<PAGE>   1
                                                                    EXHIBIT 13.0

 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
                                    OVERVIEW
 
     In April 1998, Cooper Industries, Inc. ("Cooper") announced that it engaged
an investment banking firm to assist in the evaluation of options for exiting
the automotive business. On October 9, 1998 the sale of the Automotive Products
segment was consummated with Cooper receiving $1.9 billion in proceeds. The book
value of the Automotive Products segment assets less the liabilities assumed by
the buyer plus costs related to the transaction resulted in a small loss before
income taxes. The loss before income taxes was offset by income tax benefits
derived through the sale of the common stock of the entity holding the
Automotive Products segment.
 
     As a consequence of treating this segment as a discontinued operation,
Cooper's results of operations and the related footnote information for all
periods presented in its consolidated financial statements exclude the results
of the Automotive Products segment from continuing operations' revenues and
other components of income and expenses. The discontinued segment's results are
presented separately in a single caption, "Income from discontinued operations,
net of income taxes."
 
     In order to facilitate an understanding of Cooper's continuing operations,
Cooper restated the Consolidated Balance Sheet as of December 31, 1997, and the
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and
1996. The net assets of discontinued operations are segregated into a single
line, "Net assets of discontinued operations" in the Consolidated Balance
Sheets. The cash flows from discontinued operations are summarized into a single
line "Cash provided by (used in) discontinued operations" in the Consolidated
Statements of Cash Flows. No cash or debt was allocated to the discontinued
operations. For a discussion of the financial results of discontinued operations
see "Discontinued Operations -- Automotive Products Segment".
 
     Impact of Automotive Products Segment Divestiture  The Automotive Products
segment represented approximately 25% of Cooper's total annual segment operating
earnings (excluding nonrecurring items) before the restatement to reclassify the
segment as a discontinued operation. The proceeds from the sale of $1.9 billion
were utilized to purchase 21.2 million shares of Cooper Common stock at a cost
of $1.0 billion and to repay $900 million of debt. The mix of debt repayment and
Common stock purchases was designed to approximately replace the loss of the
Automotive Products segment earnings per share through lower interest expense
and lower average shares and result in a debt to total capitalization ratio at
the lower end of Cooper's targeted range. Due to the timing of the purchases of
Common stock in the quarter the sale was consummated, replacing all of the loss
of the Automotive Products segment earnings per share in the quarter was not
possible. From January 1, 1998 through October 9, 1998, the date of the sale of
the Automotive Products segment, the discontinued segment earnings after income
taxes were $87.1 million ($.76 per diluted share). For the period October 10,
1998 through December 31, 1998, approximately two-thirds of the expected
Automotive Products segment earnings per share contribution was replaced by the
utilization of the sale proceeds. On a full year basis going forward, Cooper
estimates that the earnings per share impact of the loss of the Automotive
Products segment earnings will be approximately replaced by the effects of the
utilization of the proceeds.
 
     Acquisitions and Divestitures  During the last three calendar years,
Cooper's continuing operations have completed 22 acquisitions and 3
divestitures. The acquisitions have been in complementary product lines that
enhance areas of strength, while the dispositions have been of noncore or
under-performing businesses. On May 30, 1997, Cooper completed the sale of its
Kirsch window treatment division for $216.0 million. For the five months ended
May 30, 1997, and the year ended December 31, 1996, Kirsch had revenues of $97.4
million and $252.9 million, and operating earnings of $4.8 million and $20.0
million (including a $2 million nonrecurring charge), respectively. The Kirsch
operations are included in the continuing operations of Cooper until the date of
the sale. In addition, on October 9, 1998, Cooper completed the sale of its
Automotive Products segment for $1.9 billion. The Automotive Products segment is
reflected as a discontinued operation in the Consolidated Financial Statements.
 
 
     Nonrecurring Income and Expenses  During the past three years, Cooper has
been transitioning into a business focused on higher growth and less volatile
businesses concentrated in electrical products and tools and hardware products.
In 1995, Cooper divested the remaining businesses comprising its former
Petroleum and Industrial Equipment segment through an exchange offer with
shareholders for common stock of Cooper Cameron Corporation ("Cooper Cameron").
On May 30, 1997, Cooper completed the sale of its Kirsch window treatment
division, an underperforming business that had migrated to more of a fashion
business than the basic manufacture

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<PAGE>   2

of drapery hardware and did not fit with the core electrical products and tools
and hardware products businesses. On October 9, 1998, Cooper completed the sale
of its Automotive Products segment. In addition, over the past three years,
Cooper has been realigning its product lines and operations and positioning
itself to compete more efficiently in the global markets.
 
     Cooper retained minority interests in the common stock of Belden, Inc. from
the initial public offering in 1993 and Cooper Cameron from the 1995 exchange.
In 1994, Cooper sold its Cameron Forged Products business to Wyman-Gordon
Corporation ("Wyman-Gordon") and received Wyman-Gordon common stock as part of
the consideration. In 1995, the Wyman-Gordon common stock was monitized through
the issuance of DECS(SM) (Debt Exchangeable for Common Stock). Cooper realized
gains from the sale of Cooper's marketable equity securities of Belden, Cooper
Cameron and Wyman-Gordon, and the sale of Kirsch over the past three years.
 
     In 1998, Cooper also initiated an acquisition of TLG, plc. The acquisition
was not consummated as Cooper could not justify exceeding an offer made by
another company. However, Cooper realized a gain from the sale of common stock
it had acquired at its offer price.
 
     The gains before income taxes that Cooper recognized during the three years
ended December 31, 1998 were as follows:
 
<TABLE>
<CAPTION>
                                                                 1998      1997       1996
                                                                ------     -----     ------
                                                                       (IN MILLIONS)
<S>                                                             <C>        <C>       <C>
DECS(SM) and Wyman-Gordon common stock......................    $132.7     $23.2     $   --
TLG, plc common stock.......................................       2.5        --         --
Sale of Kirsch..............................................        --      69.8         --
Belden and Cooper Cameron common stock......................        --        --      150.4
                                                                ------     -----     ------
                                                                $135.2     $93.0     $150.4
                                                                ======     =====     ======
</TABLE>
 
     All of the common stock of Wyman-Gordon, Belden and Cooper Cameron was sold
during the three year period ended December 31, 1998, and at this time, Cooper
does not own investments in marketable equity securities.
 
     In 1998, Cooper recorded a charge of $53.6 million for nonrecurring and
unusual items. The nonrecurring and unusual items consist of $26.4 million in
severance, $11.1 for impairment of the assets of two product lines and $16.1
million of other charges, including facility exit costs.
 
     During the fourth quarter of 1998, Cooper completed its formal annual
review of each of its operations and developed plans to strengthen the
competitiveness and efficiencies of each operation. In addition to the specific
plans for actions of each operation committed to by management during the fourth
quarter, Cooper also initiated and announced a voluntary and involuntary
severance program. Cooper has a formal written severance policy for salaried
personnel and, in certain operations, contractual severance obligations for
hourly personnel. While both the voluntary and involuntary severance programs
were announced in 1998, the amount that could be accrued in 1998 was limited to
severance relating to personnel actually severed in the fourth quarter and the
severance provided by established written policies. Cooper accrued a total of
$26.4 million in severance in the fourth quarter of 1998 and expects to incur
approximately $5 million of additional severance related to the voluntary
program in the first quarter of 1999. In addition, Cooper will incur additional
severance as the shut down or downsizing of plants and other facilities and
other actions are announced and employees are notified. Excluding positions that
will be eliminated but are not included in the severance accrual, a total of
1,759 positions will be eliminated across Cooper. Certain of the eliminated
positions will be replaced by positions in lower cost manufacturing locations.
As of December 31, 1998, a total of 124 positions had been eliminated and, at a
minimum, an additional 295 positions will be eliminated by the end of the first
quarter of 1999. At December 31, 1998, a total of $25.4 million of the $26.4
million severance accrual remained to be expended.
 
     In the fourth quarter of 1998, Cooper also recorded a charge of $11.1
million for impairment of the assets of two electrical product lines. Market
conditions, including increased competition from imports, had reduced the
profitability of both of these product lines to negative amounts. Due to the
inability to recover the investments on an undiscounted cash flow basis, the
long-lived assets were written down to the greater of the discounted cash flows
or the fair market value. The reduction in future depreciation expense as a
result of the write-down is less than $2 million a year. Cooper also recorded
$16.1 million in other charges, including facility exit costs. At December 31,
1998, a total of $7.8 million of the $16.1 million accrual remains to be
expended. Cooper anticipates 
 
                                       A-2
<PAGE>   3
incurring in excess of $25 million in 1999 related to severance costs, facility
exit costs and disruptions to operations that could not be accrued as of
December 31, 1998. In addition to hourly and certain voluntary and involuntary
salaried severance, considerable facility exit costs cannot be accrued until the
closing of a facility is announced and the costs are incurred. Other than the
premium over the normal severance for the voluntary severance program, these
costs are spread throughout the year and are less than the savings from the
anticipated cost reductions in 1999. The nonrecurring charges in 1998 when
combined with the nonrecurring gains result in a net $53.0 million gain after
income taxes ($.46 per diluted common share) from nonrecurring and unusual items
included in 1998 income from continuing operations.
 
     Of the $53.6 million charge before income taxes, $33.2 million remains to
be expended at December 31, 1998. The future expenditures against the accrual
are $25.4 million in severance and $7.8 million primarily related to exit costs
for facilities closed and facilities that will be closed.
 
     In 1997, Cooper incurred charges of $40.5 million for actions management
committed to during the period after concluding an evaluation of geographic
manufacturing and distribution facilities within the Tools & Hardware segment
and information systems relating to year 2000 compliance efforts. The 1997
charges included impairment in the carrying value of assets and abandonment of
assets of $24.2 million and accruals for continuing obligations for replaced
systems and facility consolidations of $16.3 million.
 
     Cooper began consolidating certain international manufacturing and
distribution facilities in the Tools & Hardware segment during 1997. Adjustments
to the carrying value of assets and accruals were recorded for projects
committed to by management. Severance and certain other costs related to
projects committed to by management were not expensed until the affected
employees were notified and the costs incurred. A majority of the consolidations
were announced and such costs were accrued and expensed during 1997. Cash
expenditures in 1998 for the payout of accrued severance and other expenditures
related to the consolidations were not significant. However, as the projects
were completed, Cooper incurred additional expenses from consolidation
disruptions to operations and additional consolidation expenses. These
additional expenses were expensed as incurred in 1997 and 1998 and were not
significant.
 
     During 1997, Cooper also assessed the ability of existing information
systems to function at the turn of the century. Three of Cooper's seven
divisions implemented new enterprise systems with the remaining divisions
modifying or replacing existing software. Where possible, businesses have
abandoned home-grown or highly customized applications with purchased, year 2000
compliant replacements or upgrades. In some situations, operations within a
business abandoned existing software and migrated to consolidated hardware and
software that is year 2000 compliant. Where these solutions were not possible,
businesses either contracted with third parties or committed internal resources
to ensure that all major systems are year 2000 compliant. Cooper recorded a
$28.5 million charge in 1997 primarily related to the adjustment in the carrying
value of abandoned hardware and software. While depreciation and amortization
were reduced by the effect of the write-down, depreciation and amortization of
new systems and equipment, as well as expenses incurred to revise current
software to be year 2000 compliant and implementation costs of new systems
exceeded the reduction in depreciation and amortization.
 
 
     The nonrecurring gains in 1997, combined with nonrecurring charges and a
$6.1 million income tax benefit related to the settlements of certain state
income tax matters, resulted in the inclusion in income from continuing
operations of a net nonrecurring gain of $39.1 million after income taxes ($.32
per diluted share).
 
     Cooper incurred nonrecurring charges totaling $15.9 million before income
taxes during 1996. A total of $3.0 million was incurred primarily related to a
write-down of property and equipment at a facility; $2.0 million in legal and
other costs related to sales of imported mini blinds containing lead paint; and
$10.9 million of corporate costs primarily related to environmental litigation.
The nonrecurring charges of $15.9 million did not affect future earnings, and
expenditures beyond 1996 were nominal. Nonrecurring gains from the sale of
marketable equity securities, combined with nonrecurring charges in 1996,
resulted in the inclusion in continuing income of a net nonrecurring gain of
$83.4 million after income taxes ($.67 per diluted share).
 
     With the exception of the sale of Kirsch, the actions committed to in 1997
did not have a significant continuing impact on revenues, segment operating
earnings or cash flows. The actions committed to in 1998, exclusive of the
Automotive Products segment sale, are anticipated to result in a net cash
outflow, after cost savings in 1999 of approximately $15 million. The cost
savings in 1999 are anticipated to exceed the additional expenses incurred and
to be in excess of $40 million in years beyond 1999. See Notes 2 and 6 of Notes
to Consolidated Financial Statements for additional information on nonrecurring
gains and charges.
                                       A-3
<PAGE>   4

     Capitalization  Effective January 1, 1995, Cooper exchanged all of its
outstanding $1.60 Convertible Exchangeable Preferred Stock for $691.2 million of
7.05% Convertible Subordinated Debentures due 2015 and $3.8 million in cash
related to fractional shares. While the exchange increased the debt-to-total
capitalization ratio above Cooper's preferred target, it generated in excess of
$20 million per year of additional net cash flows. During the first half of
1997, Cooper redeemed all of its outstanding 7.05% Convertible Subordinated
Debentures with a total of $610 million converted to approximately 14.8 million
shares of Cooper Common stock and approximately $80 million redeemed for cash.
 
     During 1997, Cooper purchased approximately 3.6 million shares of its
Common stock for $191.5 million. This action was taken to maintain Cooper's
debt-to-total capitalization ratio between 35% and 45%. During 1998, Cooper
repurchased approximately 26.9 million shares of its Common stock at a cost of
$1,348.1 million. A total of $1.0 billion of the purchases of Common stock in
1998 were directly related to the sale of the Automotive Products segment as
discussed under "The Impact of the Automotive Products Segment Divestiture". The
remaining 1998 Common stock repurchases were related to maintaining the
debt-to-total capitalization in the targeted range and eliminating the dilutive
effect of Common stock issued under employee stock plans. At December 31, 1998,
Cooper's debt-to-total capitalization ratio was 36.5%.
 
                         YEAR 2000 AND EURO CONVERSION
 
YEAR 2000 SYSTEMS ASSESSMENTS AND PREPAREDNESS
 
     The Year 2000 problem arises because many information systems and devices
containing embedded technology use two digits rather than four digits to
identify a year. Calculations in date-sensitive systems using two digits could
result in system failures and errors that disrupt normal business operations as
the year 2000 approaches.
 
     Early in 1997, Cooper conducted an assessment of year 2000 compliance of
all of its major information technology systems, non-information technology
systems with date-sensitive software and embedded microprocessors and products
Cooper manufactured or sold to customers. Cooper developed detailed plans to
resolve all major issues by the end of 1998. As of December 31, 1998, Cooper
estimates that it is over 90% complete with its efforts to remediate current
systems or implement new systems that are year 2000 compliant. The majority of
the remaining efforts are anticipated to be completed before the end of the
second quarter of 1999. Cooper has substantially completed its efforts to assess
noncompliant embedded technology including Cooper's assessment of the products
it has delivered to customers.
 
     Cooper expects that only three of its seven divisions will be involved in
any significant compliance efforts in 1999. The projects that will continue into
1999 include completing lower priority information technology systems projects
and replacing systems in recently acquired business units. Efforts in 1999 will
become less focused on systems projects and more focused on identifying areas of
additional business risk and developing contingency plans where appropriate.
 
     Cooper initiated formal communications with its key suppliers and service
providers to determine the potential risk to Cooper's operations if these third
parties fail to solve year 2000 issues. Cooper's divisions have substantially
completed their assessment of suppliers and service providers. If Cooper
determines that there is a risk to its operations because a key third party may
not be year 2000 compliant, it expects to develop contingency plans to address
this risk by the end of the first quarter of 1999. The extent of this risk
cannot be determined with any degree of certainty due to the number of small
suppliers and service providers used by Cooper and the reliance of all
operations on basic utility service providers.
 
     Cooper's investment in information technology has become a larger
percentage of annual capital expenditures. Cooper estimates that it will have
total capital expenditures related to year 2000 compliance of approximately $75
million, and that it has incurred and will continue to incur into mid-1999
approximately $1 to $2 million each quarter in expense related to year 2000
efforts. Cooper has incurred approximately 80% of the capital expenditures as of
December 31, 1998. The majority of these expenditures relate to new systems
installations. Although the timing of new systems installations was influenced
by the year 2000 problem, Cooper would have installed these systems in any
event. The above costs for year 2000 compliance efforts do not include costs
relating to Cooper's Automotive Products segment, which was sold on October 9,
1998 and is treated as a discontinued operation in the consolidated financial
statements.
                                       A-4
<PAGE>   5
 
     The worst case scenario related to Cooper's preparedness is that Cooper
would not complete the information technology systems projects that are
scheduled in 1999 on time because of a severe shortage of qualified information
systems personnel, both internally and externally. Cooper recognizes that
completion of these projects could also be affected for other reasons that are
unknown to Cooper at this time. Cooper believes that it is unlikely that such
projects would be delayed beyond a point in time where Cooper would suffer
material adverse effects from noncompliance. For this reason, Cooper has not
developed a contingency plan for this risk. In the unlikely event that the
remaining information technology systems projects are not completed before
significant problems are encountered, Cooper's results of operations could be
adversely affected. Cooper has not determined whether such adverse effect would
be material.
 
     In addition to the internal risks specific to Cooper and the risks posed by
third parties that the company deals with directly, there are a number of other
year 2000 risks and uncertainties that could affect Cooper. These risks include
utility and communication failures and governmental, economic and market
responses to the year 2000 problem. While Cooper continues to believe that these
year 2000 matters will not have a material adverse impact on its results of
operations, liquidity or financial condition, the ultimate impact on Cooper of
the year 2000 problem remains uncertain.
 
     Cooper's year 2000 project capital expenditures, estimated percentage of
completion and estimated completion dates are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the availability of certain resources, third-party modification plans
and other factors. There can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
 
EURO CONVERSION
 
     On January 1, 1999, the euro became the common currency of eleven of the
fifteen member states of the European Union. The national currencies will remain
legal tender in the participating countries until mid-year 2002. During the dual
currency phase, businesses must be capable of conducting commercial transactions
in either the euro or the national currency. After the dual currency phase, all
businesses in participating countries must conduct all transactions in the euro
and must convert their financial records and reports to be euro based. The euro
introduction may affect cross-border competition by creating cross-border price
transparency, beginning with the dual currency phase on January 1, 1999.

     Cooper estimates that approximately 10% of its 1998 revenues came from
countries that adopted the euro. Cooper expects that the impact of the dual
currency phase will not be material to its results of operations. Cooper has
assessed its information technology systems and believes that they are capable
of meeting the dual currency phase requirements. Cooper is assessing the risk to
its business of the final phase of the euro conversion which begins during 2002,
and currently is unable to determine whether the final phase of the euro
conversion will have a material effect on Cooper's operations. The costs of the
euro dual currency phase are included with the year 2000 capital expenditures
and expense amounts and are not significant.
 
                             RESULTS OF OPERATIONS
 
     The financial information and discussions that follow, along with the
Consolidated Financial Statements and related footnotes, will aid in
understanding Cooper's results of operations as well as its financial position,
cash flows and indebtedness.
 
REVENUES
 
<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                           ---------------------------------------
                                                             1998           1997            1996
                                                           --------     -------------     --------
                                                                        (IN MILLIONS)
<S>                                                        <C>          <C>               <C>
Electrical Products....................................    $2,824.4       $2,568.3        $2,407.5
Tools & Hardware.......................................       826.8          749.9           720.1
                                                           --------       --------        --------
          Continuing Revenues..........................     3,651.2        3,318.2         3,127.6
Kirsch.................................................          --           97.4           252.9
                                                           --------       --------        --------
          Total Revenues...............................    $3,651.2       $3,415.6        $3,380.5
                                                           ========       ========        ========
</TABLE>

                                       A-5
<PAGE>   6
 
     1998 vs. 1997 Revenues  Revenues in 1998 increased 10% over 1997, excluding
1997 Kirsch revenues. Excluding the impact of eleven 1998 acquisitions and the
carryover impact of 1997 acquisitions, revenues for 1998 were flat when compared
to 1997. The continued strengthening of the U.S. dollar against most functional
currencies in which international operations conduct business reduced revenues
measured in U.S. dollars by approximately $23 million or 1% compared to 1997.
The strength of the dollar also had a negative unquantifiable impact on export
sales.
 
     Annual revenues for the Electrical Products segment increased 10% from the
prior year and contributed approximately 77% of Cooper's continuing revenues in
1998. Excluding the impact of acquisitions, revenues increased 1%. Revenue
increases across most electrical businesses were strong early in the year. While
demand for lighting fixtures remained strong in the later part of the year,
beginning in the second quarter of 1998, demand for electrical construction
materials and electrical distribution equipment softened. Demand for power
systems equipment and electrical construction materials was negatively impacted
by the global decline in energy and natural resources projects and the
interruption of growth in Southeast Asia. Revenues were also negatively impacted
by a weak year end buy-in of fuses by distributors to meet annual volume
incentives and disruptions in shipments and the resultant build of backlog of
electrical distribution equipment as a new enterprise-wide business system was
placed in service at the power systems operation.
 
     The Tools & Hardware segment contributed approximately 23% of Cooper's
continuing revenues in 1998. Revenues increased 10% over the prior year.
Excluding the benefit of 1998 acquisitions, revenues decreased 3% compared to
1997. Lower shipments to domestic aerospace and automotive manufacturers and
softness in the industrial and electronic markets resulted in the year-to-year
decrease. Improved hand tool demand from consumer markets, strong demand for
assembly equipment from international markets and new products provided a
partial offset. Revenues were also unfavorably impacted by the implementation of
new enterprise-wide business systems at both operations that comprise the Tools
& Hardware segment.
 
     1997 vs. 1996 Revenues  Cooper's 1997 revenues, excluding Kirsch, increased
6% over 1996. Excluding the impact of six 1997 acquisitions and the carryover
impact of 1996 acquisitions, revenues for 1997 increased 4%. The strengthening
of the U.S. dollar against most of the functional currencies in which
international operations conduct business reduced revenues measured in U.S.
dollars by approximately $45 million or 1.3% compared to 1996. The strong dollar
also had a negative unquantifiable impact on export sales.
 
     The Electrical Products segment contributed approximately 77% of Cooper's
continuing revenues in 1997, as revenues increased 7% over 1996. Excluding the
effects of 1997 acquisitions and the carryover impact of 1996 acquisitions,
revenues increased 5%. Revenue growth was attributable to strong sales increases
of distribution and transmission equipment and circuit protection products.
Lighting fixtures also benefited from strong demand in the housing and
non-residential construction markets. Strong international demand in Mexico and
Canada for construction materials was offset somewhat by a soft European market
and the effects of a strong dollar.
 
     The Tools & Hardware segment, excluding Kirsch, contributed approximately
23% of Cooper's continuing revenues in 1997, with revenues increasing 4% over
the prior year. Excluding the carryover impact of 1996 acquisitions, revenues
increased 2% compared to 1996. Sales of domestic hand-held power tools and
worldwide assembly equipment grew to meet continued demand from the automotive
and aerospace industries. Providing a partial offset to this increase was a
slight decline in demand for hand tool products in North America and the effects
of a stronger U.S. dollar against most European currencies.
 
SEGMENT OPERATING EARNINGS
 
     Cooper measures the performance of its businesses exclusive of nonrecurring
charges and financing expenses. All costs directly attributable to operating
businesses are included in segment operating earnings. Corporate overhead costs,
including costs of centrally managed functions, such as treasury, are not
allocated to the businesses. Cooper has historically reported the results of its
operations in this manner and, therefore, the required adoption of new reporting
standards for segment results did not impact historical comparability of the
segment operating results. See Notes 1 and 15 of the Notes to Consolidated
Financial Statements.
                                       A-6
<PAGE>   7
 
     Historically, Kirsch was part of the Tools & Hardware segment. Effective
with the decision to divest this operation, its results were segregated from the
continuing Tools & Hardware segment for internal management reporting.
 
<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                                -----------------------------------
Segment Operating Earnings (internal management reporting --     1998          1997           1996
excludes nonrecurring gains and charges):                       ------     -------------     ------
                                                                           (IN MILLIONS)
<S>                                                             <C>        <C>               <C>
Electrical Products........................................     $479.0        $461.6         $408.3
Tools & Hardware...........................................      112.4          99.6           91.4
                                                                ------        ------         ------
          Continuing Segment Operating Earnings............      591.4         561.2          499.7
Kirsch.....................................................         --           4.8           22.0
                                                                ------        ------         ------
          Total Segment Operating Earnings.................     $591.4        $566.0         $521.7
                                                                ======        ======         ======
</TABLE>
 
<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                              -----------------------------------
                                                               1998          1997           1996
                                                              ------     -------------     ------
             Nonrecurring Gains and (Charges)                            (IN MILLIONS)
<S>                                                           <C>        <C>               <C>
Electrical Products.......................................    $(42.6)       $(15.9)        $ (3.0)
Tools & Hardware..........................................      (8.7)        (22.5)            --
                                                              ------        ------         ------
          Continuing Segments.............................     (51.3)        (38.4)          (3.0)
Kirsch....................................................        --          69.8           (2.0)
                                                              ------        ------         ------
          Total...........................................    $(51.3)       $ 31.4         $ (5.0)
                                                              ======        ======         ======
</TABLE>
 
 
<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
Segment Operating Earnings (generally accepted accounting     -----------------------------------
                      principles --                            1998          1997           1996
        includes nonrecurring gains and charges):             ------     -------------     ------
                                                                         (IN MILLIONS)
<S>                                                           <C>        <C>               <C>
Electrical Products.......................................    $436.4        $445.7         $405.3
Tools & Hardware..........................................     103.7          77.1           91.4
                                                              ------        ------         ------
          Continuing Segment Operating Earnings...........     540.1         522.8          496.7
Kirsch....................................................        --          74.6           20.0
                                                              ------        ------         ------
          Total Segment Operating Earnings................    $540.1        $597.4         $516.7
                                                              ======        ======         ======
</TABLE>
 
     1998 vs. 1997 Segment Operating Earnings  Segment operating earnings in
1998 included nonrecurring charges of $51.3 million for adjustments to the
carrying value of assets, accruals for facility consolidations and related
severance and other obligations committed to by management. Segment operating
earnings in 1997 included nonrecurring charges of $38.4 million and a $69.8
million gain on the sale of Kirsch. See "Nonrecurring Income and Expenses" in
the "Overview" section and Note 2 of Notes to Consolidated Financial Statements.
Excluding nonrecurring charges from 1998 and nonrecurring gains and charges from
1997, segment operating earnings for 1998 increased 4% over 1997. Excluding
Kirsch from 1997 results, segment operating earnings increased 5% over 1997.
Acquisitions contributed approximately $43 million or 8% to the segment
operating earnings over the prior year.
 
     The Electrical Products segment operating earnings, excluding nonrecurring
charges of $42.6 million in 1998 and $15.9 million in 1997, improved 4% over the
prior year and contributed 81% of Cooper's continuing segment operating
earnings. Acquisitions contributed approximately $28 million of the increase in
earnings before nonrecurring items in 1998. Increased sales volume, performance
improvements at the lighting products operations and contribution from recent
acquisitions were the primary sources of earnings growth in 1998. Excluding the
impact of acquisitions, operating earnings of substantially all electrical
products businesses began the year with strong incremental improvement over the
prior year. Beginning in the second quarter of 1998, the softening of demand for
certain power systems equipment and electrical construction materials began to
negatively impact comparable operating earnings. This trend continued in the
second half of the year with indications of a more stable environment in the
fourth quarter of 1998. The weak year end buy-in of fuses and the disruption of
shipments of electrical distribution equipment from the implementation of new
business systems also had a negative impact on the comparable operating
earnings. Excluding nonrecurring items, return on revenues was 17% in 1998
versus 18% in 1997. Approximately half of the decrease in return on revenues was
driven by the addition of acquisitions with lower returns on revenues. The
remaining decrease was the result of the increase in sales of 

                                       A-7
<PAGE>   8
lighting fixtures, which carry a lower return on sales than the average, the
slowing demand for higher margin construction materials and certain power
distribution equipment and costs associated with the implementation of a
business enterprise system for the power systems operations.
 
     The Tools & Hardware segment operating earnings, excluding nonrecurring
items of $8.7 million in 1998 and $22.5 million in 1997, increased 13% from 1997
and contributed 19% of continuing segment operating earnings. Acquisitions
contributed approximately $15 million in earnings in 1998. Excluding the impact
of acquisitions, operating earnings began the year with relatively strong
incremental earnings over the prior year. Softening demand in the industrial and
electronic markets and in the aerospace and automotive markets negatively
impacted year-over-year performance in the later half of the year. Excluding
nonrecurring items, return on revenues increased to 13.6%, up three tenths of a
point from the prior year. Acquisitions contributed a small portion of the
increase in return on revenues with the remainder of the increase primarily
driven by the favorable product mix in the first half of 1998, partially offset
by costs associated with the implementation of new enterprise-wide business
systems.
 
     1997 vs. 1996 Segment Operating Earnings  Segment operating earnings in
1997 included nonrecurring charges of $38.4 million for adjustments to the
carrying value of assets, accruals for facility consolidations and related
severance and other obligations committed to by management. Segment operating
earnings also included a $69.8 million gain on the sale of Kirsch. Segment
operating earnings in 1996 included $5.0 million in nonrecurring charges. See
"Nonrecurring Income and Expenses" in the "Overview" section and Note 2 of Notes
to Consolidated Financial Statements. Excluding nonrecurring items in 1997 and
nonrecurring charges in 1996, segment operating earnings increased 8% over 1996.
Excluding Kirsch results from both years, segment operating earnings increased
12% over 1996. Acquisitions contributed approximately $9 million or 2% of the
increase in segment operating earnings over 1996.
 
     The Electrical Products segment operating earnings, excluding nonrecurring
charges of $15.9 million in 1997 and $3.0 million in 1996, improved 13% over the
prior year and contributed 82% of Cooper's continuing segment operating
earnings. Excluding nonrecurring items, return on revenues improved in 1997 to
18% from 17% in 1996. The 1997 acquisitions and the carryover impact of 1996
acquisitions contributed approximately $8 million of the increase in earnings.
Excluding this impact and nonrecurring items, segment operating earnings were up
11% over 1996. This strong growth in earnings was primarily attributable to cost
savings in transformer products, strong revenue growth in higher margin
distribution and certain transmission equipment and circuit protection products
and cost containment across all businesses. All electrical products businesses
had increases in return on revenues, excluding nonrecurring charges, during
1997.
 
     The Tools & Hardware segment operating earnings, excluding nonrecurring
items of $22.5 million in 1997, increased 9% from 1996 and contributed 18% of
the continuing segment operating earnings. The incremental earnings of the
carryover impact of two small acquisitions was less than $1 million. Excluding
nonrecurring items, return on revenues increased to 13.3%, up six tenths of a
point from the prior year. Increased sales of hand-held power tools and assembly
equipment and leveraging of costs, primarily in the power tools and assembly
equipment businesses, were the primary drivers of the performance. The absence
of implementation costs incurred in the 1996 warehouse and distribution system
conversion at the hand tools operations also contributed to the increase in
return on revenues, partially offset by lower sales volume for hand tools.
 
OTHER INCOME AND EXPENSE
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                              -------------------------------
                                                               1998        1997        1996
                                                              -------     -------     -------
                                                                       (IN MILLIONS)
<S>                                                           <C>         <C>         <C>
Segment Operating Earnings(1).............................    $ 540.1     $ 597.4     $ 516.7
General Corporate:
  Nonrecurring Gains......................................      135.2        23.2       150.4
  Nonrecurring Charges....................................       (2.3)       (2.1)      (10.9)
  Expense.................................................      (47.5)      (44.9)      (43.4)
Interest Expense, net.....................................     (101.9)      (90.4)     (142.1)
                                                              -------     -------     -------
  Income from Continuing Operations before Income Taxes...    $ 523.6     $ 483.2     $ 470.7
                                                              =======     =======     =======
</TABLE>
 
---------------
 
(1) Includes nonrecurring gain on sale of Kirsch and nonrecurring charges.

                                        A-8
<PAGE>   9

     Nonrecurring Gains and Nonrecurring Charges  See Nonrecurring Income and
Expenses in the Overview section and Notes 2 and 6 of Notes to Consolidated
Financial Statements.
 
     General Corporate Expense  General corporate expenses, excluding
nonrecurring items, increased $2.6 million and $1.5 million in 1998 and 1997,
respectively. The impact of inflation on compensation and other expenses
continued to impact general corporate expenses. Cost reductions related to the
Automotive Products segment divestiture did not significantly impact the
comparability of 1998 expense to 1997 due to the transaction activities
subsequent to the sale.
 
     Interest Expense, Net  Interest expense, net, increased in 1998 to $101.9
million from $90.4 million in 1997 as additional debt incurred to fund
acquisitions and stock repurchases more than offset the impact of the conversion
during 1997 of $610 million of the Company's 7.05% Convertible Subordinated
Debentures to Cooper Common stock. The proceeds received on October 9, 1998 from
the sale of the Automotive Products segment were utilized to repay debt incurred
for a $500 million Common stock repurchase consummated in anticipation of the
sale, to repurchase an additional $500 million in Common stock and repay $900
million in debt. The timing of Common stock repurchases and debt repayments
resulted in significant fluctuations in the total debt of Cooper at specific
points in time during 1998. Interest expense for 1997 decreased $51.7 million
from 1996. The majority of the decrease was due to the conversion during 1997 of
$610 million of Cooper's 7.05% Convertible Subordinated Debentures to Cooper
Common stock. Average debt levels in 1997, excluding the $610 million converted
debt, were also lower than 1996 and contributed to the decline in interest
expense.
 
INCOME FROM CONTINUING OPERATIONS
 
<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                                -------------------------------------
                                                                  1998          1997          1996
                                                                ---------     ---------     ---------
                                                                (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                                             <C>           <C>           <C>
Income from continuing operations before income taxes.......     $523.6        $483.2        $470.7
Income taxes................................................      187.7         173.2         185.6
                                                                 ------        ------        ------
Income from continuing operations...........................     $335.9        $310.0        $285.1
                                                                 ======        ======        ======
Diluted earnings per share from continuing operations.......     $ 2.93        $ 2.57        $ 2.52
                                                                 ======        ======        ======
</TABLE>
 
     1998 vs. 1997 Income from Continuing Operations  Income from continuing
operations before income taxes for 1998, excluding net nonrecurring gains,
increased 3% to $442.0 million from $430.7 million in 1997. The Automotive
Products segment divestiture, as discussed in the Overview section, interest
expense on Common stock repurchases and nonrecurring items all had significant
impacts on the comparability of income from continuing operations before income
taxes.
 
     The effective tax rate for 1998 was unchanged from the 1997 rate of 35.8%.
Excluding income taxes on both 1998 and 1997 nonrecurring items and the 1997 tax
benefit related to the favorable settlements of several state income tax issues,
the effective tax rates for 1998 and 1997 were 36.0% and 37.0%, respectively.
This rate reduction resulted from Cooper's ongoing tax planning efforts.
 
     Income from continuing operations increased 8% over the 1997 level.
Excluding the net after-tax impact from nonrecurring items in both years, income
from continuing operations increased 4% to $282.9 million from $270.9 million in
1997. Increased segment operating earnings more than offset higher interest
expense contributing to the earnings increase. Diluted earnings per share from
continuing operations increased 14% over the 1997 level. Excluding the net
nonrecurring item impacts of $.46 per share in 1998 and $.32 per share in 1997,
diluted earnings per share from continuing operations increased 10%. The
Automotive Products segment divestiture, as discussed in the Overview section,
interest expense on Common stock repurchases and nonrecurring items all had
significant impacts on the comparability of income from continuing operations
and earnings per share.
 
     1997 vs. 1996 Income from Continuing Operations  Income from continuing
operations before income taxes for 1997, exclusive of 1997 net nonrecurring
gains, increased to $430.7 million from $336.2 million, a 28% increase. This
increase was primarily the result of the increased segment earnings and lower
interest expense.
 
     The effective tax rate decreased from 39.4% in 1996 to 35.8% in 1997. The
effective tax rate for 1997 included $6.1 million related to the favorable
settlements of several state income tax issues. Excluding this 1997 nonrecurring
tax benefit and income taxes on net nonrecurring gains, the 1997 and 1996
effective tax rates were 
 
                                       A-9
<PAGE>   10
37.0% and 40.0%, respectively. The rate reduction from 40.0% to 37.0% stems from
Cooper's tax planning efforts, including changing its international tax
structure, maximizing tax incentives for exports and increasing research and
development tax credits, as well as from the increase in income from continuing
operations before income taxes diluting the impact of nondeductible goodwill
amortization.
 
     The 1997 income from continuing operations increased 9% over 1996.
Excluding net nonrecurring gains and the 1997 nonrecurring tax benefit, income
from continuing operations increased to $270.9 million from  
$201.7 million or 35%. This increase included the effect of (1) the redemption
and conversion of Cooper's 7.05% Convertible Subordinated Debentures, (2) the
purchase of approximately 3.6 million shares of Cooper's Common stock, and (3)
the absence of the Kirsch business for seven months of 1997. Diluted earnings
per share from continuing operations increased 2% from the 1996 level. Excluding
$.32 earnings per share in 1997, and $.67 earnings per share in 1996 from net
nonrecurring items, diluted earnings per share from continuing operations
increased 22%. The lower interest expense in 1997, which was related to the
conversion of $610 million of 7.05% Convertible Subordinated Debentures to
Cooper Common stock, had no effect on diluted earnings per share as the interest
expense was excluded and the equivalent Cooper Common stock was included in the
calculation of diluted earnings per share for both 1997 and 1996.
 
     While the purchase of Cooper Common stock and the impact of the $80 million
of 7.05% Convertible Subordinated Debentures redeemed for cash reduced average
shares utilized in the computation of diluted earnings per share, the funding of
these two items increased interest expense, offsetting most of the benefit on
diluted earnings per share. After considering the impact of additional common
stock equivalents, primarily resulting from an increase in market price of a
share of Cooper Common stock during the year, diluted earnings per share were
not impacted by the net reduction in average shares during 1997. The absence of
the Kirsch operations, net of the effect of lower interest expense resulting
from repaying debt with the net proceeds of the sale, reduced earnings per share
from continuing operations for 1997 by approximately $.05.
 
PERCENTAGE OF REVENUES
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               1998     1997     1996
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
Revenue.....................................................  100.0%   100.0%   100.0%
Cost of Sales...............................................   67.0%    66.8%    67.3%
Selling and Administrative..................................   16.9%    17.0%    17.6%
</TABLE>
 
     1998 vs. 1997 Percentage of Revenues  Cost of sales, as a percentage of
revenue, increased to 67.0% in 1998 from 66.8% in 1997. An unfavorable product
mix, competitive conditions for certain electrical product lines and higher
manufacturing costs related to implementation of new business systems in several
businesses accounted for the increase. Selling and administrative expenses
decreased slightly as a percentage of revenues. Excluding Kirsch in 1997, which
had relatively higher selling and administrative expenses, selling and
administrative expenses increased slightly as a result of softness in revenues
in certain of the Electrical Products segment businesses.
 
     1997 vs. 1996 Percentage of Revenues  Cost of sales, as a percentage of
revenues, declined to 66.8% in 1997 from 67.3% in 1996. The decline resulted
primarily from product cost improvements and containments and an overall
favorable mix of higher margin electrical products. Most of the improvement in
cost of sales as a percentage of revenue was in the Electrical Products segment,
with the Tools & Hardware segment, excluding Kirsch, improving to a lesser
extent. Selling and administrative expenses decreased, as a percentage of
revenues, to 17.0% in 1997 from 17.6% in 1996. Including Kirsch for five months
in 1997 and for the full year in 1996 represented .2 percentage points of the
improvement. Each of the segments contributed to the remaining improvement.
 
DISCONTINUED OPERATIONS -- AUTOMOTIVE PRODUCTS SEGMENT
 
     1998 vs. 1997 Revenues  Revenues for the discontinued Automotive Products
segment from January 1, 1998 through October 9, 1998, the date of sale of the
business, were $1,449.4 million compared to full year revenues for 1997 of
$1,873.2 million. Market conditions prior to the sale reflected increased sales
to worldwide original equipment manufacturers and improved steering and
suspension sales offset by weak domestic aftermarket demand in most product
lines. The net impact of the exchange of the temperature control business for
the brake business of Standard Motor Products resulted in lower revenues during
the period as a result of disruption in the marketplace 
 
                                      A-10
<PAGE>   11
during the transition. Also, revenues were affected by the bankruptcy of a large
customer significantly reducing sales volume to this customer compared to 1997.
In total, revenues for a comparable period in 1997 decreased approximately 1%.
 
     1997 vs. 1996 Revenues  Revenues for the discontinued Automotive Products
segment were $1,873.2 million in 1997, decreasing slightly from $1,903.2 million
in 1996. Excluding the effects of two small 1997 acquisitions and the carryover
impact of one 1996 acquisition, revenues declined 2% from the prior year. Sales
in the original equipment market improved as vehicle production levels increased
on existing vehicle platform contracts. Sales in the aftermarket were hampered
by weak demand in most product lines. Temperature control product sales and
remanufactured product lines declined due primarily to competitive price
pressures. Wiper volume declined significantly in the first half of 1997 as more
normal winter weather patterns were experienced in 1997 than in 1996.
 
     1998 vs. 1997 Segment Operating Earnings  Excluding 1997 nonrecurring
charges, the discontinued Automotive Products segment operating earnings from
January 1, 1998 through October 9, 1998 were $143.7 million compared to $186.9
million for the 1997 fiscal year. In comparison to a comparable period in 1997,
operating earnings were slightly lower in 1998 than the prior year. The exchange
of the temperature control business for the brake business of Standard Motor
Products had a significant impact on the comparability of operating earnings.
The temperature control business typically had operating losses in the first and
fourth quarter of each year with the majority of the operating earnings
occurring in the second and third quarter. The comparability of the 1998
operating earnings to 1997 was also impacted by the increase in the allowance
for doubtful accounts related to a customer that filed for bankruptcy in 1998
and the settlement of litigation matters.
 
     1997 vs. 1996 Segment Operating Earnings  The discontinued Automotive
Products segment operating earnings, excluding nonrecurring charges of $43.4
million in 1997 and $102.0 million in 1996, decreased 1% from the prior year.
Segment operating earnings excluding nonrecurring charges were $186.9 million in
1997 as compared to $189.3 million in 1996. Without the impact of two
acquisitions, operating earnings declined 2%. Excluding nonrecurring charges,
return on revenues increased from 9.9% in 1996 to 10.0% in 1997. Lower sales
volume in the domestic aftermarket for most chassis, temperature control and
wiper products, coupled with competitor price pressures, and a weak European
aftermarket for ignition products contributed to the earnings decline. Increased
sales in the original equipment market, lower spending on promotional expenses
and other costs and lower depreciation and amortization due to the 1996
write-down of brake assets provided a partial offset.
 
     1998 vs. 1997 Income from Discontinued Operations, Net of Taxes  Income
from discontinued operations, net of taxes, from January 1, 1998 through the
October 9, 1998 sale date, was $87.1 million ($.76 per diluted share) compared
to $84.6 million ($.69 per diluted share) for the 1997 fiscal year. Excluding
nonrecurring charges of $26.9 million ($.22 per diluted share), income from
discontinued operations, net of taxes, in 1997 was $111.5 million ($.91 per
diluted share).
 
     1997 vs. 1996 Income from Discontinued Operations, Net of Taxes  Income
from discontinued operations, net of taxes, increased from $30.3 million in 1996
($.25 per diluted share) to $84.6 million in 1997 ($.69 per diluted share).
Excluding nonrecurring charges, income from discontinued operations, net of
taxes, increased approximately 5%.
 
EARNINGS OUTLOOK
 
     The following sets forth Cooper's general business outlook for 1999, based
on current expectations. The statements are forward-looking and actual results
may differ materially. The comparative figures for 1999 include the effects of
acquisitions made during 1998 and exclude 1998 nonrecurring items.
 
     Segment revenues are expected to increase by five to ten percent for the
Electrical Products segment and approximately five percent for the Tools &
Hardware segment. Cooper expects operating earnings for the Electrical Products
segment to increase by five to ten percent. Operating earnings for the Tools &
Hardware segment are expected to increase by zero to five percent.
 
 
     As discussed in the "Overview" section under "Impact of Automotive Products
Segment Divestiture", Cooper anticipates that it will replace substantially all
of the 1998 earnings per share contributed by the Automotive Products segment
through the effects of the use of proceeds from the sale in 1998 to reduce debt
and purchase Cooper Common stock.
                                      A-11
<PAGE>   12
 
     The above statements are forward-looking, and actual results may differ
materially. The above statements are based on a number of assumptions, risks and
uncertainties. The primary economic assumptions include, without limitation, (1)
modest growth in the domestic economy; (2) a modest improvement in European
markets; (3) a modest increase in construction spending worldwide; (4) no
significant change in raw material costs; and (5) no significant adverse changes
in the relationship of the U.S. dollar to the currencies of countries in which
Cooper does business. The estimates also assume, without limitation, the
successful completion of the implementation of business enterprise systems for
the Company, no significant change in competitive conditions and such other risk
factors as are discussed from time to time in Cooper's periodic filings with the
Securities and Exchange Commission.
 
PRICING AND VOLUME
 
     In each of Cooper's segments, the nature of many of the products sold is
such that an accurate determination of the changes in unit volume of sales is
neither practical nor, in some cases, meaningful. Each segment produces a family
of products, within which there exist considerable variations in size,
configuration and other characteristics.
 
     It is Cooper's judgment that, excluding the year-to-year effects of
acquisitions and divestitures, unit volume increased in the Electrical Products
segment and decreased in the Tools & Hardware segment in 1998.
 
     During the three-year period ending in 1998, Cooper was unable to increase
prices to fully offset cost increases in selected product offerings in both
segments. Cooper has been able to control costs through manufacturing
improvements and other actions during this period so that the inability to
increase prices has not significantly affected profitability in the segments.
 
EFFECT OF INFLATION
 
     During each year, inflation has had a relatively minor effect on Cooper's
results of operations. This is true primarily for three reasons. First, in
recent years, the rate of inflation in Cooper's primary markets has been fairly
low. Second, Cooper makes extensive use of the LIFO method of accounting for
inventories. The LIFO method results in current inventory costs being matched
against current sales dollars, such that inflation affects earnings on a current
basis. Finally, many of the assets and liabilities included in Cooper's
Consolidated Balance Sheets are recorded in connection with business
combinations that are accounted for as purchases. At the time of such
acquisitions, the assets and liabilities are adjusted to fair market value and,
therefore, the cumulative long-term effect of inflation is reduced.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Operating Working Capital
 
     For purposes of this discussion, operating working capital is defined as
receivables and inventories less accounts payable.
 
     In 1998, operating working capital, as reported in the Consolidated Balance
Sheet, increased $97 million, driven by increases in receivables and inventories
of $30 million and $49 million, respectively, and a $19 million decrease in
accounts payable. Operating working capital turnover for 1998 declined to 5.0
turns from 5.3 turns in 1997. The decline in operating working capital turnover
was due to the timing of accounts payable disbursements and a build up of
inventories as a result of implementing new business systems. Excluding 1998
acquisition activity, the increase in operating working capital was driven
primarily by the timing of accounts payable disbursements.
 
     In 1997, operating working capital increased $31 million. Excluding
acquisitions consummated in December 1997, operating working capital decreased
$18 million primarily as a result of a $46 million decrease in inventories
offset by a $26 million decrease in accounts payable. Excluding the impact of
the December 1997 acquisitions, operating working capital turns increased from
4.9 to 5.3 turns in 1997, an 8% improvement.
 
     In 1996, operating working capital decreased $68 million as a reduction in
accounts receivable of $62 million accounted for the improvement. Operating
working capital turns increased in excess of 10%.
 
  Cash Flows
 
     On October 9, 1998, Cooper completed the sale of its Automotive Products
segment and received $1.9 billion in proceeds. The proceeds were utilized to
purchase $1.0 billion in Common stock and repay $900 million in debt.

                                      A-12
<PAGE>   13
 
     Net cash provided by continuing operating activities in 1998 totaled $333
million as cash generated from earnings was more than sufficient to offset
increases in operating working capital. These funds, along with the proceeds
from the Automotive Products segment sale and cash received from the exercise of
stock options of $42 million were used to fund acquisitions of $294 million,
capital expenditures of $142 million, dividends of $149 million, acquisitions of
treasury stock of $1,348 million and a net reduction in total debt of $347
million.
 
     Net cash provided by continuing operating activities in 1997 totaled $325
million. These funds, along with $216 million in proceeds from the sale of
Kirsch, an increase in debt of $213 million (net of acquisition related assumed
debt) and $74 million provided by discontinued operations were used to finance
net cash outflows for acquisitions of $366 million, capital expenditures of $117
million, dividends of $157 million and purchases of Cooper's Common stock of
$192 million.
 
     Net cash provided by continuing operating activities in 1996 totaled $350
million. The cash generated from continuing operating activities, $249 million
provided from the sales of marketable equity securities and property, plant and
equipment and $79 million provided by discontinued operations was utilized to
finance net cash flows for acquisitions of $202 million, capital expenditures of
$115 million, dividends of $143 million and debt reduction of $227 million.
 
     In connection with accounting for purchase business combinations, Cooper
records, to the extent appropriate, accruals for the costs of closing duplicate
facilities, severing redundant personnel and integrating the acquired business
into existing Cooper operations. Cash flow from operating activities for each of
the three years in the period ended December 31, 1998, is reduced by the amounts
expended on the various accruals established in connection with each
acquisition. At December 31, 1998, Cooper had accruals totaling $15.6 million
related to these activities. Cooper spent $5.7 million, $4.9 million and $3.4
million in 1998, 1997 and 1996, respectively. See Note 7 of the Notes to
Consolidated Financial Statements for further information.
 
  Debt
 
     During 1996, Cooper filed a shelf registration statement for $300 million
of medium-term notes and issued $50 million of five-year notes. During 1998,
Cooper issued the remaining $250 million of five-year notes at an average
interest rate of 6.2% under the existing shelf registration statement. The
issuance of additional notes will require the filing of a new registration
statement.
 
     During 1997 Cooper called for redemption its 7.05% Convertible Subordinated
Debentures. Cooper retired all $690 million of the debentures. Of these
debentures, a total of $610 million was converted to approximately 14.8 million
shares of Cooper Common stock and approximately $80 million was redeemed for
cash.
 
     Cooper has targeted a 35% to 45% debt-to-capitalization ratio and intends
to utilize cash flows to maintain a minimum debt-to-capitalization ratio of
approximately 35% with excess cash utilized to purchase shares of Cooper's
Common stock or fund acquisitions. The ratio of debt-to-total capitalization was
36.5%, 35.4% and 49.3% at year-end 1998, 1997 and 1996, respectively.
 
 
  Capital Expenditures and Commitments
 
     Capital expenditures on projects to reduce product costs, improve product
quality, increase manufacturing efficiency and operating flexibility, or expand
product capacity were $142 million in 1998, $117 million in 1997 and $115
million in 1996. Projected capital expenditures for 1999 are anticipated to
exceed 1998 expenditures by approximately 10%. The 1999 anticipated capital
spending represents approximately 65% for various cost-reduction and
capacity-maintenance projects, including machinery and equipment modernization
and enhancement and computer hardware and software projects; 11% for capacity
expansion; 5% related to environmental matters; and 19% for other items.
 
INTEREST RATE AND FOREIGN CURRENCY RISK
 
     Changes in interest rates and foreign currency exchange rates affect
Cooper's earnings and cash flows. In countries where Cooper has significant
investments and where practical, debt is either borrowed in the local functional
currency or foreign currency forward contracts are entered into to, in effect,
exchange U.S. dollar denominated debt into local functional currency debt. While
the purpose of borrowing in local functional currencies is primarily driven by
local tax considerations, it also reduces the cash flow risk as a significant
portion of cash 
                                      A-13
<PAGE>   14
flows generated by the operations are utilized to pay interest and principal on
the debt. The earnings risk is also reduced since interest expense is in the
same currency as the operating earnings are generated.
 
     Cooper uses forward foreign currency exchange contracts to reduce the risk
associated with changes in the exchange rates for firm commitments and
anticipated sales or purchases where a product is manufactured or purchased in
one country and sold or consumed in the manufacturing process in another
country. Cooper's policy is to hedge firm commitments to eliminate this risk if
natural hedges do not exist. Anticipated sales or purchases are hedged at the
discretion of the operating businesses. Substantially all forward contracts
expire within one year. At December 31, 1998, insignificant amounts of
anticipated sales and purchases were hedged. Cooper believes that the effects of
currency movements on the respective underlying hedged transactions offset any
gain or loss on forward exchange contracts.
 
     The table below provides information about Cooper's financial instruments
at December 31, 1998 that are sensitive to changes in interest rates. The table
presents principal cash flows by expected maturity dates and weighted average
interest rates for debt obligations.
 
<TABLE>
<CAPTION>
                          1999      2000      2001      2002       2003      THEREAFTER     TOTAL
                          ----     ------     -----     -----     ------     ----------     ------
                                              (IN MILLIONS, WHERE APPLICABLE)
<S>                       <C>      <C>        <C>       <C>       <C>        <C>            <C>
Long-term debt:
  Fixed rate............  $2.3     $  1.2     $51.1     $60.7     $153.2       $348.7       $617.2
  Average interest
     rate...............   6.3%       6.3%      6.4%      6.4%       6.5%         6.6%         6.4%
  Variable rate.........  $4.0     $100.5     $ 0.5     $ 0.5     $  0.9       $ 57.2       $163.6
  Average interest
     rate...............   5.3%       5.3%      5.4%      5.3%       5.3%         5.4%         5.3%
</TABLE>
 
     The table below provides information about Cooper's foreign currency
forward contracts in excess of $5 million at December 31, 1998. The contracts
mature during 1999. The table presents the notional amounts and weighted average
exchange rates. These notional amounts are used to calculate the contractual
payments to be exchanged under the contracts. All amounts are presented in U.S.
dollar equivalents.
 
 
<TABLE>
<CAPTION>
                                                                           1999
                                                              -------------------------------
                                                              (IN MILLIONS, WHERE APPLICABLE)
<S>                                                           <C>
U.S. Dollar Functional Currency
Buy German Deutschemark/Sell U.S. Dollars
  Notional amount...........................................              $ 132.2
  Average contract rate.....................................                  .61
Sell German Deutschemark/Buy U.S. Dollars
  Notional amount...........................................              $ 162.3
  Average contract rate.....................................                  .60
Buy Pounds Sterling/Sell U.S. Dollars
  Notional amount...........................................              $ 107.8
  Average contract rate.....................................                 1.65
Sell Pounds Sterling/Buy U.S. Dollars
  Notional amount...........................................              $ 175.3
  Average contract rate.....................................                 1.66
Canadian Dollar Functional Currency
Buy U.S. Dollars/Sell Canadian Dollars
  Notional amount...........................................              $  18.4
  Average contract rate.....................................                  .65
German Deutschemark Functional Currency
Sell Pounds Sterling/Buy German Deutschemark
  Notional amount...........................................              $   7.8
  Average contract rate.....................................                  .61
</TABLE>
                                      A-14
<PAGE>   15
 
     The table below provides information about Cooper's financial instruments
at December 31, 1997 that are sensitive to changes in interest rates. The table
presents principal cash flows by expected maturity dates and weighted average
interest rates for debt obligations.
 
<TABLE>
<CAPTION>
                                       1998     1999     2000    2001    2002    THEREAFTER   TOTAL
                                       -----   ------   ------   -----   -----   ----------   ------
                                                      (IN MILLIONS, WHERE APPLICABLE)
<S>                                    <C>     <C>      <C>      <C>     <C>     <C>          <C>
Long-term debt:
  Fixed rate.........................  $57.8   $235.7(1) $  0.5  $50.4   $60.3     $250.0     $654.7
  Average interest rate..............    6.0%     6.5%     6.5%    6.6%    6.6%       6.7%       6.0%
  Variable rate......................  $ 0.5   $ 58.4   $545.4   $ 0.5   $ 0.5     $ 70.5     $675.8
  Average interest rate..............    5.8%     5.7%     5.6%    6.1%    6.1%       6.1%       5.8%
</TABLE>
 
---------------
 
(1) Includes $235.2 of 6.0% DECS which are mandatorily exchangeable into shares
    of Wyman-Gordon common stock, or at Cooper's option, into cash in lieu of
    shares. Cooper delivered the Wyman-Gordon common stock upon redemption of
    the DECS in late 1998.
 
     The table below provides information about Cooper's financial instruments
at December 31, 1997 in excess of $5 million that are sensitive to foreign
currency exchange rate changes by functional currency. For foreign currency
denominated debt obligations, the table provides principal cash flows, weighted
average interest rates by expected maturity dates and the applicable foreign
currency exchange rate. For foreign currency forward contracts, the table
presents the notional amounts and weighted average exchange rates by contractual
maturity dates. These notional amounts are used to calculate the contractual
payments to be exchanged under the contracts. All amounts are presented in U.S.
dollar equivalents.
 
 
<TABLE>
<CAPTION>
                                                                 1998                2000
                                                              -----------         -----------
                                                              (IN MILLIONS, WHERE APPLICABLE)
<S>                                                           <C>                 <C>
U.S. Dollar Functional Currency
Long-term debt denominated in German Deutschemark...........         --             $ 128.3
Average interest rate.......................................         --                 4.0%
Foreign currency exchange rate..............................         --                 .56
Forward Exchange Contracts:
Sell Pounds Sterling/Buy U.S. Dollars
  Notional amount...........................................    $ 175.3                  --
  Average contract rate.....................................       1.66                  --
Buy Australian Dollars/Sell U.S. Dollars
  Notional amount...........................................    $   7.2                  --
  Average contract rate.....................................        .67                  --
Buy Italian Lira/Sell U.S. Dollars
  Notional amount...........................................    $   5.4                  --
  Average contract rate.....................................     .00057                  --
Pounds Sterling Functional Currency
Forward Exchange Contracts:
Buy U.S. Dollars/Sell Pounds Sterling
  Notional amount...........................................    $   5.0                  --
  Average contract rate.....................................       1.63                  --
</TABLE>
 
     See Note 16 of Notes to Consolidated Financial Statements for additional
information regarding the fair value of Cooper's financial instruments.
 
                      RECENTLY ISSUED ACCOUNTING STANDARDS
 
     See Note 1 of Notes to Consolidated Financial Statements.
 
                                      A-15
<PAGE>   16
 
                              REPORT OF MANAGEMENT
 
     The management of Cooper Industries is responsible for the preparation,
integrity and fair presentation of the accompanying Consolidated Financial
Statements. Such Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles and, as such, include
amounts based on informed estimates and judgments of management. Management also
prepared the other information included in the 1999 Proxy Statement and is
responsible for its accuracy and consistency with the Consolidated Financial
Statements.
 
     The Consolidated Financial Statements have been audited by an independent
accounting firm, Ernst & Young LLP, which was given unrestricted access to all
financial records and related data, including minutes of meetings of
shareholders, the Board of Directors and committees of the Board. Management
believes that all representations made to the independent auditors during their
audit were valid and appropriate.
 
     Cooper maintains a system of internal control designed to provide
reasonable assurance to Cooper's management and Board of Directors that assets
are safeguarded against loss, transactions are authorized, executed and recorded
in accordance with management's instructions, and accounting records are
reliable for preparing published financial statements. The system of internal
control includes: a documented organizational structure and division of
responsibility; regular management review of financial performance and internal
control activities; comprehensive written policies and procedures (including a
code of conduct to foster a sound ethical climate) that are communicated
throughout Cooper; and the careful selection, training and development of
employees. Cooper's internal audit department monitors the operation of the
internal control system and reports findings and recommendations to management
and the Audit Committee of the Board of Directors. Prompt corrective action is
taken to address control deficiencies and other opportunities for improving the
internal control system.
 
     The Audit Committee of the Board of Directors, which is composed entirely
of directors who are not officers or employees of Cooper, meets periodically
with management, the independent auditors, and the director of internal audit to
discuss the adequacy of internal control and to review accounting, reporting,
auditing and other internal control matters. The internal and independent
auditors have unrestricted access to the Audit Committee.
 
<TABLE>
<S>                           <C>                                    <C>
/s/ H. John Riley, Jr.        /s/ D. Bradley McWilliams              /s/ Terry A. Klebe
H. John Riley, Jr.            D. Bradley McWilliams                  Terry A. Klebe
Chairman, President and       Senior Vice President and              Vice President and
Chief Executive Officer       Chief Financial Officer                Controller
</TABLE>
 
                                      A-16
<PAGE>   17
 
                         REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Shareholders
Cooper Industries, Inc.
 
     We have audited the accompanying consolidated balance sheets of Cooper
Industries, Inc. as of December 31, 1998 and 1997, and the related consolidated
income statements and statements of shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cooper
Industries, Inc. at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
 
                                        /s/ Ernst & Young LLP
 
Houston, Texas
January 25, 1999
 
                                      A-17
<PAGE>   18
 
                            COOPER INDUSTRIES, INC.
 
                         CONSOLIDATED INCOME STATEMENTS
 
<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                              ------------------------------------
                                                                 1998         1997         1996
                                                              ----------   ----------   ----------
                                                              (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                                           <C>          <C>          <C>
Revenues....................................................   $3,651.2     $3,415.6     $3,380.5
 
Cost of sales...............................................    2,447.1      2,281.6      2,275.5
Selling and administrative expenses.........................      616.4        580.5        595.2
Goodwill amortization.......................................       43.8         32.4         31.5
Nonrecurring gains..........................................     (135.2)       (93.0)      (150.4)
Nonrecurring charges........................................       53.6         40.5         15.9
Interest expense............................................      101.9         90.4        142.1
                                                               --------     --------     --------
  Income from continuing operations before income taxes.....      523.6        483.2        470.7
Income taxes................................................      187.7        173.2        185.6
                                                               --------     --------     --------
  Income from continuing operations.........................      335.9        310.0        285.1
Income from discontinued operations, net of income taxes....       87.1         84.6         30.3
                                                               --------     --------     --------
          Net income........................................   $  423.0     $  394.6     $  315.4
                                                               ========     ========     ========
Income per Common share
  Basic:
     Income from continuing operations......................   $   2.97     $   2.64     $   2.66
     Income from discontinued operations....................        .77          .72          .28
                                                               --------     --------     --------
          Net income........................................   $   3.74     $   3.36     $   2.94
                                                               ========     ========     ========
  Diluted:
     Income from continuing operations......................   $   2.93     $   2.57     $   2.52
     Income from discontinued operations....................        .76          .69          .25
                                                               --------     --------     --------
          Net income........................................   $   3.69     $   3.26     $   2.77
                                                               ========     ========     ========
Cash dividends per Common share.............................   $   1.32     $   1.32     $   1.32
                                                               ========     ========     ========
</TABLE>
 
  The Notes to Consolidated Financial Statements are an integral part of these
                                  statements.
 
                                      A-18
<PAGE>   19
 
                            COOPER INDUSTRIES, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1998        1997
                                                              --------    --------
                                                                 (IN MILLIONS)
<S>                                                           <C>         <C>
                                      ASSETS
Cash and cash equivalents...................................  $   20.4    $   30.3
Receivables.................................................     626.4       596.4
Inventories.................................................     533.3       484.8
Deferred income taxes and other current assets..............     237.2       106.6
                                                              --------    --------
          Total current assets..............................   1,417.3     1,218.1
                                                              --------    --------
Net assets of discontinued operations.......................        --     1,973.7
Property, plant and equipment, less accumulated
  depreciation..............................................     710.5       673.3
Intangibles, less accumulated amortization..................   1,478.0     1,279.0
Investments in marketable equity securities.................        --       274.8
Deferred income taxes and other noncurrent assets...........     173.3        88.4
                                                              --------    --------
          Total assets......................................  $3,779.1    $5,507.3
                                                              ========    ========
 
                       LIABILITIES AND SHAREHOLDERS' EQUITY
 
Short-term debt.............................................  $  118.1    $  139.0
Accounts payable............................................     378.7       397.3
Accrued liabilities.........................................     467.6       426.8
Accrued income taxes........................................        --         5.5
Current maturities of long-term debt........................       6.3        58.3
                                                              --------    --------
          Total current liabilities.........................     970.7     1,026.9
                                                              --------    --------
Long-term debt..............................................     774.5     1,272.2
Postretirement benefits other than pensions.................     237.3       241.9
Deferred income taxes and other long-term liabilities.......     233.0       282.8
                                                              --------    --------
          Total liabilities.................................   2,215.5     2,823.8
                                                              --------    --------
Common stock, $5.00 par value...............................     615.0       615.0
Capital in excess of par value..............................     674.0       679.8
Retained earnings...........................................   1,790.0     1,514.5
Common stock held in treasury, at cost......................  (1,444.8)     (149.7)
Unearned employee stock ownership plan compensation.........     (40.6)      (66.5)
Accumulated other non-owner changes in equity...............     (30.0)       90.4
                                                              --------    --------
          Total shareholders' equity........................   1,563.6     2,683.5
                                                              --------    --------
          Total liabilities and shareholders' equity........  $3,779.1    $5,507.3
                                                              ========    ========
</TABLE>
 
  The Notes to Consolidated Financial Statements are an integral part of these
                                  statements.
 
                                      A-19
<PAGE>   20
 
                            COOPER INDUSTRIES, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                                1998       1997      1996
                                                              ---------   -------   -------
                                                                      (IN MILLIONS)
<S>                                                           <C>         <C>       <C>
Cash flows from operating activities:
  Net income................................................  $   423.0   $ 394.6   $ 315.4
  Less: income from discontinued operations.................      (87.1)    (84.6)    (30.3)
                                                              ---------   -------   -------
  Income from continuing operations.........................      335.9     310.0     285.1
  Adjustments to reconcile to net cash provided by operating
     activities:
     Depreciation and amortization..........................      137.5     122.0     132.7
     Deferred income taxes..................................       12.4      (6.6)    (59.8)
     Gain on sales of marketable equity securities and DECS
       exchange.............................................     (135.2)    (23.2)   (150.4)
     Gain on disposition of Kirsch..........................         --     (69.8)       --
     Changes in assets and liabilities:(1)
       Receivables..........................................        1.9     (40.6)     67.3
       Inventories..........................................      (31.1)    (17.6)     (2.1)
       Accounts payable and accrued liabilities.............       18.8      53.9      46.2
       Accrued income taxes.................................       (6.9)      3.1      (3.7)
       Other assets and liabilities, net....................       (0.4)     (6.5)     35.0
                                                              ---------   -------   -------
          Net cash provided by operating activities.........      332.9     324.7     350.3
                                                              ---------   -------   -------
Cash flows from investing activities:
  Proceeds from disposition of businesses...................    1,900.0     216.0       2.3
  Cash paid for acquired businesses.........................     (293.7)   (366.4)   (201.8)
  Capital expenditures......................................     (142.4)   (117.3)   (114.8)
  Purchase of TLG, plc common stock.........................      (42.4)       --        --
  Proceeds from sales of marketable equity securities.......       44.9        --     231.4
  Proceeds from sales of property, plant and equipment......        5.9       5.2      17.7
                                                              ---------   -------   -------
          Net cash provided by (used in) investing
            activities......................................    1,472.3    (262.5)    (65.2)
                                                              ---------   -------   -------
Cash flows from financing activities:
  Proceeds from issuances of debt...........................    1,220.7     564.7     316.0
  Repayments of debt........................................   (1,567.8)   (351.8)   (542.7)
  Acquisition of treasury shares............................   (1,348.1)   (191.5)       --
  Dividends.................................................     (148.8)   (157.4)   (142.6)
  Activity under employee stock plans and other.............       41.7      15.6       1.7
                                                              ---------   -------   -------
          Net cash used in financing activities.............   (1,802.3)   (120.4)   (367.6)
                                                              ---------   -------   -------
Cash provided by (used in) discontinued operations..........      (12.2)     74.2      78.5
Effect of exchange rate changes on cash and cash
  equivalents...............................................       (0.6)     (1.8)      2.4
                                                              ---------   -------   -------
Increase (decrease) in cash and cash equivalents............       (9.9)     14.2      (1.6)
Cash and cash equivalents, beginning of year................       30.3      16.1      17.7
                                                              ---------   -------   -------
Cash and cash equivalents, end of year......................  $    20.4   $  30.3   $  16.1
                                                              =========   =======   =======
</TABLE>
 
---------------
 
(1) Net of the effects of acquisitions, divestitures and translation.
 
     The Notes to Consolidated Financial Statements are an integral part of
these statements. See Note 17 for information on noncash investing and financing
activities.
 
                                      A-20
<PAGE>   21
 
                            COOPER INDUSTRIES, INC.
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                                                          UNEARNED
                                                     CAPITAL                              EMPLOYEE      ACCUMULATED
                                                    IN EXCESS                              STOCK         NON-OWNER
                                           COMMON    OF PAR     RETAINED   TREASURY    OWNERSHIP PLAN   CHANGES IN
                                           STOCK      VALUE     EARNINGS     STOCK      COMPENSATION      EQUITY       TOTAL
                                           ------   ---------   --------   ---------   --------------   -----------   --------
                                                                              (IN MILLIONS)
<S>                                        <C>      <C>         <C>        <C>         <C>              <C>           <C>
BALANCE DECEMBER 31, 1995................  $539.4    $141.6     $1,100.3   $      --      $(121.6)        $128.1      $1,787.8
                                                                                                                      --------
  Net income.............................                          315.4                                                 315.4
  Minimum pension liability adjustment...                                                                   (0.9)         (0.9)
  Translation adjustment.................                                                                    0.2           0.2
  Increase in unrealized gain on
    investments in marketable equity
    securities...........................                                                                   60.3          60.3
  Reclassification to realized gain......                                                                  (93.2)        (93.2)
                                                                                                                      --------
    Net income and other non-owner
       changes in equity.................                                                                                281.8
                                                                                                                      --------
  Common stock dividends.................                         (142.6)                                               (142.6)
  Stock issued under employee stock
    plans................................    0.5        4.4                                                                4.9
  Principal payments by ESOP.............                                                    28.7                         28.7
  Other activity.........................    0.3        4.1          2.2                                                   6.6
                                           ------    ------     --------   ---------      -------         ------      --------
BALANCE DECEMBER 31, 1996................  540.2      150.1      1,275.3          --        (92.9)          94.5       1,967.2
                                                                                                                      --------
  Net income.............................                          394.6                                                 394.6
  Minimum pension liability adjustment...                                                                   23.6          23.6
  Translation adjustment.................                                                                   (4.2)         (4.2)
  Decrease in unrealized gain on
    investments in marketable equity
    securities...........................                                                                   (9.1)         (9.1)
  Reclassification to realized gain......                                                                  (14.4)        (14.4)
                                                                                                                      --------
    Net income and other non-owner
       changes in equity.................                                                                                390.5
                                                                                                                      --------
  Common stock dividends.................                         (157.4)                                               (157.4)
  Conversion of 7.05% Convertible
    Subordinated debentures..............   73.9      536.3                                                              610.2
  Purchase of treasury shares............                                     (191.5)                                   (191.5)
  Stock issued under employee stock
    plans................................    0.7       (7.5)                    40.9                                      34.1
  Principal payments by ESOP.............                                                    26.4                         26.4
  Other activity.........................    0.2        0.9          2.0         0.9                                       4.0
                                           ------    ------     --------   ---------      -------         ------      --------
BALANCE DECEMBER 31, 1997................  615.0      679.8      1,514.5      (149.7)       (66.5)          90.4       2,683.5
                                                                                                                      --------
  Net income.............................                          423.0                                                 423.0
  Minimum pension liability adjustment...                                                                   (1.1)         (1.1)
  Translation adjustment.................                                                                   (8.4)         (8.4)
  Decrease in unrealized gain on
    investments in marketable equity
    securities...........................                                                                  (26.0)        (26.0)
  Reclassification to realized gain......                                                                  (84.9)        (84.9)
                                                                                                                      --------
    Net income and other non-owner
       changes in equity.................                                                                                302.6
                                                                                                                      --------
  Common stock dividends.................                         (148.8)                                               (148.8)
  Purchase of treasury shares............                                   (1,348.1)                                 (1,348.1)
  Stock issued under employee stock
    plans................................              (6.3)                    50.0                                      43.7
  Principal payments by ESOP.............                                                    25.9                         25.9
  Other activity.........................               0.5          1.3         3.0                                       4.8
                                           ------    ------     --------   ---------      -------         ------      --------
BALANCE DECEMBER 31, 1998................  $615.0    $674.0     $1,790.0   $(1,444.8)     $ (40.6)        $(30.0)     $1,563.6
                                           ======    ======     ========   =========      =======         ======      ========
</TABLE>
 
  The Notes to Consolidated Financial Statements are an integral part of these
                                  statements.
 
                                      A-21
<PAGE>   22
 
                            COOPER INDUSTRIES, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
PRINCIPLES OF CONSOLIDATION: The Consolidated Financial Statements include the
accounts of Cooper and its majority-owned subsidiaries. Affiliated companies are
accounted for on the equity method where Cooper owns more than 20% but less than
50% of the affiliate unless significant economic, political or contractual
considerations indicate that the cost method is appropriate.
 
USE OF ESTIMATES: 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
CASH EQUIVALENTS: For purposes of the Consolidated Statements of Cash Flows,
Cooper considers all investments purchased with original maturities of three
months or less to be cash equivalents.
 
INVENTORIES: Inventories are carried at cost or, if lower, net realizable value.
On the basis of current costs, 69% and 71% of inventories at December 31, 1998
and 1997, respectively, were carried on the last-in, first-out (LIFO) method.
The remaining inventories, which are primarily located outside the United
States, are carried on the first-in, first-out (FIFO) method.
 
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost.
Depreciation is provided over the estimated useful lives of the related assets
using primarily the straight-line method. This method is applied to group asset
accounts, which in general have the following lives: buildings -- 10 to 40
years; machinery and equipment -- 3 to 18 years; and tooling, dies, patterns and
other -- 3 to 10 years.
 
INTANGIBLES: Intangibles consist primarily of goodwill related to purchase
acquisitions. With minor exceptions, the goodwill is being amortized over 40
years from the respective acquisition dates. The carrying value of goodwill is
reviewed at the lowest level feasible whenever there are indications that the
goodwill may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on undiscounted cash flows over the remaining
amortization periods, the carrying value of the goodwill will be reduced by the
estimated shortfall in discounted cash flows.
 
INVESTMENTS IN MARKETABLE EQUITY SECURITIES: Marketable equity securities
received or retained in connection with the divestiture of businesses were
reflected as available-for-sale securities and stated at fair market value, with
unrealized gains and losses, net of tax, reported as a component of
shareholders' equity. The cost of securities sold was determined based on the
specific identification method for purposes of recording realized gains and
losses.
 
DERIVATIVE FINANCIAL INSTRUMENTS: On a recurring basis, foreign currency forward
exchange contracts and commodity contracts are entered into to reduce risks of
adverse changes in foreign exchange rates and commodity prices. All contracts
are hedges of actual or anticipated transactions with the gain or loss on the
contract recognized in the same period and in the same category of income or
expense as the underlying hedged transaction. Cooper does not enter into
speculative derivative transactions and only hedges anticipated transactions
when there is a high probability the transactions will occur. Due to the short
term of contracts and a restrictive policy, contract terminations or anticipated
transactions that do not occur are rare and insignificant events which are
accounted for through income in the period they occur. As discussed in Note 6,
in December 1995, Cooper hedged its investment in marketable equity securities
of Wyman-Gordon Company ("Wyman-Gordon"). Cooper currently is not a party to any
interest rate swap agreements used to manage its interest rate risk. Cooper's
policy is to recognize the interest rate differential to be received or paid
over the lives of the interest rate swap as an adjustment to interest expense.
 
COMMON STOCK BASED COMPENSATION: Cooper follows the intrinsic value method of
accounting for stock options and performance-based stock awards as prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees.
 
ACCUMULATED OTHER NON-OWNER CHANGES IN EQUITY: Effective January 1, 1998, Cooper
adopted Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS No. 130"). The adoption of this statement had no
impact on net income or shareholders' equity. SFAS No. 130 requires the
reporting of 

                                      A-22
<PAGE>   23
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
comprehensive income, which includes net income plus other non-owner changes in
equity, including unrealized gains or losses on investments in marketable equity
securities, the minimum pension liability adjustment and cumulative translation
adjustment. Net income plus other non-owner changes in equity has been reported
in the Consolidated Statements of Shareholders' Equity. Disclosures of the
components of accumulated non-owner changes in equity are included in Note 11.
 
SEGMENT AND GEOGRAPHIC INFORMATION: Effective January 1, 1998, Cooper adopted
the Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 131, Disclosures About Segments of an Enterprise and Related
Information ("SFAS No. 131"). SFAS No. 131 changes the way segment information
is presented from an industry segment approach to a management approach. Under
the management approach, segments are determined based on the operations
regularly reviewed by the chief operating decision maker to make decisions about
resources to be allocated to the segment and assess its performance. SFAS 131
also requires disclosures about products and services, geographic areas and
major customers. The adoption of SFAS 131 did not affect results of operations
or financial position, but did result in revised segment information disclosures
(See Note 15).
 
INTERNAL USE SOFTWARE: In March 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use ("SOP 98-1").
SOP 98-1 requires companies to capitalize qualifying computer software costs
incurred during the application development stage. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998 and permits early adoption.
Cooper adopted SOP 98-1 in the first quarter of 1998. The adoption had no impact
on net income as Cooper's policy was consistent with the requirements of this
statement.
 
START-UP ACTIVITIES: In April 1998, the AICPA issued Statement of Position 98-5,
Reporting on the Costs of Start-up Activities ("SOP 98-5"). SOP 98-5 requires
that all costs of start-up activities be expensed as incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998 and permits early
adoption. Cooper adopted this standard in the second quarter of 1998. The
adoption had no impact on net income as Cooper's policies are consistent with
this statement.
 
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES: In June 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities("SFAS No. 133"). SFAS No. 133 requires that all derivatives be
recognized as assets and liabilities and measured at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999 and early adoption is permitted. Cooper is
currently evaluating the effects of the new standard. Cooper does not anticipate
that the new standard will have an impact on net income. However, the new
standard requirement to mark to market certain of Cooper's financial instruments
utilized to hedge currency and commodity price risks will result in fluctuations
in the fair value being included in shareholders' equity, net of tax. Due to
Cooper's policies regarding financial instruments, it is not likely that the
adoption of the new standard will have a significant effect on Cooper's
Consolidated Balance Sheets.
 
NOTE 2: NONRECURRING ITEMS AND UNUSUAL ITEMS
 
     During the past three years Cooper has been transitioning into a business
focused on higher growth and less volatile businesses concentrated in electrical
products and tools and hardware. In 1995, Cooper divested the remaining
businesses comprising its former Petroleum and Industrial Equipment segment
through an exchange offer with shareholders for common stock of Cooper Cameron
Corporation ("Cooper Cameron"). On May 30, 1997, Cooper completed the sale of
its Kirsch window treatment division, a business that was underperforming and
did not fit with the core electrical products and tools and hardware businesses.
On October 9, 1998, Cooper completed the sale of its Automotive Products segment
(Note 19). In addition, over the past three years, Cooper has been realigning
its product lines and operations and positioning itself to compete more
efficiently in the global markets.
 
     Cooper retained minority interests in the common stock of Belden, Inc. from
the initial public offering in 1993 and Cooper Cameron from the 1995 exchange.
In 1994, Cooper sold its Cameron Forged Products business to                

                                   A-23
<PAGE>   24
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Wyman-Gordon Corporation ("Wyman-Gordon") and received Wyman-Gordon common stock
as part of the consideration. In 1995, the Wyman-Gordon common stock was
monitized through the issuance of DECS(SM) (Debt Exchangeable for Common Stock)
(Note 6). Cooper realized gains from the sale of Cooper's marketable equity
securities of Belden, Cooper Cameron and Wyman-Gordon, the DECS monitization,
and the sale of Kirsch over the past three years.
 
     In 1998, Cooper also initiated an acquisition of TLG, plc. The acquisition
was not consummated as Cooper could not justify exceeding an offer made by
another company. However, Cooper realized a gain from the sale of common stock
it had acquired at its offer price (Note 3).
 
     The gains before income taxes that Cooper recognized during the three years
ended December 31, 1998 are as follows:
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                               1998    1997     1996
                                                              ------   -----   ------
                                                                   (IN MILLIONS)
<S>                                                           <C>      <C>     <C>
DECS(SM) and Wyman-Gordon common stock......................  $132.7   $23.2   $   --
TLG, plc common stock.......................................     2.5      --       --
Sale of Kirsch..............................................      --    69.8       --
Belden and Cooper Cameron common stock......................      --      --    150.4
                                                              ------   -----   ------
                                                              $135.2   $93.0   $150.4
                                                              ======   =====   ======
</TABLE>
 
     In 1998, Cooper recorded a charge of $53.6 million for nonrecurring and
unusual items. The nonrecurring and unusual items consist of $26.4 million in
severance, $11.1 million for impairment of the assets of two product lines and
$16.1 million of other charges, including facility exit costs.
 
     During the fourth quarter of 1998, Cooper completed its formal annual
review of each of its operations and developed plans to strengthen the
competitiveness and efficiencies of each operation. In addition to the specific
plans for actions of each operation committed to by management during the fourth
quarter, Cooper also initiated and announced a voluntary and involuntary
severance program. Cooper has a formal written severance policy for salaried
personnel, and in certain operations, contractual severance obligations for
hourly personnel. While both the voluntary and involuntary severance programs
were announced in 1998, the amount that could be accrued in 1998 was limited to
severance relating to personnel actually severed in the fourth quarter and the
severance provided by established written policies. Cooper accrued a total of
$26.4 million in severance in the fourth quarter of 1998. Excluding positions
that will be eliminated but are not included in the severance accrual, a total
of 1,759 positions will be eliminated across Cooper. At December 31, 1998, a
total of 124 positions had been eliminated. At December 31, 1998, a total of
$25.4 million of the $26.4 million severance accrual remained to be expended.
Additional severance related to the voluntary program and additional severance
as the shut down or downsizing of plants and other facilities and other actions
are announced will be incurred.
 
     In the fourth quarter of 1998, Cooper also recorded a charge of $11.1
million for impairment of the assets of two electrical product lines. Market
conditions, including increased competition from imports, had reduced the
profitability of both of these product lines to negative amounts. Due to the
inability to recover the investments on an undiscounted cash flow basis, the
long-lived assets were written down to the greater of the discounted cash flows
or the fair market value. Cooper also recorded $16.1 million in other charges,
including facility exit costs. At December 31, 1998, a total of $7.8 million of
the $16.1 million charge remained to be expended. In addition to hourly and
certain voluntary and involuntary salaried severance, considerable facility exit
costs cannot be accrued until the closing of a facility is announced and the
costs are incurred. The charges in 1998 when combined with the nonrecurring
gains result in a net $53.0 million after income taxes ($.46 per diluted common
share) of nonrecurring and unusual items included in income from continuing
operations.
 
     In 1997, Cooper incurred charges of $40.5 million for actions management
committed to during the period after concluding an evaluation of geographic
manufacturing and distribution facilities within the Tools & Hardware segment
and information systems relating to year 2000 compliance efforts. The 1997
charges include impairment in the carrying value of assets and abandonment of
assets of $24.2 million and accruals for continuing obligations for 
                                      
                                      A-24
<PAGE>   25
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
replaced systems and facility consolidations of $16.3 million. The nonrecurring
gains in 1997, combined with nonrecurring charges and a $6.1 million income tax
benefit related to the settlements of certain state income tax matters (See Note
12), resulted in a net nonrecurring gain of $39.1 million after income taxes
($.32 per diluted share) being included in income from continuing operations.
 
     Cooper began consolidating certain international manufacturing and
distribution facilities in the Tools & Hardware segment during 1997. Adjustments
to the carrying value of assets and accruals were recorded for projects
committed to by management. Severance and certain other costs related to
projects committed to by management were not expensed until the affected
employees were notified and the costs incurred. A majority of the consolidations
were announced and such costs were accrued and expensed during 1997.
 
     During 1997, Cooper also assessed the ability of existing information
system capabilities to function at the turn of the century. Three of Cooper's
seven divisions implemented new enterprise systems with the remaining divisions
modifying or replacing existing software. Where possible, businesses have
abandoned home-grown or highly customized applications with purchased, year 2000
compliant replacements or upgrades. In some situations, operations within a
business abandoned existing software and migrated to consolidated hardware and
software that is year 2000 compliant. Where these solutions were not possible,
businesses either contracted with third parties or committed internal resources
to ensure that all major systems are year 2000 compliant. Of the 1997 total
charge, $28.5 million related to the adjustment in the carrying value of
abandoned hardware and software and liabilities related to hardware and
software.
 
     Cooper incurred nonrecurring charges totaling $15.9 million before income
taxes during 1996. A total of $3.0 million was incurred primarily related to a
write-down of property and equipment at a facility; $2.0 million in legal and
other costs related to sales of imported mini blinds containing lead paint; and
$10.9 million of corporate costs primarily related to environmental litigation.
The nonrecurring charges of $15.9 million did not affect future earnings, and
expenditures beyond 1996 were nominal. Nonrecurring gains combined with
nonrecurring charges in 1996 resulted in a net nonrecurring gain of $83.4
million after income taxes ($.67 per diluted share) being included in income
from continuing operations.
 
NOTE 3: ACQUISITIONS AND DIVESTITURES
 
     In 1998, Cooper completed one large acquisition, ten small product-line
acquisitions and the divestiture of the Automotive Products segment. Seven
acquisitions were in the Tools & Hardware segment and four were in the
Electrical Products segment. In March 1998, the Company acquired INTOOL for a
total cost of $227.2 million. INTOOL manufactures and sells pneumatic and
electric assembly tools, precision-drilling equipment, fastening systems and
portable and fixed mounted tools used in industrial, automotive, aerospace and
energy markets. The ten small product line acquisitions had an aggregate cost of
$67.6 million. A total of $235.2 million in goodwill was recorded, on a
preliminary basis, with respect to the acquisitions. On October 9, 1998, Cooper
completed the sale of its Automotive Products segment for $1.9 billion (See Note
19).
 
     On September 4, 1998, Cooper announced its offer to acquire TLG, plc in a
transaction valued at approximately $535 million. On September 28, 1998, Cooper
announced that its offer to acquire TLG, plc had expired and would not be
extended due to a rival bid made to acquire TLG, plc for approximately $585
million. During the third quarter of 1998, Cooper acquired common stock of TLG,
plc for $42.4 million. The common stock was tendered to the rival bidder in
October 1998. Cooper realized a gain of approximately $1.6 million after income
taxes in the fourth quarter of 1998 from the sale of the common stock.
 
     In 1997, Cooper completed one large acquisition, five small product-line
acquisitions and the divestiture of Kirsch. In December 1997, Cooper acquired
Menvier-Swain Group plc ("Menvier") for a total cost of approximately $274.5
million. Menvier manufactures and markets emergency lighting, fire detection and
security systems, primarily in Europe. The five small product line acquisitions
had an aggregate cost of $164.1 million. A total of $343.8 million of goodwill
was recorded with respect to the acquisitions. All acquisitions were in the
Electrical Products segment. On May 30, 1997, Cooper completed the sale of its
Kirsch window treatment division for $216 million. For the five months ended May
30, 1997, and the year ended December 31, 1996, Kirsch had 
 
                                      A-25
<PAGE>   26
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
revenues of $97.4 million and $252.9 million, and operating earnings of $4.8
million and $20.0 million (net of $2.0 million in nonrecurring charges),
respectively. Kirsch was part of the Tools & Hardware segment.
 
     In 1996, Cooper completed five small product-line acquisitions and one
small divestiture. The total cost of the acquisitions was approximately $43.3
million. A total of $38.1 million of goodwill was recorded with respect to the
acquisitions. Three acquisitions and the divestiture were in the Electrical
Products segment and two acquisitions were in the Tools & Hardware segment.
 
     The acquisitions have been accounted for as purchases and the results of
the acquisitions are included in Cooper's consolidated income statements since
the respective acquisition dates.
 
NOTE 4: INVENTORIES
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                1998         1997
                                                              ---------    --------
                                                                  (IN MILLIONS)
<S>                                                           <C>          <C>
Raw materials...............................................  $   213.4    $  192.5
Work-in-process.............................................      114.7       119.2
Finished goods..............................................      275.6       246.8
Perishable tooling and supplies.............................       21.0        18.6
                                                              ---------    --------
                                                                  624.7       577.1
Excess of current standard costs over LIFO costs............      (91.4)      (92.3)
                                                              ---------    --------
          Net inventories...................................  $   533.3    $  484.8
                                                              =========    ========
</TABLE>
 
                                    
NOTE 5: PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLES
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                1998         1997
                                                              ---------    --------
                                                                  (IN MILLIONS)
<S>                                                           <C>          <C>
Property, plant and equipment:
  Land and land improvements................................  $    56.7    $   49.9
  Buildings.................................................      367.3       348.5
  Machinery and equipment...................................      716.3       707.8
  Tooling, dies and patterns................................      151.8       131.4
  All other.................................................      227.7       182.2
  Construction in progress..................................      110.0        79.5
                                                              ---------    --------
                                                                1,629.8     1,499.3
  Accumulated depreciation..................................     (919.3)     (826.0)
                                                              ---------    --------
                                                              $   710.5    $  673.3
                                                              =========    ========
 
Intangibles:
  Goodwill..................................................  $ 1,830.4    $1,589.3
  Other.....................................................       12.6        11.4
                                                              ---------    --------
                                                                1,843.0     1,600.7
  Accumulated amortization..................................     (365.0)     (321.7)
                                                              ---------    --------
                                                              $ 1,478.0    $1,279.0
                                                              =========    ========
</TABLE>
 
NOTE 6: INVESTMENTS IN MARKETABLE EQUITY SECURITIES
 
     At December 31, 1998, Cooper did not hold any investments in marketable
equity securities. At December 31, 1997, Cooper's investment in marketable
equity securities consisted of its investment in Wyman-Gordon common stock. In
December 1995, Cooper issued 16.5 million DECS at $13.50 which, at maturity,
were mandatorily 

                                      A-26



<PAGE>   27
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
exchangeable into shares of Wyman-Gordon common stock or, at
Cooper's option, into cash in lieu of shares. During 1997, Cooper exchanged a
portion of the DECS for Wyman-Gordon common stock and realized a gain of $23.2
million ($14.4 million after income taxes). The remaining DECS were exchanged
for Wyman-Gordon common stock upon redemption in December 1998 resulting in a
realized gain of $132.7 million ($84.9 million after income taxes).
 
     The DECS were a hedge of Cooper's investment in Wyman-Gordon common stock.
Prior to redemption, the unrealized gain on the investment in Wyman-Gordon
common stock was included in shareholders' equity as an unrealized gain on
investments in marketable equity securities, net of tax. At December 31, 1997,
Cooper's long-term debt included an increase in the market value of Wyman-Gordon
common stock related to the DECS of $47.9 million. The offset to the debt
increase, net of tax, decreased the unrealized gain on investments in marketable
equity securities included in shareholders' equity.
 
     The aggregate fair value of the marketable equity securities was $274.8
million and $367.1 million at December 31, 1997 and 1996, respectively. Gross
unrealized gains on investments in marketable equity securities were $218.5
million ($170.6 million, net of the increase in the fair market value of the
DECS) and $300.8 million ($207.1 million, net of the increase in the fair market
value of the DECS) at December 31, 1997 and 1996, respectively. During 1996,
Cooper sold its remaining Belden Inc. and Cooper Cameron common stock for
proceeds of $231.4 million, resulting in realized gains of $150.4 million.

NOTE 7: ACCRUED LIABILITIES
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              ----------------
                                                               1998      1997
                                                              ------    ------
                                                               (IN MILLIONS)
<S>                                                           <C>       <C>
Salaries, wages and employee benefit plans..................  $187.7    $188.2
Product and environmental liability accruals................    61.8      66.1
Commissions and customer incentives.........................    32.1      26.7
Facility integration of acquired businesses.................    15.6       6.2
Other (individual items less than 5% of total current
  liabilities)..............................................   170.4     139.6
                                                              ------    ------
                                                              $467.6    $426.8
                                                              ======    ======
</TABLE>
 
     At December 31, 1998, Cooper had accruals of $26.2 million with respect to
potential product liability claims and $75.2 million with respect to potential
environmental liabilities, including $39.6 million classified as a long-term
liability, based on Cooper's current estimate of the most likely amount of
losses that it believes will be incurred.
 
     The product liability accrual consists of $5.8 million of known claims with
respect to ongoing operations, $15.1 million of known claims for previously
divested operations and $5.3 million which represents an estimate of claims that
have been incurred but not yet reported. While Cooper is generally self-insured
with respect to product liability claims, Cooper has insurance coverage for
individual 1998 claims above $3.0 million. Insurance levels have varied from
year to year.
 
     Environmental remediation costs are accrued based on estimates of known
environmental remediation exposures. Such accruals are adjusted as information
develops or circumstances change. The environmental liability accrual includes
$23.1 million related to sites owned by Cooper and $52.1 million for retained
environmental liabilities related to sites previously owned by Cooper and
third-party sites where Cooper was a contributor. Third-party sites usually
involve multiple contributors where Cooper's liability will be determined based
on an estimate of Cooper's proportionate responsibility for the total cleanup.
The amount actually accrued for such sites is based on these estimates as well
as an assessment of the financial capacity of the other potentially responsible
parties.
 
     It has been Cooper's consistent practice to include the entire product
liability accrual and a significant portion of the environmental liability
accrual as current liabilities, although only approximately 10-20% of the
balance classified as current will be spent on an annual basis. The annual
effect on earnings for product liability is essentially equal to the amounts
disbursed. In the case of environmental liability, the annual expense is

 
                                      A-27
<PAGE>   28
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
considerably smaller than the disbursements, since the vast majority of Cooper's
environmental liability has been recorded in connection with acquired companies.
The change in the accrual balances from year to year reflects the effect of
acquisitions and divestitures as well as normal expensing and funding.
 
     Cooper has not utilized any form of discounting in establishing its product
or environmental liability accruals. While both product liability and
environmental liability accruals involve estimates that can have wide ranges of
potential liability, Cooper has taken a proactive approach and has managed the
costs in both of these areas over the years. Cooper does not believe that the
nature of its products, its production processes, or the materials or other
factors involved in the manufacturing process subject Cooper to unusual risks or
exposures for product or environmental liability. Cooper's greatest exposure to
inaccuracy in its estimates is with respect to the constantly changing
definitions of what constitutes an environmental liability or an acceptable
level of cleanup.
 
     In connection with acquisitions accounted for using the purchase method of
accounting, Cooper records, to the extent appropriate, accruals for the costs of
closing duplicate facilities, severing redundant personnel and integrating the
acquired business into existing Cooper operations. Significant accruals include
plant shut-down and realignment costs. The following table summarizes the
accrual balances and activity during each of the last three years:
 
<TABLE>
<CAPTION>
                                                              1998    1997    1996
                                                              -----   -----   -----
                                                                  (IN MILLIONS)
<S>                                                           <C>     <C>     <C>
ACTIVITY DURING EACH YEAR:
Balance, beginning of year..................................  $ 6.2   $14.8   $ 8.8
Spending....................................................   (5.7)   (4.9)   (3.4)
Kirsch disposition..........................................     --    (0.4)     --
Reclassifications...........................................     --    (4.0)    0.1
Acquisitions -- initial allocation..........................    9.9     1.4     4.1
Acquisitions -- final allocation adjustment.................    5.2    (0.1)    4.9
Translation.................................................     --    (0.6)    0.3
                                                              -----   -----   -----
Balance, end of year........................................  $15.6   $ 6.2   $14.8
                                                              =====   =====   =====
BALANCE BY CATEGORY OF ACCRUAL:
Plant shut-down and realignment.............................  $13.4   $ 5.8   $12.0
Facility relocations and severance..........................    0.1     0.4     0.1
Other realignment and integration...........................    2.1      --     2.7
                                                              -----   -----   -----
                                                              $15.6   $ 6.2   $14.8
                                                              =====   =====   =====
</TABLE>
 
     Plant shut-down and realignment includes the costs to terminate personnel,
shut down the facilities, terminate leases and similar costs. The spending
related primarily to downsizing and consolidating facilities. Facility
relocations and severance includes costs to consolidate sales and marketing
operations of the acquired companies into Cooper operations, termination costs
of redundant personnel and shut-down costs of redundant warehouses and the
acquired companies' headquarters. Other realignment and integration costs
includes costs to liquidate joint ventures, exit product lines and miscellaneous
costs.
 
     During the three years ended December 31, 1998, accruals reversed to income
were insignificant. Reclassifications in 1997 were related to lease obligations
on closed facilities reclassified to other accrued liabilities. The 1998
acquisitions -- initial allocation amount primarily relates to the INTOOL
acquisition. Acquisitions-final allocation adjustment represents adjustments to
goodwill for finalization of the purchase price allocations recorded in the
previous year. The 1998 acquisitions -- final allocation adjustment is due to
the acquisition of Menvier in December 1997. The 1996 acquisitions -- final
allocation adjustment is related to the acquisition of CEAG on the last business
day of 1995. The Menvier and CEAG acquisitions had insignificant accruals for
terminations and no significant individual exit plan costs were accrued.
Substantially all spending related to these accruals represented cash outlays by
Cooper.
 
                                      A-28
 
<PAGE>   29
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 8: LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1998      1997
                                                              ------   --------
                                                                (IN MILLIONS)
<S>                                                           <C>      <C>
5.6%* commercial paper maturing at various dates through
  January 1999..............................................  $100.0   $  400.0
6.41%-6.97% second series medium-term notes, due through
  2010......................................................   302.1      357.6
5.72%-6.45% third series medium-term notes, due through
  2008......................................................   300.0       50.0
6.0% exchangeable notes (DECS)..............................      --      235.2
3.98% Deutschemark denominated bank loan....................      --      128.3
6.41%* Pound Sterling bank loans and notes payable maturing
  at various dates through 2005.............................    29.3       88.2
5.17%* floating-rate ESOP notes, due 1999...................     3.5       16.0
Other.......................................................    45.9       55.2
                                                              ------   --------
                                                               780.8    1,330.5
Current maturities..........................................    (6.3)     (58.3)
                                                              ------   --------
Long-term portion...........................................  $774.5   $1,272.2
                                                              ======   ========
</TABLE>
 
---------------
 
* Weighted average interest rates at December 31, 1998. The weighted average
  interest rates on commercial paper, Pound Sterling bank loans and notes and
  ESOP notes were, 6.5%, 7.2% and 5.5%, respectively, at December 31, 1997.
 
     Cooper has U.S. committed credit facilities of $685 million that expire in
2000, and $315 million that expire in 1999.
 
     At December 31, 1998, Cooper had $866.1 million of its $1.0 billion U.S.
committed credit facilities available, after considering commercial paper
backup. At December 31, 1997, $551.7 million of its total $1.15 billion U.S.
committed credit facilities was available after considering commercial paper
backup. The agreements for the credit facilities require that Cooper maintain
certain financial ratios, including a prescribed limit on debt as a percentage
of total capitalization. Retained earnings are unrestricted as to the payment of
dividends, except to the extent that payment would cause a violation of the
prescribed limit on the debt to total capitalization ratio.
 
     Interest rates on Cooper's commercial paper and U.S. bank loans were
generally 2.8% below the U.S. prime rate during 1998 and 1997, respectively.
Total interest paid during 1998, 1997 and 1996 was $100 million, $107 million
and $141 million, respectively.
 
     Commercial paper of $100 million and $400 million was reclassified to
long-term debt at December 31, 1998 and 1997, respectively, reflecting Cooper's
intention to refinance these amounts during the twelve-month period following
the balance sheet date through either continued short-term borrowing or
utilization of available credit facilities. No debt or interest expense has been
allocated to discontinued operations.
 
     In December 1995, Cooper issued $222.8 million of three-year 6%
Exchangeable Notes (DECS). The notes were mandatorily exchangeable into shares
of Wyman-Gordon common stock owned by Cooper or, at Cooper's option, into cash
in lieu of shares. During 1997, Cooper exchanged a portion of the DECS ($33.8
million) for Wyman-Gordon common stock (See Note 6). The remaining DECS were
redeemed for shares of Wyman-Gordon common stock in December 1998. At December
31, 1997, Cooper's long-term debt included $47.9 million, which represented the
increase in the market value of the Wyman-Gordon common stock exchangeable into
the DECS. The offset to the debt increase, net of tax, decreased the unrealized
gain on investments in marketable equity securities, both of which were included
in shareholders' equity.
 
     During 1998, Cooper issued $250 million of five-year medium term notes at
an average interest rate of 6.17% under an existing shelf registration
statement. At December 31, 1998, all notes registered under the shelf
registration statement had been issued.
 
     The floating-rate ESOP notes are indebtedness of Cooper's ESOP. Cooper has
guaranteed the payment of the ESOP notes; accordingly, the notes are reported as
Cooper's debt (See Note 14).
                                      A-29
<PAGE>   30
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Effective January 1, 1995, Cooper exchanged all of the outstanding $1.60
Convertible Exchangeable Preferred Stock for $691.2 million of 7.05% Convertible
Subordinated Debentures due 2015 and $3.8 million in cash related to fractional
shares. During 1997, Cooper redeemed the outstanding debentures with a total of
$610 million converting to approximately 14.8 million shares of Cooper Common
stock and approximately $80 million being redeemed for cash.
 
     Maturities of long-term debt for the five years subsequent to December 31,
1998 are $6.3 million, $101.7 million, $51.6 million, $61.2 million and $154.1
million, respectively. The future net minimum lease payments under capital
leases and obligations under operating leases are not significant.
 
NOTE 9: COMMON AND PREFERRED STOCK
 
COMMON STOCK
 
     At December 31, 1998, 1997 and 1996, 250,000,000 shares of Common stock
were authorized of which 94,248,751 and 120,161,446 and 108,038,851 shares were
issued and outstanding at December 31, 1998, 1997 and 1996, respectively. During
the year ended December 31, 1998, Cooper purchased 26,891,548 shares as treasury
stock at an average price of $50.13 per share and 926,770 shares were issued in
connection with employee stock plans. During 1997, Cooper issued 14,785,831
shares in exchange for the redemption of the 7.05% Convertible Subordinated
Debentures (See Note 8). During the year ended December 31, 1997, Cooper
purchased 3,645,017 shares as treasury stock at an average price of $52.54 per
share and 813,387 of these shares were reissued in connection with employee
stock plans. At December 31, 1998, Cooper had 12,286,218 shares reserved for the
Dividend Reinvestment Plan, grants and exercises of stock options,
performance-based stock awards and subscriptions under the Employee Stock
Purchase Plan and other plans.
 
     Under the terms of the Dividend Reinvestment Plan, any holder of Common
stock may elect to have cash dividends and up to $24,000 per year in cash
payments invested in Common stock without incurring any brokerage commissions or
service charges.
 
     Under a Shareholder Rights Plan adopted by the Board of Directors in 1997,
share purchase Rights were declared as a dividend at the rate of one Right for
each share of Common stock. Each Right entitles the holder to buy one
one-hundredth of a share of Series A Participating Preferred Stock at a purchase
price of $225 per one one-hundredth of a share or, in certain circumstances
Common stock having a value of twice the purchase price. Each Right becomes
exercisable only in certain circumstances constituting a potential change of
control on a basis considered inadequate by the Board of Directors. The Rights
expire August 5, 2007 and, at Cooper's option, may be redeemed prior to
expiration for $.01 per Right.
 
PREFERRED STOCK
 
     At December 31, 1998 and 1997, Cooper was authorized to issue 1,340,750
shares of Preferred stock with no par value, 10,000,000 shares of $2.00 par
value Preferred stock and 2,821,079 shares of $1.00 par value Preferred stock.
At December 31, 1998 and 1997, no Preferred shares were issued or outstanding.
 
NOTE 10: STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
 
     Under Cooper stock option plans, officers, directors and key employees may
be granted options to purchase Cooper's Common stock at no less than 100% of the
market price on the date the option is granted.
 
Options generally become exercisable ratably over a three-year period commencing
one year from the date of grant and have a maximum term of ten years. The plans
also provide for the granting of performance-based stock awards to certain key
executives.
 
     Cooper follows the intrinsic value method of accounting for stock options
and performance-based stock awards as prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, no compensation expense is recognized under
Cooper's fixed stock option plans or Employee Stock Purchase Plan. Compensation
expense of $6.6 million, $8.2 million and $7.1 million was recognized in the
consolidated income statements during 1998, 1997 and 1996, respectively for the
performance-

                                     A-30
<PAGE>   31
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
based stock awards. If compensation expense for stock options and
performance-based stock awards granted under Cooper's stock-based compensation
plans was recognized using the alternative fair value method of accounting under
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, net income and earnings per share would have decreased by
approximately 1.6% in 1998 and 1.2% in 1997 and 1996. The fair value was
estimated on the date of grant, using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in 1998, 1997
and 1996, respectively: dividend yield of 2.3%, 2.8% and 3.2%, expected
volatility of 22.2%, 20.1% and 20.3%, risk free interest rates of 5.6%, 6.4% and
6.1% and expected lives of 7 years in both 1998 and 1997 and 6 years in 1996.
 
     A summary of the status of Cooper's fixed stock option plans for officers
and employees as of December 31, 1998 and activity during the three years ended
December 31, 1998 is presented below:
 
<TABLE>
<CAPTION>
                                             1998                    1997                   1996
                                     ---------------------   --------------------   --------------------
                                                  WEIGHTED               WEIGHTED               WEIGHTED
                                                  AVERAGE                AVERAGE                AVERAGE
                                                  EXERCISE               EXERCISE               EXERCISE
                                       SHARES      PRICE      SHARES      PRICE      SHARES      PRICE
                                     ----------   --------   ---------   --------   ---------   --------
<S>                                  <C>          <C>        <C>         <C>        <C>         <C>
Outstanding at beginning of year...   3,113,077    $43.55    3,189,083    $44.05    2,748,219    $46.48
Granted............................     968,200    $56.63      974,900    $45.06    1,044,000    $39.06
Exercised..........................  (1,075,905)   $45.00     (491,165)   $41.67      (12,679)   $39.06
Canceled...........................    (861,268)   $49.02     (559,741)   $50.68     (590,457)   $46.68
                                     ----------              ---------              ---------
Outstanding at end of year.........   2,144,104    $46.52    3,113,077    $43.55    3,189,083    $44.05
                                     ==========              =========              =========
Options exercisable at end of
  year.............................     782,509              1,361,573              1,571,842
Options available for grant at end
  of year..........................   4,264,190              4,706,406              5,760,467
</TABLE>
 
<TABLE>
<CAPTION>
                 OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE
------------------------------------------------------   ----------------------
                                 WEIGHTED
                    SHARES        AVERAGE     WEIGHTED     SHARES      WEIGHTED
                  OUTSTANDING    REMAINING    AVERAGE    EXERCISABLE   AVERAGE
   RANGE OF           AT        CONTRACTUAL   EXERCISE       AT        EXERCISE
EXERCISE PRICES    12/31/98        LIFE        PRICE      12/31/98      PRICE
---------------   -----------   -----------   --------   -----------   --------
<S>               <C>           <C>           <C>        <C>           <C>
    $39.06           827,378        6.2        $39.06      602,163      $39.06
$45.06 - $56.63..  1,316,726        8.8        $51.22      180,346      $45.06
                   ---------                               -------
                   2,144,104                               782,509
                   =========                               =======
</TABLE>
 
     During 1998, options to purchase 11,000 shares of Common stock were granted
to nonemployee directors at an exercise price of $63.78 and options for 4,000
shares were exercised at $24.00 per share. During 1997, options to purchase
9,000 shares of Common stock were granted to nonemployee directors at an
exercise price of $45.44 and options for 6,000 shares were exercised at $27.13
per share. During 1996, options to purchase 9,000 shares of Common stock were
granted to nonemployee directors at an exercise price of $42.13 and options for
8,000 shares were exercised at $27.00 per share. At December 31, 1998, options
under the director plans for 8,000 Common shares were exercisable at $14.69 to
$17.31 per share, and 159,400 shares were reserved for future grants.
 
EMPLOYEE STOCK PURCHASE PLAN
 
     Participants in the Employee Stock Purchase Plan receive an option to
purchase Common stock at a price that is the lesser of 90% of the market value
on the offering date or 100% of the market value on the purchase date. On
September 8, 1997, a total of 575,135 shares were sold to employees at $35.33
per share. At December 31, 1998, subscriptions for 402,739 shares of Common
stock were outstanding at $45.68 per share or, if lower, the average market
price on September 10, 1999, which is the purchase date. At December 31, 1998,
an aggregate of 3,042,973 shares of Common stock were reserved for future
issuance.
                                      A-31
<PAGE>   32
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 11: ACCUMULATED NON-OWNER CHANGES IN EQUITY
 
<TABLE>
<CAPTION>
                                                      MINIMUM    UNREALIZED    CUMULATIVE
                                                      PENSION      GAIN ON     TRANSLATION
                                                     LIABILITY   INVESTMENTS   ADJUSTMENT     TOTAL
                                                     ---------   -----------   -----------   -------
                                                                      (IN MILLIONS)
<S>                                                  <C>         <C>           <C>           <C>
Balance December 31, 1995..........................    $(25.5)     $ 167.3       $(13.7)     $ 128.1
Current year other non-owner changes in equity.....      (0.9)       (32.9)         0.2        (33.6)
                                                       ------      -------       ------      -------
Balance December 31,1996...........................     (26.4)       134.4        (13.5)        94.5
Current year other non-owner changes in equity.....      23.6        (23.5)        (4.2)        (4.1)
                                                       ------      -------       ------      -------
Balance December 31, 1997..........................      (2.8)       110.9        (17.7)        90.4
Current year other non-owner changes in equity.....      (1.1)      (110.9)        (8.4)      (120.4)
                                                       ------      -------       ------      -------
Balance December 31, 1998..........................    $ (3.9)     $    --       $(26.1)     $ (30.0)
                                                       ======      =======       ======      =======
</TABLE>
 
<TABLE>
<CAPTION>
                                        1998                           1997                           1996
                            -----------------------------   ---------------------------   ----------------------------
                            BEFORE       TAX                BEFORE      TAX               BEFORE       TAX
                              TAX     (EXPENSE)     NET      TAX     (EXPENSE)    NET       TAX     (EXPENSE)    NET
                            AMOUNT     BENEFIT    AMOUNT    AMOUNT    BENEFIT    AMOUNT   AMOUNT     BENEFIT    AMOUNT
                            -------   ---------   -------   ------   ---------   ------   -------   ---------   ------
                                                                  (IN MILLIONS)
<S>                         <C>       <C>         <C>       <C>      <C>         <C>      <C>       <C>         <C>
Minimum pension liability
  adjustment..............  $ (1.8)     $ 0.7     $ (1.1)   $39.3     $(15.7)    $23.6    $ (1.5)    $  0.6     $ (0.9)
                            -------     -----     -------   ------    ------     ------   -------    ------     ------
Increase (decrease) in
  unrealized gain during
  the year................   (40.6)      14.6      (26.0)   (14.7)       5.6      (9.1)     92.8      (32.5)      60.3
Less reclassification
  adjustment for realized
  gains...................  (132.7)      47.8      (84.9)   (23.2)       8.8     (14.4)   (150.4)      57.2      (93.2)
                            -------     -----     -------   ------    ------     ------   -------    ------     ------
Net unrealized gain on
  investments.............  (173.3)      62.4     (110.9)   (37.9)      14.4     (23.5)    (57.6)      24.7      (32.9)
                            -------     -----     -------   ------    ------     ------   -------    ------     ------
Translation adjustment....   (12.9)       4.5       (8.4)    (6.4)       2.2      (4.2)      0.2         --        0.2
                            -------     -----     -------   ------    ------     ------   -------    ------     ------
Other non-owner changes in
  equity..................  $(188.0)    $67.6     $(120.4)  $(5.0)    $  0.9     $(4.1)   $(58.9)    $ 25.3     $(33.6)
                            =======     =====     =======   ======    ======     ======   =======    ======     ======
</TABLE>
 
                                      A-32
<PAGE>   33
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 12: INCOME TAXES
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               1998     1997     1996
                                                              ------   ------   ------
                                                              (IN MILLIONS, EXCEPT FOR
                                                                    PERCENTAGES)
<S>                                                           <C>      <C>      <C>
Components of income from continuing operations before
  income taxes:
  U.S. operations...........................................  $404.8   $405.5   $382.0
  Foreign operations........................................   118.8     77.7     88.7
                                                              ------   ------   ------
          Income from continuing operations before income
            taxes...........................................  $523.6   $483.2   $470.7
                                                              ======   ======   ======
Components of income tax expense:
  Current:
     U.S. Federal...........................................  $122.8   $131.0   $181.3
     U.S. state and local...................................    18.1     16.0     37.2
     Foreign................................................    34.4     32.8     26.9
                                                              ------   ------   ------
                                                               175.3    179.8    245.4
                                                              ------   ------   ------
Deferred:
     U.S. Federal...........................................    11.0     (4.5)   (54.2)
     U.S. state and local...................................    (2.7)    (0.6)   (14.0)
     Foreign................................................     4.1     (1.5)     8.4
                                                              ------   ------   ------
                                                                12.4     (6.6)   (59.8)
                                                              ------   ------   ------
          Income tax expense................................  $187.7   $173.2   $185.6
                                                              ======   ======   ======
Total income taxes paid.....................................  $184.4   $211.4   $155.0
                                                              ======   ======   ======
Effective tax rate reconciliation:
  U.S. Federal statutory rate...............................    35.0%    35.0%    35.0%
  State and local income taxes..............................     1.7      1.8      2.9
  Foreign statutory rate differential.......................    (0.5)    (1.0)      --
  Nondeductible goodwill....................................     2.2      2.3      2.4
  State tax settlements(1)..................................      --     (1.3)      --
  Foreign Sales Corporation.................................    (1.0)    (0.8)    (0.3)
  Tax credits...............................................    (0.8)    (1.0)    (0.2)
  Other.....................................................    (0.8)     0.8     (0.4)
                                                              ------   ------   ------
          Effective tax rate attributable to continuing
            operations......................................    35.8%    35.8%    39.4%
                                                              ======   ======   ======
</TABLE>
 
---------------
 
(1) During 1997, Cooper settled several state income tax matters and recognized
    a $6.1 million benefit in its income tax provision.
 
                                      A-33
<PAGE>   34
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1998      1997
                                                              -------   -------
                                                                (IN MILLIONS)
<S>                                                           <C>       <C>
Components of deferred tax liabilities and assets:
  Deferred tax liabilities:
     Property, plant and equipment and intangibles..........  $ (64.6)  $ (65.4)
     Unrealized net gain on investments in marketable equity
      securities and DECS...................................       --     (56.4)
     Deferred gain on marketable equity securities..........    (47.9)       --
     Inventories............................................    (24.9)    (34.0)
     Employee stock ownership plan..........................    (19.2)    (16.4)
     Pension plans..........................................    (27.4)    (22.3)
     Other..................................................    (41.0)    (64.5)
                                                              -------   -------
          Total deferred tax liabilities....................   (225.0)   (259.0)
                                                              -------   -------
  Deferred tax assets:
     Postretirement and other employee welfare benefits.....     94.2      92.2
     Accrued liabilities....................................    155.8     117.2
     Minimum pension liability..............................      2.6       1.9
     Capital loss carryforward(1)...........................    157.3        --
     Other..................................................     20.5      11.5
                                                              -------   -------
          Total deferred tax assets.........................    430.4     222.8
  Valuation allowance(1)....................................    (51.6)       --
                                                              =======   =======
          Net deferred tax asset (liability)................  $ 153.8   $ (36.2)
                                                              =======   =======
</TABLE>
 
---------------
 
(1) Cooper incurred a capital loss on the sale of the Automotive Products
    segment. The capital loss carryforward and valuation allowance are based on
    preliminary estimates and will be finalized upon the completion of
    appraisals and the finalization of other matters related to the sale and an
    allocation of sales proceeds to the various operations that comprised the
    former Automotive Products segment (See Note 19). The capital loss
    carryforward is available to offset capital gains through 2003.
 
     The U.S. Federal portion of the above provision includes U.S. tax expected
to be payable on the foreign portion of Cooper's income before income taxes when
such earnings are remitted. Cooper's liabilities for continuing operations at
December 31, 1998 and 1997 include the additional U.S. tax estimated to be
payable on all unremitted earnings of foreign subsidiaries.
 
NOTE 13: PENSION AND OTHER POSTRETIREMENT BENEFITS
 
     Cooper and its subsidiaries have numerous defined benefit pension plans and
other postretirement benefit plans. The benefits provided under Cooper's various
postretirement benefit plans other than pensions, all of which are unfunded,
include retiree medical care, dental care, prescriptions and life insurance,
with medical care accounting for approximately 90% of the total. Current
employees, unless grandfathered under plans assumed in acquisitions, are not
provided postretirement benefits other than pensions. The vast majority of the
annual other postretirement benefit expense is related to employees who are
already retired.
 
                                      A-34
<PAGE>   35
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                     OTHER
                                                                                POSTRETIREMENT
                                                           PENSION BENEFITS        BENEFITS
                                                           -----------------   -----------------
                                                            1998      1997      1998      1997
                                                           -------   -------   -------   -------
                                                                       (IN MILLIONS)
<S>                                                        <C>       <C>       <C>       <C>
Change in benefit obligation:
  Benefit obligation at January 1........................  $547.3    $580.6    $ 156.1   $ 204.4
  Service cost...........................................    13.3      13.8        0.3       0.5
  Interest cost..........................................    39.0      40.0       10.3      12.5
  Benefit payments.......................................   (49.2)    (46.5)     (13.7)    (16.2)
  Actuarial (gains) losses...............................    32.9      20.3       (0.5)    (20.1)
  Acquisitions...........................................     6.7       1.9        6.3        --
  Divestiture of Kirsch..................................      --     (57.9)        --     (25.0)
  Other..................................................     2.5      (4.9)        --        --
                                                           ------    ------    -------   -------
Benefit obligation at December 31........................   592.5     547.3      158.8     156.1
                                                           ------    ------    -------   -------
Change in plan assets:
  Fair value of plan assets at January 1.................   569.6     560.7         --        --
  Actual return on plan assets...........................    68.7      79.6         --        --
  Employer contributions.................................     6.4      24.8       13.7      16.2
  Benefit payments.......................................   (46.3)    (43.8)     (13.7)    (16.2)
  Acquisitions...........................................     7.0       1.9         --        --
  Divestiture of Kirsch..................................      --     (55.8)        --        --
  Other..................................................     1.4       2.2         --        --
                                                           ------    ------    -------   -------
Fair value of plan assets at December 31.................   606.8     569.6         --        --
                                                           ------    ------    -------   -------
Funded status............................................    14.3      22.3     (158.8)   (156.1)
Unrecognized actuarial gain..............................   (16.2)    (22.0)     (73.6)    (79.7)
Unrecognized prior service cost..........................    (0.2)     (0.2)      (4.9)     (6.1)
Other....................................................    (0.3)     (1.9)        --        --
                                                           ------    ------    -------   -------
Net amount recognized....................................  $ (2.4)   $ (1.8)   $(237.3)  $(241.9)
                                                           ======    ======    =======   =======
Amounts recognized in the balance sheet consist of:
  Prepaid benefit asset..................................  $ 68.1    $ 63.1    $    --   $    --
  Accrued benefit liability..............................   (79.4)    (72.3)    (237.3)   (241.9)
  Intangible asset.......................................     2.4       2.8         --        --
  Accumulated other non-owner changes in equity..........     6.5       4.6         --        --
                                                           ------    ------    -------   -------
Net amount recognized....................................  $ (2.4)   $ (1.8)   $(237.3)  $(241.9)
                                                           ======    ======    =======   =======
</TABLE>
 
     The projected benefit obligation and accumulated benefit obligation for
Cooper's unfunded defined benefit pension plans were $77.9 million and $71.7
million as of December 31, 1998, and $73.1 million and $67.2 million as of
December 31, 1997, respectively.
 
                                      A-35
<PAGE>   36
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                   OTHER POSTRETIREMENT
                                            PENSION BENEFITS             BENEFITS
                                        ------------------------   ---------------------
                                         1998     1997     1996    1998    1997    1996
                                        ------   ------   ------   -----   -----   -----
                                                         (IN MILLIONS)
<S>                                     <C>      <C>      <C>      <C>     <C>     <C>
Components of net periodic benefit
  cost:
 
Service cost..........................  $ 13.3   $ 13.8   $ 14.4   $ 0.3   $ 0.5   $ 0.5
Interest cost.........................    39.0     40.0     40.7    10.3    12.5    13.3
Expected return on plan assets........   (47.6)   (44.5)   (43.6)     --      --      --
Amortization of unrecognized
  transition asset....................    (1.5)    (1.4)    (1.1)     --      --      --
Amortization of prior service cost....     0.1      0.1     (0.2)   (1.4)   (1.8)   (2.5)
Recognized actuarial (gain) loss......    (0.1)     2.2      2.6    (6.6)   (5.5)   (4.1)
Curtailment...........................      --      0.5       --      --      --      --
                                        ------   ------   ------   -----   -----   -----
Net periodic benefit cost.............  $  3.2   $ 10.7   $ 12.8   $ 2.6   $ 5.7   $ 7.2
                                        ======   ======   ======   =====   =====   =====
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                              OTHER
                                                                                          POSTRETIREMENT
                                                        PENSION BENEFITS                     BENEFITS
                                                  -----------------------------   -----------------------------
                                                      1998            1997            1998            1997
                                                  -------------   -------------   -------------   -------------
<S>                                               <C>             <C>             <C>             <C>
Weighted average assumptions as of December 31:
 
Discount rate...................................  5 1/2%-6 3/4%       6%-7 1/2%      6 3/4%          6 3/4%
Expected return on plan assets..................  8 1/2%-9%       8 1/2%-9 3/4%        --              --
Rate of compensation increase...................      3%-5%           4%-6%            --              --
</TABLE>
 
     For other postretirement benefit measurement purposes, an 8.9% annual
increase in the per capita cost of covered health care benefits was assumed for
1999. The rate was assumed to decrease gradually to 5.5% for 2002 and remain at
that level thereafter. A one-percentage-point change in the assumed health care
cost trend rates would have the following effects:
 
<TABLE>
<CAPTION>
                                                             1-PERCENTAGE-    1-PERCENTAGE-
                                                             POINT INCREASE   POINT DECREASE
                                                             --------------   --------------
<S>                                                          <C>              <C>
Effect on total of service and interest cost components....      $ 1.0            $ (0.7)
Effect on the postretirement benefit obligation............      $13.6            $(11.1)
</TABLE>
 
     During 1998, 1997 and 1996, continuing operations expense with respect to
domestic and foreign defined contribution plans (primarily related to various
groups of hourly employees) totaled $15.7 million, $13.3 million and $14.5
million, respectively.
 
NOTE 14: COOPER SAVINGS AND EMPLOYEE STOCK OWNERSHIP PLANS
 
     All full-time domestic employees, except for certain bargaining unit
employees, are eligible to participate in the Cooper Retirement Savings and
Stock Ownership Plan ("CO-SAV"). Under the terms of the Plan, employee savings
deferrals are partially matched with contributions by Cooper of Common stock
consisting of either an allocation of shares in Cooper's Employee Stock
Ownership Plan ("ESOP") or new shares issued to the ESOP.
 
     Cooper makes annual contributions to the ESOP to fund the payment of
principal and interest on ESOP debt (See Note 8). All dividends received by the
ESOP are used to pay debt service. As the debt is repaid, unallocated shares are
allocated to participants to satisfy Cooper's matching obligation or to replace
dividends on allocated shares with Cooper Common shares.
 
     For shares purchased by the ESOP prior to 1994, compensation expense is
equal to Cooper's matching obligation, adjusted for the difference between the
fair market value and cost of the shares released. Compensation expense is
reduced by the amount of dividends paid on unallocated ESOP shares available for
future matching. In addition, all shares issued to the ESOP are considered
outstanding for purposes of computing earnings per share. 

                                      A-36
<PAGE>   37
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
For shares purchased by the ESOP in 1994, compensation expense is recorded equal
to the amount of Cooper's CO-SAV matching obligation, with the difference
between the fair market value and cost of shares released recorded as an
adjustment to capital in excess of par value. Dividends paid on unallocated
shares are recorded as a reduction of ESOP debt and accrued interest.
Unallocated shares are not treated as outstanding in the earnings per share
computation.
 
     Dividends paid on unallocated shares purchased prior to 1994 of $.8 million
and $1.6 million during 1998 and 1997, respectively, were used to reduce the
amount of cash required to fund principal and interest payments on ESOP debt.
Dividends paid on allocated ESOP shares purchased prior to 1994 of $4.8 million
and $4.7 million during 1998 and 1997, respectively, were used to pay additional
principal and interest payments in order to release shares equivalent to the
dividend amount to participants in the savings plan. Cooper contributed an
additional $14.1 million and $21.6 million in cash to the ESOP during 1998 and
1997, respectively, to fund principal and interest payments on debt associated
with shares purchased prior to 1994.
 
     During 1994, Cooper sold 1.6 million shares to the ESOP for $82.3 million
in cash. The 1994 sales were funded by loans between the ESOP and Cooper, which
for financial statement purposes are treated as eliminated intercompany loans.
The fair value of the remaining unallocated ESOP shares purchased during 1994
was $24.5 million at December 31, 1998. The number of allocated, committed to be
released, and unallocated ESOP shares held at December 31, 1998 and 1997 is
summarized below.
 
<TABLE>
<CAPTION>
                                                  SHARES PURCHASED      SHARES PURCHASED
                                                       IN 1994            PRIOR TO 1994
                                                  -----------------   ---------------------
                                                   1998      1997       1998        1997
                                                  -------   -------   ---------   ---------
<S>                                               <C>       <C>       <C>         <C>
Allocated.......................................  559,967   619,320   2,813,078   3,638,849
Committed to be released........................   11,991     8,156      47,793      60,510
Unallocated.....................................  513,823   692,942     321,969     725,412
</TABLE>
 
     Compensation expense for continuing operations from the CO-SAV plan and the
ESOP was $15.6 million, $13.1 million and $16.6 million and interest expense on
ESOP debt was $.4 million, $1.4 million and $2.7 million in 1998, 1997 and 1996,
respectively.
 
NOTE 15: INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION
 
INDUSTRY SEGMENTS
 
     Cooper's continuing operations consist of two segments: Electrical Products
and Tools & Hardware. Markets for Cooper's products and services are worldwide,
with the United States being the largest market.
 
     The Electrical Products segment manufactures and markets electrical and
electronic distribution and circuit protection products and lighting fixtures
for use in residential, commercial and industrial construction, maintenance and
repair and products for use by utilities and industries for primary power
distribution and control.
 
     The Tools & Hardware segment produces and markets tools and hardware items
for use in residential, commercial and industrial construction, maintenance and
repair and for general industrial and consumer use. Cooper also manufactured and
marketed window treatments through its Kirsch division until its sale on May 30,
1997. Historically, Kirsch was included in the Tools & Hardware segment.
Effective with the decision to divest the operation, its results were segregated
from the continuing Tools & Hardware segment for internal management reporting.
 
     The performance of businesses are evaluated at the segment level and
resources allocated between the segments. The Cooper executive responsible for
each segment further allocates resources between the various division operating
units that compose the segment and, in international markets, determines the
integration of product lines and operations across division operating units. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note 1. Cooper manages cash, debt
and income taxes centrally. Accordingly, Cooper evaluates performance of its
segments and operating units based on the operating earnings exclusive of
financing activities and income taxes. Nonrecurring and unusual items are

                                      A-37
<PAGE>   38
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
excluded from the evaluations. The segments are managed separately because they
manufacture and distribute distinct products. Intersegment sales and related
receivables for each of the years presented were insignificant.
 
     Financial information by industry segment was as follows:
 
<TABLE>
<CAPTION>
                                       REVENUES                 OPERATING EARNINGS               TOTAL ASSETS
                            ------------------------------   ------------------------   ------------------------------
                               YEAR ENDED DECEMBER 31,       YEAR ENDED DECEMBER 31,       YEAR ENDED DECEMBER 31,
                            ------------------------------   ------------------------   ------------------------------
                              1998       1997       1996      1998     1997     1996      1998       1997       1996
                            --------   --------   --------   ------   ------   ------   --------   --------   --------
                                                                  (IN MILLIONS)
<S>                         <C>        <C>        <C>        <C>      <C>      <C>      <C>        <C>        <C>
Electrical Products.......  $2,824.4   $2,568.3   $2,407.5   $479.0   $461.6   $408.3   $2,473.3   $2,441.7   $1,976.0
Tools & Hardware..........     826.8      749.9      720.1    112.4     99.6     91.4      903.8      561.7      569.7
Kirsch....................        --       97.4      252.9       --      4.8     22.0         --         --      217.6
                            --------   --------   --------   ------   ------   ------   --------   --------   --------
  Total management
    reporting.............  $3,651.2   $3,415.6   $3,380.5    591.4    566.0    521.7    3,377.1    3,003.4    2,763.3
                            ========   ========   ========
Segment nonrecurring and
  unusual items...........                                    (51.3)    31.4     (5.0)
                                                             ------   ------   ------
Net segment operating
  earnings................                                    540.1    597.4    516.7
 
General Corporate:
  Nonrecurring gains......                                    135.2     23.2    150.4
  Nonrecurring charges....                                     (2.3)    (2.1)   (10.9)
  Expense.................                                    (47.5)   (44.9)   (43.4)
Interest expense..........                                   (101.9)   (90.4)  (142.1)
                                                             ------   ------   ------
Consolidated income from
  continuing operations
  before income taxes.....                                   $523.6   $483.2   $470.7
                                                             ======   ======   ======
Corporate assets..........                                                                 402.0      530.2      592.3
Discontinued operations...                                                                    --    1,973.7    1,963.3
                                                                                        --------   --------   --------
Consolidated assets.......                                                              $3,779.1   $5,507.3   $5,318.9
                                                                                        ========   ========   ========
</TABLE>
 
                                      A-38
<PAGE>   39
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                              ELECTRICAL   TOOLS &                         CONSOLIDATED
                                               PRODUCTS    HARDWARE   KIRSCH   CORPORATE      TOTAL
                                              ----------   --------   ------   ---------   ------------
                                                                    (IN MILLIONS)
<S>                                           <C>          <C>        <C>      <C>         <C>
1998
  Depreciation..............................    $66.4       $25.9     $  --     $  1.4        $ 93.7
  Goodwill amortization.....................     35.9         7.9        --         --          43.8
  Nonrecurring gains........................       --          --        --      135.2         135.2
  Nonrecurring charges......................     42.6         8.7        --        2.3          53.6
  Capital expenditures......................     95.9        45.3        --        1.2         142.4
  Investment in unconsolidated affiliates...      8.6          --        --         --           8.6
  Other significant noncash item:
     Write-down of impaired long-lived
       assets...............................     11.1          --        --         --          11.1
1997
  Depreciation..............................    $61.2       $22.3     $ 4.2     $  1.9        $ 89.6
  Goodwill amortization.....................     27.9         4.2       0.3         --          32.4
  Nonrecurring gains........................       --          --      69.8       23.2          93.0
  Nonrecurring charges......................     15.9        22.5        --        2.1          40.5
  Capital expenditures......................     79.2        35.6       1.4        1.1         117.3
  Investment in unconsolidated affiliates...       .4         2.0        --         --           2.4
  Other significant noncash item:
     Write-down of impaired long-lived
       assets...............................     13.4        10.1        --         .7          24.2
1996
  Depreciation..............................    $63.4       $27.0     $ 8.2     $  2.6        $101.2
  Goodwill amortization.....................     26.9         3.9       0.7         --          31.5
  Nonrecurring gains........................       --          --        --      150.4         150.4
  Nonrecurring charges......................      3.0          --       2.0       10.9          15.9
  Capital expenditures......................     79.1        28.4       4.3        3.0         114.8
  Investment in unconsolidated affiliates...      1.6         2.0      19.1         --          22.7
</TABLE>
 
GEOGRAPHIC INFORMATION
 
     Revenues and long-lived assets by country are summarized below. Revenues
are attributed to geographic areas based on the location of the assets producing
the revenues.
 
<TABLE>
<CAPTION>
                                              REVENUES                    LONG-LIVED ASSETS
                                   ------------------------------   ------------------------------
                                     1998       1997       1996       1998       1997       1996
                                   --------   --------   --------   --------   --------   --------
                                                            (IN MILLIONS)
<S>                                <C>        <C>        <C>        <C>        <C>        <C>
United States....................  $2,815.7   $2,730.4   $2,666.7   $1,756.3   $1,755.6   $1,827.6
Germany..........................     226.1      197.7      248.4      171.4      149.0      176.6
Canada...........................     127.3      136.3      132.7        5.1        7.2       14.4
United Kingdom...................     164.1       72.4       64.5      302.3      310.7       57.8
Other foreign countries..........     318.0      278.8      268.2      126.7       93.0      101.0
                                   --------   --------   --------   --------   --------   --------
                                   $3,651.2   $3,415.6   $3,380.5   $2,361.8   $2,315.5   $2,177.4
                                   ========   ========   ========   ========   ========   ========
</TABLE>
 
                                      A-39
<PAGE>   40
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     International revenues by destination, based on the location products were
delivered, were as follows by segment:
 
<TABLE>
<CAPTION>
                                                               INTERNATIONAL REVENUES
                                                              ------------------------
                                                               1998     1997     1996
                                                              ------   ------   ------
                                                                   (IN MILLIONS)
<S>                                                           <C>      <C>      <C>
Electrical Products.........................................  $678.9   $612.7   $578.6
Tools & Hardware............................................   286.6    290.5    273.9
Kirsch......................................................      --     29.1     83.3
                                                              ------   ------   ------
                                                              $965.5   $932.3   $935.8
                                                              ======   ======   ======
</TABLE>
 
NOTE 16: OFF-BALANCE-SHEET RISK, CONCENTRATIONS OF CREDIT RISK AND FAIR
         VALUE OF FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVES
 
     As a result of having sales and purchases and other transactions
denominated in currencies other than the functional currencies used by Cooper's
businesses, Cooper is exposed to the effect of foreign exchange rate
fluctuations on its cash flows and earnings. To the extent possible, Cooper
utilizes natural hedges to minimize the effect on cash flows of fluctuating
foreign currencies. When natural hedges are not sufficient, it is Cooper's
policy to enter into forward foreign exchange contracts to hedge all significant
transactions for periods consistent with the terms of the underlying
transactions. Cooper does not engage in speculative transactions. While forward
contracts affect Cooper's results of operations, they do so only in connection
with the underlying transactions. Gains and losses on these contracts offset
losses and gains on the transactions being hedged. The volume of forward
activity engaged in by Cooper from year to year fluctuates in proportion to the
level of worldwide cross-border transactions, and contracts generally have
maturities that do not exceed one year.
 
     The table below summarizes, by currency, the contractual amounts of
Cooper's forward exchange contracts at December 31, 1998 and 1997.
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              ---------------
                                                               1998     1997
                                                              ------   ------
                                                               (IN MILLIONS)
<S>                                                           <C>      <C>
British Pound Sterling(1)...................................  $290.9   $175.3
German Deutschemark(2)......................................   298.2      4.0
Canadian Dollar.............................................    18.6       --
Italian Lira................................................     2.0      5.4
Australian Dollar...........................................     2.7      7.2
Dutch Guilder...............................................     3.5      2.5
Other.......................................................     9.9      9.9
                                                              ------   ------
                                                              $625.8   $204.3
                                                              ======   ======
</TABLE>
 
---------------
 
(1) $276.9 of the 1998 British Pound Sterling forward contracts were entered
    into in the fourth quarter of 1998 and mature in May 1999.
 
(2) $260.2 million of the 1998 German Deutschemark contracts were entered into
    in the fourth quarter of 1998 and matured in January 1999.
 
     In the normal course of business, Cooper has letters of credit, performance
bonds and other guarantees which are not reflected in the consolidated balance
sheets. In the past, no significant claims have been made against these
financial instruments. Management believes the likelihood of performance under
these instruments is minimal and expects no material losses to occur in
connection with these instruments. Cooper's other off-balance-sheet risks are
not material.
 

 
                                      A-40
<PAGE>   41
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
CONCENTRATIONS OF CREDIT RISK
 
     Concentrations of credit risk with respect to trade receivables are limited
due to the wide variety of customers and no one customer exceeding 3.5% of
accounts receivable. Credit risk is also limited by the world-wide markets into
which Cooper's products are sold, as well as their dispersion across many
different geographic areas.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     Cooper's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables, debt instruments and foreign
currency forward contracts. The book values of cash and cash equivalents, trade
receivables and trade payables are considered to be representative of their
respective fair values. Cooper had approximately $899 million and $1.5 billion
of debt instruments at December 31, 1998 and 1997, respectively. The book value
of these instruments was approximately equal to fair value at December 31, 1998
and 1997. Based on year-end exchange rates and the various maturity dates of the
foreign currency forward contracts, Cooper estimates that the contract value is
representative of the fair value of these items at December 31, 1998 and 1997.
 
NOTE 17: SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES
 
     The following noncash transactions have been excluded from the consolidated
statements of cash flows:
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               1998      1997       1996
                                                              -------   -------    ------
                                                                    (IN MILLIONS)
<S>                                                           <C>       <C>        <C>
Assets acquired and liabilities assumed or incurred
  From the acquisition of businesses:
  Fair value of assets acquired.............................  $ 349.8   $ 505.1    $ 66.1
  Cash used to acquire businesses, net of cash acquired.....   (293.7)   (366.4)    (37.8)(2)
                                                              -------   -------    ------
Liabilities assumed or incurred.............................  $  56.1   $ 138.7(1) $ 28.3
                                                              =======   =======    ======
Noncash increase in net assets from:
  Conversion of 7.05% Convertible Subordinated Debentures
     Into Cooper Common stock...............................  $    --   $ 610.0   $   --
  Exchange of DECS for Wyman-Gordon common stock............    235.2      33.8       --
</TABLE>
 
---------------
 
(1) Includes $46.2 million of notes payable exchanged for Menvier-Swain common
    stock.
 
(2) Excludes $164.0 million paid on January 6, 1996 for the acquisition of CEAG
    in December 1995.
 
                                      A-41
<PAGE>   42
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 18: NET INCOME PER COMMON SHARE
 
<TABLE>
<CAPTION>
                                                 BASIC                        DILUTED
                                      ---------------------------   ---------------------------
                                        YEAR ENDED DECEMBER 31,       YEAR ENDED DECEMBER 31,
                                      ---------------------------   ---------------------------
                                       1998      1997      1996      1998      1997      1996
                                      -------   -------   -------   -------   -------   -------
                                                ($ IN MILLIONS, SHARES IN THOUSANDS)
<S>                                   <C>       <C>       <C>       <C>       <C>       <C>
Income from continuing operations...  $ 335.9   $ 310.0   $ 285.1   $ 335.9   $ 310.0   $ 285.1
Income from discontinued
  operations........................     87.1      84.6      30.3      87.1      84.6      30.3
Interest expense on 7.05%
  Convertible Subordinated
  Debentures, net of income taxes...       --        --        --        --       5.8      29.2
                                      -------   -------   -------   -------   -------   -------
Net income applicable to Common
  stock.............................  $ 423.0   $ 394.6   $ 315.4   $ 423.0   $ 400.4   $ 344.6
                                      =======   =======   =======   =======   =======   =======
Weighted average Common shares
  outstanding.......................  113,266   117,459   107,284   113,266   117,459   107,284
                                      =======   =======   =======
Incremental shares from assumed
  conversions:
  Options, performance-based stock
     awards and other employee
     awards.........................                                  1,392     1,201       613
  7.05% Convertible Subordinated
     Debentures.....................                                     --     4,270    16,731
                                                                    -------   -------   -------
Weighted average Common shares and
  Common Share equivalents..........                                114,658   122,930   124,628
                                                                    =======   =======   =======
</TABLE>
 
NOTE 19: DISCONTINUED OPERATION
 
     On October 9, 1998, Cooper completed the sale of the Automotive Products
segment for cash proceeds of $1.9 billion.
 
     Cooper's results of operations and the related footnote information for all
periods presented herein excludes the results of the Automotive Products segment
from continuing operations' revenues and other components of income and expense.
The discontinued segment's results are presented separately in a single caption,
"Income from discontinued operations, net of income taxes". Revenues from the
discontinued Automotive Products segment were $1.5 billion for the period from
January 1, 1998 to October 9, 1998 and $1.9 billion during each of the years
ended December 31, 1997 and 1996. Income from the discontinued Automotive
Products segment was $87.1 million (net of $56.6 million of income taxes) for
the period from January 1, 1998 to October 9, 1998, $84.6 million (net of $58.9
million of income taxes) during the year ended December 31, 1997 and $30.3
million (net of $57.0 million of income taxes) during the year ended December
31, 1996.
 
     The Consolidated Balance Sheet as of December 31, 1997 and the Consolidated
Statements of Cash Flows for the years ended December 31, 1997 and 1996 and all
related footnote disclosures have been restated to reflect the Automotive
Products segment as a discontinued operation. The net assets of discontinued
operations at December 31, 1997 have been segregated into a single line, "Net
assets of discontinued operations" in the Consolidated Balance Sheets. The cash
flows from discontinued operations have been summarized into a single line "Cash
flows provided by (used in) discontinued operations" in the Consolidated
Statements of Cash Flows. No cash or debt has been allocated to the discontinued
operations.
 
     The pre-tax loss on the sale of $18.8 million was offset by a tax benefit.
Cooper sold the common stock of the entity that held a majority of the
Automotive Products segment assets domiciled in the United States and certain
investments in foreign subsidiaries. In certain countries the assets, net of
liabilities or investments in subsidiaries, were sold by existing Cooper
entities.
 
     Cooper's total income tax basis exceeded the book carrying amount of the
net assets exclusive of deferred income tax assets which generated a capital
loss carryforward. The amount of the capital loss carryforward will not be
finalized until appraisals are completed and the sales proceeds are allocated to
the various components of the Automotive Products segment.
 
     For financial reporting purposes, the sale of the common stock versus a
sale of the net assets of the Automotive Products segment resulted in a
realization of items (primarily goodwill amortization) that had reduced 
 

                                      A-42
<PAGE>   43
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
the book carrying amount without a corresponding income tax benefit. Cooper
limited the amount of tax benefits recognized based on an evaluation of the
amount of the capital loss carryforward that is expected to be realized before
it expires.
 
     Cooper does not currently anticipate that the finalization of matters
related to the sale will result in significant revisions to its estimates.
 
NOTE 20: UNAUDITED QUARTERLY OPERATING RESULTS
 
<TABLE>
<CAPTION>
                                                                       1998 (BY QUARTER)
                                                             -------------------------------------
                                                                1         2         3         4
                                                             -------   -------   -------   -------
                                                             (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                                          <C>       <C>       <C>       <C>
Revenues...................................................  $894.1    $951.2    $924.0    $881.9
 
Cost of sales..............................................   601.9     639.8     621.8     583.6
Selling and administrative expenses........................   154.8     156.7     151.0     153.9
Goodwill amortization......................................    10.1      11.1      11.2      11.4
Nonrecurring gains.........................................      --        --        --    (135.2)
Nonrecurring charges.......................................      --        --        --      53.6
Interest expense...........................................    25.3      27.4      34.8      14.4
                                                             ------    ------    ------    ------
Income from continuing operations before income taxes......   102.0     116.2     105.2     200.2
Income taxes...............................................    36.7      41.8      37.9      71.3
                                                             ------    ------    ------    ------
Income from continuing operations..........................    65.3      74.4      67.3     128.9
Income from discontinued operations, net of taxes..........    26.7      31.6      25.9       2.9
                                                             ------    ------    ------    ------
Net income.................................................  $ 92.0    $106.0    $ 93.2    $131.8
                                                             ======    ======    ======    ======
Income per Common share
Basic:
  Income from continuing operations........................  $ 0.55    $ 0.62    $ 0.59    $ 1.27
  Income from discontinued operations......................    0.22      0.27      0.23      0.03
                                                             ------    ------    ------    ------
  Net income...............................................  $ 0.77    $ 0.89    $ 0.82    $ 1.30
                                                             ======    ======    ======    ======
Diluted:
  Income from continuing operations(1).....................  $ 0.54    $ 0.62    $ 0.59    $ 1.26
  Income from discontinued operations......................    0.22      0.26      0.22      0.03
                                                             ------    ------    ------    ------
  Net income...............................................  $ 0.76    $ 0.88    $ 0.81    $ 1.29
                                                             ======    ======    ======    ======
</TABLE>
 
---------------
 
(1) Includes gains, net of nonrecurring expenses on the redemption of the DECS
    and sale of investments of $.52 in the fourth quarter.
 

                                        A-43
<PAGE>   44
                            COOPER INDUSTRIES, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                       1997 (BY QUARTER)
                                                             -------------------------------------
                                                                1         2         3         4
                                                             -------   -------   -------   -------
                                                             (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                                          <C>       <C>       <C>       <C>
Revenues...................................................  $848.4    $898.2    $830.3    $838.7
 
Cost of sales..............................................   577.7     601.6     554.4     547.9
Selling and administrative expenses........................   153.8     151.1     138.0     137.6
Goodwill amortization......................................     7.9       7.9       8.1       8.5
Nonrecurring gains.........................................      --     (69.8)    (23.2)       --
Nonrecurring charges.......................................      --      36.7       3.8        --
Interest expense...........................................    29.6      21.3      19.4      20.1
                                                             ------    ------    ------    ------
Income from continuing operations before income taxes......    79.4     149.4     129.8     124.6
Income taxes(1)............................................    29.4      55.6      48.2      40.0
                                                             ------    ------    ------    ------
Income from continuing operations..........................    50.0      93.8      81.6      84.6
Income from discontinued operations, net of taxes..........    27.7      11.7      20.9      24.3
                                                             ------    ------    ------    ------
Net income.................................................  $ 77.7    $105.5    $102.5    $108.9
                                                             ======    ======    ======    ======
Income per Common share
Basic:
  Income from continuing operations........................  $ 0.46    $ 0.79    $ 0.68    $ 0.71
  Income from discontinued operations......................    0.25      0.10      0.17      0.20
                                                             ------    ------    ------    ------
  Net income...............................................  $ 0.71    $ 0.89    $ 0.85    $ 0.91
                                                             ======    ======    ======    ======
Diluted:
  Income from continuing operations(2).....................  $ 0.45    $ 0.76    $ 0.67    $ 0.70
  Income from discontinued operations(3)...................    0.22      0.10      0.17      0.20
                                                             ------    ------    ------    ------
  Net income...............................................  $ 0.67    $ 0.86    $ 0.84    $ 0.90
                                                             ======    ======    ======    ======
</TABLE>
 
---------------
 
(1) Includes $6.1 million related to the favorable settlements of state income
    tax issues in the fourth quarter.
 
(2) Includes gains, net of nonrecurring expenses, on the sale of Kirsch of $.17
    in the second quarter, the exchange of the DECS of $.10 in the third quarter
    and $.05 related to the favorable settlements of state tax issues in the
    fourth quarter.
 
(3) Includes nonrecurring expenses of $.17 in the second quarter and $.05 in the
    third quarter.
 

                                      A-44