<PAGE>   1
                                                                    EXHIBIT 13.0
                                   APPENDIX A

                            COOPER INDUSTRIES, INC.

<TABLE>
<S>                                                            <C>
Management's Discussion and Analysis of Financial Condition
  and Results of Operations.................................     A-1
Consolidated Financial Statements:
  Report of Management......................................    A-13
  Report of Independent Auditors............................    A-14
  Consolidated Income Statements for the three years ended
     December 31, 1997......................................    A-15
  Consolidated Balance Sheets as of December 31, 1997 and
     1996...................................................    A-16
  Consolidated Statements of Cash Flows for the three years
     ended December 31, 1997................................    A-17
  Consolidated Statements of Shareholders' Equity for the
     three years ended December 31, 1997....................    A-18
  Notes to Consolidated Financial Statements................    A-19
</TABLE>
<PAGE>   2

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

OVERVIEW

     Acquisitions and Divestitures  During the last three years, Cooper's
continuing operations have completed 18 acquisitions and 3 divestitures. The
acquisitions have been in complementary product lines that enhance areas of
strength, while the dispositions have been of noncore or under-performing
businesses. In 1995, Cooper divested the remaining businesses comprising the
former Petroleum & Industrial Equipment segment through an exchange offer with
shareholders for common stock of Cooper Cameron Corporation ("Cooper Cameron").
On May 30, 1997, Cooper completed the sale of its Kirsch window treatment
division for $216.0 million. For the five months ended May 30, 1997, and the
year ended December 31, 1996, Kirsch had revenues of $97.4 million and $252.9
million, and operating earnings of $4.8 million and $20.0 million, respectively.

     Nonrecurring Income and Expenses  In the third quarter of 1995, Cooper
began to sell the common shares of Belden Inc. ("Belden") that it retained
following the 1993 initial public offering of Belden's common stock. In 1995,
Cooper recognized gains from the sale of the Belden marketable equity securities
of $.05 per share.

     In 1996, Cooper sold the remaining common shares of Belden and all of the
shares of Cooper Cameron retained in the 1995 exchange offer with shareholders.
Also in 1996, Cooper initiated a strategic review of most of its businesses and
operations. Actions resulting from this review included (1) the decision to
retain an investment banking firm to evaluate the possible sale of Kirsch; (2) a
change in the strategic direction of the automotive brake business and the
write-down of long-lived assets and goodwill associated with certain brake
product lines; and (3) nonrecurring charges related primarily to facility
closings and consolidations and resolution of environmental litigation. The 1996
nonrecurring charges, when combined with the realization of gains from the sale
of marketable equity securities, resulted in a net gain of $.05 per share.

     On May 30, 1997, Cooper completed the sale of its Kirsch window treatment
division. The sale resulted in a gain of $69.8 million. During 1997, Cooper also
exchanged a portion of its DECSSM (Debt Exchangeable for Common Stock) for
Wyman-Gordon Company ("Wyman-Gordon") common stock and realized a gain of $23.2
million. Cooper incurred charges of $83.9 million for actions management
committed to during 1997 after concluding an evaluation of (1) geographic
manufacturing and distribution facilities within the Tools & Hardware segment,
(2) certain sales, marketing and distribution activities within the Automotive
Products segment and (3) information systems relating to year 2000 compliance
efforts. The 1997 charges included adjustments to the carrying value of assets
of $54.8 million and accruals for continuing obligations for replaced systems
and facility consolidations of $29.1 million. Cooper also recorded a tax benefit
of $6.1 million related to favorable settlements of state income tax issues in
1997. For 1997, the nonrecurring gains, net of the nonrecurring charges, and the
tax benefit increased earnings per share by $.10.

     Cooper currently is not considering additional consolidations in the
Electrical Products segment. The Tools & Hardware segment is currently in the
process of consolidating certain international manufacturing and distribution
facilities and the Automotive Products segment is currently in the process of
consolidating sales, marketing and distribution activities. In addition, during
1997, Cooper began negotiations with Standard Motor Products, Inc. ("SMP") to
exchange Cooper's temperature control business for the brake products business
owned by SMP. In December 1997, Cooper received the necessary government
approvals for completion of the transaction with SMP. Closing of the business
exchange is subject to negotiation of a definitive agreement and is currently
anticipated to occur in the first quarter of 1998.

     Cooper is continuing to evaluate strategic alternatives related to the
Automotive Products segment. During early 1998, Cooper anticipates completing
the exit of Automotive Products remanufacturing activities and all product lines
included in the temperature control businesses and completing the consolidation
of the Automotive Products sales, marketing and distribution activities.
Adjustments to the carrying value of assets and accruals, noted above, were
recorded for projects committed to by management. Severance and certain other
costs related to projects committed to by management are not expensed until
affected employees are notified. A majority of the consolidations have been
announced and such costs were accrued and expended by the end of 1997. Cash
expenditures related to the payout of accrued severance and other expenditures
related to the committed consolidations in 1998 will not be significant.
However, Cooper could incur additional expenses as the projects are completed,
resulting from consolidation disruptions to operations and additional
consolidation expenses. These additional expenses are currently not anticipated
to be significant to any quarterly period in 1998. In addition, other gains or
charges could be incurred during 1998 as

                                       A-1
<PAGE>   3

management completes its evaluation of strategic alternatives related to the
Automotive Products segment or adds to the strategic projects committed to in
the Tools & Hardware segment.

     With the exception of the sale of Kirsch, the actions committed to in 1997
will not have a continuing significant impact on revenues, segment operating
earnings or cash flows. See Notes 2 and 6 of Notes to Consolidated Financial
Statements for additional information on nonrecurring gains and charges.

     Capitalization  Effective January 1, 1995, Cooper exchanged all of its
outstanding $1.60 Convertible Exchangeable Preferred Stock for $691.2 million of
7.05% Convertible Subordinated Debentures due 2015 and $3.8 million in cash
related to fractional shares. While the exchange increased the debt-to-total
capitalization ratio above Cooper's preferred target, it generated in excess of
$20 million per year of additional net cash flows. During the first half of
1997, Cooper completed calls for redemption of all of its outstanding 7.05%
Convertible Subordinated Debentures with a total of $610 million converted to
approximately 14.8 million shares of Cooper Common stock and approximately $80
million redeemed for cash.

     On June 30, 1995, Cooper reduced common shares outstanding by 9.5 million
shares through the completion of the exchange offer with its shareholders for
the common stock of Cooper Cameron. In December 1995, Cooper issued $222.8
million in 6% Exchangeable Notes (DECSSM -- Debt Exchangeable for Common Stock)
due January 1, 1999. The notes are mandatorily exchangeable into shares of
Wyman-Gordon common stock owned by Cooper or, at Cooper's option, into cash in
lieu of shares. The notes are, in effect, a monetization of Cooper's investment
in Wyman-Gordon common stock. In addition, Cooper retained the first 16% of
appreciation in the fair market value of the Wyman-Gordon common stock between
the date of issuance of the notes and their maturity, plus 13.8% of any
additional appreciation beyond the first 16%. During 1997, Cooper exchanged
$33.8 million of its DECS for Wyman-Gordon common stock. At December 31, 1997, a
minimum of $85.4 million after income taxes will be realized as a gain on the
Wyman-Gordon common stock through the DECS monetization. This gain plus any
additional appreciation will be realized upon redemption of the DECS.

     During 1997, Cooper purchased approximately 3.6 million shares of its
Common stock for $192 million. This action was taken as part of the remaining
$275 million Common stock repurchase authorization program to maintain Cooper's
debt-to-total capitalization between 35% and 45%.

     Cooper has invested $586 million in capital assets related to modernization
and expansion of facilities plus significant amounts related to the integration
of newly acquired businesses and the revitalization of existing ones during the
last three years. More importantly, Cooper today is a much different company
than it was in 1994, and one that is well prepared for the increasingly
competitive global marketplace.

YEAR 2000 INFORMATION SYSTEMS ASSESSMENTS

     Many of Cooper's purchased and internally developed information systems
programs were written using two digits rather than four to identify a year. With
the turn of the century, time sensitive software using two digits may not
identify the year 2000, which could result in system failures and
miscalculations disrupting the ability to conduct normal business operations.
Cooper completed an assessment of its major information systems for year 2000
compliance during 1997 and developed detailed plans to resolve all major issues
by the end of 1998. Cooper has nine divisions with multiple hardware platforms
and software products in use. At the time the assessment was completed, several
businesses were, in the normal course, upgrading software and systems to
increase efficiency and customer responsiveness. Therefore, while the assessment
expedited certain systems conversions and upgrades, it did not initiate all of
the actions subsequently described. Cooper also assesses major information
systems of newly acquired businesses for year 2000 compliance as part of its
assessment program.

     Four of Cooper's divisions are implementing new enterprise systems with the
remaining divisions revising or upgrading existing software to be year 2000
compliant. One of the divisions implementing a new enterprise system began the
rollout in 1997 with the other three divisions planning the rollouts in the
second and third quarters of 1998. Where possible, businesses have abandoned
home-grown or highly customized applications with purchased, year 2000 compliant
replacements or upgrades. In some situations, operations within a business
abandoned existing software and migrated to consolidated hardware and software
that is year 2000 compliant. Where these solutions were not possible, businesses
have contracted with third parties or committed internal resources to ensure
that all major systems are year 2000 compliant. Cooper believes it was close to
fifty percent complete with its efforts to convert software or install systems
that are year 2000 compliant at the end of 1997. While most efforts are
anticipated to be completed by the end of 1998, it is likely that certain
efforts will be delayed into early 1999.

                                       A-2
<PAGE>   4

     Cooper has also initiated formal communications with its significant
suppliers and large customers to determine the potential risk of disruption to
Cooper's operations if these companies fail to remediate year 2000 issues. The
greatest year 2000 compliance risk to Cooper is that implementation of new
enterprise systems will be delayed beyond the anticipated completion dates in
1998 and the severe shortage of qualified information systems personnel, both
internally and externally, could delay compliance efforts.

     Cooper's total annual capital investment has not increased significantly
over historical expenditures, although like most companies the investment in
information technology has become a larger percentage of annual capital
expenditures. During the period 1996 through 1998, Cooper estimates that it will
have capital expenditures of close to $100 million on information technology
related to new systems installations. During 1997 and until completion of year
2000 compliance efforts, considerable internal resources are being devoted to
these projects. In addition to the internal resources, Cooper has been
incurring, and anticipates continuing to incur, approximately $2 million of
quarterly expense in its compliance efforts.

     The capital expenditures and expenses of the projects, the estimated
percentage of completion to date, and the dates on which Cooper believes it will
complete the year 2000 compliance efforts are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.

RESULTS OF OPERATIONS

     The financial information and discussions that follow, along with the
Consolidated Financial Statements and related footnotes, will aid in
understanding Cooper's results of operations as well as its financial position,
cash flows and indebtedness.

REVENUES

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                               ------------------------------
                                                                 1997       1996       1995
                                                               --------   --------   --------
                                                                       (IN MILLIONS)
<S>                                                            <C>        <C>        <C>
Electrical Products.........................................   $2,568.3   $2,407.5   $2,089.7
Tools & Hardware............................................      749.9      720.1      702.9
Automotive Products.........................................    1,873.2    1,903.2    1,758.8
                                                               --------   --------   --------
          Continuing Revenues...............................    5,191.4    5,030.8    4,551.4
Kirsch......................................................       97.4      252.9      259.5
                                                               --------   --------   --------
          Total Revenues....................................   $5,288.8   $5,283.7   $4,810.9
                                                               ========   ========   ========
</TABLE>

     1997 vs. 1996 Revenues  Cooper's 1997 revenues, excluding Kirsch, increased
3% over 1996. Excluding the impact of eight 1997 acquisitions and the carryover
impact of 1996 acquisitions, revenues for 1997 increased 2%. The strengthening
of the U.S. dollar against most of the functional currencies in which
international operations conduct business reduced revenues measured in U.S.
dollars by approximately $80 million or 1.5% compared to 1996. The strong dollar
also had a negative unquantifiable impact on export sales.

     The Electrical Products segment contributed close to 50% of Cooper's
continuing revenues in 1997, as revenues increased 7% over 1996. Excluding the
effects of 1997 acquisitions and the carryover impact of 1996 acquisitions,
revenues increased 5%. Revenue growth is attributable to strong sales increases
of distribution and transmission equipment and circuit protection products.
Lighting fixtures also benefited from strong demand in the housing and
nonresidential construction markets. Strong international demand in Mexico and
Canada for construction materials was offset somewhat by a soft European market
and the effects of a strong dollar.

     The Tools & Hardware segment made up approximately 14% of Cooper's
continuing revenues in 1997, with revenues increasing 4% over the prior year.
Excluding the carryover impact of 1996 acquisitions, revenues increased 2%
compared to 1996. Sales of domestic hand-held power tools and worldwide assembly
equipment grew to meet continued demand from the automotive and aerospace
industries. Providing a partial offset to this increase was a slight decline in
demand for hand tool products in North America and the effects of a stronger
U.S. dollar against most European currencies.

                                       A-3
<PAGE>   5

     The Automotive Products segment contributed 36% of Cooper's continuing
revenues in 1997 with revenues decreasing slightly from the prior year.
Excluding the effects of two small 1997 acquisitions and the carryover impact of
one 1996 acquisition, revenues declined 2% from the prior year. Sales in the
original equipment market improved as vehicle production levels increased on
existing vehicle platform contracts. Sales in the aftermarket were hampered by
weak demand in most product lines. Temperature control product sales and
remanufactured product lines declined due primarily to competitive price
pressures. Wiper volume declined significantly in the first half of 1997 as more
normal winter weather patterns were experienced in 1997 than in 1996.

     1996 vs. 1995 Revenues  Cooper's 1996 revenues increased 10% over 1995.
Excluding the impact of seven 1996 acquisitions, the carryover impact of 1995
acquisitions (including the CEAG acquisition on December 31, 1995) and one small
1996 divestiture, revenues for 1996 were up 5%.

     The Electrical Products segment comprised approximately 46% of Cooper's
total revenues in 1996, as revenues increased 15% over 1995. Excluding the
effects of 1996 acquisitions and the carryover impact of 1995 acquisitions
(including the CEAG acquisition on December 31, 1995), revenues increased 6%.
Sales of electrical construction materials, lighting fixtures and power
distribution products benefited from continued strength in industrial production
and commercial and industrial construction and renovation activity. Strong
international demand for a number of the segment's transformer and power
management products and a recovery from the 1995 economic downturn in Mexico
contributed to the revenue increase. New product introductions also added to
revenues in 1996.

     The Tools & Hardware segment, including Kirsch, made up approximately 18%
of Cooper's total revenues in 1996, with revenues increasing slightly over the
1995 level. Excluding the effects of two small 1996 acquisitions, revenues were
flat when compared to 1995. Sales of power tools and assembly equipment
continued to grow to meet demand from the automotive and aircraft assembly
industries, both domestically and internationally. However, slowing demand in
the European markets for hand tools and drapery hardware products and the
disruptions from the implementation of a new hand tools distribution center in
North America offset the revenue gains from power tools and assembly equipment.

     The Automotive Products segment contributed approximately 36% of Cooper's
total revenues in 1996, with revenues increasing 8% over 1995. Excluding the
effects of two 1996 acquisitions and carryover impact of one 1995 acquisition,
revenues increased 5% over the prior year. Harsh winter weather and lean
distributor inventories boosted domestic aftermarket demand for wiper blades and
ignition products early in the year. New customers for lighting products and a
partial recovery from the 1995 economic downturn in Mexico also increased
revenues. Product sales in the original equipment market improved as a result of
increased light vehicle production and increased placement of products on new
vehicle platforms. However, a decline in sales of temperature control products,
the result of a mild summer and related product returns; a decline in domestic
sales of heavy duty brake components, the result of decreases in original
equipment production; and lower European aftermarket sales, influenced by weak
economic conditions there, offset some of the gains made in other product
categories.

SEGMENT OPERATING EARNINGS

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                               ------------------------
                                                                1997     1996     1995
                                                               ------   ------   ------
            Reported Segment Operating Earnings:                    (IN MILLIONS)
<S>                                                            <C>      <C>      <C>
Electrical Products.........................................   $445.7   $405.3   $355.5
Tools & Hardware............................................     77.1     91.4     96.5
Automotive Products.........................................    143.5     87.3    180.7
                                                               ------   ------   ------
          Continuing Segment Operating Earnings.............    666.3    584.0    632.7
Kirsch......................................................     74.6     20.0     14.7
                                                               ------   ------   ------
          Segment Operating Earnings........................   $740.9   $604.0   $647.4
                                                               ======   ======   ======
</TABLE>

                                       A-4
<PAGE>   6

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                               ------------------------
                                                                1997     1996     1995
                                                               ------   ------   ------
  Segment Operating Earnings Excluding Nonrecurring Items:          (IN MILLIONS)
<S>                                                            <C>      <C>      <C>
Electrical Products.........................................   $461.6   $408.3   $355.5
Tools & Hardware............................................     99.6     91.4     96.5
Automotive Products.........................................    186.9    189.3    180.7
                                                               ------   ------   ------
          Continuing Segment Operating Earnings.............    748.1    689.0    632.7
Kirsch......................................................      4.8     22.0     14.7
                                                               ------   ------   ------
          Segment Operating Earnings........................   $752.9   $711.0   $647.4
                                                               ======   ======   ======
</TABLE>

     1997 vs. 1996 Segment Operating Earnings  Segment operating earnings in
1997 include nonrecurring charges of $81.8 million for adjustments to the
carrying value of assets, accruals for facility consolidations and related
severance and other obligations committed to by management. Reported segment
operating earnings also include a $69.8 million gain on the sale of Kirsch.
Segment operating earnings in 1996 include nonrecurring charges of an $85.3
million write-down of assets in the Automotive Products segment and $21.7
million in other nonrecurring charges related primarily to facility closings and
consolidations. See Nonrecurring Income and Expenses in the Overview section and
Note 2 of Notes to Consolidated Financial Statements. Excluding nonrecurring
items in 1997 and nonrecurring charges of $107 million in 1996, segment
operating earnings increased 6% over 1996. Excluding Kirsch results from both
years, segment operating earnings increased 9% over 1996. Acquisitions
contributed approximately $11 million or 2% of the increase in segment operating
earnings over 1996.

     The Electrical Products segment operating earnings, excluding nonrecurring
charges of $15.9 million in 1997 and $3.0 million in 1996, improved 13% over the
prior year and contributed 62% of Cooper's continuing segment operating
earnings. Return on revenues improved in 1997 to 18% from 17% in 1996. The 1997
acquisitions and the carryover impact of 1996 acquisitions contributed
approximately $8 million of the increase in earnings. Excluding this impact and
nonrecurring items, segment operating earnings were up 11% over 1996. This
strong growth in earnings is primarily attributable to cost savings in
transformer products, strong revenue growth in higher margin distribution and
certain transmission equipment and circuit protection products and cost
containment across all businesses. All electrical products businesses had
increases in return on revenues, excluding nonrecurring charges, during 1997.

     The Tools & Hardware segment operating earnings, excluding nonrecurring
items of $22.5 million in 1997 and Kirsch, increased 9% from 1996 and
contributed 13% of the continuing segment operating earnings. The incremental
earnings of the carryover impact of two small acquisitions was less than $1.5
million. Return on revenues increased to 13.3%, up .6 percentage points from the
prior year. Increased sales of hand-held power tools and assembly equipment and
leveraging of costs, primarily in the power tools and assembly equipment
businesses, were the primary drivers of the performance. The absence of
implementation costs incurred in the 1996 warehouse and distribution system
conversion at the hand tools operations also contributed to the increase in
return on revenues, partially offset by lower sales volume for hand tools.

     The Automotive Products segment operating earnings, excluding nonrecurring
charges of $43.4 million in 1997 and $102.0 million in 1996, decreased 1% from
the prior year. The segment contributed 25% of continuing segment operating
earnings. Without the impact of two acquisitions, operating earnings declined
2%. Return on revenues increased from 9.9% in 1996 to 10.0% in 1997. Lower sales
volume in the domestic aftermarket for most chassis, temperature control and
wiper products, coupled with competitor price pressures, and a weak European
aftermarket for ignition products contributed to the earnings decline. Increased
sales in the original equipment market, lower spending on promotional expenses
and other costs and lower depreciation and amortization due to the 1996
write-down of brake assets provided a partial offset.

     1996 vs. 1995 Segment Operating Earnings  Segment operating earnings in
1996, excluding nonrecurring charges, included an $85.3 million write-down of
assets in the Automotive Products segment and $21.7 million in other
nonrecurring charges related primarily to facility closings and consolidations.
See Nonrecurring Income and Expense in the Overview section and Note 2 of Notes
to Consolidated Financial Statements. Excluding nonrecurring charges of $107
million, segment operating earnings in 1996 increased 10% over 1995.
Acquisitions contributed approximately $45 million or 7% of the increase in
segment operating earnings over 1995.

     The Electrical Products segment operating earnings, excluding nonrecurring
charges, improved 15% from 1995, and contributed 57% of Cooper's total segment
operating earnings. Return on revenues decreased only slightly in 1996

                                       A-5
<PAGE>   7

to 16.8% due to an unfavorable mix of power distribution products and a
proportionately lower contribution of higher-margin fuse products. Excluding
nonrecurring charges, return on revenues declined less than .1 percentage
points. The 1996 acquisitions and the carryover impact of 1995 acquisitions,
including CEAG, added approximately $36 million of incremental earnings to 1996.
Excluding this impact, segment operating earnings were up 4% over 1995. This
resulted from the growth in revenues from improvements in construction markets,
cost reduction efforts and a more favorable product line mix beginning in the
third quarter of 1996.

     The Tools & Hardware segment operating earnings, excluding Kirsch, declined
$5.1 million when compared to 1995 with the segment, including Kirsch,
contributing 16% of total segment operating earnings before nonrecurring
charges. The incremental earnings impact from 1996 acquisitions was less than $2
million. Return on revenues, excluding Kirsch, of 12.7% in 1996 was below the
1995 level of 13.7%. The favorable impact from prior cost improvement actions,
including the consolidation of forged hand tools manufacturing, and increased
sales of power assembly tools were offset by implementation costs incurred in
the warehouse and distribution system conversion at the hand tools operations
and the effects of slower European markets. Kirsch results included nonrecurring
expenses of $2 million for legal and other costs related to sales of imported
mini blinds containing lead paint.

     The Automotive Products segment operating earnings, before nonrecurring
expenses of $102 million, increased 5% from 1995 and contributed 27% of total
segment operating earnings. Acquisitions provided all of the increase in the
Automotive Products segment operating earnings. Return on revenues, before
nonrecurring expenses, declined from 10.3% in 1995 to 9.9% in 1996. Increased
sales in the North American market for most ignition, wiper, lighting and
steering and suspension products in 1996 contributed to earnings. However, the
North American reduction in production of vehicles utilizing heavy-duty brake
products; continuing severe price competition for brake and temperature control
products and a weak European aftermarket offset the increased sales and related
earnings and contributed to the decline in return on revenues. In addition,
customer changeover costs more than doubled in 1996 as a result of adding two
new large customers and several smaller customers. Price competition continued
in 1996, offsetting many of the efficiency gains achieved through facility
consolidations.

OTHER INCOME AND EXPENSE

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                               ------------------------
                                                                1997     1996     1995
                                                               ------   ------   ------
                                                                    (IN MILLIONS)
<S>                                                            <C>      <C>      <C>
Segment Operating Earnings(1)...............................   $740.9   $604.0   $647.4
Other Income................................................     14.2     23.0     25.5
Nonrecurring Gains..........................................     23.2    150.4     11.7
General Corporate Expense...................................    (61.2)   (77.3)   (55.6)
Interest Expense............................................    (90.4)  (142.1)  (151.0)
                                                               ------   ------   ------
  Income from Continuing Operations before Income Taxes.....   $626.7   $558.0   $478.0
                                                               ======   ======   ======
</TABLE>

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

(1) Includes nonrecurring gain on sale of Kirsch and nonrecurring charges.

     Other Income  Other income in 1997 declined compared to 1996 due to the
absence of dividends on marketable equity securities and the utilization of cash
to reduce average debt outstanding.

     General Corporate Expense  General corporate expenses decreased $16.1
million in 1997 compared to 1996. Excluding nonrecurring charges, general
corporate expenses decreased $7.3 million in 1997 compared to 1996. The 1997 and
1996 expenses included nonrecurring charges of $2.1 million and $10.9 million,
respectively. The 1997 charge relates primarily to information systems and the
1996 charge related primarily to environmental litigation. The remainder of the
decrease was primarily due to lower costs for retirements and severance. General
corporate expenses increased $21.7 million in 1996 compared to 1995. The 1996
general corporate expense includes $10.9 million in nonrecurring expenses
related to environmental litigation. The remainder of the increase from 1995 is
related to costs in connection with the executive incentive plan adopted by
shareholders in 1996 and severance and retirement expenses.

     Nonrecurring Gains  Nonrecurring gains decreased by $127.2 million in 1997
from 1996. The gain on the exchange of the Wyman-Gordon DECS of $23.2 million
was recognized in 1997 while 1996 included $150.4 million in gains on the sale
of marketable equity securities of Belden and Cooper Cameron. Nonrecurring gains
increased $138.7 million in 1996 from 1995 due to lower gains on sales of
marketable equity securities in 1995.

                                       A-6
<PAGE>   8

     Interest Expense  Interest expense for 1997 decreased $51.7 million from
1996. The majority of the decrease was due to the conversion during 1997 of $610
million of Cooper's 7.05% Convertible Subordinated Debentures to Cooper Common
stock. Average debt levels in 1997, excluding the $610 million converted debt,
were also lower than 1996 and contributed to the decline in interest expense.
Interest expense decreased $8.9 million in 1996 from the 1995 level. The decline
was driven by lower average interest rates and lower average debt levels.

INCOME FROM CONTINUING OPERATIONS

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                                -------------------------------------
                                                                  1997          1996          1995
                                                                ---------     ---------     ---------
                                                                (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                                             <C>           <C>           <C>
Income from continuing operations before income taxes.......     $626.7        $558.0        $478.0
Income taxes................................................      232.1         242.6         197.4
                                                                 ------        ------        ------
Income from continuing operations...........................     $394.6        $315.4        $280.6
                                                                 ======        ======        ======
Diluted earnings per share from continuing operations.......     $ 3.26        $ 2.77        $ 2.41
                                                                 ======        ======        ======
</TABLE>

     1997 vs. 1996 Income from Continuing Operations  Income from continuing
operations before income taxes for 1997, exclusive of 1997 net nonrecurring
gains of $9.1 million and 1996 net nonrecurring gains of $32.5 million,
increased to $617.6 million from $525.5 million, an 18% increase. This increase
was primarily the result of the increased segment earnings and lower interest
expense.

     The effective tax rate decreased from 43.5% in 1996 to 37.0% in 1997. The
1996 rate was higher than normal due to the asset write-down which included the
write-off of nondeductible goodwill. Excluding the impact of this write-down,
the effective tax rate was 41.2%. The effective tax rate for 1997 includes $6.1
million related to the favorable settlements of several state income tax issues.
Excluding the 1997 nonrecurring tax benefit, the 1997 effective tax rate was
38%. The rate reduction from 41.2% to 38.0% stems from Cooper's tax planning
efforts, including changing its international tax structure, maximizing tax
incentives for exports and increasing research and development tax credits. In
addition, the impact of nondeductible goodwill on the effective tax rate is
reduced as earnings increase.

     Income from continuing operations increased 25% over 1996. The 1997 net
income includes the effect of (1) the redemption and conversion of Cooper's
7.05% Convertible Subordinated Debentures, (2) the purchase of approximately 3.6
million shares of Cooper's Common stock, (3) the absence of the Kirsch business
for seven months of 1997, and (4) a $6.1 million benefit from settlements of
several state income tax matters. Diluted earnings per share from continuing
operations increased 18% from the 1996 level. The lower interest expense in 1997
related to the conversion of $610 million of 7.05% Convertible Subordinated
Debentures to Cooper Common stock, had no effect on diluted earnings per share
as the interest expense is excluded and the equivalent Cooper Common stock are
included in the calculation of diluted earnings per share for both 1997 and
1996.

     While the purchase of Cooper Common stock and the impact of the $80 million
of 7.05% Convertible Subordinated Debentures redeemed for cash reduced average
shares utilized in the computation of diluted earnings per share, the funding of
these two items increased interest expense, offsetting most of the benefit on
diluted earnings per share. After considering the impact of additional common
stock equivalents, primarily resulting from an increase in market price of a
share of Cooper Common stock during the year, diluted earnings per share were
not impacted by the net reduction in average shares during 1997. The absence of
the Kirsch operations, net of the effect of lower interest expense resulting
from repaying debt with the net proceeds of the sale, reduced earnings per share
for 1997 by approximately $.05. Earnings per share for 1997 also includes
contributions of $.10 of nonrecurring gains (net of nonrecurring expenses) and
the favorable settlements of several state income tax issues. Earnings per share
for 1996 include a contribution of $.05 per share (net of nonrecurring expenses)
from the sale of marketable equity securities.

     1996 vs. 1995 Income from Continuing Operations  Income from continuing
operations before income taxes, exclusive of the third quarter 1996 gain of
$107.2 million on the sale of marketable equity securities and the $85.3 million
write-down in the Automotive Products segment, increased 12% to $536.1 million
compared to $478.0 million in 1995. The increase results primarily from the
increase in operating earnings and the reduction in interest expense offset
partially by an increase in general corporate expense.

     The effective tax rate increased to 43.5% in 1996 from 41.3% in 1995. The
increase resulted primarily from the asset write-down in the Automotive Products
segment, which included a write-down of goodwill that was not

                                       A-7
<PAGE>   9

deductible for income tax purposes. Excluding the gain on the sale of marketable
equity securities and the nonrecurring write-down, the effective tax rate
decreased from 41.3% in 1995 to 41.2% in 1996.

     Income from continuing operations increased 12% due to the factors outlined
above, while diluted earnings per share from continuing operations increased
15%. The full-year impact of the reduction in average shares outstanding
resulting from the Cooper Cameron Exchange Offer completed in mid-year 1995,
accounted for $.09 per share of the earnings per share increase. See Note 18 of
Notes to Consolidated Financial Statements. Both 1996 and 1995 earnings per
share include a net contribution (net of nonrecurring expenses in 1996) of $.05
per share from the sale of marketable equity securities.

PERCENTAGE OF REVENUES

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                               ------------------------
                                                                1997     1996     1995
                                                               ------   ------   ------
<S>                                                            <C>      <C>      <C>
Revenues....................................................    100.0%   100.0%   100.0%
Cost of Sales...............................................     67.8%    68.2%    68.5%
Selling and Administrative..................................     17.5%    17.9%    17.5%
</TABLE>

     1997 vs. 1996 Percentage of Revenues  Cost of sales, as a percentage of
revenues, declined to 67.8% in 1997 from 68.2% in 1996. The decline resulted
primarily from product cost improvements and containments and an overall
favorable mix of higher margin electrical products. Most of the improvement in
cost of sales as a percentage of revenue was in the Electrical Products segment,
with the Tools & Hardware segment, excluding Kirsch, improving to a lesser
extent and the Automotive Products segment being flat with the prior year.
Selling and administrative expenses decreased, as a percentage of revenues, to
17.5% in 1997 from 17.9% in 1996. The inclusion of Kirsch for five months in
1997 and for the full year in 1996, represented .2 percentage points of the
improvement. Each of the segments contributed to the remaining improvement.
Lower general corporate expenses discussed under "General Corporate Expense"
also contributed to the improvement.

     1996 vs. 1995 Percentage of Revenues  Cost of sales, as a percentage of
revenues, declined to 68.2% from 68.5% in 1995. The improvement in the cost of
sales percentage reflects the continued improvement in operating efficiencies
achieved through manufacturing and distribution improvement programs, the
emphasis beginning in 1995 on top line growth through new products, market
penetration and acquisitions offset in part by disruptions resulting from
consolidations and facility closings and the large increase in transformer
sales, which carry a lower margin. Selling and administrative expense, as a
percentage of revenues, increased to 17.9% in 1996 from 17.5% in 1995. The
increase of .4 percentage points in 1996, is primarily attributable to higher
selling and administrative expenses of the CEAG acquisition, acquired December
31, 1995, the higher corporate general expenses discussed under "General
Corporate Expense", additional investments in personnel and other sales
expenses, primarily in the business comprising the Electrical Products segment,
and high customer changeover expenses in the Automotive Products segment.

DISCONTINUED OPERATIONS

     In September 1994, Cooper announced its decision to discontinue its
Petroleum & Industrial Equipment segment through an exchange offer with holders
of Cooper Common stock. On June 30, 1995, Cooper's Common shareholders exchanged
9.5 million shares of their Cooper Common stock for common stock of Cooper
Cameron Corporation, a newly formed company that included all of the assets and
liabilities of the four divisions that comprised Cooper's Petroleum & Industrial
Equipment segment, as well as $375 million of allocated indebtedness. See Note
18 of the Notes to Consolidated Financial Statements for additional information.

     In the second quarter of 1995, Cooper recorded a charge of $186.6 million
($1.45 per diluted share) to reflect the actual loss on the split-off of Cooper
Cameron. The charge was composed of the difference between the historical cost
of Cooper's investment in Cooper Cameron remaining after the September 1994
estimated charge and the market value of Cooper Cameron common stock during the
first few days the common stock traded on a national exchange ($162.8 million),
additional Cooper Cameron operating losses during the period October 1, 1994
through June 30, 1995 ($20.3 million) and additional transaction costs ($3.5
million). The additional operating losses and transaction costs resulted
primarily from the delay in completing the exchange transaction and the
recording by Cooper Cameron of a $17 million pretax charge in the second quarter
of 1995 for the write-down of receivables due from customers in Iran.

                                       A-8
<PAGE>   10

     Under the provisions of the Asset Transfer Agreement between Cooper and
Cooper Cameron, Cooper Cameron was responsible, other than for certain agreed
amounts of estimated operating losses, for its cash requirements between October
1, 1994 and the expiration date of the Exchange Offer. Other than for income tax
liabilities for periods prior to the completion of the Exchange Offer, Cooper
did not retain any liabilities, contingent or otherwise, with respect to the
discontinued operations.

EARNINGS OUTLOOK

     The following sets forth Cooper's general business outlook for 1998, based
on current expectations. The statements are forward looking and actual results
may differ materially. The comparative figures for 1998 include the effects of
acquisitions made during 1997 and exclude 1997 nonrecurring items and the Kirsch
division from the Tools & Hardware segment.

     Electrical Products segment revenues are expected to increase by
approximately fifteen percent, Tools & Hardware segment revenues are expected to
increase approximately five percent and Automotive Products segment revenues are
expected to be about the same as 1997 revenues. Cooper expects operating
earnings for the Electrical Products segment to increase by approximately ten to
fifteen percent. Operating earnings for both the Tools & Hardware segment and
the Automotive Products segment are expected to increase by approximately five
to ten percent.

     The above statements are forward looking, and actual results may differ
materially. The above statements are based on a number of assumptions, risks and
uncertainties. The primary economic assumptions include, without limitation, (1)
modest growth in the domestic economy; (2) a modest improvement in European
markets; (3) a modest increase in construction spending worldwide; (4) no
significant change in raw material costs; (5) no major customer consolidation in
the automotive aftermarket; and (6) no significant adverse changes in the
relationship of the currencies of Western European countries to the U.S. dollar.
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.

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 best judgment that, excluding the year-to-year effects of
acquisitions and divestitures, unit volume increased in the Electrical Products
and Tools & Hardware segments but decreased in the Automotive Products segment
in 1997. During 1996, Cooper's best judgment is that unit volume increased in
the Electrical Products and Automotive Products segments and decreased in the
Tools & Hardware segment.

     During the three-year period ending in 1997, Cooper was unable to increase
prices to fully offset cost increases in selected product offerings in all
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.

                                       A-9
<PAGE>   11

LIQUIDITY AND CAPITAL RESOURCES

  Operating Working Capital

     For purposes of this discussion, operating working capital is defined as
receivables and inventories less accounts payable.

     In 1997, operating working capital, as reported in the consolidated balance
sheet, increased $31.1 million. Excluding acquisitions consummated in December
1997, operating working capital decreased $19.5 million as a result of a $17.3
million decrease in accounts receivable, a $36.4 million decrease in inventories
and a $34.2 million decrease in accounts payable. Excluding the impact of the
December 1997 acquisitions, operating working capital turns increased from 3.8
to 4.0 turns in 1997, a 5% improvement.

     In 1996, operating working capital decreased $58 million as a reduction in
accounts receivable of $33 million and an increase in accounts payable of $32
million contributed to the improvement. Operating working capital turns
increased in excess of 10%.

     In 1995, operating working capital decreased $16 million primarily driven
by a reduction of inventories during the year. All three segments contributed to
the reduction of inventory. Management attention was focused in 1995 on reducing
the build up of inventories that occurred in 1994.

  Cash Flows

     Net cash provided by operating activities in 1997 totaled $494 million.
These funds, along with $216 million in proceeds from the sale of Kirsch and an
increase in debt of $213 million (net of acquisition related assumed debt), were
used to finance net cash outflows for acquisitions of $387 million, capital
expenditures of $196 million, dividends of $157 million and purchases of
Cooper's Common stock of $192 million.

     Net cash provided by operating activities in 1996 totaled $562 million. The
cash generated from operating activities, and $259 million provided from the
sales of marketable equity securities and fixed assets, was utilized to finance
net cash flows for acquisitions of $257 million, capital expenditures of $202
million, dividends of $143 million and debt reduction of $227 million.

     Net cash flows provided by operating activities in 1995 totaled $550
million. This cash, in addition to $40 million generated by sales of fixed
assets and marketable equity securities, was used to fund capital spending of
$188 million, dividends of $164 million, debt reduction of $186 million and
discontinued operations of $48 million.

     In connection with accounting for purchase business combinations, Cooper
records, to the extent appropriate, accruals for the costs of closing duplicate
facilities, severing redundant personnel and integrating the acquired business
into existing Cooper operations. Cash flow from operating activities for each of
the three years in the period ended December 31, 1997, is reduced by the amounts
expended on the various accruals established in connection with each
acquisition. At December 31, 1997, Cooper had accruals totaling $26.0 million
related to these activities. Cooper spent $9.3 million, $24.3 million and $47.0
million in 1997, 1996 and 1995, respectively. Spending in 1998 and future years
is not expected to be at these levels, as most of the major projects related to
earlier acquisitions have been completed and recent acquisitions do not involve
significant restructuring activities. Cooper does not believe that future
spending will impair Cooper's overall financial flexibility. See Note 7 of the
Notes to Consolidated Financial Statements for further information.

  Debt

     The ratio of debt-to-total capitalization was 36.3%, 50.3% and 54.5% at
year-end 1997, 1996 and 1995, respectively. The 1997 and 1996 debt-to-total
capitalization ratio includes the noncash effect of marking the DECS to market.
The 1997 ratio reflects the conversion of $610 million of 7.05% Convertible
Subordinated Debentures into Cooper Common stock and the subsequent purchase of
$192 million of Cooper Common stock. The 1995 ratio reflected the exchange, on
January 1, 1995, of the $1.60 Convertible Exchangeable Preferred Stock for 7.05%
Convertible Subordinated Debentures and the $614.1 million reduction in
shareholders' equity from the June 30, 1995 exchange of Cooper Common stock for
Cooper Cameron common stock.

     During 1996, Cooper filed a shelf registration statement for $300 million
of medium-term notes and issued $50 million of five-year notes at an average
rate of 5.74%. At December 31, 1997, $250 million was available for issuance
under the shelf registration statement.

                                      A-10
<PAGE>   12

     During 1997, Cooper called for redemption its 7.05% Convertible
Subordinated Debentures. Cooper retired all $690 million of the debentures. Of
these debentures, a total of $610 million was converted to approximately 14.8
million shares of Cooper Common stock and approximately $80 million was redeemed
for cash.

     Cooper has targeted a 35% to 45% debt-to-total capitalization ratio and
intends to utilize cash flows to maintain approximately a minimum of a 35%
debt-to-total capitalization ratio with excess cash utilized to purchase shares
of Cooper's Common stock or fund acquisitions.

  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 $196 million in 1997, $202 million in 1996 and $188
million in 1995. Projected capital expenditures for 1998 are anticipated to
exceed 1997 expenditures by ten to fifteen percent. The 1998 anticipated capital
spending represents approximately 55% for various cost-reduction and
capacity-maintenance projects, including machinery and equipment modernization
and enhancement and computer hardware and software projects, 14% for capacity
expansion, 9% related to environmental matters and 22% for other items.

  Interest Rate and Foreign Currency Risk

     Changes in interest rates and foreign currency exchange rates affect
Cooper's earnings and cash flows. In countries where Cooper has significant
investments and where practical, debt is either borrowed in the local functional
currency or foreign currency forward contracts are entered into to, in effect,
exchange U.S. dollar denominated debt into local functional currency debt. While
the purpose of borrowing in local functional currencies is primarily driven by
tax planning considerations, it also reduces the cash flow risk as a significant
portion of cash flows generated by the operations are utilized to pay interest
and principal on the debt. The earnings risk is also reduced since interest
expense is in the same currency as the operating earnings are generated.

     Cooper uses forward foreign currency exchange contracts to reduce the risk
associated with changes in the exchange rates for firm commitments and
anticipated sales or purchases where a product is manufactured or purchased in
one country and sold or consumed in the manufacturing process in another
country. Cooper's policy is to hedge firm commitments to eliminate this risk if
natural hedges do not exist. Anticipated sales or purchases are hedged at the
discretion of the operating businesses. Substantially all forward contracts
expire within one year. At December 31, 1997, insignificant amounts of
anticipated sales and purchases were hedged. Cooper believes that the effects of
currency movements on the respective underlying hedged transactions offset any
gain or loss on forward exchange contracts.

     The table below provides information about Cooper's financial instruments
at December 31, 1997 that are sensitive to changes in interest rates. The table
presents principal cash flows by expected maturity dates and weighted average
interest rates for debt obligations.

<TABLE>
<CAPTION>
                                1998       1999       2000      2001      2002      THEREAFTER     TOTAL
                                -----     ------     ------     -----     -----     ----------     ------
                                                     (IN MILLIONS, WHERE APPLICABLE)
<S>                             <C>       <C>        <C>        <C>       <C>       <C>            <C>
Long-term debt:
  Fixed rate..................  $57.8     $235.7(1)  $  0.5     $50.4     $60.3       $250.0       $654.7
  Average interest rate.......    6.0%       6.5%       6.5%      6.6%      6.6%         6.7%         6.0%
  Variable rate...............  $ 0.5     $ 58.4     $545.4     $ 0.5     $ 0.5       $ 70.5       $675.8
  Average interest rate.......    5.8%       5.7%       5.6%      6.1%      6.1%         6.1%         5.8%
</TABLE>

---------------
(1)Includes $235.2 of 6.0% DECS which are mandatorily exchangeable into shares
   of Wyman-Gordon common stock, or at Cooper's option, into cash in lieu of
   shares. Cooper anticipates delivering the Wyman-Gordon common stock upon
   redemption of the DECS in 1999.

                                      A-11
<PAGE>   13

     The table below provides information about Cooper's financial instruments
at December 31, 1997 in excess of $5 million that are sensitive to foreign
currency exchange rate changes by functional currency. For foreign currency
denominated debt obligations, the table provides principal cash flows, weighted
average interest rates by expected maturity dates and the applicable foreign
currency exchange rate. For foreign currency forward contracts, the table
presents the notional amounts and weighted average exchange rates by contractual
maturity dates. These notional amounts are used to calculate the contractual
payments to be exchanged under the contracts. All amounts are presented in U.S.
dollar equivalents.

<TABLE>
<CAPTION>
                                                                  1998                2000
                                                              ------------        ------------
                                                              (IN MILLIONS, WHERE APPLICABLE)
<S>                                                           <C>                 <C>
U.S. Dollar Functional Currency
Long-term debt denominated in German Deutschemark...........       --               $ 128.3
Average interest rate.......................................       --                   4.0%
Foreign currency exchange rate..............................       --                    .56
Forward Exchange Contracts:
Sell Pounds Sterling/Buy U.S. Dollars
  Notional amount...........................................    $ 175.3                --
  Average contract rate.....................................        1.66               --
Buy Australian Dollars/Sell U.S. Dollars
  Notional amount...........................................    $   7.2                --
  Average contract rate.....................................         .67               --
Buy Italian Lira/Sell U.S. Dollars
  Notional amount...........................................    $   5.4                --
  Average contract rate.....................................        .00057             --
Pounds Sterling Functional Currency
Forward Exchange Contracts:
Buy U.S. Dollars/Sell Pounds Sterling
  Notional amount...........................................    $   5.0                --
  Average contract rate.....................................        1.63               --
</TABLE>

     See Note 16 of Notes to Consolidated Financial Statements for additional
information regarding the fair value of Cooper's financial instruments.

RECENTLY ISSUED ACCOUNTING STANDARDS

     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 Reporting Comprehensive Income ("FAS No.
130") and No. 131 Disclosures About Segments of an Enterprise and Related
Information ("FAS No. 131"). Both FAS No. 130 and FAS No. 131 are effective for
Cooper's calendar year ending December 31, 1998.

     FAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources. Upon
adopting the new standard in 1998, Cooper will report and display comprehensive
income which includes net income plus non-owner changes in equity such as the
change in foreign currency translation, the minimum pension liability, and
unrealized gains or losses on investments in marketable equity securities.

     FAS No. 131 changes the way segment information is presented from an
industry segment approach to a management approach. Under the management
approach, segments are determined based on the operations regularly reviewed by
the chief operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance. FAS No. 131 also allows the
presentation of information on an internally reported basis and changes certain
other disclosures. Cooper is managed in a similar structure to the present
segment disclosures and information reviewed with the Board of Directors and
senior management is in a similar format. Cooper has not presently determined
the extent to which the segment groupings and related disclosures will be
revised when FAS No. 131 is adopted, but does not anticipate major revisions
that would make the information lack all comparability with the current
presentation.

                                      A-12
<PAGE>   14

                              REPORT OF MANAGEMENT

     The management of Cooper Industries is responsible for the preparation,
integrity and fair presentation of the accompanying Consolidated Financial
Statements. Such Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles and, as such, include
amounts based on informed estimates and judgments of management. Management also
prepared the other information included in the 1998 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, that 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. Prompt corrective action is taken to address control
deficiencies and other opportunities for improving the internal control system.

     The Audit Committee of the Board of Directors, which is composed entirely
of directors who are not officers or employees of Cooper, meets periodically
with management, the independent auditors, and the director of internal audit to
discuss the adequacy of internal control and to review accounting, reporting,
auditing and other internal control matters. The internal and independent
auditors have unrestricted access to the Audit Committee.

<TABLE>
<S>                           <C>                                    <C>
/s/ H. John Riley, Jr.        /s/ D. Bradley McWilliams              /s/ Terry A. Klebe
H. John Riley, Jr.            D. Bradley McWilliams                  Terry A. Klebe
Chairman, President and       Senior Vice President and              Vice President and
Chief Executive Officer       Chief Financial Officer                Controller
</TABLE>

                                      A-13
<PAGE>   15

                         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, 1997 and 1996, and the related consolidated
income statements, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cooper
Industries, Inc. at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.

                                    /s/ ERNST & YOUNG LLP

Houston, Texas
January 23, 1998

                                      A-14
<PAGE>   16

                            COOPER INDUSTRIES, INC.

                         CONSOLIDATED INCOME STATEMENTS

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                              ----------------------------------
                                                                1997         1996         1995
                                                              --------     --------     --------
                                                                (IN MILLIONS, EXCEPT PER SHARE
                                                                            DATA)
<S>                                                           <C>          <C>          <C>
Revenues....................................................  $5,288.8     $5,283.7     $4,810.9
Cost of sales...............................................   3,588.3      3,605.7      3,297.5
Selling and administrative expenses.........................     925.3        945.4        841.1
Goodwill amortization.......................................      65.1         65.2         60.8
Nonrecurring gains..........................................     (93.0)      (150.4)       (11.7)
Nonrecurring charges........................................      83.9        117.9           --
Other (income) expense, net.................................       2.1         (0.2)        (5.8)
Interest expense............................................      90.4        142.1        151.0
                                                              --------     --------     --------
  Income from continuing operations before income taxes.....     626.7        558.0        478.0
Income taxes................................................     232.1        242.6        197.4
                                                              --------     --------     --------
  Income from continuing operations.........................     394.6        315.4        280.6
Charge for discontinued operations..........................        --           --       (186.6)
                                                              --------     --------     --------
          Net income........................................  $  394.6     $  315.4     $   94.0
                                                              ========     ========     ========
Income per Common share
  Basic:
     Income from continuing operations......................  $   3.36     $   2.94     $   2.52
     Charge for discontinued operations.....................        --           --        (1.67)
                                                              --------     --------     --------
          Net income........................................  $   3.36     $   2.94     $   0.85
                                                              ========     ========     ========
  Diluted:
     Income from continuing operations......................  $   3.26     $   2.77     $   2.41
     Charge for discontinued operations.....................        --           --        (1.45)
                                                              --------     --------     --------
          Net income........................................  $   3.26     $   2.77     $   0.96
                                                              ========     ========     ========
Cash dividends per Common share.............................  $   1.32     $   1.32     $   1.32
                                                              ========     ========     ========
</TABLE>

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

                                      A-15
<PAGE>   17

                            COOPER INDUSTRIES, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1997          1996
                                                              --------      --------
                                                                  (IN MILLIONS)
<S>                                                           <C>           <C>
                                       ASSETS

Cash and cash equivalents...................................  $   30.3      $   16.1
Receivables.................................................     991.7         959.4
Inventories.................................................     958.2         971.1
Other.......................................................     156.5         151.5
                                                              --------      --------
          Total current assets..............................   2,136.7       2,098.1
                                                              --------      --------
Property, plant and equipment, less accumulated
  depreciation..............................................   1,198.8       1,241.3
Intangibles, less accumulated amortization..................   2,389.9       2,154.9
Investments in marketable equity securities.................     274.8         367.1
Deferred income taxes and other assets......................      52.3          89.0
                                                              --------      --------
          Total assets......................................  $6,052.5      $5,950.4
                                                              ========      ========

                        LIABILITIES AND SHAREHOLDERS' EQUITY

Short-term debt.............................................  $  139.0      $   98.2
Accounts payable............................................     574.5         586.2
Accrued liabilities.........................................     589.5         581.8
Accrued income taxes........................................      23.8          37.3
Current maturities of long-term debt........................      58.3          77.8
                                                              --------      --------
          Total current liabilities.........................   1,385.1       1,381.3
                                                              --------      --------
Long-term debt..............................................   1,272.2       1,737.7
Postretirement benefits other than pensions.................     558.0         606.4
Other long-term liabilities.................................     260.6         334.8
                                                              --------      --------
          Total liabilities.................................   3,475.9       4,060.2
                                                              --------      --------
Common stock, $5.00 par value...............................     615.0         540.2
Capital in excess of par value..............................     679.8         150.1
Retained earnings...........................................   1,514.5       1,275.3
Common stock held in treasury, at cost......................    (149.7)           --
Unearned employee stock ownership plan compensation.........     (66.5)        (92.9)
Other.......................................................     (16.5)         17.5
                                                              --------      --------
          Total shareholders' equity........................   2,576.6       1,890.2
                                                              --------      --------
          Total liabilities and shareholders' equity........  $6,052.5      $5,950.4
                                                              ========      ========
</TABLE>

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

                                      A-16
<PAGE>   18

                            COOPER INDUSTRIES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                               1997       1996       1995
                                                              -------    -------    -------
                                                                      (IN MILLIONS)
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net income................................................  $ 394.6    $ 315.4    $  94.0
  Charge for discontinued operations........................       --         --      186.6
                                                              -------    -------    -------
  Income from continuing operations.........................    394.6      315.4      280.6
  Adjustments to reconcile to net cash provided by operating
     activities:
     Depreciation and amortization..........................    219.6      233.8      218.8
     Deferred income taxes..................................     (3.4)      13.3       65.4
     Gain on sales of marketable equity securities and DECS
      exchange..............................................    (23.2)    (150.4)     (11.7)
     Gain on disposition of business........................    (69.8)        --         --
     Nonrecurring asset write-down..........................     54.8       85.3         --
     Changes in assets and liabilities:(1)
       Receivables..........................................    (31.3)      46.6      (12.1)
       Inventories..........................................    (37.1)       3.3       68.2
       Accounts payable and accrued liabilities.............      8.0       (1.2)      16.6
       Accrued income taxes.................................    (15.3)      28.5      (33.2)
       Other assets and liabilities, net....................     (2.6)     (12.2)     (42.3)
                                                              -------    -------    -------
          Net cash provided by operating activities.........    494.3      562.4      550.3
                                                              -------    -------    -------
Cash flows from investing activities:
  Cash paid for acquired businesses.........................   (386.5)    (257.2)     (11.9)
  Proceeds from disposition of business.....................    216.0        2.3         --
  Capital expenditures......................................   (195.7)    (201.9)    (188.4)
  Proceeds from sales of marketable equity securities.......       --      231.4       14.4
  Proceeds from sales of property, plant and equipment......      8.3       27.6       25.4
                                                              -------    -------    -------
          Net cash used in investing activities.............   (357.9)    (197.8)    (160.5)
                                                              -------    -------    -------
Cash flows from financing activities:
  Proceeds from issuances of debt...........................    564.7      316.0      704.7
  Repayments of debt........................................   (351.8)    (542.7)    (890.3)
  Dividends.................................................   (157.4)    (142.6)    (164.0)
  Acquisition of treasury shares............................   (191.5)        --         --
  Activity under employee stock plans and other.............     15.6        1.7       (5.8)
                                                              -------    -------    -------
          Net cash used in financing activities.............   (120.4)    (367.6)    (355.4)
                                                              -------    -------    -------
Cash flows used by discontinued operations..................       --         --      (47.7)
Effect of exchange rate changes on cash and cash
  equivalents...............................................     (1.8)       1.4        5.7
                                                              -------    -------    -------
Increase (decrease) in cash and cash equivalents............     14.2       (1.6)      (7.6)
Cash and cash equivalents, beginning of year................     16.1       17.7       25.3
                                                              -------    -------    -------
Cash and cash equivalents, end of year......................  $  30.3    $  16.1    $  17.7
                                                              =======    =======    =======
</TABLE>

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

(1)Net of the effects of acquisitions, divestitures and translation.

     The Notes to Consolidated Financial Statements are an integral part of
these statements. See Note 17 for information on noncash investing and financing
activities.

                                      A-17
<PAGE>   19

                            COOPER INDUSTRIES, INC.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                           $1.60
                                        CONVERTIBLE              CAPITAL                             UNEARNED
                                        EXCHANGEABLE            IN EXCESS                         EMPLOYEE STOCK
                                         PREFERRED     COMMON    OF PAR     RETAINED   TREASURY   OWNERSHIP PLAN
                                           STOCK       STOCK      VALUE     EARNINGS    STOCK      COMPENSATION     OTHER
                                        ------------   ------   ---------   --------   --------   --------------   -------
                                                                          (IN MILLIONS)
<S>                                     <C>            <C>      <C>         <C>        <C>        <C>              <C>
BALANCE DECEMBER 31, 1994.............     $30.6       $584.6   $1,176.5    $1,153.4   $    --       $(147.4)      $ (56.6)
  Net income..........................                                          94.0
  Common stock dividends..............                                        (148.4)
  Exchange of Common stock for Cooper
     Cameron common stock.............                 (47.5)     (382.6)                                2.6
  Redemption of $1.60 Preferred for
     7.05% Convertible Subordinated
     Debentures.......................     (30.6)                 (664.4)
  Stock issued under employee stock
     plans............................                   1.8        12.0
  Principal payments by ESOP..........                                                                  25.4
  Adjustment for minimum pension
     liability........................                                                                                 8.7
  Translation loss....................                                                                               (15.0)
  Unrealized gain on investments in
     marketable equity securities.....                                                                               126.8
  Reclassification to realized gain...                                                                                (7.2)
  Other activity......................                   0.5         0.1         1.3                    (2.2)
                                           -----       ------   --------    --------   -------       -------       -------
BALANCE DECEMBER 31, 1995.............        --       539.4       141.6     1,100.3        --        (121.6)         56.7
  Net income..........................                                         315.4
  Common stock dividends..............                                        (142.6)
  Stock issued under employee stock
     plans............................                   0.5         4.4
  Principal payments by ESOP..........                                                                  28.7
  Adjustment for minimum pension
     liability........................                                                                                (1.5)
  Translation loss....................                                                                                (4.9)
  Unrealized gain on investments in
     marketable equity securities.....                                                                                60.3
  Reclassification to realized gain...                                                                               (93.2)
  Other activity......................                   0.3         4.1         2.2                                   0.1
                                           -----       ------   --------    --------   -------       -------       -------
BALANCE DECEMBER 31, 1996.............        --       540.2       150.1     1,275.3        --         (92.9)         17.5
  Net income..........................                                         394.6
  Common stock dividends..............                                        (157.4)
  Conversion of 7.05% Convertible
     Subordinated Debentures..........                  73.9       536.3
  Purchase of treasury shares.........                                                  (191.5)
  Stock issued under employee stock
     plans............................                   0.7        (7.5)                 40.9
  Principal payments by ESOP..........                                                                  26.4
  Adjustment for minimum pension
     liability........................                                                                                27.6
  Translation loss....................                                                                               (38.1)
  Unrealized loss on investments in
     marketable equity securities.....                                                                                (9.1)
  Reclassification to realized gain...                                                                               (14.4)
  Other activity......................                   0.2         0.9         2.0       0.9                          --
                                           -----       ------   --------    --------   -------       -------       -------
BALANCE DECEMBER 31, 1997.............     $  --       $615.0   $  679.8    $1,514.5   $(149.7)      $ (66.5)      $ (16.5)(1)
                                           =====       ======   ========    ========   =======       =======       =======
</TABLE>

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

(1)At December 31, 1997, "Other" included the minimum pension liability of
   $(20.1) million, net of tax, cumulative translation adjustments of $(107.3)
   million and the unrealized gain on Cooper's investment in Wyman-Gordon, net
   of the increase in the market value of the DECS, of $110.9 million, net of
   tax.

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

                                      A-18
<PAGE>   20

                            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 Industries, Inc. ("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, 71% of inventories at December 31, 1997 and 1996
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 -- 5 to 10 years.

INTANGIBLES: Intangibles consist primarily of goodwill related to purchase
acquisitions. With minor exceptions, the goodwill is being amortized over 40
years from the respective acquisition dates. The carrying value of goodwill is
reviewed at the lowest level feasible whenever there are indications that the
goodwill may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on undiscounted cash flows over the remaining
amortization periods, the carrying value of the goodwill will be reduced by the
estimated shortfall in discounted cash flows.

INVESTMENTS IN MARKETABLE EQUITY SECURITIES: Marketable equity securities
received or retained in connection with the divestiture of businesses are
reflected as available-for-sale securities and are stated at fair market value
at each balance sheet date, with unrealized gains and losses, net of tax,
reported as a component of shareholders' equity. The cost of securities sold is
determined based on the specific identification method for purposes of recording
realized gains and losses.

DERIVATIVE FINANCIAL INSTRUMENTS: On a recurring basis, foreign currency forward
exchange contracts and commodity contracts are entered into to reduce risks of
adverse changes in foreign exchange rates and commodity prices. All contracts
are hedges of actual or anticipated transactions with the gain or loss on the
contract recognized in the same period and in the same category of income or
expense as the underlying hedged transaction. Cooper does not enter into
speculative derivative transactions or hedges of anticipated transactions unless
there is a high probability the transactions will occur. Due to the short term
of contracts and a restrictive policy, contract terminations or anticipated
transactions that do not occur are rare and insignificant events which are
accounted for through income in the period they occur. As discussed in Note 6,
in December 1995, Cooper hedged its investment in marketable equity securities
of Wyman-Gordon Company ("Wyman-Gordon"). Cooper currently is not a party to any
interest rate swap agreements used to manage its interest rate risk. Cooper's
policy is to recognize the interest rate differential to be received or paid
over the lives of the interest rate swap as an adjustment to interest expense.

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

INCOME PER COMMON SHARE: In the fourth quarter of 1997, Cooper adopted Statement
of Financial Accounting Standards No. 128, Earnings Per Share. The new
accounting standard required all prior periods' income per Common share to be
restated based on a new computational method for average shares outstanding.
Adopting the new standard had no impact on previously reported fully diluted,
currently referred to as diluted, income per Common share from

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

continuing operations and increased primary, currently referred to as basic,
income per common share $.01 in each of the years ended December 31, 1996 and
1995. Unlike primary earnings per share, basic earnings per share excludes the
dilutive effects of common stock equivalents. Adopting the new standard also
increased 1995 diluted net income by $.12 per share as the new standard requires
the use of income from continuing operations rather than net income to determine
whether common stock equivalents are antidilutive.

RECLASSIFICATION: Certain amounts in the Consolidated Income Statements for the
years ended December 31, 1996 and 1995 have been reclassified to conform to the
1997 presentation.

NOTE 2: NONRECURRING ITEMS

     During 1997, Cooper realized a gain of $69.8 million ($43.3 million after
income taxes) from the sale of Kirsch (See Note 3) and exchanged a portion of
its DECS(SM) (Debt Exchangeable for Common Stock) for Wyman-Gordon common stock
and realized a gain of $23.2 million ($14.4 million after income taxes) (See
Note 6). Cooper also incurred charges of $83.9 million ($52.0 million after
income taxes) for actions management committed to during the period after
concluding an evaluation of (1) geographic manufacturing and distribution
facilities within the Tools & Hardware segment; (2) certain sales, marketing and
distribution activities within the Automotive Products segment; and (3)
information systems relating to year 2000 compliance efforts. The 1997 charges
include adjustments to the carrying value of assets of $54.8 million and
accruals for continuing obligations for replaced systems and facility
consolidations of $29.1 million. The charges decreased operating earnings of the
Electrical Products segment by $15.9 million, Tools & Hardware segment by $22.5
million, and the Automotive Products segment by $43.4 million and increased
general corporate expenses by $2.1 million. The gains, combined with
nonrecurring charges and a $6.1 million income tax benefit related to the
settlements of certain state income tax matters (See Note 11), resulted in a net
$.10 per share of nonrecurring income being recognized in 1997.

     Cooper has begun a consolidation of certain international manufacturing and
distribution facilities in the Tools & Hardware segment and the consolidation of
certain sales, marketing and distribution activities in the Automotive Products
segment. Adjustments to the carrying value of assets and accruals were recorded
for projects committed to by management. Severance and certain other costs
related to projects committed to by management are not expensed until the
affected employees are notified. A majority of the consolidations have been
announced and such costs were accrued and expensed during 1997. The remaining
committed but unannounced consolidations are not anticipated to result in
significant additional expenses.

     During 1997, Cooper began negotiations with Standard Motor Products, Inc.
("SMP") to exchange Cooper's temperature control business for the brake products
business owned by SMP. In December 1997, Cooper received the necessary
government approval for completion of the transaction with SMP. Closing of the
business exchange is subject to negotiation of a definitive agreement and is
currently anticipated to occur in the first quarter of 1998.

     During 1997, Cooper also assessed the impact of existing system
capabilities to function at the turn of the century. Four of Cooper's nine
divisions are implementing new enterprise systems with the remaining divisions
modifying or replacing existing software. Where possible, businesses have
abandoned home-grown or highly customized applications with purchased, year 2000
compliant replacements or upgrades. In some situations, operations within a
business abandoned existing software and migrated to consolidated hardware and
software that is year 2000 compliant. Where these solutions were not possible,
businesses either contracted to third parties or committed internal resources to
ensure that all major systems are year 2000 compliant. Cooper recorded a $43.7
million charge in 1997 primarily related to the adjustment in the carrying value
of abandoned hardware and software. While depreciation and amortization are
reduced by the effect of the write-down, depreciation and amortization of new
systems and equipment, as well as expenses incurred to revise current software
to be year 2000 compliant, and implementation costs of new systems, are likely
to exceed the reduction in depreciation and amortization in most future periods.

     During the third quarter of 1996 Cooper completed a strategic review of its
automotive brake business, resulting in a write-down of approximately 21% of the
long-lived assets of the business. The Wagner brake product lines, acquired as
part of the McGraw-Edison acquisition in 1985, were subjected to intense
competitive pricing and anticipated profitability improvements during 1996 were
not being realized. As a result of the review of the Wagner brake products,
Cooper replaced Wagner technology with technology acquired in the 1994
acquisition of Abex Friction Products.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Based on the strategic review, Cooper concluded that the projected undiscounted
cash flows of certain Wagner product lines would not recover the carrying value
of the long-lived assets and goodwill associated with these product lines.
Accordingly, Cooper recorded an $85.3 million write-down, including $31.5
million in goodwill, in the third quarter of 1996. The write-down reduced
depreciation and amortization costs equivalent to approximately $.03 per share
in 1997. Cooper has incurred expenses executing its revised brake strategy,
which have offset some of the benefit of the reduced depreciation and
amortization in 1997.

     During 1996, Cooper initiated a strategic review of most of its businesses.
As a result of those actions and certain legal matters, Cooper incurred
nonrecurring charges totaling $32.6 million during 1996. A total of $3.0 million
was incurred in the Electrical Products segment primarily related to a
write-down of property and equipment at a facility; $2.0 million in the Tools &
Hardware segment for legal and other costs related to sales of imported mini
blinds containing lead paint; $16.7 million in the Automotive Products segment
primarily related to costs incurred on facility closings and consolidations; and
$10.9 million of corporate costs primarily related to environmental litigation.
Cooper anticipates future cost savings from the facility closings and
consolidations, however, the amounts are not quantifiable with any degree of
accuracy. The nonrecurring charges of $32.6 million have an insignificant effect
on future earnings and expenditures beyond 1996 are insignificant. During 1996,
Cooper realized $150.4 million in gains on the sale of marketable equity
securities (See Note 6). These gains combined with nonrecurring charges resulted
in a net $.05 per share of nonrecurring income being recognized in 1996. In
1995, Cooper realized a gain of $.05 per share from the sale of marketable
equity securities (See Note 6).

NOTE 3: ACQUISITIONS AND DIVESTITURES

     In 1997, Cooper completed one large acquisition, seven small product-line
acquisitions and the divestiture of Kirsch. In December 1997, Cooper acquired
Menvier-Swain Group plc ("Menvier-Swain") for a total cost of approximately
$274.5 million. Menvier-Swain manufactures and markets emergency lighting, fire
detection and security systems primarily in Europe. The seven small product line
acquisitions had an aggregate cost of $184.2 million. A total of $349.3 million
of goodwill was recorded, on a preliminary basis, with respect to the
acquisitions. Five of the small acquisitions and Menvier-Swain were in the
Electrical Products segment, and the other two small acquisitions were in the
Automotive Products segment. On May 30, 1997, Cooper completed the sale of its
Kirsch window treatment division for $216 million. For the five months ended May
30, 1997, and the year ended December 31, 1996, Kirsch had revenues of $97.4
million and $252.9 million, and operating earnings of $4.8 million and $20.0
million, respectively. Kirsch was part of the Tools & Hardware segment.

     In 1996, Cooper completed seven small product-line acquisitions and one
small divestiture. The total cost of the acquisitions was approximately $97.4
million. A total of $74.2 million of goodwill was recorded, including 1997
revisions of $.9 million with respect to the acquisitions. Three acquisitions
and the divestiture were in the Electrical Products segment, two were in the
Tools & Hardware segment and two were in the Automotive Products segment.

     In 1995, Cooper completed one large acquisition, two small product-line
acquisitions, and the divestiture, through an exchange offer with shareholders,
of Cooper Cameron Corporation ("Cooper Cameron") (See Note 18). Effective
December 31, 1995, Cooper acquired CEAG Sicherheitstechnik GmbH ("CEAG") from
Asea Brown Boveri AG, Mannheim. The total cost of the acquisition, which was
paid on January 5, 1996, was approximately $164 million. CEAG manufactures and
markets explosion proof electrical products and business security and emergency
lighting products. The two small product-line acquisitions had an aggregate cost
of $13.5 million. A total of $139.5 million of goodwill was recorded with
respect to the three acquisitions. One small acquisition was in the Automotive
Products segment and the two other acquisitions were in the Electrical Products
segment.

     The acquisitions have been accounted for as purchases and the results of
the acquisitions are included in Cooper's consolidated income statements since
the respective acquisition dates.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4: INVENTORIES

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1997        1996
                                                              --------    --------
                                                                 (IN MILLIONS)
<S>                                                           <C>         <C>
Raw materials...............................................  $  295.7    $  302.9
Work-in-process.............................................     178.7       205.2
Finished goods..............................................     512.1       513.8
Perishable tooling and supplies.............................      54.5        54.2
                                                              --------    --------
                                                               1,041.0     1,076.1
Excess of current standard costs over LIFO costs............     (82.8)     (105.0)
                                                              --------    --------
          Net Inventories...................................  $  958.2    $  971.1
                                                              ========    ========
</TABLE>

NOTE 5: PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLES

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                1997        1996
                                                              ---------   ---------
                                                                  (IN MILLIONS)
<S>                                                           <C>         <C>
Property, plant and equipment:
  Land and land improvements................................  $    71.5   $    82.9
  Buildings.................................................      543.4       569.7
  Machinery and equipment...................................    1,196.1     1,171.5
  Tooling, dies and patterns................................      189.0       171.0
  All other.................................................      263.1       303.0
  Construction in progress..................................      134.8       103.7
                                                              ---------   ---------
                                                                2,397.9     2,401.8
  Accumulated depreciation..................................   (1,199.1)   (1,160.5)
                                                              ---------   ---------
                                                              $ 1,198.8   $ 1,241.3
                                                              =========   =========
Intangibles:
  Goodwill..................................................  $ 2,906.0   $ 2,614.7
  Other.....................................................       17.1        17.8
                                                              ---------   ---------
                                                                2,923.1     2,632.5
  Accumulated amortization..................................     (533.2)     (477.6)
                                                              ---------   ---------
                                                              $ 2,389.9   $ 2,154.9
                                                              =========   =========
</TABLE>

NOTE 6: INVESTMENTS IN MARKETABLE EQUITY SECURITIES

     At December 31, 1997 and 1996, Cooper's investment in marketable equity
securities consisted of its investment in Wyman-Gordon common stock. During
1996, Cooper sold its remaining common shares of Belden Inc. and all of the
shares of Cooper Cameron common stock (See Note 18). In December 1995, Cooper
issued 16.5 million DECS at $13.50 which, at maturity, are mandatorily
exchangeable into shares of Wyman-Gordon common stock or, at Cooper's option,
into cash in lieu of shares. The number of shares or the amount of cash will be
based on the average market value of Wyman-Gordon common stock on the 20 trading
days prior to maturity on January 1, 1999 (the "WGC Maturity Price"). If the WGC
Maturity Price is greater than or equal to $15.66 per share, each DECS will be
exchangeable at maturity into the equivalent of .862 shares of Wyman-Gordon
common stock. If the WGC Maturity Price is less than or equal to $13.50 per
share, each DECS will be exchangeable at maturity into one Wyman-Gordon share.
If the WGC Maturity Price is between $13.50 and $15.66 per share, each DECS will
be exchangeable into a fraction of shares of Wyman-Gordon common stock between
 .862 and 1, based on an exchange ratio. If the DECS are redeemed for cash, the
amount of cash will be equal to the number of Wyman-Gordon shares exchangeable
under the terms of the DECS times the WGC Maturity Price.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The DECS are a hedge of Cooper's investment in Wyman-Gordon common stock
and will result in Cooper realizing a minimum after-tax gain of $85.4 million
upon redemption of the DECS. This unrealized gain, plus any additional
appreciation of the investment in Wyman-Gordon common stock since the issuance
of the DECS, is included in shareholders' equity as an unrealized gain on
investments in marketable equity securities, net of tax. At December 31, 1997
and 1996, Cooper's long-term debt includes an increase in the market value of
Wyman-Gordon common stock related to the DECS of $47.9 million and $93.7
million, respectively. The offset to the debt increase, net of tax, decreased
the unrealized gain on investments in marketable equity securities included in
shareholders' equity. During 1997, Cooper exchanged a portion of the DECS for
Wyman-Gordon common stock and realized a gain of $23.2 million ($14.4 million
after income taxes).

     The aggregate fair value of the marketable equity securities was $274.8
million and $367.1 million at December 31, 1997 and 1996, respectively. Gross
unrealized gains on investments in marketable equity securities were $218.5
million ($170.6 million, net of the increase in the fair market value of the
DECS) and $300.8 million ($207.1 million, net of the increase in the fair market
value of the DECS) at December 31, 1997 and 1996, respectively. During 1996 and
1995, marketable equity securities were sold for proceeds of $231.4 million and
$14.4 million, respectively, resulting in realized gains of $150.4 million and
$11.7 million, respectively. Cooper incurred nonrecurring charges during 1996
which, when combined with the gains from the sale of marketable equity
securities, resulted in Cooper realizing $.05 per share in 1996. In 1995, Cooper
realized $.05 per share from the sale of marketable equity securities.

NOTE 7: ACCRUED LIABILITIES

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              ----------------
                                                               1997      1996
                                                              ------    ------
                                                               (IN MILLIONS)
<S>                                                           <C>       <C>
Salaries, wages and employee benefit plans..................  $236.8    $201.5
Product and environmental liability accruals................    77.8      95.0
Commissions and customer incentives.........................    76.3      80.3
Facility integration of acquired businesses.................    26.0      48.0
Other (individual items less than 5% of total current
  liabilities)..............................................   172.6     157.0
                                                              ------    ------
                                                              $589.5    $581.8
                                                              ======    ======
</TABLE>

     At December 31, 1997, Cooper had accruals of $28.8 million with respect to
potential product liability claims and $104.9 million with respect to potential
environmental liabilities, including $55.9 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 $8.2 million of known claims with
respect to ongoing operations, $12.8 million of known claims for previously
divested operations and $7.8 million which represents an estimate of claims that
have been incurred but not yet reported. While Cooper is generally self-insured
with respect to product liability claims, Cooper has insurance coverage for
individual 1997 claims above $3.0 million. Insurance levels have varied from
year to year.

     Environmental remediation costs are accrued based on estimates of known
environmental remediation exposures. Such accruals are adjusted as information
develops or circumstances change. The environmental liability accrual includes
$39.6 million related to sites owned by Cooper and $65.3 million for retained
environmental liabilities related to sites previously owned by Cooper and
third-party sites where Cooper was a contributor. Third-party sites usually
involve multiple contributors where Cooper's liability will be determined based
on an estimate of Cooper's proportionate responsibility for the total cleanup.
The amount actually accrued for such sites is based on these estimates as well
as an assessment of the financial capacity of the other potentially responsible
parties.

     It has been Cooper's consistent practice to include the entire product
liability accrual and a significant portion of the environmental liability
accrual as current liabilities, although only approximately 10-20% of the
balance classified as current will be spent on an annual basis. The annual
effect on earnings for product liability is essentially equal to the amounts
disbursed. In the case of environmental liability, the annual expense is
considerably smaller than the disbursements, since the vast majority of Cooper's
environmental liability has been recorded in connection with

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, and facility relocations. The following
table summarizes the accrual balances and activity during each of the last three
years:

<TABLE>
<CAPTION>
                                            1997      1996      1995
                                           ------    ------    ------
                                                 (IN MILLIONS)
<S>                                        <C>       <C>       <C>
Activity during each year:
Balance, beginning of year..............   $ 48.0    $ 65.6    $122.3
Spending................................     (9.3)    (24.3)    (47.0)
Kirsch disposition......................     (0.4)       --        --
Reclassifications.......................    (15.8)     (2.2)    (27.8)
Acquisitions -- initial allocation......      4.7       4.1        .1
Acquisitions -- final allocation
  adjustment............................      1.2       4.9      13.8
Translation.............................     (2.4)     (0.1)      4.2
                                           ------    ------    ------
Balance, end of year....................   $ 26.0    $ 48.0    $ 65.6
                                           ======    ======    ======
Balances by category of accrual:
Plant shut-down and realignment.........   $ 17.5    $ 37.7    $ 43.2
Other facility relocations and
  severance.............................      5.2       6.8       8.5
Other realignment and integration.......      3.3       3.5      13.9
                                           ------    ------    ------
                                           $ 26.0    $ 48.0    $ 65.6
                                           ======    ======    ======
Balances by acquisition:
Champion................................   $  1.2    $ 10.4    $ 21.4
Moog Automotive.........................       .2       2.5      13.3
Abex Friction Products..................      9.1      12.4      13.3
Other...................................     15.5      22.7      17.6
                                           ------    ------    ------
                                           $ 26.0    $ 48.0    $ 65.6
                                           ======    ======    ======
</TABLE>

     Plant shut-down and realignment includes the costs to terminate personnel,
shut down the facilities, terminate leases and similar costs. The spending
related primarily to downsizing and consolidating international facilities in
Mexico, Venezuela, Belgium and the United Kingdom totaling $7.7 million and
$26.3 million in 1996 and 1995, respectively. Other facility relocations and
severance include costs to consolidate sales and marketing operations of the
acquired company into Cooper operations, termination costs of redundant
personnel and shut-down costs of redundant warehouses and the acquired
companies' headquarters. Other realignment and integration costs include costs
to liquidate joint ventures, exit product lines and miscellaneous costs.

     During the three years ended December 31, 1997, accruals reversed to income
were insignificant. Reclassifications were substantially all related to
termination and other benefit payments due former employees and lease
obligations on closed facilities reclassified to trade accounts payable and
other accrued liabilities. Acquisitions-final allocation adjustment represents
adjustments to goodwill for finalization of the purchase price allocations
recorded in the previous year. Substantially all spending related to these
accruals represented cash outlays by Cooper. The amounts related to

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the acquisitions of CEAG on the last business day of 1995, Abex on the last
business day of 1994 and Zanxx in November 1994 were preliminary estimates that
were finalized in the year following the acquisition. The CEAG, Abex and Zanxx
acquisitions had insignificant accruals for terminations and no significant
individual exit plan costs were accrued.

NOTE 8: LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                               --------------------
                                                                 1997        1996
                                                               --------    --------
                                                                  (IN MILLIONS)
<S>                                                            <C>         <C>
3.98%-6.47%* commercial paper and Deutschemark denominated
  bank loans maturing at various dates through January
  1998......................................................   $  528.3    $  151.3
7.05% convertible subordinated debentures, due 2015.........         --       690.4
6.41%-7.99% second series medium-term notes, due through
  2010......................................................      357.6       429.6
6.0% exchangeable notes, due 1999...........................      235.2       316.5
7.19%-7.74%* Pound Sterling bank loans and notes payable
  maturing at various dates through 2005....................       88.2        94.2
5.74% third series medium-term notes, due 2001..............       50.0        50.0
5.52%* floating-rate ESOP notes, due through 1999...........       16.0        40.5
Other.......................................................       55.2        43.0
                                                               --------    --------
                                                                1,330.5     1,815.5
Current maturities..........................................      (58.3)      (77.8)
                                                               --------    --------
Long-term portion...........................................   $1,272.2    $1,737.7
                                                               ========    ========
</TABLE>

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

* Weighted average interest rates at December 31, 1997. The weighted average
  interest rates on commercial paper and bank loans, Pounds Sterling bank loans
  and notes and ESOP notes were, 3.35%, 6.42% and 5.12%, respectively at
  December 31, 1996.

     Cooper has U.S. committed credit facilities of $835 million that expire in
2000, and $315 million that expire in 1998. At December 31, 1997, Cooper had an
effective "shelf" registration statement, which may be used to issue an
additional $250 million of medium-term notes from time to time.

     At December 31, 1997, Cooper had $551.7 million of its $1.15 billion U.S.
committed credit facilities available, after considering commercial paper
backup. At December 31, 1996, $1.02 billion of its total $1.22 billion U.S.
committed credit facilities was available after considering commercial paper
backup, and none of its 30 million Pound Sterling credit facility was available.
The 30 million Pound Sterling credit facility expired in 1997 and was not
re-established. The agreements for the credit facilities require that Cooper
maintain certain financial ratios, including a prescribed limit on debt as a
percentage of total capitalization. Retained earnings are unrestricted as to the
payment of dividends, except to the extent that payment would cause a violation
of the prescribed limit on the debt to total capitalization ratio.

     Interest rates on Cooper's commercial paper and U.S. bank loans were
generally 2.8% below the U.S. prime rate during 1997 and 1996. Total interest
paid during 1997, 1996 and 1995 was $107 million, $141 million and $134 million,
respectively.

     Commercial paper of $400 million and bank loans of $202.7 million were
reclassified to long-term debt at December 31, 1997 and 1996, respectively,
reflecting Cooper's intention to refinance these amounts during the twelve-
month period following the balance sheet date through either continued
short-term borrowing or utilization of available credit facilities.

     Effective January 1, 1995, Cooper exchanged all of the outstanding $1.60
Convertible Exchangeable Preferred Stock for $691.2 million of 7.05% Convertible
Subordinated Debentures due 2015 and $3.8 million in cash related to fractional
shares. During 1997, Cooper called for redemption the outstanding debentures
with a total of $610 million converting to approximately 14.8 million shares of
Cooper Common stock and approximately $80 million being redeemed for cash.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In December 1995, Cooper issued $222.8 million in 6% Exchangeable Notes
(DECS) due January 1, 1999. At maturity, the notes are mandatorily exchangeable
into shares of Wyman-Gordon common stock owned by Cooper or, at Cooper's option,
into cash in lieu of shares. During 1997, Cooper exchanged a portion of the DECS
($33.8 million) for Wyman-Gordon common stock (See Note 6). At December 31, 1997
and 1996, Cooper's long-term debt includes $47.9 million and $93.7 million,
respectively, which represents the increase in the market value of the
Wyman-Gordon common stock exchangeable into the DECS. The offset to the debt
increase, net of tax, decreased the unrealized gain on investments in marketable
equity securities, both of which are included in shareholders' equity.

     The floating-rate ESOP notes are indebtedness of Cooper's ESOP. Cooper has
guaranteed the payment of the ESOP notes; accordingly, the notes are reported as
Cooper's debt (See Note 14).

     Maturities of long-term debt for the five years subsequent to December 31,
1997 are $58.3 million, $294.1 million, $545.9 million, $50.9 million and $60.8
million, respectively. Cooper anticipates delivering Wyman-Gordon common stock
in settlement of the DECS, which represents $235.2 million of the 1999
maturities. The future net minimum lease payments under capital leases and
obligations under operating leases are not significant.

NOTE 9: COMMON AND PREFERRED STOCK

COMMON STOCK

     At December 31, 1997, 1996 and 1995, 250,000,000 shares of Common stock
were authorized of which 120,161,446 and 108,038,851 and 107,876,821 shares were
issued and outstanding at December 31, 1997, 1996 and 1995, respectively. During
1997, Cooper issued 14,785,831 shares in exchange for the redemption of the
7.05% Convertible Subordinated Debentures (See Note 8). During the year ended
December 31, 1997, Cooper purchased 3,645,017 shares as treasury stock at an
average price of $52.54 per share and 813,387 of these shares were reissued in
connection with employee stock plans. During 1995, Cooper exchanged 9,500,000
shares of Cooper Common stock for Cooper Cameron common stock (See Note 18). At
December 31, 1997, Cooper had 12,818,206 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, 1997 and 1996, 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, 1997 and 1996, no Preferred shares were issued or outstanding.

NOTE 10: STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN

     Under Cooper stock option plans, officers, directors and key employees may
be granted options to purchase Cooper's Common stock at no less than 100% of the
market price on the date the option is granted. Options generally become
exercisable ratably over a three-year period commencing one year from the date
of grant and have a maximum term of ten years. The plans also provide for the
granting of performance-based stock awards to certain key executives.

     Cooper follows the intrinsic value method of accounting for stock options
and performance-based stock awards as prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interpretations. Accordingly, no compensation expense is recognized under
Cooper's fixed stock option plans or Employee Stock Purchase Plan. Compensation
expense of $8.2 million, $7.1 million and $3.8 million was recognized in the
consolidated income statements during 1997, 1996 and 1995, respectively for the
performance-based stock awards. If compensation expense for stock options and
performance-based stock awards granted under Cooper's stock based compensation
plans during 1997 and 1996 was recognized using the alternative fair value
method of accounting under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, net income and earnings per share would
have decreased by approximately 1.2% in both 1997 and 1996. The fair value was
estimated on the date of grant, using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in 1997 and
1996, respectively: dividend yield of 2.8% and 3.2%, expected volatility of
20.1% and 20.3%, risk free interest rates of 6.4% and 6.1% and expected lives of
7 years and 6 years.

     A summary of the status of Cooper's fixed stock option plans for officers
and employees as of December 31, 1997 and activity during the three years ended
December 31, 1997 is presented below:

<TABLE>
<CAPTION>
                                                  1997                   1996                   1995
                                          --------------------   --------------------   --------------------
                                                      WEIGHTED               WEIGHTED               WEIGHTED
                                                      AVERAGE                AVERAGE                AVERAGE
                                                      EXERCISE               EXERCISE               EXERCISE
                                           SHARES      PRICE      SHARES      PRICE      SHARES      PRICE
                                          ---------   --------   ---------   --------   ---------   --------
<S>                                       <C>         <C>        <C>         <C>        <C>         <C>
Outstanding at beginning of year........  3,189,083    $44.05    2,748,219    $46.48    2,951,660    $49.19
Granted.................................    974,900    $45.06    1,044,000    $39.06      903,700    $39.06
Exercised...............................   (491,165)   $41.67      (12,679)   $39.06     (125,500)   $37.75
Canceled................................   (559,741)   $50.68     (590,457)   $46.68     (981,641)   $48.91
                                          ---------              ---------              ---------
Outstanding at end of year..............  3,113,077    $43.55    3,189,083    $44.05    2,748,219    $46.48
                                          =========              =========              =========
Options exercisable at end of year......  1,361,573              1,571,842              1,416,896
Options available for grant at end of
  year..................................  4,706,406              5,760,467              1,676,054
</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   12/31/97        LIFE        PRICE      12/31/97      PRICE
---------------  -----------   -----------   --------   -----------   --------
<S>              <C>           <C>           <C>        <C>           <C>
    $39.06        1,531,406        5.9        $39.06       681,902     $39.06
    $45.06          902,000        9.1        $45.06            --         --
$50.13 - $52.81     679,671         .6        $51.64       679,671     $51.64
                  ---------                              ---------
                  3,113,077        5.6                   1,361,573
                  =========                              =========
</TABLE>

     During 1997, options to purchase 9,000 shares of Common stock were granted
to nonemployee directors at an exercise price of $45.44 and options for 6,000
shares were exercised at $27.13 per share. During 1996, options to purchase
9,000 shares of Common stock were granted to nonemployee directors at an
exercise price of $42.13 and options for 8,000 shares were exercised at $27.00
per share. During 1995, options for 4,000 shares were granted, net of the annual
retainer fee, at $17.31 per share and options for 6,000 shares were exercised at
$25.44 per share. At December 31, 1997, options under the director plans for
12,000 Common shares were exercisable at $14.69 to $24.00 per share, and 174,800
shares were reserved for future grants.

EMPLOYEE STOCK PURCHASE PLAN

     Participants in the Employee Stock Purchase Plan receive an option to
purchase Common stock at a price that is the lesser of 90% of the market value
on the offering date or 100% of the market value on the purchase date. On
September 8, 1997, a total of 575,135 shares were sold to employees at $35.33
per share. At December 31, 1997, subscriptions for 711,332 shares of Common
stock were outstanding at $45.68 per share or, if lower, the average market
price on September 10, 1999, which is the purchase date. At December 31, 1997,
an aggregate of 3,042,973 shares of Common stock were reserved for future
issuance.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11: INCOME TAXES

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               1997     1996     1995
                                                              ------   ------   ------
                                                              (IN MILLIONS, EXCEPT FOR
                                                                    PERCENTAGES)
<S>                                                           <C>      <C>      <C>
Components of income before income taxes:
  U.S. operations...........................................  $526.0   $434.7   $384.9
  Foreign operations........................................   100.7    123.3     93.1
                                                              ------   ------   ------
          Income from continuing operations before income
           taxes............................................  $626.7   $558.0   $478.0
                                                              ======   ======   ======
Components of income tax expense:
  Current:
     U.S. Federal...........................................  $166.9   $156.9   $ 82.1
     U.S. state and local...................................    26.2     20.9     23.3
     Foreign................................................    42.4     51.5     26.6
                                                              ------   ------   ------
                                                               235.5    229.3    132.0
                                                              ------   ------   ------
  Deferred:
     U.S. Federal...........................................     4.2      2.2     51.0
     U.S. state and local...................................    (9.3)    10.2      5.8
     Foreign................................................     1.7       .9      8.6
                                                              ------   ------   ------
                                                                (3.4)    13.3     65.4
                                                              ------   ------   ------
          Income tax expense................................  $232.1   $242.6   $197.4
                                                              ======   ======   ======
Total income taxes paid.....................................  $252.1   $208.4   $158.2
                                                              ======   ======   ======
Effective tax rate reconciliation:
  U.S. Federal statutory rate...............................    35.0%    35.0%    35.0%
  State and local income taxes..............................     2.4      2.8      3.4
  Foreign statutory rate differential.......................    (1.0)     (.4)     (.5)
  Nondeductible goodwill....................................     3.4      4.0      4.7
  Automotive asset goodwill write-down......................      --      2.3       --
  State tax settlements(1)..................................    (1.0)      --       --
  Foreign Sales Corporation.................................    (0.8)    (0.5)    (0.6)
  Tax credits...............................................    (1.0)    (0.2)      --
  Other.....................................................      --       .5     (0.7)
                                                              ------   ------   ------
          Effective tax rate attributable to continuing
           operations.......................................    37.0%    43.5%    41.3%
                                                              ======   ======   ======
</TABLE>

---------------
(1) During 1997, Cooper settled several state income tax matters and recognized
    a $6.1 million benefit in its income tax provision.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1997       1996
                                                              -------    -------
                                                                (IN MILLIONS)
<S>                                                           <C>        <C>
Components of deferred tax liabilities and assets:
  Deferred tax liabilities:
     Property, plant and equipment and intangibles..........  $(121.4)   $(143.6)
     Unrealized net gain on investments in marketable equity
      securities and DECS...................................    (59.7)     (72.5)
     Inventories............................................    (63.8)     (63.8)
     Employee medical program funding.......................    (11.5)     (11.5)
     Employee stock ownership plan..........................    (22.0)     (19.7)
     Pension plans..........................................    (30.2)     (24.8)
     Other..................................................    (53.0)     (65.1)
                                                              -------    -------
          Total deferred tax liabilities....................   (361.6)    (401.0)
                                                              -------    -------
  Deferred tax assets:
     Postretirement benefits other than pensions............    226.2      242.6
     Accrued liabilities....................................    195.0      193.1
     Minimum pension liability..............................     13.3       31.9
     Net operating loss carryforwards.......................      2.3       15.2
     Other..................................................     19.8       29.7
                                                              -------    -------
          Total deferred tax assets.........................    456.6      512.5
                                                              -------    -------
  Valuation allowances......................................    (16.3)     (16.3)
                                                              -------    -------
          Net deferred tax assets...........................  $  78.7    $  95.2
                                                              =======    =======
</TABLE>

     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, 1997 and 1996 include the additional U.S. tax estimated to be
payable on substantially all unremitted earnings of foreign subsidiaries.

NOTE 12: PENSION PLANS

     Cooper and its subsidiaries have numerous pension plans covering
substantially all domestic employees and pension and similar arrangements in
accordance with local customs covering employees at foreign locations. The
assets of the various domestic and foreign plans are maintained in various
trusts and consist primarily of equity and fixed-income securities. Funding
policies range from five to thirty years. Pension benefits for salaried
employees are generally based upon career earnings. Benefits for hourly
employees are generally based on a dollar unit, multiplied by years of service.
Aggregate pension expense amounted to $37.8 million, $41.5 million and $40.7
million during 1997, 1996 and 1995, respectively. The amount of expense with
respect to Cooper's various defined benefit pension plans is set forth in the
table below. During 1997, 1996 and 1995, expense with respect to domestic and
foreign defined contribution plans (primarily related to various groups of
hourly employees) amounted to $18.7 million, $18.9 million and $16.2 million,
respectively. Also included in pension expense are gains and losses on
curtailments and settlements and other matters. Cooper partially or completely
settled or curtailed one salaried plan in 1997 resulting in a net loss of $.5
million and four defined benefit plans for hourly employees in 1995 resulting in
a reversion to Cooper of surplus assets totaling $1.0 million during 1995.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               1997     1996     1995
                                                              ------   ------   ------
                                                                   (IN MILLIONS)
<S>                                                           <C>      <C>      <C>
Components of defined benefit plan net pension expense:

Service cost -- benefits earned during the year.............  $23.1    $23.7    $21.6
Interest cost on projected benefit obligation...............   69.7     69.1     67.6
Actual return on assets.....................................  (93.7)   (79.2)   (65.9)
Net amortization and deferral...............................   19.5      9.0      1.2
                                                              -----    -----    -----
Net pension expense.........................................  $18.6    $22.6    $24.5
                                                              =====    =====    =====
</TABLE>

The funded status of the plans at December 31 was as follows:

<TABLE>
<CAPTION>
                                                             ASSETS EXCEED       ACCUMULATED BENEFITS
                                                         ACCUMULATED BENEFITS        EXCEED ASSETS
                                                         ---------------------   ---------------------
                                                           1997        1996        1997        1996
                                                         ---------   ---------   ---------   ---------
                                                                         (IN MILLIONS)
<S>                                                      <C>         <C>         <C>         <C>
Actuarial present value of:
  Vested benefit obligation............................   $(585.7)    $(476.3)    $(291.9)    $(419.9)
                                                          =======     =======     =======     =======
  Accumulated benefit obligation.......................   $(618.8)    $(509.2)    $(318.3)    $(446.1)
                                                          =======     =======     =======     =======
  Projected benefit obligation.........................   $(632.3)    $(529.0)    $(330.8)    $(453.0)
Plan assets at fair value..............................     762.8       624.3       212.5       319.0
                                                          -------     -------     -------     -------
Projected benefit obligation less than (in excess of)
  plan assets..........................................     130.5        95.3      (118.3)     (134.0)
Unrecognized net (gain) loss...........................     (52.2)      (46.1)       51.8        75.2
Unrecognized net (asset) obligation from adoption
  date.................................................      (5.6)       (7.7)        2.3         4.5
Unrecognized prior service cost........................      (3.7)       (4.4)        7.2         5.1
Adjustment required to recognize minimum liability.....        --          --       (41.2)      (86.8)
                                                          -------     -------     -------     -------
Pension asset (liability) at end of year...............   $  69.0     $  37.1     $ (98.2)    $(136.0)
                                                          =======     =======     =======     =======
</TABLE>

<TABLE>
<CAPTION>
                                                              1997                       1996
                                                    ------------------------   ------------------------
                                                    DOMESTIC   INTERNATIONAL   DOMESTIC   INTERNATIONAL
                                                    --------   -------------   --------   -------------
<S>                                                 <C>        <C>             <C>        <C>
Actuarial assumptions used:
  Discount Rate...................................  7 1/2%       6-7 1/4%      7 1/2%     6 1/2-8 1/4%
  Rate of compensation increase...................  4 3/4%           4-6%      4 3/4%           4-6%
  Expected long-term rate of return on assets.....  8 1/2%     7 1/2-9 3/4%    8 1/2%      7 1/2-10%
</TABLE>

NOTE 13: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

     The benefits provided under Cooper's various postretirement 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. While Cooper has numerous plans, primarily
resulting from Cooper's extensive acquisition activity, the vast majority of the
annual expense is related to employees who are already retired. In fact, as a
result of actions taken by Cooper starting in 1989, virtually no active salaried
employees continue to earn retiree medical benefits, and the number of active
hourly employees earning such benefits has been greatly diminished.
Additionally, Cooper continues to amend its various plans to provide for
appropriate levels of cost sharing and other cost-control measures.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Postretirement benefit cost includes the following components:

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                               -----------------------
                                                                1997     1996    1995
                                                               ------   ------   -----
                                                                    (IN MILLIONS)
<S>                                                            <C>      <C>      <C>
Service cost -- benefits earned during the year.............   $  0.6   $  0.6   $ 0.6
Interest cost on accumulated postretirement benefit
  obligation................................................     30.2     30.5    36.5
Net amortization and deferral...............................    (12.7)   (10.5)  (19.0)
                                                               ------   ------   -----
Postretirement benefit cost.................................   $ 18.1   $ 20.6   $18.1
                                                               ======   ======   =====
</TABLE>

Amounts recognized in the consolidated balance sheets were as follows:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                               ---------------
                                                                1997     1996
                                                               ------   ------
                                                                (IN MILLIONS)
<S>                                                            <C>      <C>
Accumulated postretirement benefit obligation (APBO):
  Retirees..................................................   $356.8   $452.9
  Employees eligible to retire..............................     24.3      7.5
  Other employees...........................................     10.2     12.6
                                                               ------   ------
                                                                391.3    473.0
Unrecognized prior service costs............................     13.9     22.0
Unrecognized net gain.......................................    152.8    111.4
                                                               ------   ------
Accrued postretirement benefit cost.........................   $558.0   $606.4
                                                               ======   ======
</TABLE>

<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                        --------------------------------------------
                                                               1997                    1996
                                                        -------------------    ---------------------
                                                             (IN MILLIONS, EXCEPT PERCENTAGES)
<S>                                                     <C>                    <C>
Actuarial assumptions:
  Discount rate......................................                 6.75%                    7.23%
  Ensuing year to 2002 health care cost trend rate...   11% ratable to 5.5%    11.5% ratable to 5.5%
Effect of 1% change in health care cost trend rate:
  Increase in APBO...................................                 $34.8                    $40.9
  Increase in expense................................                 $ 2.7                    $ 2.7
</TABLE>

NOTE 14: COOPER SAVINGS AND EMPLOYEE STOCK OWNERSHIP PLANS

     All full-time domestic employees, except for certain bargaining unit
employees, are eligible to participate in the Cooper Savings Plan ("CO-SAV").
Under the terms of the Plan, employee savings deferrals are partially matched
with contributions by Cooper of Common stock consisting of either an allocation
of shares in Cooper's Employee Stock Ownership Plan ("ESOP") or new shares
issued to the ESOP.

     Cooper makes annual contributions to the ESOP to fund the payment of
principal and interest on ESOP debt (See Note 8). All dividends received by the
ESOP are used to pay debt service. As the debt is repaid, unallocated shares are
allocated to participants to satisfy Cooper's matching obligation or to replace
dividends on allocated shares with Cooper Common shares.

     For shares purchased by the ESOP prior to 1994, compensation expense is
equal to Cooper's matching obligation, adjusted for the difference between the
fair market value and cost of the shares released. Compensation expense is
reduced by the amount of dividends paid on unallocated ESOP shares available for
future matching. In addition, all shares issued to the ESOP are considered
outstanding for purposes of computing earnings per share. For shares purchased
by the ESOP in 1994, compensation expense is recorded equal to the amount of
Cooper's CO-SAV matching obligation, with the difference between the fair market
value and cost of shares released recorded as an adjustment to capital in excess
of par value. Dividends paid on unallocated shares are recorded as a reduction
of ESOP debt and accrued interest. Unallocated shares are not treated as
outstanding in the earnings per share computation.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Dividends paid on unallocated shares purchased prior to 1994 of $1.6
million and $2.3 million during 1997 and 1996, respectively, were used to reduce
the amount of cash required to fund principal and interest payments on ESOP
debt. Dividends paid on allocated ESOP shares purchased prior to 1994 of $4.7
million and $4.3 million during 1997 and 1996, respectively, were used to pay
additional principal and interest payments in order to release shares equivalent
to the dividend amount to participants in the savings plan. Cooper contributed
an additional $21.6 million and $26.6 million in cash to the ESOP during 1997
and 1996, respectively, to fund principal and interest payments on debt
associated with shares purchased prior to 1994.

     During 1994, Cooper sold 1.6 million shares to the ESOP for $82.3 million
in cash. The 1994 sales were funded by loans between the ESOP and Cooper, which
for financial statement purposes are treated as eliminated intercompany loans.
The fair value of the remaining unallocated ESOP shares purchased during 1994
was $34.0 million at December 31, 1997. The number of allocated, committed to be
released, and unallocated ESOP shares held at December 31, 1997 and 1996 is
summarized below.

<TABLE>
<CAPTION>
                                                   SHARES PURCHASED        SHARES PURCHASED
                                                       IN 1994              PRIOR TO 1994
                                                  ------------------    ----------------------
                                                   1997       1996        1997         1996
                                                  -------    -------    ---------    ---------
<S>                                               <C>        <C>        <C>          <C>
Allocated.......................................  619,320    668,146    3,638,849    3,532,167
Committed to be released........................    8,156     11,271       60,510      130,275
Unallocated.....................................  692,942    740,880      725,412    1,327,446
</TABLE>

     Compensation expense with respect to the CO-SAV plan and the ESOP was $18.9
million, $23.5 million and $21.7 million and interest expense on ESOP debt was
$1.4 million, $2.7 million and $4.2 million in 1997, 1996 and 1995,
respectively.

NOTE 15: INDUSTRY SEGMENTS, DOMESTIC AND INTERNATIONAL OPERATIONS

INDUSTRY SEGMENTS

     Cooper's operations consist of three segments: Electrical Products, Tools &
Hardware and Automotive Products. Markets for Cooper's products and services are
worldwide, with the United States being the largest market.

     The Electrical Products segment manufactures and markets electrical and
electronic distribution and circuit protection products and lighting fixtures
for use in residential, commercial and industrial construction, maintenance and
repair and products for use by utilities and industries for primary power
distribution and control.

     The Tools & Hardware segment produces and markets tools and hardware items
for use in residential, commercial and industrial construction, maintenance and
repair and for general industrial and consumer use. This segment manufactured
and marketed window treatments through May 30, 1997.

     The Automotive Products segment manufactures and distributes spark plugs,
wiper blades, lamps, brake friction materials and other products for use by the
automotive aftermarket and in automobile assemblies. In addition, this segment
manufactures and distributes suspension, steering, temperature control,
driveline and brake system components and material for the automotive
aftermarket.

     Intersegment sales and related receivables for each of the years presented
were immaterial.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Financial information by industry segment was as follows:

<TABLE>
<CAPTION>
                                               REVENUES                  OPERATING EARNINGS             IDENTIFIABLE ASSETS
                                    ------------------------------   ---------------------------   ------------------------------
                                       YEAR ENDED DECEMBER 31,         YEAR ENDED DECEMBER 31,              DECEMBER 31,
                                    ------------------------------   ---------------------------   ------------------------------
                                      1997       1996       1995      1997      1996      1995       1997       1996       1995
                                    --------   --------   --------   -------   -------   -------   --------   --------   --------
                                                                            (IN MILLIONS)
<S>                                 <C>        <C>        <C>        <C>       <C>       <C>       <C>        <C>        <C>
Electrical Products(1)............  $2,568.3   $2,407.5   $2,089.7   $ 445.7   $ 405.3   $ 355.5   $2,464.4   $1,985.0   $2,000.4
Tools & Hardware(1)(2)............     847.3      973.0      962.4     151.7     111.4     111.2      548.9      773.2      759.7
Automotive Products(1)............   1,873.2    1,903.2    1,758.8     143.5      87.3     180.7    2,547.6    2,594.0    2,635.3
                                    --------   --------   --------   -------   -------   -------   --------   --------   --------
                                    $5,288.8   $5,283.7   $4,810.9     740.9     604.0     647.4    5,560.9    5,352.2    5,395.4
                                    ========   ========   ========
Other income......................                                      14.2      23.0      25.5
Nonrecurring gains(3).............                                      23.2     150.4      11.7
General corporate(1)..............                                     (61.2)    (77.3)    (55.6)     487.1      575.3      646.0
Interest expense..................                                     (90.4)   (142.1)   (151.0)
                                                                     -------   -------   -------
Consolidated income from
  continuing
  operations before income
  taxes...........................                                   $ 626.7   $ 558.0   $ 478.0
                                                                     =======   =======   =======
Investments in unconsolidated
  affiliates......................                                                                      4.5       22.9       22.5
                                                                                                   --------   --------   --------
Consolidated assets...............                                                                 $6,052.5   $5,950.4   $6,063.9
                                                                                                   ========   ========   ========
</TABLE>

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

(1)The respective 1997 and 1996 operating earnings amount includes nonrecurring
   expenses of $15.9 million and $3.0 million for Electrical Products, $22.5
   million and $2.0 million for Tools & Hardware and $43.4 million and $102.0
   million (including an $85.3 million asset write-down) for Automotive Products
   and $2.1 million and $10.9 million for general corporate expense (See Note
   2).

(2)The Tools & Hardware segment includes revenues and operating earnings for the
   Kirsch division through May 30, 1997. Operating earnings include a gain on
   the sale of Kirsch of $69.8 million in 1997.

(3)Includes gain on the exchange of DECS of $23.2 million in 1997 and gains on
   the sale of investments in marketable equity securities of $150.4 million and
   $11.7 million in 1996 and 1995, respectively (See Note 6).
---------------

<TABLE>
<CAPTION>
                                       DEPRECIATION          GOODWILL AMORTIZATION       CAPITAL EXPENDITURES
                                 ------------------------   ------------------------   ------------------------
                                 YEAR ENDED DECEMBER 31,    YEAR ENDED DECEMBER 31,    YEAR ENDED DECEMBER 31,
                                 ------------------------   ------------------------   ------------------------
                                  1997     1996     1995     1997     1996     1995     1997     1996     1995
                                 ------   ------   ------   ------   ------   ------   ------   ------   ------
                                                                 (IN MILLIONS)
<S>                              <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Electrical Products...........   $ 61.2   $ 63.4   $ 52.6   $27.9    $26.9    $23.1    $ 79.2   $ 79.1   $ 62.4
Tools & Hardware..............     26.5     35.2     36.1     4.5      4.6      4.8      37.0     32.7     31.6
Automotive Products...........     64.9     67.4     66.2    32.7     33.7     32.9      78.4     87.1     85.7
Corporate.....................      1.9      2.6      3.1      --       --       --       1.1      3.0      8.7
                                 ------   ------   ------   -----    -----    -----    ------   ------   ------
                                 $154.5   $168.6   $158.0   $65.1    $65.2    $60.8    $195.7   $201.9   $188.4
                                 ======   ======   ======   =====    =====    =====    ======   ======   ======
</TABLE>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DOMESTIC AND INTERNATIONAL OPERATIONS

     Transfers between domestic and international operations, principally
inventory transfers, are designed to charge the receiving organization at
third-party arms-length prices that are generally sufficient to recover
manufacturing costs and provide a reasonable return. Export sales to
unaffiliated customers included in domestic sales were $366.9 million, $302.5
million and $268.5 million in 1997, 1996 and 1995, respectively. Of total export
sales, approximately 39% in 1997, 41% in 1996 and 39% in 1995 were to Asia,
Africa, Australia and the Middle East; 26% in 1997, 25% in 1996 and 27% in 1995
were to Canada and Europe; 35% in 1997, and 34% in 1996 and 1995 were to Latin
America. Domestic and international financial information was as follows:

<TABLE>
<CAPTION>
                                               REVENUES                 OPERATING EARNINGS           IDENTIFIABLE ASSETS
                                    ------------------------------   ------------------------   ------------------------------
                                       YEAR ENDED DECEMBER 31,       YEAR ENDED DECEMBER 31,             DECEMBER 31,
                                    ------------------------------   ------------------------   ------------------------------
                                      1997       1996       1995      1997     1996     1995      1997       1996       1995
                                    --------   --------   --------   ------   ------   ------   --------   --------   --------
                                                                          (IN MILLIONS)
<S>                                 <C>        <C>        <C>        <C>      <C>      <C>      <C>        <C>        <C>
Domestic(1).......................  $4,297.7   $4,294.2   $4,030.2   $628.8   $459.9   $540.8   $4,128.6   $4,132.8   $4,171.2
                                    --------   --------   --------   ------   ------   ------   --------   --------   --------
International:(1)
  Europe..........................     678.8      737.9      537.5     58.7     88.2     56.1    1,125.9      987.9      959.2
  Canada..........................     219.1      256.7      250.8     14.9      6.3     10.7      138.1      146.6      131.9
  Other...........................     290.0      257.2      225.7     39.6     50.4     39.9      363.9      311.9      280.5
                                    --------   --------   --------   ------   ------   ------   --------   --------   --------
    Sub-total International.......   1,187.9    1,251.8    1,014.0    113.2    144.9    106.7    1,627.9    1,446.4    1,371.6
Eliminations:
  Transfers to International......    (153.5)    (178.2)    (165.4)      --       --       --      (42.8)     (57.1)     (62.1)
  Transfers to Domestic...........     (43.3)     (84.1)     (67.9)      --       --       --     (141.0)    (158.3)     (75.4)
  Other...........................        --         --         --     (1.1)     (.8)     (.1)     (11.8)     (11.6)      (9.9)
                                    --------   --------   --------   ------   ------   ------   --------   --------   --------
                                    $5,288.8   $5,283.7   $4,810.9    740.9    604.0    647.4    5,560.9    5,352.2    5,395.4
                                    ========   ========   ========
Other income......................                                     14.2     23.0     25.5
Nonrecurring gains(2).............                                     23.2    150.4     11.7
General corporate(3)..............                                    (61.2)   (77.3)   (55.6)     487.1      575.3      646.0
Interest expense..................                                    (90.4)  (142.1)  (151.0)
                                                                     ------   ------   ------
Consolidated income from
  continuing operations before
  income taxes....................                                   $626.7   $558.0   $478.0
                                                                     ======   ======   ======
Investments in unconsolidated
  affiliates......................                                                                   4.5       22.9       22.5
                                                                                                --------   --------   --------
Consolidated assets...............                                                              $6,052.5   $5,950.4   $6,063.9
                                                                                                ========   ========   ========
</TABLE>

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

(1) The 1997 domestic, Europe and other operating earnings amount includes
    nonrecurring expenses of $56.8 million, $15.3 million and $9.7 million,
    respectively. The 1996 domestic operating earnings includes nonrecurring
    expenses of $107.0 million. The 1997 domestic operating earnings also
    include a gain on the sale of Kirsch of $69.8 million.

(2) Includes gain on the exchange of DECS of $23.2 million in 1997 and gains on
    the sale of investments in marketable equity securities of $150.4 million
    and $11.7 million in 1996 and 1995, respectively (See Note 6).

(3) Includes nonrecurring expenses of $2.1 million and $10.9 million in 1997 and
    1996, respectively.
---------------

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

<TABLE>
<CAPTION>
                                                                  INTERNATIONAL REVENUES
                                                              ------------------------------
                                                                1997       1996       1995
                                                              --------   --------   --------
                                                                      (IN MILLIONS)
<S>                                                           <C>        <C>        <C>
Electrical Products.........................................  $  612.7   $  578.6   $  355.2
Tools & Hardware(1).........................................     319.6      357.2      354.8
Automotive Products.........................................     543.8      537.5      506.6
                                                              --------   --------   --------
                                                              $1,476.1   $1,473.3   $1,216.6
                                                              ========   ========   ========
</TABLE>

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

(1) Includes $29.1 million in 1997, $83.3 million in 1996 and $90.0 in 1995 of
    Kirsch revenues.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 16: OFF-BALANCE-SHEET RISK, CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF
         FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVES

     As a result of having sales and purchases and other transactions
denominated in currencies other than the functional currencies used by Cooper's
businesses, Cooper is exposed to the effect of foreign exchange rate
fluctuations on its cash flows and earnings. To the extent possible, Cooper
utilizes natural hedges to minimize the effect on cash flows of fluctuating
foreign currencies. When natural hedges are not sufficient, it is Cooper's
policy to enter into forward foreign exchange contracts to hedge all significant
transactions for periods consistent with the terms of the underlying
transactions. Cooper does not engage in speculative transactions. While forward
contracts affect Cooper's results of operations, they do so only in connection
with the underlying transactions. Gains and losses on these contracts offset
losses and gains on the transactions being hedged. The volume of forward
activity engaged in by Cooper from year to year fluctuates in proportion to the
level of worldwide cross-border transactions, and contracts generally have
maturities that do not exceed one year. The table below summarizes, by currency,
the contractual amounts of Cooper's forward exchange contracts at December 31,
1997 and 1996.

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              ----------------
                                                               1997      1996
                                                              ------    ------
                                                               (IN MILLIONS)
<S>                                                           <C>       <C>
British Pound Sterling(1)...................................  $175.3    $  7.7
Canadian Dollar.............................................      --      58.2
German Deutschemark.........................................     4.1      27.8
Italian Lira................................................     5.4      16.9
Spanish Peseta..............................................     1.3      10.6
Australian Dollar...........................................     7.2       6.9
Japanese Yen................................................     2.2       4.6
Dutch Guilder...............................................     2.5       1.8
Other.......................................................    11.0      12.8
                                                              ------    ------
                                                              $209.0    $147.3
                                                              ======    ======
</TABLE>

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

(1)Substantially all of the British Pound Sterling forward contracts were
   entered into in December 1997 and matured in January 1998.

     In an effort to reduce interest expense on Cooper's fixed-rate borrowings,
Cooper entered into an interest rate swap in 1991, which matured in February
1996, that converted a $50 million fixed rate borrowing into a floating-rate
borrowing resulting in an effective interest rate of 6.2% during 1995.

     In the normal course of business, Cooper has letters of credit, performance
bonds and other guarantees which are not reflected in the consolidated balance
sheets. In the past, no significant claims have been made against these
financial instruments. Management believes the likelihood of performance under
these instruments is minimal and expects no material losses to occur in
connection with these instruments. Cooper's other off-balance-sheet risks are
not material.

CONCENTRATIONS OF CREDIT RISK

     Concentrations of credit risk with respect to trade receivables are limited
due to the wide variety of customers and no one customer exceeding 3% of
accounts receivable. Credit risk is also limited by the world-wide markets into
which Cooper's products are sold, as well as their dispersion across many
different geographic areas.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     Cooper's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables, debt instruments and foreign
currency forward contracts. The book values of cash and cash equivalents, trade
receivables and trade payables are considered to be representative of their
respective fair values. Cooper had approximately $1.5 billion and $1.9 billion
of debt instruments at December 31, 1997 and 1996, respectively. The book value
of these instruments was approximately equal to fair value at December 31, 1997
and 1996. Based on year-end

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 1997 and 1996.

NOTE 17: SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES

     The following noncash transactions have been excluded from the consolidated
statements of cash flows:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                              -------------------------------
                                                               1997        1996        1995
                                                              -------     -------     -------
                                                                       (IN MILLIONS)
<S>                                                           <C>         <C>         <C>
Assets acquired and liabilities assumed or incurred from the
  acquisition of businesses:
  Fair value of assets acquired.............................  $ 532.1     $ 131.6     $ 249.9
  Cash used to acquire businesses, net of cash acquired.....   (386.5)      (93.2)     (175.9)(1)
                                                              -------     -------     -------
Liabilities assumed or incurred.............................  $ 145.6(2)  $  38.4     $  74.0
                                                              =======     =======     =======
Noncash increase (decrease) in net assets from:
  Conversion of 7.05% Convertible Subordinated Debentures
     into Cooper Common stock...............................  $ 610.0     $    --     $    --
  Exchange of DECS for Wyman-Gordon common stock............     33.8          --          --
  Retirement of Cooper Common shares exchanged for Cooper
     Cameron common shares..................................       --          --       427.5
  Exchange of $1.60 Convertible Exchangeable Preferred Stock
     into 7.05% Convertible Subordinated Debentures.........       --          --       691.2
</TABLE>

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

(1) Includes approximately $164 million at December 31, 1995 for the acquisition
    of CEAG that was paid on January 5, 1996 (See Note 3).

(2) Includes $46.2 million of notes exchanged for Menvier-Swain common stock.

NOTE 18: DISCONTINUED OPERATIONS

     In September 1994, Cooper announced its decision to establish its Petroleum
& Industrial Equipment segment as an independent publicly traded company, Cooper
Cameron, through an exchange offer with Cooper's common shareholders. The
exchange offer was completed on June 30, 1995, at which time 9.5 million shares
of Cooper Common stock were exchanged for 85.5% of Cooper Cameron common stock.
The Petroleum & Industrial Equipment segment split-off has been accounted for as
a discontinued operation.

     During the second quarter of 1995, Cooper recorded an additional charge of
$186.6 million, with no tax benefit, to reflect the actual loss on the split-off
of Cooper Cameron. This additional charge was composed of the difference between
the historical cost of Cooper's investment in Cooper Cameron remaining after the
initial September 1994 estimated charge and the market value of Cooper Cameron
common stock during the first few days the common stock traded on a national
exchange ($162.8 million), additional Cooper Cameron operating losses during the
period October 1, 1994 through June 30, 1995 ($20.3 million) and additional
transaction costs ($3.5 million). The additional operating losses and
transaction costs resulted primarily from the delay in completing the exchange
transaction and the recording by Cooper Cameron of a $17 million pretax charge
in the second quarter of 1995 for the write-down of receivables due from
customers in Iran.

     Cooper retained a 14.5% interest in Cooper Cameron, which was accounted for
as a marketable equity security. Cooper sold its entire investment in Cooper
Cameron common stock during 1996 (See Note 6).

                                      A-36
<PAGE>   38
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 19: NET INCOME PER COMMON SHARE

<TABLE>
<CAPTION>
                                                    BASIC                           DILUTED
                                        ------------------------------   ------------------------------
                                           YEAR ENDED DECEMBER 31,          YEAR ENDED DECEMBER 31,
                                        ------------------------------   ------------------------------
                                          1997       1996       1995       1997       1996       1995
                                        --------   --------   --------   --------   --------   --------
                                                     ($ IN MILLIONS, SHARES IN THOUSANDS)
<S>                                     <C>        <C>        <C>        <C>        <C>        <C>
Income from continuing operations.....  $  394.6   $  315.4   $  280.6   $  394.6   $  315.4   $  280.6
Charge for discontinued operations....        --         --     (186.6)        --         --     (186.6)
Interest expense on 7.05% Convertible
  Subordinated Debentures, net of
  income taxes........................        --         --         --        5.8       29.2       29.2
                                        --------   --------   --------   --------   --------   --------
Net income applicable to Common
  stock...............................  $  394.6   $  315.4   $   94.0   $  400.4   $  344.6   $  123.2
                                        ========   ========   ========   ========   ========   ========
Weighted average Common shares
  outstanding.........................   117,459    107,284    111,510    117,459    107,284    111,510
                                        ========   ========   ========
Incremental shares from assumed
  conversions:
  Options, performance-based stock
     awards and other employee
     awards...........................                                      1,201        613        442
  7.05% Convertible Subordinated
     Debentures.......................                                      4,270     16,731     16,731
                                                                         --------   --------   --------
Weighted average Common shares and
  Common share equivalents............                                    122,930    124,628    128,683
                                                                         ========   ========   ========
</TABLE>

NOTE 20: UNAUDITED QUARTERLY OPERATING RESULTS

<TABLE>
<CAPTION>
                                                                          1997 (BY QUARTER)
                                                              -----------------------------------------
                                                                 1          2          3          4
                                                              --------   --------   --------   --------
                                                                (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                                           <C>        <C>        <C>        <C>
Revenues....................................................  $1,318.9   $1,384.9   $1,296.9   $1,288.1
Cost of sales...............................................     905.7      938.4      883.1      861.1
Selling and administrative expenses.........................     240.8      238.8      222.5      223.2
Goodwill amortization.......................................      16.0       16.1       16.3       16.7
Nonrecurring gains..........................................        --      (69.8)     (23.2)        --
Nonrecurring charges........................................        --       70.5       13.4         --
Other (income) expense, net.................................       1.5       (0.6)        --        1.2
Interest expense............................................      29.6       21.3       19.4       20.1
                                                              --------   --------   --------   --------
Income before income taxes..................................     125.3      170.2      165.4      165.8
Income taxes(1).............................................      47.6       64.7       62.9       56.9
                                                              --------   --------   --------   --------
Net income..................................................  $   77.7   $  105.5   $  102.5   $  108.9
                                                              ========   ========   ========   ========
Income per Common share:(2)(3)
  Basic.....................................................  $   0.71   $   0.89   $   0.85   $   0.91
                                                              ========   ========   ========   ========
  Diluted...................................................  $   0.67   $   0.86   $   0.84   $   0.90
                                                              ========   ========   ========   ========
</TABLE>

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

(1)Includes $6.1 million related to the favorable settlements of state income
   tax issues in the fourth quarter.

(2)Includes gain, net of nonrecurring expenses, on the exchange of the DECS of
   $.05 in the third quarter and $.05 related to the favorable settlements of
   state tax issues in the fourth quarter.

(3)Adoption of Statement of Financial Accounting Standards No. 128, Earnings Per
   Share increased the second and third quarter 1997 Basic Income per Common
   Share $.01 each quarter.

                                      A-37
<PAGE>   39
                            COOPER INDUSTRIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                          1996 (BY QUARTER)
                                                              -----------------------------------------
                                                                 1          2          3          4
                                                              --------   --------   --------   --------
                                                                (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                                           <C>        <C>        <C>        <C>
Revenues...................................................   $1,291.7   $1,351.4   $1,308.1   $1,332.5
Cost of sales..............................................      897.1      919.3      889.8      899.5
Selling and administrative expenses........................      233.6      232.8      235.5      243.5
Goodwill amortization......................................       16.2       16.4       16.4       16.2
Nonrecurring gains.........................................      (10.9)      (9.5)    (107.2)     (22.8)
Nonrecurring charges.......................................       10.9        8.3       85.3       13.4
Other (income) expense, net................................        1.5       (2.3)      (0.5)       1.1
Interest expense...........................................       37.6       36.8       35.4       32.3
                                                              --------   --------   --------   --------
Income before income taxes.................................      105.7      149.6      153.4      149.3
Income taxes(1)............................................       43.6       61.3       76.1       61.6
                                                              --------   --------   --------   --------
Net income.................................................   $   62.1   $   88.3   $   77.3   $   87.7
                                                              ========   ========   ========   ========
Income per Common share:(2)(3)
  Basic....................................................   $   0.58   $   0.82   $   0.72   $   0.82
                                                              ========   ========   ========   ========
  Diluted..................................................   $   0.56   $   0.77   $   0.68   $   0.76
                                                              ========   ========   ========   ========
</TABLE>

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

(1)Income before income taxes includes a net nonrecurring gain of $21.9 million
   and income taxes include a $12.9 million effect related to the goodwill
   write-down included in the Automotive Products asset write-down in the third
   quarter of 1996.

(2)Includes gains from the sale of marketable equity securities, net of
   nonrecurring expense, of $.01 and $.04 in the second and fourth quarters,
   respectively.

(3)Adoption of Statement of Financial Accounting Standards No. 128, Earnings Per
   Share increased the fourth quarter of 1996 Basic Income per Common Share
   $.01.

                                      A-38