2004 STOCK PLAN
 
1. PURPOSE
 
The Plan enables non-employee directors and professional and management
employees who contribute significantly to the success of Eaton Corporation (the
"Company") to participate in its future prosperity and growth and to identify
their interests with those of the shareholders. The purpose of the Plan is to
provide long-term incentive through outstanding service to the Company and its
shareholders and to assist in recruiting and retaining people of outstanding
ability and initiative in non-employee director, professional and management
positions.
 
2. ADMINISTRATION
 
(A) Employee Awards
 
With respect to employee awards, the Plan shall be administered by the
Compensation and Organization Committee of the Board of Directors (the
"Committee"), which shall consist of at least three non-employee directors.
 
(B) Non-employee Director Options
 
With respect to non-employee director options, the Plan shall be administered by
the Governance Committee of the Board of Directors, which shall consist of at
least three non-employee directors.
 
(C) Authority of Committees
 
With respect only to those awards for which it has administrative
responsibility, the Committee and the Governance Committee shall each have
complete authority (except as otherwise expressly provided herein) to interpret
all provisions of the Plan consistent with law, to determine the type and terms
of awards consistent with the provisions of the Plan, to prescribe the form of
instruments evidencing awards, to adopt, amend and rescind general and special
rules and regulations for its administration, and to make all other
determinations necessary or advisable for its administration of the Plan. The
determinations of each committee shall be final and conclusive. The committees
may act by resolution or in any other manner permitted by law. The Committee may
delegate its authority to officers of the Company with respect to the granting
of awards to employees who are not officers or directors of the Company.
 
3. SHARES AVAILABLE
 
The aggregate of (a) the number of Eaton common shares delivered by the Company
in payment and upon exercise of awards to employees and non-employee directors
and (b) the number of shares subject to outstanding awards to employees and
non-employee directors shall not exceed 7,000,000 at any one time, subject to
adjustments as authorized herein. Shares related to awards that are forfeited,
terminated, unexercised upon expiration, settled in cash in lieu of shares or in
such manner that all or some of the shares covered by an award are not issued,
or exchanged for awards that do not involve shares, shall immediately become
available for other awards. Shares available for awards may consist, in whole or
in part, of authorized and unissued shares or treasury shares.
 
The maximum aggregate number of shares or share units underlying options or
related to other awards that may be granted to any employee during any three
consecutive calendar year period is 1,200,000. No more than 40% of the total
number of shares authorized for delivery under the Plan may be granted as
performance shares, restricted shares, stock appreciation rights or other
share-based awards (other than stock options). In addition, no more than 5% of
the total number of shares authorized for delivery under the Plan may be granted
as performance shares, restricted shares, stock appreciation rights or other
share-based awards (other than stock options) which 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 such authorized number of shares, the
 
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vesting period must exceed one year, with no more than one third of shares
becoming vested at the end of each of the twelve-month periods following the
date of grant.
 
Awards may be made under the Plan at any time after approval of the Plan by
shareholders at the 2004 annual meeting until December 31, 2013.
 
4. ELIGIBILITY FOR AWARDS
 
Any non-union salaried employee (including officers) of the Company or any of
its subsidiaries may be granted an award. The Committee (a) will designate
employees to whom grants are to be made, (b) will specify the number of options,
stock appreciation rights, performance shares, restricted shares or other
share-based awards subject to each grant, and (c) subject to Section 5(C), will
specify the price of the award. Non-employee directors are eligible to receive
stock options as provided under Section 5(B).
 
5. STOCK OPTIONS
 
(A) Employee Stock Options
 
Grants.  The Committee may grant to eligible employees (i) options which are
intended to qualify as incentive stock options ("Incentive Stock Options") under
the Internal Revenue Code, or (ii) options which are not intended to qualify as
Incentive Stock Options. Each option will give the employee the right to
purchase a designated number of the Company's common shares with a par value of
50c each ("shares"). The aggregate fair market value (at the time of grant) of
shares for Incentive Stock Options under all plans of the Company which become
initially exercisable by an employee during any calendar year shall not exceed
$100,000 (or such other amount as may be provided by the Internal Revenue Code
or regulations thereunder).
 
Exercise.  Each option shall be exercisable on such date or dates, during such
period and for such number of shares, as shall be determined by the Committee as
of the date of grant, although grants to employees subject to Section 16(b) of
the Securities Exchange Act of 1934 ("Section 16b") shall not be exercisable for
at least six months after those options are granted. The Committee may, in its
sole discretion, accelerate the times when an option may be exercised and the
Management Compensation Committee (comprised of Company officers) may do
likewise for employees who are not subject to Section 16b.
 
(B) Non-employee Director Stock Options
 
Grants.  Subject to approval of the Plan by shareholders at the 2002 annual
meeting, each person who at that meeting or thereafter first becomes a
non-employee director automatically shall be granted an option for 10,000 shares
upon the date of his or her election. On each granting date that each
non-employee director continues to serve in that capacity, beginning in the year
after that director receives his or her initial grant, he or she shall
automatically be 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. Notwithstanding
anything to the contrary herein, no non-employee director shall receive an
initial grant or a continuing grant for a particular year if that director
receives such a grant under any other stock plan of the Company.
 
Term.  The term of each option shall expire ten years from the date of grant.
 
Exercise.  An option shall become fully exercisable six months following the
date of grant.
 
(C) Price
 
Each employee option and each non-employee director option shall state the
number of shares to which it pertains and the option price. The option price
shall be the fair market value of the shares subject to the option on the date
of grant. The fair market value shall be the mean of the high and low prices as
quoted on the New York Stock Exchange Composite Transactions.
 
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(D) Payment
 
The price at which shares may be purchased upon exercise of an employee option
or non-employee director option shall be paid in cash, or, if permitted by the
terms of the option, by means of tendering shares or other consideration valued
at fair market value on the date of exercise, or any combination thereof. The
appropriate committee shall determine acceptable methods of tendering shares or
other consideration. Delivery of shares by the Company to the option holder upon
exercise of an option may be deferred, as authorized by the appropriate
committee.
 
6. PERFORMANCE SHARES
 
The Committee may grant performance shares to any eligible employee for no cash
consideration, if permitted by applicable law, or for such consideration as may
be determined by the Committee and specified in the grant. The Committee shall
establish award periods and shall establish the number of performance shares to
be earned if Company performance objectives are met. The performance objectives
shall be stated in terms of cash flow return on gross capital employed in the
Company's business ("CFR"). CFR equals the total of net income plus depreciation
and after-tax net interest divided by the total of capital plus accumulated
depreciation (minus goodwill and short-term investments). After performance
shares have been awarded and performance objectives have been established, the
Committee may not increase the number of performance shares that may be earned
by any employee upon attainment of those performance objectives within a
performance period. The actual levels of CFR to be achieved, and the length of
the performance period and, subject to the requirements of Section 3, other
terms and conditions of the performance shares, shall be determined by the
Committee. To the extent performance shares are forfeited or the grant of
performance shares has expired or is surrendered, canceled or terminated, the
shares subject to the grant shall be available for future grants if within other
Plan limitations.
 
7. OTHER AWARDS
 
In limited circumstances where the Committee determines that the use of stock
options is inadvisable for tax or other regulatory reasons, it may grant stock
appreciation rights to eligible employees. Stock appreciation rights entitle the
holder, upon exercise, to receive a number of shares or cash, as the Committee
may determine, equal to the increase in fair market value of a number of shares
designated by such rights from the date of grant to the date of exercise. The
number of shares subject to a stock appreciation right shall be counted against
the individual limit on the maximum number of shares that may be awarded to any
employee during any three consecutive calendar year period, and against the
maximum number of shares which may be delivered under the Plan.
 
Subject to Section 3, the Committee may grant other share-based awards to any
eligible employee for no cash consideration, if permitted by applicable law, or
for such consideration as may be determined by the Committee and specified in
the grant. Such grants may include restricted shares. The Committee may specify
such criteria or periods for payment as it shall determine, and the extent to
which such criteria or periods have been met shall be conclusively determined by
the Committee. Other share-based grants may be paid in shares or other
consideration related to shares, as specified by the grant, and, subject to the
requirements of Section 3, shall have such terms and conditions as shall be
determined by the Committee.
 
8. TRANSFERS
 
Except as otherwise provided by the appropriate committee, awards under the Plan
are not transferable other than by will or the laws of descent and distribution.
A transferred award may be exercised by the transferee only to the extent that
the grantee would have been entitled had the award not been transferred.
Notwithstanding anything herein to the contrary, the transfer of Incentive Stock
Options shall be limited as required by the Internal Revenue Code and applicable
regulations.
 
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9. ADJUSTMENTS
 
In the event of a reorganization, merger, consolidation, reclassification,
recapitalization, combination or exchange of shares, stock split, stock
dividend, rights offering or similar event affecting shares of the Company, the
following shall be equitably adjusted by the appropriate committee: (a) the
number and class of shares (i) reserved under the Plan, (ii) for which awards
may be granted to an individual, and (iii) covered by outstanding awards
denominated in shares or share units, (b) the prices relating to outstanding
awards, and (c) the appropriate fair market value and other price determinations
for such awards.
 
10. GENERAL PROVISIONS
 
The Company shall have the right to deduct from any cash payment made under the
Plan any taxes required by law to be withheld. It shall be a condition to the
obligation of the Company to deliver shares that the participant pay the Company
such amount as it may request for the purpose of satisfying any such tax
liability. Any award under the Plan may provide that the participant may elect,
in accordance with any regulations issued by the appropriate committee, to pay
the amount of such withholding taxes in shares.
 
No person, estate or other entity shall have any of the rights of a shareholder
with reference to shares subject to an award until a certificate or certificates
for the shares have been delivered to that person, estate or other entity. The
Plan shall not confer upon any non-employee director or employee any right to
continue in that capacity. The laws of Ohio shall govern the Plan and all
determinations made and actions taken pursuant hereto, to the extent not
governed by the laws of the United States.
 
11. AMENDMENT
 
The Board of Directors of the Company may alter, amend or terminate the Plan
from time to time, except that the Plan may not be amended without shareholder
approval to (i) materially increase the aggregate number of shares which may be
issued, (ii) increase the maximum number of shares which may be granted to any
employee, (iii) grant options or stock appreciation rights at a purchase price
below fair market value on date of grant, or (iv) materially modify the
requirements as to eligibility for participation in the Plan, or in any respect
as to which shareholder approval is required under the rules of the New York
Stock Exchange, provided that the Company is subject to such rules at the time
of the amendment. The provisions of the Plan pertaining to the awards to
non-employee directors may not be amended more than once every six months, other
than to comport with changes in the Internal Revenue Code, the Employee
Retirement Income Security Act, or the rules thereunder.
 
12. EFFECTIVE AND TERMINATION DATES
 
The Plan will become effective if and when approved by shareholders holding a
majority of the Company's outstanding common shares entitled to vote at the 2004
annual meeting of shareholders.
 
No awards shall be granted under the Plan after December 31, 2013. Awards
granted before that date shall remain valid thereafter in accordance with their
terms.
 
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