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CORRESP
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corresp

December 21, 2005

SUBMITTED VIA EDGAR

Mr. Rufus Decker

Accounting Branch Chief

Division of Corporation Finance

United States Securities and Exchange Commission

Washington, D.C. 20549

    Re:

     Eaton Corporation

Form 10-K for the fiscal year ended December 31, 2004

Form 10-Q for the quarter ended September 30, 2005

File No. 1-1396

Dear Mr. Decker:

We have reviewed your November 25, 2005 letter (“the Letter”) regarding your further comments on
the financial statements and disclosures contained in the above referenced reports (the “Subject
Reports”) filed by Eaton Corporation (the “Company”) with the Securities and Exchange Commission
(the “SEC”) and provide the following responses.

FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004

General

    1.

    Where a comment below requests additional disclosures or other revisions to be made,
please show us in your supplemental response what the revisions will look like. These
revisions should be included in your future filings.

Financial Statements

Statements of Consolidated Cash Flows, page F-8

    2.

    We have reviewed your response to comment 4. Given that the other-net line item
presented within net cash provided by operating activities is approximately 8% of the
total net cash provided by operating activities for 2004, we continue to believe that you
should breakout this line item into smaller components having more descriptive titles. In
addition, please show us supplementally for each period presented, the amounts comprising
this line item.

    The largest amount included in “Other-net” in “Net cash provided by operating activities”
for 2002 through 2004 was the income tax benefit related to exercises of stock options.
This item represented 1.0% of net cash provided by operating activities in 2002, 2.7% in
2003 and 5.3% in 2004. Other items included in

1

    “Other-net” were foreign currency translation
adjustments and changes in other assets. These amounts
were not material and we believe were properly included in “Other-net”.

    The Company will continue to carefully evaluate its disclosure of “Other-net” in “Net Cash
Provided by Operating Activities” and, should the amounts become material, will alter its
future filings accordingly.

Statements of Consolidated Shareholders’ Equity, page F-9

    3.

    We have reviewed your response to comment 7. Based on your response, it is not clear
if you intend to disclose the amount of income taxes for each classification of other
comprehensive income or only for minimum pension liability. Please clarify. If you
intend to only disclose the amount of income taxes for minimum pension liability, tell us
the amount of income taxes for the other classifications of other comprehensive income for
2004, 2003, and 2002. In addition, please tell us the amount of the reclassification
adjustments related to foreign currency translation adjustments for 2004, 2003, and 2002.

    In future filings, the Company will disclose for each year, each component of other
comprehensive income (loss) and each related amount of income taxes. Also, each component
of accumulated other comprehensive loss as of the most recent year-end and the prior
year-end will be disclosed, along with each related amount of income taxes. Please see
Schedule 1 below for the revised disclosure related to the components of comprehensive
income.

    Reclassification adjustments related to foreign currency translation adjustments were
$939,000 in 2002. There were no adjustments recorded in 2003 or 2004.

Lease Commitments, page F-33

    4.

    We have reviewed your response to comment 14. Please separately tell us for each
period presented the total amount of minimum rentals, contingent rentals, and sublease
rentals you have in relation to your operating leases. Please also provide us with a
summary of the range of purchase options, escalation clauses, and restrictions imposed by
your operating leases. Please also tell us how you concluded that disclosure of this
information was not material.

    Minimum rental commitments under noncancelable operating leases, which expire at various
dates and in most cases contain renewal options, for each of the next five years and
thereafter in the aggregate, are as follows:

2

    Commitments for

    operating leases

    (in millions)

    2004

    2003

    2002

    Succeeding year

    #1

    $
    97

    $
    89

    $
    83

    #2

    71

    71

    66

    #3

    51

    52

    50

    #4

    32

    37

    35

    #5

    21

    23

    12

    Thereafter

    33

    13

    39

    $
    305

    $
    285

    $
    285

    As indicated in the Company’s response to the SEC’s first comment letter dated
November 4, 2005, the Company will revise its future filings to add the disclosure of
minimum operating lease payments, in the aggregate and for each of the next 5 years, to the
“Lease Commitments” footnote in the “Other information” footnote.

    The majority of the operating lease commitments above relate to real estate leases for
office space, distribution, warehouse and service facilities, and a few manufacturing
locations. These leases were entered into at arms-length and none is of an unusual
economic nature, or at a bargain or a premium compared to the going market rate rental cost
for similar properties. For these leases, there are no properties with contingent rentals.
Sublease rentals due to the Company represent less than 0.6% as a percentage of total
lease commitments for 2005 and beyond. Purchase options within these leases are generally
exercisable at fair market value, maturing at a specified date or at the expiration of the
lease. Escalation clauses are of three types: tied to a CPI based index (specific to local
market as specified in the lease), determined at a set date based upon fair market rentals
of comparable size in the applicable market, or adjusted to fixed pre-determined levels at
varying dates as defined within the lease. The Company’s policy is to recognize expense
for lease payments, including those that depend on an existing index or rate, on a
straight-line basis over the lease term. There are no restrictions imposed by these leases
that prevent the Company’s intended commercial use at any location, or that limit the
Company’s actions, including no restrictions on paying cash dividends, borrowing money, or
leasing additional assets.

    The remaining operating lease commitments relate to vehicles; office equipment such as
computers, phone systems, copiers; and certain production equipment. These leases normally
do not include provisions for contingent rentals, sublease rentals, purchase options,
escalation clauses, or restrictions. Based on this analysis, the Company concluded that
this information was not material and disclosure was not required.

3

Business Segment and Geographic Region Information, page F-34

    5.

    We have reviewed your response to comment 18. Please show us your proposed
disclosure regarding the types of amounts that are included in the other corporate
expenses-net line item.

    The proposed disclosure that will be included in future filings follows:

    In accordance with SFAS No. 131, for purposes of business segment performance measurement,
the Company does not allocate to the business segments, items that are of a non-operating
nature or corporate organizational and functional expenses of a governance nature.
Corporate expenses consist of corporate office expenses including compensation, benefits,
occupancy, depreciation, and other administrative costs.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, page
F-40

Results of Operations – 2004 Compared to 2003, page F-42

Results by Business Segment, page F-45

    6.

    We have reviewed your response to comment 21. We continue to believe you should
discuss in greater detail the business reasons for the changes between periods in sales
and operating profit of each of your segments. In doing so, please disclose the amount of
each significant change in line items between periods and the business reasons for it. In
circumstances where there is more than one business reason for the change, attempt to
quantify the incremental impact of each individual business reason discussed on the
overall change in the line item. Please show us what your revised MD&A for 2004 as
compared to 2003 will look like. See Item 303(a)(3) of Regulation S-K and Financial
Reporting Codification 501.04.

    The Company has responded to the staff’s request to discuss, in greater detail, the
business reasons for the changes between periods in sales and operating profit of each of
its segments. Where there is more than one business reason for the change, the Company has
also responded to the staff’s request to quantify the incremental impact of each business
reason for the change, but only for those changes where the Company routinely gathers such
numerical data. The Company does not routinely gather numerical data related to the
incremental impact of each business reason for a change and, therefore, it is not practical
to provide this additional information in the MD&A. Please see Schedule 2 below for the
revised results of business segments in MD&A.

4

Market Risk Disclosure and Contractual Obligations, page F-53

    7.

    We have reviewed your response to comment 22. Please show us your revised table of
contractual obligations, as well as your proposed disclosure regarding any assumptions you
made to derive the estimated interest payments on your debt and payments you are obligated
to make under your interest rate swap agreements.

    Please see Schedule 3 below for the new disclosures in the table of contractual obligations
for interest expense related to long-term debt and net interest income from interest rate
swap agreements related to long-term debt.

Sincerely,

/s/ Richard H. Fearon

Richard H. Fearon

Executive Vice President –

Chief Financial & Planning Officer

Eaton Corporation

5

Eaton Corporation

Response to SEC comment letter dated

November 25, 2005

Schedule 1

(Note that new disclosures are in bold)

Statements of Consolidated Shareholders’

Equity

    Capital

    Accumulated

    Deferred

    Total

    Common

    Common

    in excess

    other com-

    compen-

    Share-

    Shares -

    Shares -

    of par

    Retained

    prehensive

    sation

    holders’

    (Millions)

    Number

    Dollars

    value

    earnings

    loss

    plans

    equity

    Balance at January 1, 2003

    141.2

    $
    70

    $
    1,413

    $
    1,568

    $
    (699
    )

    $
    (50
    )

    $
    2,302

    Net income

    386

    386

    Foreign currency translation
adjustments and related hedging
instruments (including income tax
credits of $16)

    126

    126

    Unrealized gain on available for sale
investments

    1

    1

    Deferred gain on cash flow hedges (net
of income taxes of $2)

    4

    4

    Minimum pension liability adjustment
(net of income tax income credits of
$9)

    (17
    )

    (17
    )

    Other comprehensive income

    114

    114

    Total comprehensive income

    500

    Cash dividends paid

    (134
    )

    (134
    )

    Issuance of shares under employee
benefit plans, including tax benefit

    4.2

    2

    141

    (2
    )

    5

    146

    Issuance of shares to trust

    .1

    3

    (3
    )

    0

    Sale of shares

    7.4

    4

    294

    (2
    )

    296

    Other-net

    .1

    —

    5

    —

    —

    2

    7

    Balance at December 31, 2003

    153.0

    76

    1,856

    1,816

    (585
    )

    (46
    )

    3,117

    Net income

    648

    648

    Foreign currency translation
adjustments and related hedging
instruments (including income tax
credits of $9)

    99

    99

    Unrealized loss on available for sale
investments (net of income tax credits
of $1)

    (2
    )

    (2
    )

    Deferred loss on cash flow hedges (net
of income tax credits of $1)

    (2
    )

    (2
    )

    Minimum pension liability adjustment
(net of income tax income credits of
$25)

    (48
    )

    (48
    )

    Other comprehensive income

    47

    47

    Total comprehensive income

    695

    Cash dividends paid

    (163
    )

    (163
    )

    Issuance of shares under employee
benefit plans, including tax benefit

    4.5

    3

    188

    (2
    )

    10

    199

    Issuance of shares to trust

    2

    (2
    )

    0

    Purchase of shares

    (4.2
    )

    (2
    )

    (53
    )

    (195
    )

    (250
    )

    Other-net

    —

    —

    —

    8

    —

    —

    8

    Balance at December 31, 2004

    153.3

    77

    1,993

    2,112

    (538
    )

    (38
    )

    3,606

6

Schedule 1 continued

(Note that new disclosures below are in bold)

Accumulated Other Comprehensive Loss

The components of Accumulated other comprehensive loss as reported in the Statement of Consolidated
Shareholders’ Equity as of December 31, 2005 and 2004 follow:

    2005

    2004

    Foreign currency translation adjustments and related
hedging instruments (net of income tax credits of $xx in
2005 and $38 in 2004)

    $
    (64
    )

    Deferred loss on cash flow hedges (net of income tax
credits of $xx in 2005 and $1 in 2004)

    (2
    )

    Minimum pension liability adjustment (net of income tax
credits of $xx in 2005 and $245 in 2004)

    (472
    )

    Total

    $
    (538
    )

7

Eaton Corporation

Response to SEC comment letter dated November 25, 2005

Schedule 2

Results by Business Segment

(in millions)

Fluid Power

    2004

    2003

    Increase

    Net sales

    $
    3,098

    $
    2,786

    11
    %

    Operating profit

    338

    247

    37
    %

    Operating margin

    10.9
    %

    8.9
    %

Sales of the Fluid Power segment were at record levels in 2004. The 11% increase in sales in 2004
over 2003 included 8% growth attributed to volume growth and 3% due to foreign exchange rates.
Volume growth was driven by the mix of markets in which this segment participates. The majority of
sales growth in 2004 resulted from the strong performance of mobile and industrial hydraulics
markets. The commercial aerospace market also began to recover in 2004, growing in the fourth
quarter at its fastest rate in over two years. Global hydraulics markets were up an estimated 13%,
commercial aerospace markets were up 3%, defense aerospace markets were up 7%, and European
automotive production up 1%. Operating results for 2004 included Walterscheid, a manufacturer of
hydraulic tube connectors and fittings primarily for the European market, from the date of
acquisition, with less than 1% of the increase in sales attributed to this acquisition in 2004.

Operating profit in 2004 was also a record. Higher operating profit in 2004 was largely due to
sales growth, which generated an incremental 27% profit. Increased operating profit was also due
to lower restructuring charges in 2004, which were $8 compared to $14 in 2003, reducing operating
margins by .3% in 2004 and .5% in 2003. The lower restructuring charges contributed an additional
2% incremental profit on the sales increase. The restructuring charges in 2004 and 2003 related
primarily to the integration of the Boston Weatherhead business acquired in late 2002. The
incremental margins were helped by the benefits of restructuring actions to integrate acquired
businesses and continued productivity improvements, but were hurt by higher prices paid, primarily
for basic metals.

In January 2004, Eaton acquired Ultronics Limited with its advanced electro-hydraulic valve system
technology that is utilized in mobile applications in construction, forestry, agriculture and other
markets. In early 2004, Eaton invested in Eaton Senstar Automotive Fluid Connector (Shanghai) Co.,
Ltd