<PAGE>   1

                                   APPENDIX D

                            COOPER INDUSTRIES, INC.

<TABLE>
<S>                                                            <C>
Management's Discussion and Analysis of Financial Condition
  and Results of Operations.................................    D-1
Consolidated Financial Statements:
  Report of Management......................................   D-12
  Report of Independent Auditors............................   D-13
  Consolidated Income Statements for the three years ended
     December 31, 2000......................................   D-14
  Consolidated Balance Sheets as of December 31, 2000 and
     1999...................................................   D-15
  Consolidated Statements of Cash Flows for the three years
     ended December 31, 2000................................   D-16
  Consolidated Statements of Shareholders' Equity for the
     three years ended December 31, 2000....................   D-17
  Notes to Consolidated Financial Statements................   D-18
</TABLE>
<PAGE>   2

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

     This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, includes certain forward-looking
statements. The forward-looking statements reflect Cooper's expectations,
objectives and goals with respect to future events and financial performance,
and are based on assumptions and estimates which Cooper believes are reasonable.
Forward-looking statements include, but are not limited to, statements regarding
Cooper's facility consolidations and cost reductions programs and any statements
regarding future revenues, earnings, cash flows and capital expenditures. Cooper
wishes to caution readers not to put undue reliance on these statements and that
actual results could differ materially from anticipated results. Important
factors which may affect the actual results include, but are not limited to,
political developments, market and economic conditions, changes in raw material
and energy costs, industry competition, the net effects of Cooper's cost
reduction programs, changes in financial markets including foreign currency rate
fluctuations and changing legislation and regulations. The forward-looking
statements contained in this report are intended to qualify for the safe harbor
provisions of Section 21E of the Securities Exchange Act of 1934, as amended.

     The Notes to Consolidated Financial Statements contain information that is
pertinent to the following analysis.

                                    OVERVIEW

     During the last three calendar years, Cooper's continuing operations have
completed 27 acquisitions and one significant divestiture. The acquisitions have
been in complementary product lines that enhance areas of strength. The most
significant acquisitions in 2000 were Eagle Electric in March and B-Line Systems
in May. These two businesses added more than $350 million in revenues for the
year.

     On October 9, 1998, Cooper completed the sale of its Automotive Products
segment for $1.9 billion. This segment is reflected as a discontinued operation
in the Consolidated Financial Statements. Cooper used the proceeds from this
sale to reshape its capital structure through the purchase of 21.2 million
shares of Cooper Common stock for $1.0 billion and the repayment of $900 million
of debt in 1998. As a result, the reported results for 1999 are not comparable
to the 1998 results other than for segment operating earnings and net income per
share. In addition, actions taken to reduce the cost structure and improve
productivity subsequent to the Automotive Products segment divestiture resulted
in charges against earnings, expenses incurred as operations were consolidated,
and disruptions to the affected businesses. The following discussion provides
comparability of results where practical.

                             RESULTS OF OPERATIONS

REVENUES

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                      (IN MILLIONS)
<S>                                                           <C>        <C>        <C>
Electrical Products.........................................  $3,659.2   $3,060.9   $2,824.4
Tools & Hardware............................................     800.7      808.0      826.8
                                                              --------   --------   --------
          Total Revenues....................................  $4,459.9   $3,868.9   $3,651.2
                                                              ========   ========   ========
</TABLE>

     2000 vs. 1999 Revenues  Revenues in 2000 rose 15% compared to 1999.
Excluding the effects of acquisitions, revenues were slightly ahead of the prior
year period. Revenues, excluding recent acquisitions and the impact of foreign
currency translation, grew 2% compared to 1999.

     Electrical Products segment revenues represent 82% of 2000 revenues and
rose 20% over 1999. Excluding recent acquisitions, segment revenues were up 1%
compared to 1999. By further excluding the impact of foreign currency
translation, revenues for the Electrical Products segment grew 2% over the prior
year. Continued strong demand for circuit protection and electronic power
management products, along with solid growth in lighting products drove core
business revenue gains compared to 1999, partially offset by declines in
hazardous duty construction material sales which continued to be impacted by
delayed recovery in energy markets.

                                       D-1
<PAGE>   3

     The Tools & Hardware segment contributed 18% of total revenues in 2000.
Revenues were 1% below the prior year. The impact of translation reduced
revenues for 2000 by approximately 3%.

     1999 vs. 1998 Revenues  Revenues in 1999 grew 6% over 1998. After excluding
the effects of ten acquisitions, revenues were 2% ahead of the prior year. The
continuing 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 1% compared to 1998.

     Annual revenues for the Electrical Products segment rose 8% over the prior
year and contributed approximately 79% of Cooper's continuing revenues in 1999.
Excluding recent acquisitions, segment revenues grew 5% from 1998. Revenues in
all of the Electrical Products' businesses, except electrical construction
materials, were up over 1998. The strength of the U.S. economy and new product
introductions resulted in strong overall growth in North American sales.
European sales declined slightly primarily due to the strength of the U.S.
dollar. Sales of lighting fixtures benefited from a continued strong residential
and non-residential construction market and new product introductions. Sales of
circuit protection products and electrical components benefited from increased
sales to original equipment manufacturers. Increased shipments of electrical
distribution equipment following the fourth quarter 1998 implementation of a new
business system, also contributed to the year-over-year improvement.

     The Tools & Hardware segment contributed approximately 21% of Cooper's
continuing revenues in 1999. Revenues decreased 2% from the prior year. Without
the benefit of acquisitions, revenues declined 8% from the prior year. The
negative impact of translation reduced revenues for the year by approximately
2%. Assembly equipment sales, both domestically and internationally, grew over
the prior year. However, industrial tool sales to the aerospace industry
declined dramatically from the prior year and industrial tool markets were weak
throughout the year, both in North America and Europe.

SEGMENT OPERATING EARNINGS

     Cooper measures the performance of its businesses exclusive of nonrecurring
gains and 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. See Note 14 of the Notes to
Consolidated Financial Statements.

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               2000     1999     1998
                                                              ------   ------   ------
                                                                   (IN MILLIONS)
Segment Operating Earnings (internal management reporting --
excludes nonrecurring gains and charges):
<S>                                                           <C>      <C>      <C>
Electrical Products.........................................  $585.0   $516.7   $479.0
Tools & Hardware............................................    97.7     97.9    112.4
                                                              ------   ------   ------
          Total Segment Operating Earnings..................  $682.7   $614.6   $591.4
                                                              ======   ======   ======

Nonrecurring Gains and (Charges):
Electrical Products.........................................  $   --   $ (3.0)  $(42.6)
Tools & Hardware............................................      --     (4.3)    (8.7)
                                                              ------   ------   ------
          Continuing Segments...............................      --     (7.3)   (51.3)
Kirsch......................................................      --      2.8       --
                                                              ------   ------   ------
          Total.............................................  $   --   $ (4.5)  $(51.3)
                                                              ======   ======   ======
</TABLE>

                                       D-2
<PAGE>   4

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                                            ----------------------------
                                                                             2000       1999       1998
                                                                            ------     ------     ------
                                                                                   (IN MILLIONS)
Segment Operating Earnings (generally accepted accounting principles --
includes nonrecurring gains and charges):
<S>                                                                        <C>         <C>        <C>
Electrical Products...............................................          $585.0     $513.7     $436.4
Tools & Hardware..................................................            97.7       93.6      103.7
                                                                            ------     ------     ------
          Continuing Segment Operating Earnings...................           682.7      607.3      540.1
Kirsch............................................................              --        2.8         --
                                                                            ------     ------     ------
          Total Segment Operating Earnings........................          $682.7     $610.1     $540.1
                                                                            ======     ======     ======
</TABLE>

     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.

     2000 vs. 1999 Segment Operating Earnings Excluding Nonrecurring Gains and
Charges  Segment operating earnings grew 11% to $682.7 million in 2000 compared
to $614.6 million in 1999. Excluding the impact of recent acquisitions, segment
earnings in 2000 were up 1% over 1999.

     The Electrical Products segment operating earnings rose 13% to $585.0
million from $516.7 million for 1999. Excluding recent acquisitions, segment
earnings were up 1% compared to 1999. The earnings increase was driven mainly by
strong demand for circuit protection products from telecommunications and
electronic markets and productivity improvements across most business units.
This increase was partially offset by the slower demand for hazardous duty
construction materials. Excluding recent acquisitions, return on revenues for
the Electrical Products segment was 17.0% in 2000 compared with 16.9% in 1999,
reflecting Cooper's continued focus on cost reduction and efficiency
improvements.

     The Tools & Hardware segment operating earnings were $97.7 million compared
to $97.9 million in 1999. Acquisitions contributed 2% to operating earnings in
2000 compared to 1999. Earnings for the period were impacted by slightly lower
revenues and expenses related to plant consolidations and other rationalization
activities. Excluding recent acquisitions, return on revenues was 12.1% in 2000
as Cooper continued to rationalize its Tools and Hardware operations.

     1999 vs. 1998 Segment Operating Earnings Excluding Nonrecurring Gains and
Charges  Segment operating earnings for 1999 increased 4% over 1998.
Acquisitions contributed approximately $17 million or 3% to the increase in
segment operating earnings over the prior year. The continued strengthening of
the U.S. dollar against most functional currencies in which international
operations conduct business reduced segment operating earnings approximately 1%
compared to 1998.

     The Electrical Products segment operating earnings improved 8% to $516.7
million from $479.0 million in 1998. Excluding the incremental effect of
acquisitions, segment operating earnings were up 6% compared to the prior year.
The operating earnings growth was driven mainly by increased sales of lighting
products into the residential and non-residential construction markets and
greater shipments of circuit protection and electrical components. Also
contributing to the improvement in operating earnings were the benefits of cost
reduction programs. Lower shipments of hazardous duty construction materials and
inefficiencies in the electrical distribution equipment business, as the
business implemented a new information system, held down the increases for the
segment as a whole. Excluding nonrecurring items, return on revenues was 16.9%
in 1999 versus 17.0% in 1998. Excluding recently acquired businesses, the return
on revenues was 17.1% in 1999.

     The Tools & Hardware segment operating earnings were 13% below the prior
year. Without the benefit of acquisitions, operating earnings for 1999 were 19%
below 1998. The increase in assembly equipment shipments over the prior year and
the decrease in highly engineered industrial tools had a negative impact on
product mix and resulting earnings. Also impacting operating earnings were
manufacturing inefficiencies as operations adjusted to lower levels of
production and from disruptions related to restructuring projects. Translation
of international earnings reduced segment operating earnings approximately 2%
compared to 1998. Excluding nonrecurring items, return on revenues decreased to
12.1% in 1999 compared to 13.6% in 1998. Recent acquisitions had a nominal
impact. The decrease was primarily attributable to an unfavorable product mix
and manufacturing inefficiencies as operations adjusted to lower levels of
production and disruptions related to restructuring projects.

                                       D-3
<PAGE>   5

NONRECURRING GAINS AND CHARGES

     During the fourth quarter of 1998, Cooper announced a voluntary and
involuntary severance program and committed to consolidate several facilities.
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 Cooper's written formal policies. During the first quarter of 1999, Cooper
completed the voluntary program and accrued an additional $5.8 million primarily
representing the voluntary severance program premium over the severance provided
under Cooper's established policies. Cooper also accrued $1.5 million related to
severance and other costs for facility closures announced during the first
quarter of 1999. The additional accruals during the first quarter of 1999
totaled $7.3 million. In addition, during the first quarter of 1999, Cooper
reduced legal accruals by $2.8 million related to the favorable settlement of
certain litigation concerning lead in mini-blinds and reassessment of the
required reserve. Cooper also reached agreement and received $0.8 million under
an insurance policy related to the unsuccessful offer to acquire TLG plc in
1998. Since the original charge related to the litigation was included as a
nonrecurring item in the Tools & Hardware segment and the costs related to TLG
plc were reflected as a nonrecurring corporate item, the reversal of the accrual
and the reimbursement of the expenses were reflected as nonrecurring items.

     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 monetized through
the issuance of DECS(SM) (Debt Exchangeable for Common Stock) which matured in
three years and were mandatorily exchangeable into shares of Wyman-Gordon common
stock, or, at Cooper's option, into cash in lieu of shares. The DECS were
exchanged for Wyman-Gordon common stock upon redemption resulting in a $132.7
million realized gain in 1998.

     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 of $2.5 million from the sale
of common stock it had acquired at its offer price.

     In 1998, Cooper recorded a charge of $53.6 million for nonrecurring and
unusual items. Cooper completed its formal annual review of each of its
operations in the fourth quarter of 1998 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, affecting all divisions and the Corporate
office. 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. At December 31, 1998, a total of $25.4 million of
the $26.4 million severance accrual remained to be expended.

     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
estimated fair market value based on prices for similar assets. The reduction in
future depreciation expense as a result of the write-down was less than $2
million in 1999. 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 remained to be expended.

                                       D-4
<PAGE>   6

     The following table reflects activity related to the first quarter 1999 and
fourth quarter 1998 employee reduction and facility consolidation plan.

<TABLE>
<CAPTION>
                                                               NO. OF      ACCRUED      FACILITY
                                                              EMPLOYEES   SEVERANCE   CONSOLIDATION
                                                              ---------   ---------   -------------
                                                                                (IN MILLIONS)
<S>                                                           <C>         <C>         <C>
Balance at December 31, 1998................................    1,635      $ 25.4         $ 7.8
Voluntary Severance Program premium over normal severance...       --         5.8            --
Facility closings announced.................................      249         1.2           0.3
Employees terminated........................................     (966)         --            --
Cash expenditures...........................................       --       (22.0)         (3.4)
                                                                -----      ------         -----
Balance at December 31, 1999................................      918        10.4           4.7
Employees terminated........................................     (311)         --            --
Cash expenditures...........................................       --        (5.3)         (1.7)
                                                                -----      ------         -----
Balance at December 31, 2000................................      607      $  5.1         $ 3.0
                                                                =====      ======         =====
</TABLE>

     Cooper anticipates incurring approximately $5 million related to severance
costs, facility exit costs and disruptions to operations that could not be
accrued as of December 31, 2000. A majority of the $5 million relates to
operating inefficiencies, training, personnel and inventory relocation costs,
which are required to be expensed as incurred. These costs are expected to be
incurred throughout 2001 and are anticipated to be modestly less than the
savings from the anticipated cost reductions. Cooper anticipates that the
accrued severance and facility consolidation accruals will be expended during
2001 as terminated employees are paid, the additional employees leave the
employment of the Company and facility consolidations are completed.

     With the exception of the sale of the Automotive Products segment, the
actions committed to in 1998 and 1999 did not have a significant continuing
impact on revenues. See Note 2 of Notes to Consolidated Financial Statements for
additional information on nonrecurring gains and charges.

OTHER INCOME AND EXPENSE

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               2000      1999      1998
                                                              -------   -------   -------
                                                                     (IN MILLIONS)
<S>                                                           <C>       <C>       <C>
Segment Operating Earnings(1)...............................  $ 682.7   $ 610.1   $ 540.1
General Corporate:
  Nonrecurring Gains........................................       --       0.8     135.2
  Nonrecurring Charges......................................       --        --      (2.3)
  Expense...................................................    (32.5)    (37.1)    (47.5)
Interest Expense, net.......................................   (100.3)    (55.2)   (101.9)
                                                              -------   -------   -------
  Income from Continuing Operations before Income Taxes.....  $ 549.9   $ 518.6   $ 523.6
                                                              =======   =======   =======
</TABLE>

---------------

(1) Includes segment nonrecurring gains and nonrecurring charges.

     Corporate Nonrecurring Gains and Charges  See the "Nonrecurring Gains and
Charges" section above and Note 2 of Notes to Consolidated Financial Statements.

     General Corporate Expense  General corporate expenses decreased $4.6
million in 2000 compared to 1999. General corporate expenses, decreased $10.4
million in 1999. Reductions in personnel following the fourth quarter of 1998
divestiture of the Automotive Products segment, cost reduction efforts and lower
employee benefit-related costs were the primary contributors to the reductions.

     Interest Expense, net  Interest expense, net increased in 2000 by $45.1
million compared to 1999 primarily as a result of additional borrowings to fund
acquisitions and stock repurchases, partially offset by increased capitalized
interest. Interest expense, net decreased in 1999 to $55.2 million from $101.9
million in 1998 primarily as a result of utilizing $900 million of the
Automotive Products sale proceeds to reduce debt.

                                       D-5
<PAGE>   7

PERCENTAGE OF REVENUES

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                                ----------------------------
                                                                 2000       1999       1998
                                                                ------     ------     ------
<S>                                                             <C>        <C>        <C>
Revenues....................................................     100.0%     100.0%     100.0%
Cost of Sales...............................................      67.7%      67.3%      67.0%
Selling and Administrative..................................      16.4%      16.6%      16.9%
</TABLE>

     2000 vs. 1999 Percentage of Revenues  Cost of sales, as a percentage of
revenues, in 2000 increased four tenths of a point from 1999. This increase was
primarily due to recent acquisitions. Excluding the impact of acquisitions, cost
of sales as a percentage of revenues improved three tenths of a point to 67.0%,
compared to 67.3% for 1999. Selling and administrative expenses, as a percentage
of revenues, decreased two tenths of a point from 1999 due to lower general
corporate expense and the impact of acquisitions.

     1999 vs. 1998 Percentage of Revenues  Cost of sales, as a percentage of
revenues, in 1999 increased three tenths of a point from 1998. Recent
acquisitions increased cost of sales as a percentage of revenues two tenths of a
point in 1999. The remaining increase was primarily related to expenses from
reorganization activities and related production inefficiencies and lower
absorption of overhead costs due to reduced production levels in the Tools &
Hardware segment. Selling and administrative expenses, as a percentage of
revenues, were lower than the prior year by three tenths of a point. This
reduction in selling and administrative expenses as a percentage of revenues for
1999 was primarily due to reduced corporate expenses following the fourth
quarter 1998 divestiture of the Automotive Products business and cost
improvement efforts, somewhat offset by the loss of leverage from lower revenues
in the Tools & Hardware segment.

INCOME FROM CONTINUING OPERATIONS

     Income from continuing operations before and after income taxes and diluted
earnings per share from continuing operations are not comparable between 1999
and 1998 due to the sale of the Automotive Products segment in the fourth
quarter of 1998 and the use of the proceeds to repurchase 21.2 million shares of
Cooper Common stock for $1.0 billion and repay $900 million of debt. Cooper
estimates that the effects of the utilization of the proceeds and lower expenses
resulting from the divestiture substantially replaced the earnings per share of
the Automotive Products segment in 1999. Cooper believes that the only
meaningful comparison of the results for 1999 to 1998 is the comparison of the
diluted earnings per share for 1999 to the diluted earnings per share inclusive
of the Automotive Products segment earnings per share in 1998.

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                                -------------------------------------
                                                                  2000          1999          1998
                                                                ---------     ---------     ---------
                                                                (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                                             <C>           <C>           <C>
Income from continuing operations before income taxes.......     $549.9        $518.6        $523.6
  Excluding nonrecurring items..............................      549.9         522.3         442.0
Income taxes................................................      192.5         186.7         187.7
  Excluding nonrecurring items..............................      192.5         188.0         159.1
                                                                 ------        ------        ------
Income from continuing operations...........................     $357.4        $331.9        $335.9
                                                                 ======        ======        ======
  Excluding nonrecurring items..............................     $357.4        $334.3        $282.9

Diluted earnings per share from continuing operations.......     $ 3.80        $ 3.50        $ 2.93
                                                                 ======        ======        ======
  Excluding nonrecurring items..............................     $ 3.80        $ 3.52        $ 2.47
Diluted earnings per share -- net income....................     $ 3.80        $ 3.50        $ 3.69
                                                                 ======        ======        ======
  Excluding nonrecurring items..............................     $ 3.80        $ 3.52        $ 3.23
</TABLE>

     2000 vs. 1999 Income from Continuing Operations  Income from continuing
operations before income taxes for 2000, excluding net nonrecurring items,
increased 5% to $549.9 million from $522.3 million in 1999. The effective tax
rate for 2000 was 35%, a 1% decrease from the 1999 rate of 36%, excluding
nonrecurring items. Excluding nonrecurring items, income from continuing
operations increased 7% to $357.4 million from $334.3 million in 1999. Diluted
earnings per share -- net income, excluding nonrecurring items, increased 8% to
$3.80 from $3.52 in 1999.

                                       D-6
<PAGE>   8

     1999 vs. 1998 Income from Continuing Operations  Income from continuing
operations before income taxes for 1999, excluding net nonrecurring items,
increased 18% to $522.3 million from $442.0 million in 1998. Excluding income
taxes on both 1999 and 1998 nonrecurring items, the effective tax rate for 1999
and 1998 was 36%.

     The net nonrecurring charges for 1999 resulted in a $3.7 million charge
before income taxes and an after-tax charge of $2.4 million ($.02 per diluted
common share).

     The nonrecurring charges in 1998 when combined with the nonrecurring gains
resulted in a net $81.6 million gain before income taxes and a net $53.0 million
gain after income taxes ($.46 per diluted common share).

     Excluding the net after-tax impact from nonrecurring items in both years,
income from continuing operations increased 18% to $334.3 million from $282.9
million in 1998. Excluding nonrecurring items, diluted earnings per share -- net
income increased 9% to $3.52 in 1999 from $3.23 in 1998.

DISCONTINUED OPERATIONS

     The Automotive Products segment was sold on October 9, 1998 with Cooper
receiving $1.9 billion in proceeds. Cooper received an additional $149.1 million
in 1999 representing the reimbursement of Cooper's pre-closing cash funding of
international automotive operations and the earnings and additional cash
invested in the Automotive Products segment between March 31, 1998 and October
9, 1998. The discontinued segment's results for the period from January 1, 1998
to October 9, 1998 are presented separately in a single caption, "Income from
discontinued operations, net of income taxes." The cash flows from discontinued
operations are summarized into a single line "Cash used in discontinued
operations" in the Consolidated Statements of Cash Flows. No debt was allocated
to the discontinued operations and the income from discontinued operations does
not include an allocation of Cooper's interest expense.

     The book value of the Automotive Products segment's 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. Cooper's income tax basis exceeded the book carrying amount
of the net assets exclusive of deferred income taxes thereby generating a
capital loss carryforward. Cooper limited the amount of tax benefits recognized
and recorded a deferred tax valuation allowance of $51.6 million based on an
evaluation of the amount of capital loss carryforward that is expected to be
realized before it expires. The valuation allowance represents the excess of the
deferred tax asset arising from the capital loss carryforward over capital gains
recognized during the three years prior to the sale and anticipated capital
gains which could be generated in prudent feasible transactions prior to 2003.

EARNINGS OUTLOOK

     The following sets forth Cooper's general business outlook for 2001, based
on current expectations. The comparative figures for 2001 include the effects of
acquisitions made during 2000.

     Cooper expects revenues and operating earnings for the Electrical Products
segment to grow approximately 10% and return on sales to be approximately 16%.
Revenues and operating earnings for the Tools & Hardware segment are expected to
be relatively unchanged from the prior year and return on sales is expected to
be approximately 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)
slow growth in the domestic economy during the first part of the year and
modestly improving growth thereafter; (2) modest growth in European and Latin
American markets; (3) a gradual improvement in worldwide energy-related project
spending; (4) no significant change in raw material or energy costs; (5)
realization of benefits of cost reduction programs with no major disruptions
from those programs currently underway; and (6) 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, 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.

                                       D-7
<PAGE>   9

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 2000.

     During the three-year period ending in 2000, 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.

     Cooper's operating working capital increased $149 million in 2000 compared
to an increase of $135 million in 1999. The increase in operating working
capital for 2000 was due to acquisitions made during the year. Operating working
capital turnover for 2000 was 4.5 turns, declining from 4.6 turns in 1999, also
primarily due to acquisitions.

     In 1999, operating working capital increased $135 million. A majority of
the increase resulted from recent acquisitions. Operating working capital
turnover for 1999 of 4.6 turns declined from 5.0 turns in 1998. Higher operating
working capital levels to support consolidation and cost reduction programs in
several businesses and the impact of the new business system implementation at
one of the electrical product businesses offset the benefits from ongoing
improvement programs.

     In 1998, operating working capital 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.

CASH FLOWS

     Net cash provided by operating activities in 2000 totaled $503 million.
These funds, along with a net $404 million of additional debt, were used to fund
acquisitions of $580 million, capital expenditures of $175 million, share
repurchases of $39 million and dividends of $131 million.

     Net cash provided by operating activities in 1999 totaled $402 million.
These funds, along with $149 million in cash received from the disposition of
the Automotive Products segment, $31 million in cash received from the exercise
of stock options and a net increase in debt of $182 million were used to fund
capital expenditures of $166 million, acquisitions of $435 million, share
repurchases of $44 million and dividends of $124 million.

                                       D-8
<PAGE>   10

     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 $1.9 billion
in 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.

     Cooper currently anticipates a continuation of its long-term ability to
annually generate in excess of $200 million in cash flow available for
acquisitions, debt repayment and common stock repurchases.

     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 businesses
into existing Cooper operations. At December 31, 2000, Cooper had accruals
totaling $37.5 million related to these activities. Cash flows from operating
activities for each of the three years in the period ended December 31, 2000, is
reduced by the amounts expended on the various accruals established in
connection with each acquisition. Cooper spent $3.5 million, $4.8 million and
$5.7 million on these integration activities in 2000, 1999 and 1998,
respectively. See Note 6 of the Notes to Consolidated Financial Statements for
further information.

DEBT AND CAPITALIZATION

     In October 2000, Cooper issued Euro 300 million five-year bonds. The bonds
bear interest at 6.25% and mature in October 2005. The proceeds from the
borrowing were primarily used to repay existing commercial paper debt. During
1999, Cooper completed a shelf registration statement to issue up to $500
million of debt securities. At December 31, 2000, all $500 million of the shelf
registration was available to be issued.

     On February 10, 2000, Cooper increased the annual dividend on its common
stock by 8 cents per share to $1.40 or $.35 per quarter.

     During 2000 and 1999, Cooper repurchased 1.1 million shares and 0.8 million
shares of its Common stock at a cost of $39.3 million and $44.0 million,
respectively. 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 was directly related to the sale of the
Automotive Products segment. The remaining 1998 Common stock repurchases were
related to maintaining the debt-to-total capitalization ratio in the targeted
range and eliminating the dilutive effect of Common stock issued under employee
stock plans.

     Cooper has targeted a 35% to 45% debt-to-total capitalization ratio and
intends to utilize cash flows to maintain a debt-to-capitalization ratio within
this range. Excess cash will be utilized to purchase shares of Cooper's Common
stock or fund acquisitions. At December 31, 2000, 1999 and 1998, Cooper's
debt-to-total capitalization ratio was 44.4%, 38.4% and 36.5%, 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 $175 million in 2000, $166 million in 1999 and $142
million in 1998. Capital expenditures for 2000 included expenditures for a large
manufacturing facility in Mexico. Capital expenditures for 1999 and 1998
included significant expenditures for new system implementations. Capital
expenditures for 2001 are projected to approximate the same level as 2000
expenditures. Projected expenditures for 2001 include expenditures to expand
capacity for products serving the electronics and telecommunications markets and
a large hand tool manufacturing facility in Mexico currently under construction.
The 2001 anticipated capital spending represents approximately 45% for various
cost-reduction and capacity-maintenance projects, including machinery and
equipment modernization and enhancement and computer hardware and software
projects; 32% for capacity expansion; 5% related to environmental matters; and
18% 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. Cooper uses forward foreign currency exchange
contracts to reduce the risk associated with changes in the exchange rates for
firm commitments, 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

                                       D-9
<PAGE>   11

natural hedges do not exist. Substantially all forward contracts expire within
one year. 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, 2000 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>
                                           2001    2002     2003     2004     2005    THEREAFTER   TOTAL
                                           -----   -----   ------   ------   ------   ----------   ------
                                                          (IN MILLIONS, WHERE APPLICABLE)
<S>                                        <C>     <C>     <C>      <C>      <C>      <C>          <C>
Long-term debt:
  Fixed rate.............................  $50.6   $61.5   $153.8   $  0.5   $510.5     $119.5     $896.4
  Average interest rate..................    6.3%    6.3%     6.4%     6.5%     6.4%       6.5%       6.3%
  Variable rate..........................  $ 0.5   $ 0.5   $  0.5   $400.5   $ 25.7     $ 27.8     $455.5
  Average interest rate..................    6.7%    6.7%     6.7%     6.7%     5.7%       5.7%       6.7%
</TABLE>

     The table below provides information about Cooper's foreign currency
forward contracts in excess of $5 million at December 31, 2000. The contracts
mature during 2001. All amounts are presented in U.S. dollar equivalents. The
table presents the notional amounts and the weighted average contractual
exchange rates. These notional amounts are used to calculate the contractual
payments exchanged under the contracts.

<TABLE>
<CAPTION>
                                                                    2001
                                                              -----------------
                                                                (IN MILLIONS,
                                                              WHERE APPLICABLE)
<S>                                                           <C>
U.S. Dollar Functional Currency
Buy Pounds Sterling/Sell U.S. Dollars
  Notional amount...........................................       $ 17.6
  Average contract rate.....................................        1.476
Buy Euros/Sell U.S. Dollars
  Notional amount...........................................       $ 11.9
  Average contract rate.....................................        .9020
</TABLE>

     The table below provides information about Cooper's financial instruments
at December 31, 1999 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>
                                             2000   2001      2002       2003        2004      THEREAFTER   TOTAL
                                             ----   -----   --------   ---------   ---------   ----------   ------
                                                            (IN MILLIONS, WHERE APPLICABLE)
<S>                                          <C>    <C>     <C>        <C>         <C>         <C>          <C>
Long-term debt:
  Fixed rate...............................  $1.6   $51.8    $61.0      $153.8      $  0.5       $349.8     $618.5
  Average interest rate....................   6.3%    6.3%     6.4%        6.5%        6.5%         6.5%       6.3%
  Variable rate............................  $0.5   $ 0.5    $ 0.5      $  0.5      $220.5       $ 55.6     $278.1
  Average interest rate....................   6.1%    6.1%     6.1%        6.1%        5.9%         5.0%       6.1%
</TABLE>

     Information about Cooper's foreign currency forward contracts in excess of
$5 million at December 31, 1999 is presented below. The contracts matured during
2000. The notional amount is used to calculate the contractual payments
exchanged under the contracts. The notional amount represents the U.S. dollar
equivalent.

<TABLE>
<CAPTION>
                                                                    2000
                                                              -----------------
                                                                (IN MILLIONS,
                                                              WHERE APPLICABLE)
<S>                                                           <C>
U.S. Dollar Functional Currency
Buy German Deutschemarks/Sell U.S. Dollars
  Notional amount...........................................        $6.1
  Average contract rate.....................................         .52
</TABLE>

     See Note 15 of Notes to Consolidated Financial Statements for additional
information regarding the fair value of Cooper's financial instruments.

                                       D-10
<PAGE>   12

                                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.

     Cooper estimates that approximately 7% of its 2000 revenues and 10% of its
1999 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 its operations.

                      RECENTLY ISSUED ACCOUNTING STANDARDS

     See Note 1 of Notes to Consolidated Financial Statements.

                                       D-11
<PAGE>   13

                              REPORT OF MANAGEMENT

     The management of Cooper Industries is responsible for the preparation,
integrity and fair presentation of the accompanying Consolidated Financial
Statements. The 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 2001 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 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/ Jeffrey B. Levos
H. John Riley, Jr.                D. Bradley McWilliams             Jeffrey B. Levos
Chairman, President and Chief     Senior Vice President and Chief   Vice President and Controller
Executive Officer                 Financial Officer                 and Chief Accounting Officer
</TABLE>

                                       D-12
<PAGE>   14

                         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, 2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.

                                        /s/ ERNST & YOUNG LLP

Houston, Texas
January 23, 2001

                                       D-13
<PAGE>   15

                            COOPER INDUSTRIES, INC.

                         CONSOLIDATED INCOME STATEMENTS

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                              ------------------------------------
                                                                 2000         1999         1998
                                                              ----------   ----------   ----------
                                                              (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                                           <C>          <C>          <C>
Revenues....................................................   $4,459.9     $3,868.9     $3,651.2
Cost of sales...............................................    3,018.3      2,603.4      2,447.1
Selling and administrative expenses.........................      732.9        640.9        616.4
Goodwill amortization.......................................       58.5         47.1         43.8
Nonrecurring gains..........................................         --           --       (135.2)
Nonrecurring charges........................................         --          3.7         53.6
Interest expense, net.......................................      100.3         55.2        101.9
                                                               --------     --------     --------
          Income from continuing operations before income
            taxes...........................................      549.9        518.6        523.6
Income taxes................................................      192.5        186.7        187.7
                                                               --------     --------     --------
          Income from continuing operations.................      357.4        331.9        335.9
Income from discontinued operations, net of income taxes....         --           --         87.1
                                                               --------     --------     --------
          Net income........................................   $  357.4     $  331.9     $  423.0
                                                               ========     ========     ========
Income per Common share
  Basic:
     Income from continuing operations......................   $   3.82     $   3.53     $   2.97
     Income from discontinued operations....................         --           --          .77
                                                               --------     --------     --------
          Net income........................................   $   3.82     $   3.53     $   3.74
                                                               ========     ========     ========
  Diluted:
     Income from continuing operations......................   $   3.80     $   3.50     $   2.93
     Income from discontinued operations....................         --           --          .76
                                                               --------     --------     --------
          Net income........................................   $   3.80     $   3.50     $   3.69
                                                               ========     ========     ========
Cash dividends per Common share.............................   $   1.40     $   1.32     $   1.32
                                                               ========     ========     ========
</TABLE>

  The Notes to Consolidated Financial Statements are an integral part of these
                                  statements.

                                       D-14
<PAGE>   16

                            COOPER INDUSTRIES, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2000        1999
                                                              ---------   ---------
                                                                  (IN MILLIONS)
<S>                                                           <C>         <C>
                                      ASSETS

Cash and cash equivalents...................................  $    26.4   $    26.9
Receivables.................................................      828.8       740.3
Inventories.................................................      706.9       569.3
Deferred income taxes and other current assets..............      173.0       130.1
                                                              ---------   ---------
          Total current assets..............................    1,735.1     1,466.6
                                                              ---------   ---------
Property, plant and equipment, less accumulated
  depreciation..............................................      870.4       768.0
Goodwill, less accumulated amortization.....................    2,013.5     1,739.0
Deferred income taxes and other noncurrent assets...........      170.3       169.8
                                                              ---------   ---------
          Total assets......................................  $ 4,789.3   $ 4,143.4
                                                              =========   =========

                       LIABILITIES AND SHAREHOLDERS' EQUITY

Short-term debt.............................................  $   166.1   $   191.2
Accounts payable............................................      470.1       393.4
Accrued liabilities.........................................      486.3       492.5
Accrued income taxes........................................         --         6.6
Current maturities of long-term debt........................       51.1         2.1
                                                              ---------   ---------
          Total current liabilities.........................    1,173.6     1,085.8
                                                              ---------   ---------
Long-term debt..............................................    1,300.8       894.5
Postretirement benefits other than pensions.................      211.2       224.4
Other long-term liabilities.................................      199.5       195.6
                                                              ---------   ---------
          Total liabilities.................................    2,885.1     2,400.3
                                                              ---------   ---------
Common stock, $5.00 par value...............................      615.0       615.0
Capital in excess of par value..............................      663.3       671.7
Retained earnings...........................................    2,225.0     1,998.1
Common stock held in treasury, at cost......................   (1,470.0)   (1,449.3)
Unearned employee stock ownership plan compensation.........       (8.6)      (23.0)
Accumulated other nonowner changes in equity................     (120.5)      (69.4)
                                                              ---------   ---------
          Total shareholders' equity........................    1,904.2     1,743.1
                                                              ---------   ---------
          Total liabilities and shareholders' equity........  $ 4,789.3   $ 4,143.4
                                                              =========   =========
</TABLE>

  The Notes to Consolidated Financial Statements are an integral part of these
                                  statements.

                                       D-15
<PAGE>   17

                            COOPER INDUSTRIES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                               2000      1999       1998
                                                              -------   -------   ---------
                                                                      (IN MILLIONS)
<S>                                                           <C>       <C>       <C>
Cash flows from operating activities:
  Net income................................................  $ 357.4   $ 331.9   $   423.0
  Less: income from discontinued operations.................       --        --       (87.1)
                                                              -------   -------   ---------
  Income from continuing operations.........................    357.4     331.9       335.9
  Adjustments to reconcile to net cash provided by operating
     activities:
     Depreciation and amortization..........................    174.4     147.6       137.5
     Deferred income taxes..................................     98.8      60.0        12.4
     Gain on sales of marketable equity securities and DECS
      exchange..............................................       --        --      (135.2)
     Changes in assets and liabilities:(1)
       Receivables..........................................     (8.0)    (47.5)        1.9
       Inventories..........................................    (51.1)     (5.2)      (31.1)
       Accounts payable and accrued liabilities.............      5.6     (25.9)       18.8
       Accrued income taxes.................................    (52.3)      4.6        (6.9)
       Other assets and liabilities, net....................    (22.2)    (63.6)       (0.4)
                                                              -------   -------   ---------
          Net cash provided by operating activities.........    502.6     401.9       332.9
                                                              -------   -------   ---------
Cash flows from investing activities:
  Cash paid for acquired businesses.........................   (580.4)   (434.6)     (293.7)
  Capital expenditures......................................   (174.9)   (165.8)     (142.4)
  Purchase of TLG plc common stock..........................       --        --       (42.4)
  Proceeds from disposition of businesses...................       --     149.1     1,900.0
  Proceeds from sales of marketable equity securities.......       --        --        44.9
  Proceeds from sales of property, plant and equipment......     16.4      11.2         5.9
                                                              -------   -------   ---------
          Net cash provided by (used in) investing
            activities......................................   (738.9)   (440.1)    1,472.3
                                                              -------   -------   ---------
Cash flows from financing activities:
  Proceeds from issuances of debt...........................    878.5     250.9     1,220.7
  Repayments of debt........................................   (474.9)    (69.0)   (1,567.8)
  Acquisition of treasury shares............................    (39.3)    (44.0)   (1,348.1)
  Dividends.................................................   (130.6)   (124.4)     (148.8)
  Activity under employee stock plans and other.............      1.9      30.7        41.7
                                                              -------   -------   ---------
          Net cash provided by (used in) financing
            activities......................................    235.6      44.2    (1,802.3)
                                                              -------   -------   ---------
Cash used in discontinued operations........................       --        --       (12.2)
Effect of exchange rate changes on cash and cash
  equivalents...............................................      0.2       0.5        (0.6)
                                                              -------   -------   ---------
Increase (decrease) in cash and cash equivalents............     (0.5)      6.5        (9.9)
Cash and cash equivalents, beginning of year................     26.9      20.4        30.3
                                                              -------   -------   ---------
Cash and cash equivalents, end of year......................  $  26.4   $  26.9   $    20.4
                                                              =======   =======   =========
</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 16 for supplemental cash flow information.

                                       D-16
<PAGE>   18

                            COOPER INDUSTRIES, INC.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                  CAPITAL                              UNEARNED      ACCUMULATED
                                                 IN EXCESS                          EMPLOYEE STOCK    NONOWNER
                                        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, 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 nonowner
      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
  ESOP shares allocated...............               0.7                                   25.9                        26.6
  Other activity......................              (0.2)         1.3         3.0                                       4.1
                                        ------    ------     --------   ---------     ---------       ---------    --------
BALANCE DECEMBER 31, 1998.............  615.0      674.0      1,790.0    (1,444.8)        (40.6)          (30.0)    1,563.6
                                                                                                                   --------
  Net income..........................                          331.9                                                 331.9
  Minimum pension liability
    adjustment........................                                                                      1.1         1.1
  Translation adjustment..............                                                                    (40.5)      (40.5)
                                                                                                                   --------
    Net income and other nonowner
      changes in equity...............                                                                                292.5
                                                                                                                   --------
  Common stock dividends..............                         (124.4)                                               (124.4)
  Purchase of treasury shares.........                                      (44.0)                                    (44.0)
  Stock issued under employee stock
    plans.............................              (1.6)                    37.2                                      35.6
  ESOP shares allocated...............              (0.5)                                  17.6                        17.1
  Other activity......................              (0.2)         0.6         2.3                                       2.7
                                        ------    ------     --------   ---------     ---------       ---------    --------
BALANCE DECEMBER 31, 1999.............  615.0      671.7      1,998.1    (1,449.3)        (23.0)          (69.4)    1,743.1
                                                                                                                   --------
  Net income..........................                          357.4                                                 357.4
  Minimum pension liability
    adjustment........................                                                                      0.1         0.1
  Translation adjustment..............                                                                    (51.2)      (51.2)
                                                                                                                   --------
    Net income and other nonowner
      changes in equity...............                                                                                306.3
                                                                                                                   --------
  Common stock dividends..............                         (130.6)                                               (130.6)
  Purchase of treasury shares.........                                      (39.3)                                    (39.3)
  Stock issued under employee stock
    plans.............................              (4.9)                    15.7                                      10.8
  ESOP shares allocated...............              (2.5)                                  14.4                        11.9
  Other activity......................              (1.0)         0.1         2.9                                       2.0
                                        ------    ------     --------   ---------     ---------       ---------    --------
BALANCE DECEMBER 31, 2000.............  $615.0    $663.3     $2,225.0   $(1,470.0)    $    (8.6)      $  (120.5)   $1,904.2
                                        ======    ======     ========   =========     =========       =========    ========
</TABLE>

  The Notes to Consolidated Financial Statements are an integral part of these
                                  statements.

                                       D-17
<PAGE>   19

                            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, 64% and 69% of inventories at December 31, 2000
and 1999, 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.

GOODWILL: With minor exceptions, goodwill is amortized over 40 years from the
respective acquisition dates. At each balance sheet date presented, management
reviews the carrying value of long-lived assets and goodwill at the lowest level
feasible whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. If this review indicates that the carrying amount
will not be recoverable, as determined based on undiscounted cash flows over the
remaining amortization periods, an impairment loss is recognized. The impairment
loss equals the excess of the carrying amount over the fair value of the asset.
The fair value of the asset is based on prices for similar assets, if available,
or discounted cash flows.

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 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. Due
to the short term of the contracts and a restrictive policy, contract
terminations are rare and insignificant events which are accounted for through
income in the period they occur. Cooper currently is not a party to any interest
rate swap agreements. 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.

REVENUE RECOGNITION: Cooper recognizes sales when products are shipped. Accruals
for sales returns and other allowances are provided at the time of shipment
based upon experience. Shipping and handling costs of $124.6 million, $96.2
million and $84.5 million in 2000, 1999 and 1998, respectively are reported as a
reduction of revenues in the consolidated income statements.

COMMON STOCK BASED COMPENSATION: Cooper follows the intrinsic value method of
accounting for stock based compensation plans as prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.

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 as amended by SFAS No. 137 and 138, is effective
for fiscal years beginning after June 15, 2000. Cooper will adopt the new
statement effective January 1, 2001. SFAS No. 133 requires that all derivatives
be recognized as assets and liabilities and measured at fair value. Derivatives
that are not designated as hedges must be adjusted to fair value through income.
If the derivative is designated as a hedge,

                                       D-18
<PAGE>   20
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

changes in the fair value of the derivative will either be offset against the
fair value of the hedged asset, liability or firm commitment through earnings or
recognized in accumulated nonowner changes in equity until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. Based on Cooper's existing
derivative financial instruments at December 31, 2000 and the ongoing
utilization of these instruments, adoption of the new standard will not have a
significant effect on Cooper's consolidated results of operations, financial
position or cash flows.

NOTE 2: NONRECURRING ITEMS AND UNUSUAL ITEMS

     During the fourth quarter of 1998, Cooper announced a voluntary and
involuntary severance program and committed to consolidate several facilities.
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 Cooper's written formal policies. During the first quarter of 1999, Cooper
completed the voluntary program and accrued an additional $5.8 million primarily
representing the voluntary severance program premium over the severance provided
under Cooper's established policies. Cooper also accrued $1.5 million related to
severance and other costs for facility closures announced during the first
quarter of 1999. The additional accruals during 1999 totaled $7.3 million. In
addition, during 1999, Cooper reduced legal accruals by $2.8 million related to
the favorable settlement of certain litigation concerning lead in mini-blinds
and reassessment of the required reserve. Cooper also reached agreement and
received $0.8 million under an insurance policy related to the unsuccessful
offer to acquire TLG plc in 1998. Since the original charge related to the
litigation was included as a nonrecurring item in the Tools & Hardware segment
and the costs related to TLG plc were reflected as a nonrecurring corporate
item, the reversal of the accrual and the reimbursement of the expenses were
reflected as nonrecurring items. The net nonrecurring items for 1999 resulted in
a $3.7 million charge before income taxes and resulted in an after-tax charge of
$2.4 million ($.02 per diluted common share).

     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 monetized through
the issuance of DECS(SM) (Debt Exchangeable for Common Stock) (Note 10). Cooper
realized a $132.7 million gain from the sale of Cooper's marketable equity
securities of Wyman-Gordon and the DECS monetization during 1998.

     In 1998, Cooper 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 of $2.5 million from the sale of common
stock it had acquired at its offer price (Note 3).

     In 1998, Cooper recorded a $53.6 million charge for nonrecurring and
unusual items. Cooper completed its formal annual review of each of its
operations in the fourth quarter of 1998 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.

     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
estimated fair market value based on prices for similar assets. Cooper also
recorded $16.1 million in other charges, including facility exit costs. 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

                                       D-19
<PAGE>   21
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

     See "Nonrecurring Income and Expenses" in Management's Discussion and
Analysis of Financial Condition and Results of Operations for additional
information related to the 1999 and 1998 severance and facility consolidation
charges including spending, number of employees terminated and remaining accrual
balances.

NOTE 3: ACQUISITIONS AND DIVESTITURES

     In 2000, Cooper completed two large acquisitions and three small
product-line acquisitions in its Electrical Products segment and one small
acquisition in its Tools & Hardware segment for an aggregate cost of $578.4
million, subject to adjustment as provided in the acquisition agreements. A
total of $355.0 million in goodwill was recorded, on a preliminary basis, with
respect to the acquisitions. In March 2000, Cooper acquired Eagle Electric for a
total cost of $124.6 million. Eagle Electric manufactures and sells electrical
wiring devices including switches, receptacles, plugs and connectors, cords and
other electrical accessories to the residential and commercial markets. In May
2000, Cooper acquired B-Line Systems for a total cost of $430.6 million. B-Line
Systems manufactures and markets support systems and enclosures for electrical,
mechanical and telecommunications/data applications.

     In 1999, Cooper completed eight acquisitions in its Electrical Products
segment and two small acquisitions in its Tools & Hardware segment for an
aggregate cost of $443.8 million. The acquisitions include two businesses in the
United Kingdom and a business in France that expanded the product offerings of
the Cooper European based division, three domestic lighting businesses and four
other small product-line acquisitions. A total of $354.4 million in goodwill was
recorded, including an additional $16.2 million in 2000, with respect to the
acquisitions.

     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 $245.7 million in goodwill was recorded, including an
additional $10.5 million in 1999, with respect to the acquisitions. On October
9, 1998, Cooper completed the sale of its Automotive Products segment for $1.9
billion (See Note 18).

     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.

     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. The pro forma net income and earnings per
share for 2000, 1999 and 1998, assuming the acquisitions had been made at the
beginning of each year, would not be materially different from reported net
income and earnings per share.

                                       D-20
<PAGE>   22
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4: INVENTORIES

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                2000        1999
                                                              ---------   --------
                                                                 (IN MILLIONS)
<S>                                                           <C>         <C>
Raw materials...............................................  $   230.1   $  196.9
Work-in-process.............................................      134.6      133.6
Finished goods..............................................      404.5      299.5
Perishable tooling and supplies.............................       20.5       20.1
                                                              ---------   --------
                                                                  789.7      650.1
Excess of current standard costs over LIFO costs............      (82.8)     (80.8)
                                                              ---------   --------
          Net inventories...................................  $   706.9   $  569.3
                                                              =========   ========
</TABLE>

NOTE 5: PROPERTY, PLANT AND EQUIPMENT AND GOODWILL

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                2000        1999
                                                              ---------   --------
                                                                 (IN MILLIONS)
<S>                                                           <C>         <C>
Property, plant and equipment:
  Land and land improvements................................  $    51.5   $   51.6
  Buildings.................................................      408.9      356.0
  Machinery and equipment...................................      816.0      731.7
  Tooling, dies and patterns................................      191.1      168.0
  All other.................................................      290.2      267.6
  Construction in progress..................................      124.6      117.7
                                                              ---------   --------
                                                                1,882.3    1,692.6
  Accumulated depreciation..................................   (1,011.9)    (924.6)
                                                              ---------   --------
                                                              $   870.4   $  768.0
                                                              =========   ========
  Goodwill..................................................  $ 2,473.7   $2,143.6
  Accumulated amortization..................................     (460.2)    (404.6)
                                                              ---------   --------
                                                              $ 2,013.5   $1,739.0
                                                              =========   ========
</TABLE>

NOTE 6: ACCRUED LIABILITIES

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                2000        1999
                                                              ---------   --------
                                                                 (IN MILLIONS)
<S>                                                           <C>         <C>
Salaries, wages and employee benefit plans..................  $   207.9   $  201.2
Product and environmental liability accruals................       40.9       48.2
Commissions and customer incentives.........................       39.1       36.0
Facility integration of acquired businesses.................       37.5       10.8
Other (individual items less than 5% of total current
  liabilities)..............................................      160.9      196.3
                                                              ---------   --------
                                                              $   486.3   $  492.5
                                                              =========   ========
</TABLE>

     At December 31, 2000, Cooper had accruals of $16.3 million with respect to
potential product liability claims and $49.6 million with respect to potential
environmental liabilities, including $25.0 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 $3.4 million of known claims with
respect to ongoing operations, $7.9 million of known claims for previously
divested operations and $5.0 million which represents an estimate of

                                       D-21
<PAGE>   23
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 2000 claims above $3.0 million.

     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
$8.7 million related to sites owned by Cooper and $40.9 million for retained
environmental liabilities related to sites previously owned by Cooper and
third-party sites where Cooper was a potentially responsible party. 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 15-25% of the
balance classified as current is normally 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
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>
                                                              2000    1999    1998
                                                              -----   -----   -----
                                                                  (IN MILLIONS)
<S>                                                           <C>     <C>     <C>
ACTIVITY DURING EACH YEAR:
Balance, beginning of year..................................  $10.8   $15.6   $ 6.2
Spending....................................................   (3.5)   (4.8)   (5.7)
Acquisitions -- initial allocation..........................   28.6     1.2     9.9
Acquisitions -- final allocation adjustment.................    2.2    (0.3)    5.2
Translation.................................................   (0.6)   (0.9)     --
                                                              -----   -----   -----
Balance, end of year........................................  $37.5   $10.8   $15.6
                                                              =====   =====   =====
BALANCE BY CATEGORY OF ACCRUAL:
Plant shut-down and realignment.............................  $36.5   $ 9.5   $13.4
Other realignment and integration...........................    1.0     1.3     2.2
                                                              -----   -----   -----
                                                              $37.5   $10.8   $15.6
                                                              =====   =====   =====
</TABLE>

     Plant shut-down and realignment includes the costs to terminate personnel,
shut down the facilities, terminate leases and similar costs. Other realignment
and integration costs includes costs to exit product lines and miscellaneous
costs.

     During the three years ended December 31, 2000, accruals reversed to income
were insignificant. The annual spending was primarily related to downsizing and
consolidating facilities. The 2000 acquisitions-initial allocation

                                       D-22
<PAGE>   24
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amount is related to the Eagle Electric acquisition and includes approximately
$24.2 million for severance and related costs to terminate personnel and $4.4
million of one-time additional costs associated with shutting down manufacturing
operations and vacating existing facilities. 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 Menvier acquisition had insignificant accruals
for terminations and no significant individual exit plan costs were accrued.

NOTE 7: LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                                2000      1999
                                                              --------   ------
                                                                (IN MILLIONS)
<S>                                                           <C>        <C>
6.89%* commercial paper maturing at various dates through
  February 2001.............................................  $  400.0   $220.0
6.41%-6.97% second series medium-term notes, due through
  2010......................................................     302.1    302.1
5.78%-6.45% third series medium-term notes, due through
  2008......................................................     300.0    300.0
6.25% Euro bonds maturing in October 2005...................     279.4       --
5.67%* Pound Sterling notes payable maturing at various
  dates through 2005........................................      27.4     27.9
Other.......................................................      43.0     46.6
                                                              --------   ------
                                                               1,351.9    896.6
Current maturities..........................................     (51.1)    (2.1)
                                                              --------   ------
Long-term portion...........................................  $1,300.8   $894.5
                                                              ========   ======
</TABLE>

---------------

* Weighted average interest rates at December 31, 2000. The weighted average
  interest rates on commercial paper and Pound Sterling notes payable were,
  6.35% and 5.65%, respectively, at December 31, 1999.

     Cooper has U.S. committed credit facilities of $1,040 million, $490 million
of which expires in 2001 and $550 million expires in 2004. At December 31, 2000,
Cooper had $547.9 million of its $1,040 million U.S. committed credit facilities
available, after considering commercial paper backup. At December 31, 1999,
$816.2 million of its total $1,165 million 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.

     During 1999, Cooper completed a shelf registration statement to issue up to
$500 million of debt securities. At December 31, 2000, all $500 million of the
shelf registration was available to be issued.

     Interest rates on Cooper's commercial paper borrowings were generally 2.80%
and 2.85% below the U.S. prime rate during 2000 and 1999, respectively. Total
interest paid during 2000, 1999 and 1998 was $96 million, $63 million and $100
million, respectively. No interest expense has been allocated to discontinued
operations.

     Commercial paper of $400 million and $220 million at December 31, 2000 and
1999, respectively, was classified as long-term debt 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.

     Maturities of long-term debt for the five years subsequent to December 31,
2000 are $51.1 million, $62.0 million, $154.3 million, $401.0 million and $536.2
million, respectively. The future net minimum lease payments under capital
leases and obligations under operating leases are not significant.

                                       D-23
<PAGE>   25
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8: COMMON AND PREFERRED STOCK

COMMON STOCK

     At December 31, 2000, 1999 and 1998, 250,000,000 shares of Common stock
were authorized of which 93,413,244, 94,199,620 and 94,248,751 shares were
issued and outstanding at December 31, 2000, 1999 and 1998, respectively. During
the year ended December 31, 2000, Cooper purchased 1,138,500 shares as treasury
stock at an average price of $34.52 per share and 352,124 shares were issued
primarily in connection with employee stock plans. During the year ended
December 31, 1999, Cooper purchased 800,000 shares as treasury stock at an
average price of $54.99 per share and 750,869 shares were issued primarily in
connection with employee stock plans. 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 978,853 shares were issued primarily in connection with
employee stock plans. At December 31, 2000, Cooper had 10,740,846 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, 2000 and 1999, 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, 2000 and 1999, no Preferred shares were issued or outstanding.

                                       D-24
<PAGE>   26
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9: 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.

     A summary of the status of Cooper's fixed stock option plans for officers
and employees as of December 31, 2000 and activity during the three years ended
December 31, 2000 is presented below:

<TABLE>
<CAPTION>
                                               2000                   1999                   1998
                                       --------------------   --------------------   ---------------------
                                                   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.....  2,748,601    $45.94    2,144,104    $46.52     3,113,077    $43.55
Granted..............................  1,425,800    $37.94    1,018,700    $43.52       968,200    $56.63
Exercised............................     (6,500)   $39.06     (286,492)   $39.82    (1,075,905)   $45.00
Canceled.............................   (357,404)   $42.57     (127,711)   $50.13      (861,268)   $49.02
                                       ---------              ---------              ----------
Outstanding at end of year...........  3,810,497    $43.28    2,748,601    $45.94     2,144,104    $46.52
                                       =========              =========              ==========
Options exercisable at end of year...  1,608,117              1,128,905                 782,509
Options available for grant at end of
  year...............................  1,916,174              3,289,602               4,264,190
</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    12/31/00        LIFE        PRICE      12/31/00      PRICE
---------------   -----------   -----------   --------   -----------   --------
<S>               <C>           <C>           <C>        <C>           <C>
$37.94 - $43.13    1,790,578        8.1        $38.24       398,644     $39.13
$43.47 - $56.63    2,019,919        7.1        $47.74     1,209,473     $48.42
                   ---------                              ---------
                   3,810,497                              1,608,117
                   =========                              =========
</TABLE>

     During 2000, options to purchase 9,000 shares of common stock were granted
to nonemployee directors at an exercise price of $35.19 and options for 4,000
shares were exercised at $17.31 per share. During 1999, options to purchase
11,000 shares of Common stock were granted to nonemployee directors at an
exercise price of $49.03 and options for 4,000 shares were exercised at $14.69
per share. 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. At December 31, 2000, options
under the director plans for 20,000 Common shares were exercisable at $42.13 to
$63.78 per share, and 141,600 shares were reserved for future grants.

     Participants in the Employee Stock Purchase Plan receive an option to
purchase Common stock at a price that is the lesser of 85% of the market value
on the offering date or 85% of the market value on the purchase date. On
September 10, 1999, a total of 307,545 shares were sold to employees at $45.68
per share. At December 31, 2000, subscriptions for 408,447 shares of Common
stock were outstanding at $44.63 per share or, if lower, 85% of the average
market price on September 10, 2001, which is the purchase date. At December 31,
2000, an aggregate of 2,735,428 shares of Common stock were reserved for future
issuance.

     Cooper follows the intrinsic value method of accounting for stock-based
compensation plans 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 $5.1
million, $6.1 million and $6.6 million was recognized in the consolidated
financial statements during 2000, 1999 and 1998, respectively for the
performance-

                                       D-25
<PAGE>   27
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

based stock awards. If compensation expense for all of 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 2.1% in 2000, 2.3% in 1999 and 1.6% in 1998. 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 2000,
1999 and 1998 respectively: dividend yield of 3.5%, 3.0% and 2.3%, expected
volatility of 26.4%, 26.4% and 22.2%, risk free interest rates of 6.7%, 5.0% and
5.6% and expected lives of 7 years in 2000, 1999 and 1998.

NOTE 10: ACCUMULATED NONOWNER 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, 1997..................................    $(2.8)      $ 110.9       $ (17.7)    $  90.4
Current year other nonowner changes in equity..............     (1.1)       (110.9)         (8.4)     (120.4)
                                                               -----       -------       -------     -------
Balance December 31, 1998..................................     (3.9)           --         (26.1)      (30.0)
Current year other nonowner changes in equity..............      1.1            --         (40.5)      (39.4)
                                                               -----       -------       -------     -------
Balance December 31, 1999..................................     (2.8)           --         (66.6)      (69.4)
Current year other nonowner changes in equity..............      0.1            --         (51.2)      (51.1)
                                                               -----       -------       -------     -------
Balance December 31, 2000..................................    $(2.7)      $    --       $(117.8)    $(120.5)
                                                               =====       =======       =======     =======
</TABLE>

<TABLE>
<CAPTION>
                                                2000                          1999                           1998
                                     ---------------------------   ---------------------------   -----------------------------
                                     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.......................  $ 0.1      $  --     $ 0.1    $ 1.9      $(0.8)    $ 1.1    $ (1.8)     $ 0.7     $  (1.1)
                                     ------     -----     ------   ------     -----     ------   -------     -----     -------
Decrease in unrealized gain during
  the year.........................     --         --        --       --         --        --     (40.6)      14.6       (26.0)
Less reclassification adjustment
  for realized gains...............     --         --        --       --         --        --    (132.7)      47.8       (84.9)
                                     ------     -----     ------   ------     -----     ------   -------     -----     -------
Net unrealized gain on
  investments......................     --         --        --       --         --        --    (173.3)      62.4      (110.9)
                                     ------     -----     ------   ------     -----     ------   -------     -----     -------
Translation adjustment.............  (78.8)      27.6     (51.2)   (62.3)      21.8     (40.5)    (12.9)       4.5        (8.4)
                                     ------     -----     ------   ------     -----     ------   -------     -----     -------
Other nonowner changes in equity...  $(78.7)    $27.6     $(51.1)  $(60.4)    $21.0     $(39.4)  $(188.0)    $67.6     $(120.4)
                                     ======     =====     ======   ======     =====     ======   =======     =====     =======
</TABLE>

     In December 1995, Cooper issued 16.5 million DECS at $13.50 which, at
maturity, were mandatorily exchangeable into shares of Wyman-Gordon common stock
or, at Cooper's option, into cash in lieu of shares. 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
accumulated nonowner changes in equity as an unrealized gain on investments in
marketable equity securities, net of tax. Additionally, Cooper's long-term debt
included an increase in the market value of Wyman-Gordon common stock related to
the DECS. The offset to the debt increase, net of tax, decreased the unrealized
gain on investments in marketable equity securities, net of tax.

     The 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).

                                       D-26
<PAGE>   28
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11: INCOME TAXES

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               2000     1999     1998
                                                              ------   ------   ------
                                                              (IN MILLIONS, EXCEPT FOR
                                                                    PERCENTAGES)
<S>                                                           <C>      <C>      <C>
Components of income from continuing operations before
  income taxes:
  U.S. operations...........................................  $433.7   $390.7   $404.8
  Foreign operations........................................   116.2    127.9    118.8
                                                              ------   ------   ------
          Income from continuing operations before income
           taxes............................................  $549.9   $518.6   $523.6
                                                              ======   ======   ======
Components of income tax expense:
  Current:
     U.S. Federal...........................................  $ 64.0   $ 84.3   $122.8
     U.S. state and local...................................     1.3      6.2     18.1
     Foreign................................................    28.4     36.2     34.4
                                                              ------   ------   ------
                                                                93.7    126.7    175.3
                                                              ------   ------   ------
  Deferred:
     U.S. Federal...........................................    72.8     48.0     11.0
     U.S. state and local...................................    19.4     10.4     (2.7)
     Foreign................................................     6.6      1.6      4.1
                                                              ------   ------   ------
                                                                98.8     60.0     12.4
                                                              ------   ------   ------
          Income tax expense................................  $192.5   $186.7   $187.7
                                                              ======   ======   ======
Total income taxes paid.....................................  $132.3   $132.5   $184.4
                                                              ======   ======   ======
Effective tax rate reconciliation:
  U.S. Federal statutory rate...............................    35.0%    35.0%    35.0%
  State and local income taxes..............................     2.2      1.9      1.7
  Foreign statutory rate differential.......................    (1.2)    (1.5)    (0.5)
  Nondeductible goodwill....................................     2.4      2.3      2.2
  Foreign Sales Corporation.................................    (0.8)    (0.7)    (1.0)
  Tax credits...............................................    (1.4)    (0.3)    (0.8)
  Other.....................................................    (1.2)    (0.7)    (0.8)
                                                              ------   ------   ------
          Effective tax rate attributable to continuing
           operations.......................................    35.0%    36.0%    35.8%
                                                              ======   ======   ======
</TABLE>

                                       D-27
<PAGE>   29
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2000      1999
                                                              -------   -------
                                                                (IN MILLIONS)
<S>                                                           <C>       <C>
Components of deferred tax assets and liabilities:
  Deferred tax assets:
     Postretirement and other employee welfare benefits.....  $  80.1   $  90.7
     Accrued liabilities....................................    134.0     147.7
     Minimum pension liability..............................      1.8       1.8
     Capital loss carryforward(1)...........................     59.1      88.6
     Other..................................................     55.1      37.0
                                                              -------   -------
          Total deferred tax assets.........................    330.1     365.8
                                                              -------   -------
  Valuation allowance(1)....................................    (47.0)    (51.6)
                                                              -------   -------
  Deferred tax liabilities:
     Property, plant and equipment and intangibles..........   (107.0)    (93.8)
     Inventories............................................    (18.9)    (22.3)
     Employee stock ownership plan..........................    (21.8)    (20.7)
     Pension plans..........................................    (34.2)    (32.8)
     Other..................................................    (22.3)    (24.9)
                                                              -------   -------
          Total deferred tax liabilities....................   (204.2)   (194.5)
                                                              -------   -------
          Net deferred tax asset............................  $  78.9   $ 119.7
                                                              =======   =======
</TABLE>

---------------

(1) Cooper incurred a capital loss on the sale of the Automotive Products
    segment. 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, 2000 and 1999 include the additional U.S. tax estimated to be
payable on substantially all unremitted earnings of foreign subsidiaries.

                                       D-28
<PAGE>   30
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12: 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.

<TABLE>
<CAPTION>
                                                                                        OTHER
                                                                                   POSTRETIREMENT
                                                              PENSION BENEFITS        BENEFITS
                                                              -----------------   -----------------
                                                               2000      1999      2000      1999
                                                              -------   -------   -------   -------
                                                                          (IN MILLIONS)
<S>                                                           <C>       <C>       <C>       <C>
Change in benefit obligation:
  Benefit obligation at January 1...........................  $565.3    $592.5    $ 116.5   $ 158.8
  Service cost..............................................    14.9      15.4        0.1       0.2
  Interest cost.............................................    41.0      38.1        8.8      10.4
  Benefit payments..........................................   (27.6)    (34.8)     (13.6)    (13.6)
  Settlements...............................................   (25.7)       --         --        --
  Actuarial gain............................................    (5.9)    (37.0)      (0.6)    (38.6)
  Acquisitions..............................................    25.5        --        2.2        --
  Other.....................................................    (3.2)     (8.9)      (1.2)     (0.7)
                                                              ------    ------    -------   -------
Benefit obligation at December 31...........................   584.3     565.3      112.2     116.5
                                                              ------    ------    -------   -------
Change in plan assets:
  Fair value of plan assets at January 1....................   615.3     606.8         --        --
  Actual return on plan assets..............................    10.7      35.5         --        --
  Employer contributions....................................     7.6      10.9       13.6      13.6
  Benefit payments..........................................   (27.6)    (34.8)     (13.6)    (13.6)
  Settlements...............................................   (25.7)       --         --        --
  Acquisitions..............................................    39.1        --         --        --
  Other.....................................................    (3.3)     (3.1)        --        --
                                                              ------    ------    -------   -------
Fair value of plan assets at December 31....................   616.1     615.3         --        --
                                                              ------    ------    -------   -------
Funded status...............................................    31.8      50.0     (112.2)   (116.5)
Unrecognized actuarial (gain) loss..........................     7.4     (36.6)     (96.0)   (104.7)
Unrecognized prior service cost.............................     0.1       0.1       (3.0)     (3.2)
Other.......................................................     0.6       1.0         --        --
                                                              ------    ------    -------   -------
Net amount recognized.......................................  $ 39.9    $ 14.5    $(211.2)  $(224.4)
                                                              ======    ======    =======   =======
Amounts recognized in the balance sheet consist of:
  Prepaid benefit asset.....................................  $105.4    $ 80.7    $    --   $    --
  Accrued benefit liability.................................   (71.5)    (72.7)    (211.2)   (224.4)
  Intangible asset..........................................     1.5       1.9         --        --
  Accumulated other nonowner changes in equity..............     4.5       4.6         --        --
                                                              ------    ------    -------   -------
Net amount recognized.......................................  $ 39.9    $ 14.5    $(211.2)  $(224.4)
                                                              ======    ======    =======   =======
</TABLE>

                                       D-29
<PAGE>   31
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The projected benefit obligation and accumulated benefit obligation for
Cooper's unfunded defined benefit pension plans were $69.0 million and $64.4
million as of December 31, 2000, and $70.1 million and $65.6 million as of
December 31, 1999, respectively.

<TABLE>
<CAPTION>
                                                                                          OTHER
                                                          PENSION BENEFITS       POSTRETIREMENT BENEFITS
                                                      ------------------------   ------------------------
                                                       2000     1999     1998     2000     1999     1998
                                                      ------   ------   ------   ------   ------   ------
                                                                         (IN MILLIONS)
<S>                                                   <C>      <C>      <C>      <C>      <C>      <C>
Components of net periodic benefit cost:
  Service cost......................................  $ 14.9   $ 15.4   $ 13.3   $ 0.1    $ 0.2    $ 0.3
  Interest cost.....................................    41.0     38.1     39.0     8.8     10.4     10.3
  Expected return on plan assets....................   (52.1)   (50.7)   (47.6)     --       --       --
  Amortization of unrecognized transition (asset)
     obligation.....................................     0.2     (1.5)    (1.5)     --       --       --
  Amortization of prior service cost................      --      0.1      0.1    (1.4)    (1.5)    (1.4)
  Recognized actuarial gain.........................    (2.0)    (0.8)    (0.1)   (9.3)    (7.5)    (6.6)
  Settlement/curtailment............................    (3.6)     0.1       --      --       --       --
                                                      ------   ------   ------   -----    -----    -----
          Net periodic benefit cost.................  $ (1.6)  $  0.7   $  3.2   $(1.8)   $ 1.6    $ 2.6
                                                      ======   ======   ======   =====    =====    =====
</TABLE>

     Net periodic pension benefit costs includes a $3.6 million settlement gain
in 2000 primarily resulting from the voluntary severance program (Note 2).

<TABLE>
<CAPTION>
                                                                                            OTHER
                                                                                       POSTRETIREMENT
                                                             PENSION BENEFITS             BENEFITS
                                                       -----------------------------   ---------------
                                                           2000            1999        2000      1999
                                                       -------------   -------------   -----     -----
<S>                                                    <C>             <C>             <C>       <C>
Weighted average assumptions as of December 31:
  Discount rate......................................  6.00% - 7.75%   6.00% - 7.75%   7.75%     7.75%
  Expected return on plan assets.....................  7.00% - 8.50%   7.50% - 8.50%     --        --
  Rate of compensation increase......................  3.00% - 4.50%   3.00% - 4.50%     --        --
</TABLE>

     For other postretirement benefit measurement purposes, a 6.6% annual
increase in the per capita cost of covered health care benefits was assumed for
2001. 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
                                                              --------------   --------------
                                                                       (IN MILLIONS)
<S>                                                           <C>              <C>
Effect on total of service and interest cost components.....       $0.6            $(0.5)
Effect on the postretirement benefit obligation.............       $7.5            $(6.9)
</TABLE>

     During 2000, 1999 and 1998, expense with respect to domestic and foreign
defined contribution plans (primarily related to various groups of hourly
employees) totaled $17.6 million, $17.5 million and $15.7 million, respectively.

NOTE 13: 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 treasury shares issued to the ESOP. The ESOP
purchased Cooper Common stock which was financed through external borrowings and
loans from Cooper. The external ESOP debt matured in July 1999 and was fully
repaid. The purchases funded by loans between the ESOP and Cooper are treated as
eliminated intercompany loans for financial statement purposes.

                                       D-30
<PAGE>   32
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Cooper makes annual contributions to the ESOP to fund the payment of principal
and interest. Dividends on unallocated shares received by the ESOP (and
allocated shares prior to 2000) are used to pay debt service. As the debt is
repaid, unallocated shares are allocated to CO-SAV participants to satisfy
Cooper's matching obligation or to replace dividends on allocated shares with
Cooper Common shares in years prior to 2000.

     Dividends paid on unallocated shares of $0.5 million and $1.0 million
during 2000 and 1999, 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 of $3.8 million during 1999 were used to pay additional
principal and interest payments in order to allocate shares equivalent to the
dividend amount to participants in the CO-SAV plan. Cooper contributed an
additional $9.6 million and $13.5 million in cash to the ESOP during 2000 and
1999, respectively, to fund principal and interest payments on ESOP debt.

     The number of allocated, committed to be allocated, and unallocated ESOP
shares at December 31, 2000 and 1999 is summarized below.

<TABLE>
<CAPTION>
                                                               SHARES PURCHASED      SHARES PURCHASED
                                                                 PRIOR TO 1994            IN 1994
                                                             ---------------------   -----------------
                                                               2000        1999       2000      1999
                                                             ---------   ---------   -------   -------
<S>                                                          <C>         <C>         <C>       <C>
Allocated to CO-SAV participants...........................  2,783,473   2,872,743   928,837   631,574
Committed to be allocated..................................      1,111       1,687        --    38,132
Unallocated................................................    166,389     175,761        --   287,394
</TABLE>

     Shares purchased by the ESOP prior to 1994 are accounted for in accordance
with Statement of Position 76-3, Accounting Practices for Certain Employee Stock
Ownership Plans and Emerging Issues Task Force Issue 89-8, Expense Recognition
for Employee Stock Ownership Plans.  Compensation expense is equal to Cooper's
CO-SAV matching obligation, adjusted for the difference between the fair market
value and cost of the shares committed to be allocated. Compensation expense is
reduced by the amount of dividends paid on unallocated ESOP shares available for
future matching. All shares issued to the ESOP are considered outstanding for
purposes of computing earnings per share.

     Shares purchased by the ESOP in 1994 are accounted for in accordance with
Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership
Plans ("SOP 93-6"). SOP 93-6 was effective for fiscal years beginning after
December 15, 1993. Compensation expense is recognized at the fair value of the
shares committed to be allocated which is equal to the amount of Cooper's CO-SAV
matching obligation. Unearned employee stock ownership plan compensation is
credited as shares are committed to be allocated based on the cost of the shares
to the ESOP. The difference between the fair market value and cost of the shares
committed to be allocated is recorded as an adjustment to capital in excess of
par value. Dividends paid on unallocated shares are recorded as a reduction of
ESOP debt, accrued interest or accrued employee benefits. Unallocated shares are
not treated as outstanding in the earnings per share computation.

     Compensation expense for the CO-SAV plan and the ESOP was $20.2 million,
$18.6 million and $15.6 million in 2000, 1999 and 1998, respectively.

NOTE 14: 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, markets and sells electrical
and circuit protection products, including fittings, support systems,
enclosures, plugs, receptacles, lighting fixtures, fuses, emergency lighting,
fire detection systems and security products for use in residential, commercial
and industrial construction, maintenance and repair applications. The segment
also manufactures, markets and sells products for use by utilities and in
industry for electrical power transmission and distribution.

                                       D-31
<PAGE>   33
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Tools & Hardware segment manufactures, markets and sells hand tools for
industrial, construction and consumer markets; automated assembly systems for
industrial markets and electric and pneumatic industrial power tools for general
industry, primarily automotive and aerospace manufacturers.

     The performance of businesses are evaluated at the segment level and
resources are allocated among 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
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,
                                  ------------------------------   --------------------------   ------------------------------
                                    2000       1999       1998      2000      1999     1998       2000       1999       1998
                                  --------   --------   --------   -------   ------   -------   --------   --------   --------
                                                                         (IN MILLIONS)
<S>                               <C>        <C>        <C>        <C>       <C>      <C>       <C>        <C>        <C>
Electrical Products.............  $3,659.2   $3,060.9   $2,824.4   $ 585.0   $516.7   $ 479.0   $3,660.9   $2,969.5   $2,473.3
Tools & Hardware................     800.7      808.0      826.8      97.7     97.9     112.4      844.8      897.8      903.8
                                  --------   --------   --------   -------   ------   -------   --------   --------   --------
  Total management reporting....  $4,459.9   $3,868.9   $3,651.2     682.7    614.6     591.4    4,505.7    3,867.3    3,377.1
                                  ========   ========   ========
Segment nonrecurring and unusual
  items.........................                                        --     (4.5)    (51.3)
                                                                   -------   ------   -------
Net segment operating
  earnings......................                                     682.7    610.1     540.1
General Corporate:
  Nonrecurring gains............                                        --      0.8     135.2
  Nonrecurring charges..........                                        --       --      (2.3)
  Expense.......................                                     (32.5)   (37.1)    (47.5)
Interest expense, net...........                                    (100.3)   (55.2)   (101.9)
                                                                   -------   ------   -------
Consolidated income from
  continuing operations before
  income taxes..................                                   $ 549.9   $518.6   $ 523.6
                                                                   =======   ======   =======
Corporate assets................                                                                   283.6      276.1      402.0
                                                                                                --------   --------   --------
Consolidated assets.............                                                                $4,789.3   $4,143.4   $3,779.1
                                                                                                ========   ========   ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                 ELECTRICAL   TOOLS &                CONSOLIDATED
                                                                                  PRODUCTS    HARDWARE   CORPORATE      TOTAL
                                                                                 ----------   --------   ---------   ------------
                                                                                                  (IN MILLIONS)
<S>                                                                              <C>          <C>        <C>         <C>
2000
  Depreciation...................................................................  $ 83.1      $ 30.7     $  2.1       $ 115.9
  Goodwill amortization..........................................................    49.1         9.4         --          58.5
  Capital expenditures...........................................................   128.9        26.8       19.2         174.9
  Investment in unconsolidated affiliates........................................    22.2          --         --          22.2
1999
  Depreciation...................................................................  $ 69.6      $ 29.4     $  1.5       $ 100.5
  Goodwill amortization..........................................................    37.7         9.4         --          47.1
  Nonrecurring gains.............................................................      --          --        0.8           0.8
  Nonrecurring charges...........................................................     3.0         1.5         --           4.5
  Capital expenditures...........................................................   117.5        36.5       11.8         165.8
  Investment in unconsolidated affiliates........................................    11.4          --         --          11.4
</TABLE>

                                      D-32
<PAGE>   34
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                             ELECTRICAL   TOOLS &                CONSOLIDATED
                                                              PRODUCTS    HARDWARE   CORPORATE      TOTAL
                                                             ----------   --------   ---------   ------------
                                                                              (IN MILLIONS)
<S>                                                          <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
</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
                                          ------------------------------   ------------------------------
                                            2000       1999       1998       2000       1999       1998
                                          --------   --------   --------   --------   --------   --------
                                                                   (IN MILLIONS)
<S>                                       <C>        <C>        <C>        <C>        <C>        <C>
United States...........................  $3,500.4   $2,944.5   $2,815.7   $2,319.2   $1,912.6   $1,756.3
Germany.................................     180.0      223.1      226.1      135.0      149.5      171.4
United Kingdom..........................     232.6      179.4      164.1      404.8      443.9      302.3
Canada..................................     158.5      133.5      127.3        3.4        4.4        5.1
Other foreign countries.................     388.4      388.4      318.0      191.8      166.4      126.7
                                          --------   --------   --------   --------   --------   --------
                                          $4,459.9   $3,868.9   $3,651.2   $3,054.2   $2,676.8   $2,361.8
                                          ========   ========   ========   ========   ========   ========
</TABLE>

     International revenues by destination, based on the location products were
delivered, were as follows by segment:

<TABLE>
<CAPTION>
                                                                                INTERNATIONAL REVENUES
                                                                             ----------------------------
                                                                               2000       1999      1998
                                                                             --------   --------   ------
                                                                                    (IN MILLIONS)
<S>                                                                          <C>        <C>        <C>
Electrical Products......................................................    $  881.0   $  775.9   $678.9
Tools & Hardware.........................................................       300.9      351.0    286.6
                                                                             --------   --------   ------
                                                                             $1,181.9   $1,126.9   $965.5
                                                                             ========   ========   ======
</TABLE>

NOTE 15: 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.

                                       D-33
<PAGE>   35
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The table below summarizes, by currency, the U.S. Dollar equivalent
contractual amounts of Cooper's forward exchange contracts at December 31, 2000
and 1999.

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                              -------------
                                                              2000    1999
                                                              -----   -----
                                                              (IN MILLIONS)
<S>                                                           <C>     <C>
British Pounds Sterling.....................................  $17.6   $  --
Euros.......................................................   15.1     3.9
German Deutschemarks........................................    0.1     7.2
Mexican Pesos...............................................    2.2     3.4
Swiss Francs................................................    2.7     2.4
Australian Dollars..........................................    2.2     0.7
Dutch Guilders..............................................     --     1.5
Other.......................................................    1.1     1.7
                                                              -----   -----
                                                              $41.0   $20.8
                                                              =====   =====
</TABLE>

     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. In 1999, Cooper entered into an executory
contract with a third party that provided Cooper the right, but not the
obligation, to purchase U.S. government obligations shortly before maturity on
January 16, 2001. Upon settlement of the agreement, Cooper incurred a $7.3
million cost in 2000.

CONCENTRATIONS OF CREDIT RISK

     Concentrations of credit risk with respect to trade receivables are limited
due to the wide variety of customers as well as their dispersion across many
different geographic areas and no one customer exceeding 3.7% of accounts
receivable.

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 $1.5 billion and $1.1 billion
of debt instruments at December 31, 2000 and 1999, respectively. The book value
of these instruments was approximately equal to fair value at December 31, 2000
and 1999. 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, 2000 and 1999.

NOTE 16: SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               2000     1999     1998
                                                              ------   ------   ------
                                                                   (IN MILLIONS)
<S>                                                           <C>      <C>      <C>
Assets acquired and liabilities assumed or incurred
  From the acquisition of businesses:
  Fair value of assets acquired.............................  $684.0   $522.9   $349.8
  Liabilities assumed or incurred...........................  (103.6)   (88.3)   (56.1)
                                                              ------   ------   ------
          Cash used to acquire businesses, net of cash
           acquired.........................................  $580.4   $434.6   $293.7
                                                              ======   ======   ======
Noncash increase in net assets from:
  Exchange of DECS for Wyman-Gordon common stock............      --       --   $235.2
</TABLE>

                                       D-34
<PAGE>   36
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 17: NET INCOME PER COMMON SHARE

<TABLE>
<CAPTION>
                                                           BASIC                         DILUTED
                                                ----------------------------   ----------------------------
                                                  YEAR ENDED DECEMBER 31,        YEAR ENDED DECEMBER 31,
                                                ----------------------------   ----------------------------
                                                 2000      1999       1998      2000      1999       1998
                                                -------   -------   --------   -------   -------   --------
                                                           ($ IN MILLIONS, SHARES IN THOUSANDS)
<S>                                             <C>       <C>       <C>        <C>       <C>       <C>
Income from continuing operations.............  $ 357.4   $ 331.9   $  335.9   $ 357.4   $ 331.9   $  335.9
Income from discontinued operations...........       --        --       87.1        --        --       87.1
                                                -------   -------   --------   -------   -------   --------
Net income applicable to Common stock.........  $ 357.4   $ 331.9   $  423.0   $ 357.4   $ 331.9   $  423.0
                                                =======   =======   ========   =======   =======   ========
Weighted average Common shares outstanding....   93,524    94,046    113,266    93,524    94,046    113,266
                                                =======   =======   ========
Incremental shares from assumed conversions:
  Options, performance-based stock awards and
     other employee awards....................                                     626       896      1,392
                                                                               -------   -------   --------
Weighted average Common shares and Common
  share equivalents...........................                                  94,150    94,942    114,658
                                                                               =======   =======   ========
</TABLE>

Options and employee awards are not considered in the calculations if the effect
would be antidilutive.

NOTE 18: DISCONTINUED OPERATION

     On October 9, 1998, Cooper completed the sale of the Automotive Products
segment for cash proceeds of $1.9 billion. During 1999, Cooper received an
additional $149.1 million representing reimbursement of Cooper's pre-closing
cash funding of international automotive operations and the earnings and
additional cash invested in the Automotive Products segment between March 31,
1998 and October 9, 1998.

     Cooper's results of operations and the related footnote information for
1998 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." The Consolidated
Statements of Cash Flows reflect the cash flows from discontinued operations in
a single line "Cash used in discontinued operations." No cash or debt was
allocated to the discontinued operations.

     Revenues from the discontinued Automotive Products segment were $1.5
billion for the period from January 1, 1998 to October 9, 1998. 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.

     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. 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 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.

                                       D-35
<PAGE>   37
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 19: UNAUDITED QUARTERLY OPERATING RESULTS

<TABLE>
<CAPTION>
                                                                          2000 (BY QUARTER)
                                                              -----------------------------------------
                                                                 1          2          3          4
                                                              --------   --------   --------   --------
                                                                (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                                           <C>        <C>        <C>        <C>
Revenues....................................................  $1,038.9   $1,168.2   $1,145.8   $1,107.0
Cost of sales...............................................     701.7      794.5      773.1      749.0
Selling and administrative expenses.........................     176.4      189.4      188.2      178.9
Goodwill amortization.......................................      13.4       14.7       15.4       15.0
Interest expense, net.......................................      18.3       26.6       28.6       26.8
                                                              --------   --------   --------   --------
Income before income taxes..................................     129.1      143.0      140.5      137.3
Income taxes................................................      45.2       50.1       49.1       48.1
                                                              --------   --------   --------   --------
Net income..................................................  $   83.9   $   92.9   $   91.4   $   89.2
                                                              ========   ========   ========   ========
Income per Common share:
  Basic.....................................................  $    .89   $   1.00   $    .98   $    .95
  Diluted...................................................  $    .89   $    .99   $    .97   $    .95
</TABLE>

<TABLE>
<CAPTION>
                                                                          1999 (BY QUARTER)
                                                              -----------------------------------------
                                                                 1          2          3          4
                                                              --------   --------   --------   --------
                                                                (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                                           <C>        <C>        <C>        <C>
Revenues....................................................  $  924.7   $  957.5   $  982.2   $1,004.5
Cost of sales...............................................     622.0      639.8      664.4      677.2
Selling and administrative expenses.........................     156.3      156.6      160.8      167.2
Goodwill amortization.......................................      11.3       11.5       11.5       12.8
Nonrecurring charges........................................       3.7         --         --         --
Interest expense, net.......................................      13.2       12.2       13.7       16.1
                                                              --------   --------   --------   --------
Income before income taxes..................................     118.2      137.4      131.8      131.2
Income taxes................................................      42.6       49.4       47.4       47.3
                                                              --------   --------   --------   --------
Net income..................................................  $   75.6   $   88.0   $   84.4   $   83.9
                                                              ========   ========   ========   ========
Income per Common share:
  Basic.....................................................  $    .80   $    .93   $    .90   $    .89
  Diluted(1)................................................  $    .80   $    .92   $    .89   $    .89
</TABLE>

---------------

(1) Includes net nonrecurring charges of $.02 per share in the first quarter.

                                       D-36