 2006, the Master Trust received $13,855,208 and $13,866,504, respectively, in common stock dividends from the Company.

During 2007, former employees of Saturn Electronics & Engineering, Inc. chose to rollover 401(k) balances totaling $816,590. These rollovers include $90,671 of participant loans. The balance of the rollovers relates to other employees hired into the organization.

During 2006, former employees of Dover Resources, Inc. chose to rollover 401(k) balances totaling $813,029, former employees of PerkinElmer, Inc. chose to rollover 401(k) balances totaling $14,379,857, and former employees of Saint-Gobain Corporation chose to rollover 401(k) balances totaling $8,738,180. These rollovers, in total, include $946,721 of participant loans. The balance of the rollovers relates to other employees hired into the organization.

On August 31, 2007, the Argo Tech Employees Savings Plan and the Argo Tech Costa Mesa 401(k) Plan were merged into the Eaton Savings Plan. As a result, 401(k) balances totaling $60,638,438 were transferred into the plan. In addition, a total of $1,181,484 in participant loans was transferred into the Eaton Savings Plan as a result of these plan mergers. The balance of the transfers relate to the other Eaton plans.

On February 15, 2006, the Tractech Inc. 401(k) Savings Plan was merged into the Eaton Savings Plan. As a result, 401(k) balances totaling $2,942,588 were transferred into the plan on this date. On April 3, 2006, the Stanley Aviation Corporation 401(k) Plan was merged into the Eaton Savings Plan. As a result, 401(k) balances totaling $12,073,651 were transferred into the plan on this date. In addition, a total of $746,078 in participant loans was transferred into the Eaton Savings Plan as a result of these plan mergers. The balance of the transfers relate to the other Eaton plans.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of FAS 157 will not impact the amounts reported in the financial statements, however, additional disclosures will be required to describe the inputs used to develop the measurements of fair value and the effect of certain of the measurements reported in the statement of operations for a fiscal period.

In March 2008, the FASB issued SFAS 161, “Disclosure about Derivative Instruments and Hedging Activities”, which amends the disclosure requirements of SFAS 133. SFAS 161 requires increased disclosures about derivative instruments and hedging activities and their effects on an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. The effect of SFAS 161 has not yet been determined.

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Account Standards (“SFAS”) 162, “The hierarchy of Generally Accepted Accounting Principles”, which is intended to improve financial reporting by indentifying the sources of accounting principles and a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. SFAS 162 will be effected 60 days after U.S. Securities and Exchange Commission approves the Public Company Accounting Oversight Board’s amendments to AU section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. SFAS 162 is not expected to have a material impact on the Plan’s financial statements.

The Plan holds an interest in a benefit-responsive investment contract with Vanguard in the Eaton Stable Value Fund. Vanguard maintains the contributions in a general account. The account is credited with earnings on the underlying investments and charged for participant withdrawals and administrative expenses. The guaranteed investment contract issuer is contractually obligated to repay the principal and a specified interest rate that is guaranteed to the Plan.

As described in Note 2, because the guaranteed investment contracts are fully benefit-responsive, contract value is the relevant measurement attribute for that portion of the net assets available for benefits attributable to the guaranteed investment contract. Contract value, as reported to the Plan by Vanguard, represents contributions made under the contracts, plus earnings, less participant withdrawals and administrative expenses. Participants may ordinarily direct the withdrawal or transfer of all or a portion of their investment at contract value.

The average market yield of the Fund for 2007 and 2006 was 4.68% and 4.29%, respectively. This yield is calculated based on actual investment income from the underlying investments for the last month of the year, annualized and divided by the fair value of the investment portfolio on the report date. The average yield of the Fund with an adjustment to reflect the actual interest rate credited to participants in the Fund was 4.69% and 4.29%, respectively.

There are no reserves against contract value for credit risk of the contract issuer or otherwise. The crediting interest rate is based on a formula agreed upon with the issuer, but it may not be less than zero percent. Such interest rates are reviewed quarterly for resetting.

The fair value is based on various valuation approaches dependent on the underlying investments of the contract.

Certain events limit the ability of the Plan to transact at contract value with the issuers. The Plan Administrator does not believe that the occurrence of any such value event, which would limit the Plan’s ability to transact at contract value with participants is probable. The issuer may terminate the contract for cause at any time.

Interest in Eaton Employee Savings Trust Master Trust

Interest in Eaton Stable Value Fund-Footnote 1

Participant Loans