10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-K

(Mark One)
 X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
       For Fiscal Year Ended December 31, 2002
       OR
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-4639

CTS CORPORATION
(Exact name of registrant as specified in its charter)

Indiana	35-0225010
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

905 West Boulevard North, Elkhart, IN	46514
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 574-293-7511

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common stock, without par value	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  X      No     

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes  X     No     

The aggregate market value of the voting stock held by non-affiliates of CTS Corporation, based upon the closing sales price of CTS’ common stock on February 11, 2003, was approximately $250.4 million. There were 34,111,810 shares of Common Stock, without par value, outstanding on February 11, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the 2002 Annual Report to shareholders are incorporated herein by reference in Parts 1 and 2.

(2) Portions of the Proxy Statement to be filed for the annual meeting of shareholders to be held on May 1, 2003, are incorporated by reference in Part 3.

   TABLE OF CONTENTS

	PART 1
1.	Business	1
2.	Properties	8
3.	Legal Proceedings	9
4.	Submission of Matters to a Vote of Security Holders	10
	PART 2
5.	Market for Registrant's Common Equity and Related Stockholder Matters	10
6.	Selected Financial Data	10
7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10
7A.	Quantitative and Qualitative Disclosures About Market Risk	10
8.	Financial Statements and Supplementary Data	10
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	11
	PART 3
10.	Directors and Executive Officers of the Registrant	11
11.	Executive Compensation	12
12.	Security Ownership of Certain Beneficial Owners and Management	12
13.	Certain Relationships and Related Transactions	13
14.	Controls and Procedures	13
	PART 4
15.	Exhibits, Financial Statements Schedules, and Reports on Form 8-K	14

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PART 1

Item 1.  Business

CTS Corporation is a global manufacturer of components and sensors and a supplier of electronics manufacturing services. CTS was established in 1896 as a provider of high-quality telephone products and was incorporated as an Indiana corporation in February 1929. The principal executive offices are located in Elkhart, Indiana. CTS maintains a website at http://www.ctscorp.com. Filing on Forms 10-K, 10-Q and 8-K made by CTS with the Securities and Exchange Commission may be obtained, free of charge, on this website, as soon as reasonably practicable after filing.

CTS Corporation designs, manufactures, assembles and sells a broad line of components and sensors and provides electronics manufacturing services primarily for the automotive, communications and computer markets. CTS operates manufacturing facilities located throughout North America, Asia and Europe. Our product lines serve major markets globally, focused primarily on the needs of original equipment manufacturers (OEMs). Sales and marketing is accomplished through CTS sales engineers, independent manufacturers’ representatives and distributors.

Statements about the Company’s earnings outlook and its plans, estimates and beliefs concerning the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations. Actual results may differ materially from those reflected in the forward-looking statements due to a variety of factors which could affect the Company’s operating results, liquidity and financial condition. We undertake no obligations to publicly update or revise any forward-looking statements. Factors that could impact future results include among others: the general market conditions in the automotive, communications and computer markets, and in the overall economy; reliance on key customers; whether the Company is able to implement measures to improve its financial condition and flexibility; pricing pressures and demand for the Company’s products, especially if economic conditions worsen or do not recover in the key markets for the Company’s products; and risks associated with our international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks.

BUSINESS SEGMENTS AND PRODUCTS BY MAJOR MARKET

At the beginning of the fourth quarter of 2002, CTS renamed the reportable business segments and realigned the product lines included in each segment to reflect changes in its organizational structure and the manner that results are evaluated and resources allocated by the chief operating decision maker. All segment data included in this Form 10-K reflects the reportable business segments adopted in 2002. CTS has two reportable business segments: 1) Components and Sensors and 2) Electronics Manufacturing Services (EMS).

Components and sensors are products which perform specific electronic functions for a given product family for use by global original equipment manufacturers, contract manufacturers and electronic distributors. Components and sensors consist principally of:

• quartz crystals and oscillators used in public infrastructure and networking for the communications and computer markets;

• automotive sensors and actuators used in the automotive market;

• terminators, including ClearONE(TM)terminators, used in computer and other high speed applications;

• potentiometers, resistor networks and switches used to serve multiple markets;

• ceramic filters and radio frequency (RF) integrated modules used in cellular handsets;

• pointing sticks/cursor controls for computers and games for the computer market; and

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• low temperature cofired ceramics (LTCC) for applications such as global positioning system (GPS) devices and electronic substrates used in various automotive and communications applications.

EMS includes the higher level assembly of electronic and mechanical components into a finished subassembly or assembly performed under a contract manufacturing agreement with OEMs or other contract manufacturers. EMS also includes design of interconnect systems and complex backplanes, global supply-chain management services and related manufacturing and design services as may be required by the customer.

Products from the Components and Sensors business segment are principally sold into three major OEM markets: 1) automotive, 2) communications and 3) computer. Products from the EMS business segment are principally sold into the communications and computer OEM markets. Other smaller markets include OEM customers in consumer electronics, instruments and controls and defense/aerospace.

The following tables provide a breakdown of net sales by business segment and market in dollars and as a percent of consolidated net sales:

	Components & Sensors						EMS						Total
(Net sales $ in millions)		2002		2001		2000		2002		2001		2000		2002		2001		2000
Markets
Automotive	$	115.9	$	114.3	$	131.3	$	--	$	--	$	--	$	115.9	$	114.3	$	131.3
Communications		112.7		196.8		391.1		28.2		51.8		60.9		140.9		248.6		452.0
Computer		16.9		22.8		51.4		156.1		156.6		176.7		173.0		179.4		228.1
Other		25.4		32.2		52.5		2.6		3.2		2.6		28.0		35.4		55.1
Consolidated
net sales	$	270.9	$	366.1	$	626.3	$	186.9	$	211.6	$	240.2	$	457.8	$	577.7	$	866.5

	Components & Sensors				EMS				Total
(As a % of consolidated net sales)		2002	2001	2000		2002	2001	2000		2002	2001	2000
Markets
Automotive		25%	20%	15%		--	--	--		25%	20%	15%
Communications		25%	34%	45%		6%	9%	7%		31%	43%	52%
Computer		4%	4%	6%		34%	27%	21%		38%	31%	27%
Other		5%	5%	6%		1%	1%	--		6%	6%	6%
Net sales by segment as a % of
consolidated net sales		59%	63%	72%		41%	37%	28%		100%	100%	100%

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Net sales to external customers, operating earnings and total assets by segment, and net sales and long-lived assets by geographic area, are contained in Note I, “Business Segments,” appearing in the financial statements as noted in the Index appearing under Item 15 (a) (1) and (2).

General market conditions in the global automotive, communications and computer industries and in the overall economy also affect the business of CTS. Any adverse occurrence that results in a significant decline in the volume of sales in these industries, or in an overall downturn in the business and operations of our customers in these industries, could have a material adverse effect on our business, financial condition and results of operations.

The following table identifies major products by their business segment and markets. Many products are sold into several OEM markets:

Product Description	Automotive Market	Communications Market	Computer Market	Other Markets
COMPONENTS AND SENSORS:
Ceramic Filters		•
Quartz Crystals, Clock and   Precision Oscillators		•	•	•
Automotive Sensors	•
Resistor Networks	•	•	•	•
ClearONE™ Terminators			•
DIP Switches and   Potentiometers	•	•	•	•
Actuators	•
RF Integrated Modules		•	•	•
Pointing Sticks/Cursor Controls			•	•
Low Temperature   Cofired Ceramics (LTCC)	•	•
EMS:
Integrated Interconnect   Systems and Backpanels		•	•	•

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MARKETING AND DISTRIBUTION

CTS sales engineers and independent manufacturers’ representatives sell products from both the Components and Sensors business segment and the EMS business segment to OEMs. CTS maintains sales offices in China, Hong Kong, Japan, South Korea, Scotland, Singapore, Taiwan and the United States. Approximately 65% of 2002 net sales was attributable to coverage by CTS sales engineers.

CTS sales engineers generally service the largest customers with application specific products. The engineers work closely with major customers in designing and developing products to meet specific customer requirements.

CTS utilizes the services of independent manufacturers’ representatives in the United States and other countries for customers not serviced directly by CTS sales engineers for both of its business segments. Independent manufacturers’ representatives receive commissions from CTS. During 2002, 32% of net sales was attributable to coverage by independent manufacturers’ representatives. CTS also uses distributors for customers in its Components and Sensors business segment. Independent distributors purchase component and sensor products from CTS for resale to customers. In 2002, independent distributors and/or dealers accounted for approximately 3% of net sales.

The following table summarizes marketing and distribution methods utilized by business segment and for consolidated CTS in 2002:

	Components and Sensors		EMS		Consolidated Net Sales
CTS sales engineers		74%		51%		65%
Independent manufacturers' representatives		20%		49%		32%
Independent distributors		6%		--%		3%
		100%		100%		100%

RAW MATERIALS

CTS utilizes a wide variety of raw materials and purchased parts in its manufacturing processes. The following are the most significant raw materials and purchased parts, identified by business segment:

          Components

and Sensors: Copper, brass, precious metals, resistive and conductive inks, piezoceramics, passive electronic components and semiconductors, integrated circuits, ceramic materials, plastic and molding compounds, printed circuit boards, quartz blanks and crystals.

EMS: Power supplies and converters, prefabricated steel, printed circuit boards, passive electronics components and semiconductors, integrated circuits, connectors, cables and modules.

These raw materials are purchased from several vendors, and except for certain semiconductors, CTS does not believe it is dependent upon one or a limited number of vendors. Although CTS purchases all of its semiconductors from a limited number of vendors, alternative sources are available. In 2002, substantially all of these materials were available in adequate quantities to meet CTS’ production demands.

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CTS does not currently anticipate any raw material shortages which would slow production. However, the lead times between the placement of orders for certain raw materials and purchased parts and actual delivery to CTS may vary. Occasionally CTS might need to order raw materials in greater quantities and at higher prices than optimal to compensate for the variability of lead times for delivery.

Precious metal prices may have a significant effect on the cost and selling price of many CTS products, particularly some ceramic filters, sensors, resistor networks and switches.

WORKING CAPITAL

Working capital requirements are generally dependent on the overall level of business activities. During 2002, consolidated working capital decreased from $46.8 million to $17.8 million. Lower inventory and accounts receivable levels primarily caused by reduced sales volumes contributed $31.6 million of the decrease to working capital. Other significant components of the change in working capital include lower current deferred tax assets of $15.5 million which were partially offset by lower trade payable and other accruals of $19.7 million. Changes in CTS’ cash position during 2002 are shown in the “Consolidated Statements of Cash Flows” as noted in the Index appearing under Item 15 (a) (1) and (2).

CTS does not usually buy inventories or manufacture products without actual or reasonably anticipated customer orders, except for some standard, off-the-shelf distributor products. CTS is not generally required to carry significant amounts of inventory in anticipation of rapid delivery requirements because most customer orders are custom built. CTS has “just-in-time” arrangements with certain major customers and vendors to efficiently meet delivery requirements.

CTS carries raw materials, including certain semiconductors, work-in-process and finished goods inventories which are unique to particular customers. In the event of reductions or cancellations of orders, some inventories may not be useable or returnable to vendors for credit. CTS generally imposes charges for the reduction or cancellation of orders by customers, and these charges are usually sufficient to cover a significant portion of the financial exposure of CTS for inventories which are unique to a customer. CTS does not customarily grant special return or payment privileges to customers. CTS’ working capital requirements and businesses are generally neither cyclical nor seasonal.

PATENTS, TRADEMARKS AND LICENSES

CTS maintains a program of obtaining and protecting U.S. and non-U.S. patents and trademarks. CTS believes its success is not materially dependent on the existence or duration of any patent, group of patents or trademarks. CTS was issued 29 new U.S. patents in 2002 and currently holds in excess of 360 U.S. patents with hundreds of non-U.S. counterpart patents.

CTS licenses the right to manufacture several electronic products to companies in the United States and non-U.S. countries. In 2002, license and royalty income was less than 1% of net sales. CTS believes its success is not materially dependent upon any licensing arrangement where CTS is either the licensor or licensee.

MAJOR CUSTOMERS

CTS’ 15 largest customers represented 73% of net sales in 2002 and 75% of net sales in 2001 and 2000. Sales to Hewlett-Packard Company (Hewlett-Packard), which acquired Compaq Computer Corporation (Compaq) in May 2002, amounted to 33% of net sales in 2002. Sales to Compaq were 28% of net sales in 2001, and 21% of net sales in 2000. Sales to Motorola, Inc. (Motorola) accounted for 12% of net sales in 2002, 17% of net sales in 2001 and 21% of net sales in 2000.

The Components and Sensors business segment revenues from Motorola represent $38.6 million, or 14%, $84.2 million, or 23%, and $180.3 million, or 29%, of the segment’s revenue for the years ended December 31, 2002, 2001 and 2000, respectively. EMS business

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segment revenues from Hewlett-Packard represent $150.4 million, or 80%, of the segment’s revenue for the year ended December 31, 2002. EMS business segment revenues from Compaq were $160.2 million, or 76%, and $177.6 million, or 74%, of the segment’s revenue for the years ended December 31, 2001 and 2000, respectively.

We expect to continue to depend on sales to our major customers. Some of our customers are increasingly outsourcing their purchasing activities, with the result that a greater emphasis is being placed on cost while maintaining an emphasis on quality. Since it is difficult to replace lost business on a timely basis, it is likely that our operating results would be adversely affected if one or more of our major customers were to cancel, delay or reduce a large amount of orders with us in the future. If one or more of our customers were to become insolvent or otherwise unable to pay for our products, our operating results, financial condition and cash flows could be adversely affected.

ORDER BACKLOG

Order backlog may not provide an accurate indication of present or future revenue levels for CTS. For many components and sensors and EMS products, the period between receipt of orders and expected delivery is relatively short. Additionally, large orders from major customers may include backlog covering an extended period of time. Production scheduling and delivery for these orders could be changed or canceled by the customer on relatively short notice.

The following table shows order backlog by segment and in total as of January 26, 2003 and January 27, 2002.

	January 26, 2003		January 27, 2002
	($ in millions)
Components and Sensors	$	52.3	$	57.1
EMS		10.9		11.3
Total	$	63.2	$	68.4

Backlog decreased slightly compared to amounts from one year ago. Many customers are still displaying a conservative ordering pattern, including short-term and small quantity orders. Order backlog at the end of January 2003 will generally be filled during the 2003 fiscal year.

GOVERNMENT CONTRACTS

CTS estimates less than 1% of its net sales are associated with purchases by the government.

COMPETITION

In the Components and Sensors business segment, CTS competes with many U.S. and non-U.S. manufacturers principally on the basis of product features, price, technology, quality, reliability, delivery and service. Most CTS product lines encounter significant global competition. The number of significant competitors varies from product line to product line. No one competitor competes with CTS in every product line, but many competitors are larger and more diversified than CTS. Some competitors are divisions or affiliates of CTS’ customers.

In the EMS segment, CTS competes with a number of well-established U.S. and non-U.S. manufacturers on the basis of product features, price, technology, quality, reliability, delivery and service in the markets in which we participate. Most CTS product lines

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encounter significant global competition. Some of our competitors have greater manufacturing and financial resources. However, we generally do not pursue extremely high volume, highly price sensitive business, as do some of our major competitors. Some competitors are divisions or affiliates of CTS’ customers.

In both the Components and Sensors and EMS business segments, some customers have reduced or plan to reduce their number of suppliers, while increasing the volume of their purchases. Most customers are demanding higher quality, reliability and delivery standards from CTS as well as competitors. These trends create opportunities for CTS, but also increase the risk of loss of business to competitors. CTS is subject to competitive risks which are the nature of the electronics industry including short product life cycles and technical obsolescence.

CTS believes it competes most successfully in custom products manufactured to meet specific applications of major OEMs.

NON-U.S. REVENUES AND RISKS

In 2002, 56% of net sales to external customers originated from non-U.S. operations compared to 57% in 2001 and 52% in 2000. At December 31, 2002, approximately 39% of total CTS assets were located at non-U.S. operations compared to 41% of total CTS assets at the end of 2001. A substantial portion of these assets, other than cash and equivalents, cannot readily be liquidated. CTS believes the business risks to its non-U.S. operations, though substantial, are normal risks for non-U.S. businesses. These risks include currency controls and changes in currency exchange rates, longer collection cycles, political and transportation risks, economic downturns and inflation, government regulations and expropriation. CTS’ non-U.S. manufacturing facilities are located in Canada, China, Mexico, Scotland, Singapore and Taiwan.

Net sales to external customers originating from non-U.S. operations for the Components and Sensors business segment were $153.8 million in 2002, compared to $210.4 million in 2001 and $341.2 million in 2000. Net sales to external customers originating from non-U.S. operations for the EMS business segment were $104.0 million in 2002, compared to $120.6 million in 2001 and $110.7 million in 2000. Additional information about net sales to external customers, operating earnings and total assets by segment, and net sales to external customers and long-lived assets by geographic area, is contained in Note I, “Business Segments,” appearing in the financial statements as noted in the Index appearing under Item 15 (a) (1) and (2).

RESEARCH AND DEVELOPMENT ACTIVITIES

In 2002, 2001 and 2000, CTS spent $24.1 million, $32.8 million and $32.6 million, respectively, for research and development. The reduction in 2002 reflects savings due to organizational consolidation of certain products. Significant ongoing research and development activities continue in our Components and Sensors business segment to support current product and process enhancements, expanded applications and new product development. Research and development expenditures in the EMS business segment are typically much lower.

CTS believes a strong commitment to research and development is required for future growth. Most CTS research and development activities relate to developing new products and technologies, improving product flow and adding product value to meet the current and future needs of its customers. CTS employs approximately 530 engineers and technicians who are specifically assigned to the development of new materials, new processes and innovative products. CTS provides its customers with full systems support to ensure quality and reliability through all phases of design, launch and manufacturing to meet or exceed customer requirements. Many such research and development activities are for the benefit of one or a limited number of customers or potential customers. CTS expenses all research and development costs as incurred.

EMPLOYEES

CTS employed 5,313 people at December 31, 2002, and 73% of these people were employed outside the United States. Approximately 260 CTS employees at one location in the United States were covered by collective bargaining agreements as of December 31, 2002. One agreement will expire in 2005 and the other will expire in 2008. CTS employed 5,837 people at December 31, 2001.

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ADDITIONAL INFORMATION

Exhibit 99(b) to this report contains an updated description of CTS’ capital stock. This exhibit, which is incorporated herein by reference, updates and supersedes the description of CTS’ capital stock in CTS prospectuses related to CTS’ active registration statements listed in Exhibit 23 hereto.

Exhibit 99(c) hereto contains updated risk factors applicable to CTS’ business and an investment in CTS securities. This exhibit, which is incorporated herein by reference, describes some of the factors that may cause actual results to differ materially from the forward-looking statements made herein and in the documents incorporated by reference herein. In addition, this exhibit updates and supersedes the descriptions of risk factors in CTS’ prospectuses related to CTS’ active registration statements listed in Exhibit 23 hereto.

Item 2.  Properties

As of February 14, 2003, CTS has manufacturing facilities, administrative, research and development and sales offices in the following locations:

Manufacturing Facilities	Square Footage	Owned/ Leased	Business Segment
Albuquerque, New Mexico Berne, Indiana Burbank, California Burbank, California Dongguan, China Elkhart, Indiana Glasgow, Scotland Glasgow, Scotland Glasgow, Scotland Kaohsiung, Taiwan Londonderry, New Hampshire Matamoros, Mexico Singapore Streetsville, Ontario, Canada Tianjin, China West Lafayette, Indiana	267,000 249,000 9,200 4,850 23,000 319,000 75,000 20,000 37,000 133,000 83,000 51,000 159,000 112,000 210,000 102,500	Owned (1) Owned (2) Owned (2) Leased Leased Owned (2) Owned Leased Leased Owned Leased Owned Owned (3) Owned Owned (4) Owned (2)	Components and Sensors Components and Sensors Components and Sensors Components and Sensors Components and Sensors Components and Sensors Components and Sensors     and EMS Components and Sensors     and EMS Components and Sensors     and EMS Components and Sensors EMS Components and Sensors Components and Sensors Components and Sensors Components and Sensors     and EMS Components and Sensors
Total Manufacturing	1,854,550

⁽¹⁾    The land and buildings are collateral for certain industrial revenue bonds.
⁽²⁾    The land and buildings are collateral for the revolving credit agreement.
⁽³⁾    Ground lease through 2039; restrictions on use and transfer apply.
⁽⁴⁾    Land Use Rights Agreement through 2050 includes transfer, lease and mortgage rights.

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Non-Manufacturing Facilities	Square Footage	Owned/ Leased	Description	Business Segment
Baldwin, Wisconsin Bloomingdale, Illinois Brownsville, Texas Carlisle, Pennsylvania Elkhart, Indiana Kowloon, Hong Kong Longtan, Taiwan Sandwich, Illinois Seoul, Korea Southfield, Michigan Taipei, Taiwan Yokohama, Japan	39,000 110,000 85,000 114,200 93,000 600 280,000 94,000 100 1,700 1,250 1,400	Owned (1) Leased Owned (1) Leased Owned (1) Leased Owned Owned (1) Leased Leased Leased Leased	Held for Sale Administrative Offices     and Research Warehousing Facility Research Offices Administrative Offices     and Research Sales Office Held for Sale Held for Sale Sales Office Sales Office Sales Office Sales Office	Components and Sensors Components and Sensors Components and Sensors Components and Sensors Components and Sensors     and EMS Components and Sensors Components and Sensors Components and Sensors Components and Sensors Components and Sensors Components and Sensors Components and Sensors
(1)    The land and buildings are collateral for the revolving credit agreement.

CTS regularly assesses the adequacy of its manufacturing facilities for manufacturing capacity, available labor and location to its markets and major customers. Management believes CTS’ manufacturing facilities are suitable and adequate, and have sufficient capacity to meet its current needs. The extent of utilization varies from plant to plant and with general economic conditions. CTS also reviews the operating costs of its facilities and may from time-to-time relocate or move a portion of its manufacturing activities in order to reduce operating costs and improve asset utilization and cash flow. As indicated in the table above, CTS has decided to sell a number of its facilities closed in connection with its 2001 and 2002 restructurings. Refer also to Note B, “Restructuring and Impairment Charges,” and Note D, “Assets Held for Sale,” appearing in the financial statements as noted in the Index appearing under Item 15 (a) (1) and (2).

Item 3.  Legal Proceedings

Certain processes in the manufacture of CTS’ current and past products create hazardous waste by-products as currently defined by federal and state laws and regulations. CTS has been notified by the U.S. Environmental Protection Agency, state environmental agencies and, in some cases, generator groups, that it is or may be a Potentially Responsible Party (PRP) regarding hazardous waste remediation at several non-CTS sites. In addition to these non-CTS sites, CTS has an ongoing practice of providing reserves for probable remediation activities at certain of its manufacturing locations and for claims and proceedings against CTS with respect to other environmental matters. In the opinion of management, based upon presently available information relating to all such matters, either adequate provision for probable costs has been made, or the ultimate costs resulting will not materially affect the consolidated financial position, results of operations or cash flows of CTS.

Certain claims are pending against CTS with respect to matters arising out of the ordinary conduct of its business. For all claims, in the opinion of management, based upon presently available information, either adequate provision for anticipated costs has been made by insurance, accruals or otherwise, or the ultimate anticipated costs resulting will not materially affect CTS’ consolidated financial position or results of operations.

In one case, a claim made by one business unit of a major customer regarding a possible performance-related issue with a particular product is pending. In the opinion of management, CTS is not responsible for the customer’s performance-related issue associated with its application of the CTS product which met or exceeded all of the customer’s specifications. CTS and the customer are in discussions to resolve the issue. If CTS is unable to resolve this claim in a manner that is acceptable to both parties, it is possible that future revenues could be reduced and that could have a material adverse effect on CTS’ results of operations.

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Item 4.  Submission of Matters to a Vote of Security Holders

During the fourth quarter of 2002, no matter was submitted to a vote of CTS security holders.

PART 2

Item 5.  Market for Registrant’s Common Equity and Related Stockholder Matters

The principal market for CTS common stock is the New York Stock Exchange using the symbol “CTS.” Quarterly market high and low trading prices for CTS Common Stock for each quarter of the past two years and the amount of dividends declared during the previous two years can be located in “Shareholder Information,” appearing in the 2002 Annual Report to Shareholders, portions of which are filed herewith as Exhibit (13) and are incorporated herein by reference (2002 Annual Report). On February 11, 2003, there were approximately 1,585 CTS common shareholders of record.

CTS’ current practice is to pay quarterly dividends at the rate of $0.03 per share, or an annual rate of $0.12 per share. The credit agreement limits CTS’ ability to pay dividends, but it permits CTS to continue to pay quarterly dividends at the rate of $0.03 per share. The declaration of a dividend and the amount of any such dividend is subject to earnings, anticipated working capital, capital expenditures, other investment requirements, the financial condition of CTS and any other factors considered relevant by the Board of Directors.

Item 6.  Selected Financial Data

A summary of selected financial data for CTS for each of the previous five years is contained in the “Five-Year Summary,” included in the 2002 Annual Report and incorporated herein by reference.

Certain acquisitions, divestitures, closures of operations or product lines and certain accounting reclassifications affect the comparability of information contained in the “Five-Year Summary.”

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Information about results of operations, liquidity and capital resources for the three previous fiscal years, is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations (2000-2002),” included in the 2002 Annual Report and incorporated herein by reference.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

A discussion of market risk for CTS is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations (2000-2002),” included in the 2002 Annual Report and incorporated herein by reference and in Note A, “Summary of Significant Accounting Policies — Financial Instruments,” of the financial statements as noted in the Index appearing under item 15 (a) (1) and (2).

Item 8.  Financial Statements and Supplementary Data

Consolidated financial statements, meeting the requirements of Regulation S-X, the Report of Independent Accountants, and “Quarterly Results of Operations” and “Per Share Data” appear in the financial statements and supplementary financial data as noted in the Index appearing under Item 15 (a)(1) and (2), and included in the 2002 Annual Report and incorporated herein by reference.

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Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

PART 3

Item 10.  Directors and Executive Officers of the Registrant

Information responsive to Items 401(a) and 401(e) of Regulation S-K pertaining to directors of CTS is contained in the 2003 Proxy Statement for the 2003 Annual Meeting of Shareholders (2003 Proxy Statement) under the caption “Item 1. — Election of Directors,” to be filed with the Securities and Exchange Commission, and is incorporated herein by reference.

Information responsive to Item 405 of Regulation S-K pertaining to compliance with Section 16(a) of the Securities Exchange Act of 1934 is contained in the 2003 Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance,” to be filed with the Securities and Exchange Commission, and is incorporated herein by reference.

The individuals in the following list were elected as executive officers of CTS at the annual meeting of the Board of Directors on May 1, 2002 as indicated in “Brief History of Officers.” They are expected to serve as executive officers until the next annual meeting of the Board of Directors, scheduled on May 1, 2003, at which time the election of officers will be considered again by the Board of Directors.

LIST OF OFFICERS

Name	Age	Position and Offices
Donald K. Schwanz Donald R. Schroeder Vinod M. Khilnani H. Tyler Buchanan James L. Cummins Richard G. Cutter, III George T. Newhart Thomas A. Kroll Matthew W. Long	58 54 50 51 47 56 60 48 41	Chairman of the Board, President     and Chief Executive Officer Executive Vice President     and Chief Technology Officer Senior Vice President     and Chief Financial Officer Senior Vice President Senior Vice President Administration Vice President, General Counsel     and Secretary Vice President Investor Relations Vice President and Controller Assistant Treasurer

BRIEF HISTORY OF OFFICERS

Donald K. Schwanz  was elected President and Chief Executive Officer, effective September 30, 2001. Mr. Schwanz was appointed Chairman of the Board of Directors on January 1, 2002. In January 2001, Mr. Schwanz was elected President and Chief Operating Officer. Prior to joining CTS in January 2001, he was President of the Industrial Control Business at Honeywell, Inc. since 1999, and had been with Honeywell, an aerospace company, since 1979, with positions of increasing responsibility.

Donald R. Schroeder  was elected Executive Vice President and Chief Technology Officer, effective December 20, 2000. From February 2000 to December 2000, Mr. Schroeder served as Vice President Business Development and Chief Technology Officer. From 1995 to January 2000, Mr. Schroeder served as Vice President Sales and Marketing.

11

Vinod M. Khilnani  was elected Senior Vice President and Chief Financial Officer, effective May 7, 2001. Prior to joining CTS, Mr. Khilnani was Vice President and Chief Financial Officer at Simpson Industries, Inc. from 1997 to December 2000, and was appointed Vice President and Corporate Controller of Metaldyne Corporation, a $2.5 billion automotive components company created through the merger of Simpson Industries and Masco Tech, in December 2000.

H. Tyler Buchanan  was elected Senior Vice President, effective December 31, 2001. Prior to this, Mr. Buchanan was Vice President since August 2000, and Vice President and General Manager, CTS Automotive Products. He has held positions of varying responsibility with CTS since 1977.

James L. Cummins  was elected Senior Vice President Administration, effective December 31, 2001. Prior to this, Mr. Cummins was Vice President Human Resources since 1994. From 1991 — 1994, he served as Director of Human Resources for CTS Corporation.

Richard G. Cutter, III  was elected Vice President General Counsel and Secretary effective December 31, 2001. Prior to this, Mr. Cutter was Vice President and Assistant Secretary since August 2000, and General Counsel since January 2000. Prior to joining CTS, he was General Counsel with General Electric — Silicones, a global manufacturer of silicone based raw materials.

George T. Newhart  was elected Vice President Investor Relations effective December 8, 2000. Prior to this, Mr. Newhart served as Vice President and Corporate Controller since 1998, and he served as Corporate Controller from 1989-1998.

Thomas A. Kroll  was elected Vice President and Controller on October 31, 2002. Prior to this, Mr. Kroll served as Controller Group Accounting since joining CTS in November 2000. Prior to joining CTS, he served as Corporate Controller for Fedders Corporation from 1995.

Matthew W. Long  was elected Assistant Treasurer effective December 18, 2000. Mr. Long was Corporate Controller for Morgan Drive Away, Inc., a transportation services company, from July through December 2000. Prior to this, he served as Controller with CTS’ Electrocomponents operating unit and as Corporate External Financial Accounting Manager from 1996 — July 2000.

Item 11.  Executive Compensation

Information responsive to Item 402 of Regulation S-K pertaining to management remuneration is contained in the 2003 Proxy Statement under the captions “Director Compensation” and “Executive Compensation” to be filed with the Securities and Exchange Commission, and is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

Information responsive to Item 403 of Regulation S-K pertaining to security ownership of certain beneficial owners and management is contained in the 2003 Proxy Statement under the caption “Stock Ownership Information” and “Directors’ and Officers’ Stock Ownership,” to be filed with the Securities and Exchange Commission, and is incorporated herein by reference.

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Equity Compensation Plan Information

Information responsive to Item 201(d)(2) pertaining to equity compensation plan information is summarized in the following table:

Plan Category	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights			(b) Weighted-average exercise price of outstanding options, warrants and rights			(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		1,560,789			$18.74			1,512,028
Equity compensation plans not approved by security holders		52,253	(1)		--	(1)			(1)
Total		1,613,042						1,512,028

(1) CTS has a stock retirement plan for nonemployee directors under which an account for each nonemployee director is annually credited with 800 common stock units. Furthermore, as of each dividend payment date for CTS’ common stock, CTS credits the deferred stock accounts with an additional number of common stock units equal to the product of the dividend per share multiplied by the number of common stock units credited to the directors’ deferred stock accounts. Upon retirement, the nonemployee director is entitled to receive one share of the Company’s common stock for each common stock unit in his deferred stock account. CTS has issued only treasury shares for common stock units under the plan. In the past, the New York Stock Exchange has not required companies to obtain shareholder approval when issuing treasury shares or shares purchased in the open market under compensatory plans. At December 31, 2002, the deferred stock accounts contained a total of 52,253 units.

Item 13.  Certain Relationships and Related Transactions

None.

Item 14.  Controls and Procedures

CTS maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by CTS in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of CTS’ management, including the chief executive officer and chief financial officer, of the effectiveness of CTS’ disclosure controls and procedures. Based on that evaluation, the chief executive and financial officers have concluded that CTS’ disclosure controls and procedures are effective.  Subsequent to the date of their evaluation, there have been no significant changes in CTS’ internal controls or in other factors that could significantly affect these controls.

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The company's management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

PART 4

Item 15.  Exhibits, Financial Statements Schedules, and Reports on Form 8-K

The list of financial statements and schedules required by Item 15 (a) (1) and (2) is contained on page S-1 herein.

(a) (3)  Exhibits

All references to documents filed pursuant to the Securities Exchange Act of 1934, including Forms 10-K, 10-Q and 8-K, were filed by CTS Corporation, File No. 1-4639.

(3)(i)


(3)(ii)


(10)(a)



(10)(b)


(10)(c)



(10)(d)



(10)(e)



(10)(f)



(10)(g)




(10)(h)





(10)(i)



(10)(j)



(10)(k)


(10)(l)



(10)(m)




(10)(n)


(10)(o)



(10)(p)




(10)(q)



(10)(r)




(10)(s)



(10)(t)

(10)(u)

(13)

(21)

(23)


(99)(a)


(99)(b)

(99(c) Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 5 to the Current Report on Form 8-K, filed with the Commission on September 1, 1998).

Bylaws (incorporated by reference to Exhibit 4 to the Current Report on Form 8-K, filed with the Commission on September 1, 1998).

Employment Agreement, dated as of September 7, 2001, between the Company and Donald K. Schwanz (incorporated by reference to Exhibit (10)(a) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, filed with the Commission on November 5, 2001).

Prototype officers and directors' indemnification agreement (incorporated by reference to Exhibit (10) (g) to the Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 21, 1996).

CTS Corporation 1988 Restricted Stock and Cash Bonus Plan, approved by the shareholders on April 28, 1989, as amended and restated on May 9, 1997 (incorporated by reference to Exhibit 10(e) to the Quarterly Report on Form 10-Q for the quarter ended June 29, 1997, filed with the Commission on August 12, 1997).

CTS Corporation 1996 Stock Option Plan, approved by the shareholders on April 26, 1996, as amended and restated on May 9, 1997 (incorporated by reference to Exhibit 10(f) to the Quarterly Report on Form 10-Q for the quarter ended June 29, 1997, filed with the Commission on August 12, 1997).

CTS Corporation 1997 Stock Option Agreements approved by the shareholders on October 16, 1997 (incorporated by reference to Exhibit (10)(l) to the Form 10-K for the year ended December 31, 1997, filed with the Commission on March 27, 1998).

CTS Corporation 2001 Stock Option Plan, approved by the shareholders on March 9, 2001 (incorporated by reference to Exhibit (10)(c) to the Quarterly Report on Form 10-Q for the quarter ended April 1, 2001, filed with the Commission on April 27, 2001).

Asset Sale Agreement dated December 22, 1998, and Earnout Exhibit thereto, between CTS Wireless Components, Inc. and Motorola, Inc., under which CTS Wireless Components, Inc. acquired the assets of Motorola's Components Products Division, (incorporated by reference to Exhibit 10(f) to the Annual Report on Form 10-K for the year ended December 31, 1998, filed with the Commission on February 25, 1999).

Third Amended and Restated Credit Agreement effective December 20, 2001, and related Security and Pledge Agreements by and among CTS Corporation, the Lenders named therein, Bank One, NA, as the agent, ABN AMRO Bank N.V., as documentation agent, and Harris Trust and Savings Bank, as syndication agent (incorporated by reference to Exhibit (10)(h) to the Annual Report on Form 10K for the year ended December 31, 2001, filed with the Commission on March 18, 2002).

Rights Agreement between CTS Corporation and State Street Bank and Trust Company dated August 28, 1998 (incorporated by reference to Exhibit 1 to the Current Report on Form 8-K filed with the Commission on September 1, 1998).

CTS Corporation Stock Retirement Plan for Non-Employee Directors, effective April 30, 1990 (incorporated by reference to Exhibit (10)(j) to the Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Commission on March 18, 2002).

Prototype Severance Agreements between CTS Corporation and its officers, general managers and managing directors filed herewith.

CTS Corporation Executive Deferred Compensation Plan, effective September 14, 2000 (incorporated by reference to Exhibit (10)(h) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, filed with the Commission on March 9, 2001).

Securities Purchase Agreement, dated April 15, 2002, among CTS Corporation, Halifax Fund, L.P., DeAm Convertible Arbitrage Fund, Ltd., Palladin Overseas Fund, Ltd., Lancer Securities (Cayman) Ltd., Palladin Partners I, L.P., Steelhead Investments, Ltd. and Ram Trading, Ltd. (incorporated by reference to Exhibit 99.1 to the Current Report on 8-K dated April 19, 2002, filed with the Commission on April 22, 2002).

Form of 6 1/2% Convertible Subordinated Debenture (incorporated by reference to Exhibit 99.2 to the Current Report on 8-K dated April 19, 2002, filed with the Commission on April 22, 2002).

First Amendment to Third Amended and Restated Credit Agreement, dated as of April 15, 2002, by and among CTS Corporation, the Lenders identified therein and Bank One, NA (incorporated by reference to Exhibit (10)(a) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, filed with the Commission on April 30, 2002).

Second Amendment to Third Amended and Restated Credit Agreement, dated as of October 11, 2002, by and among CTS Corporation, the Lenders identified therein and Bank One, NA (incorporated by reference to Exhibit (10)(a) to the Quarterly Report on Form 10-Q for the quarter ended September 29, 2002, filed with the Commission on October 25, 2002).

Amendment to Rights Agreement, dated October 15, 2001, to the Rights Agreement, dated as of August 28, 1998, between CTS Corporation, State Street Bank and Trust Company (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registration Statement on Form 8-A filed with the Commission on April 29, 2002).

Amendment No. 2, dated as of April 22, 2002, to the Rights Agreement, dated as of August 28, 1998, between CTS Corporation and EquiServe Trust Company, N.A., as rights agent, as amended on October 15, 2001 (incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Registration Statement on Form 8-A filed with the Commission on April 29, 2002).

CTS Corporation Management Incentive Plan approved by the shareholders on May 1, 2002, (incorporated by reference to Appendix A to the Proxy Statement for the 2002 Annual Meeting of Shareholders, filed with the Commission on March 18, 2002).

CTS Corporation Salaried Employees' Pension Plan, filed herewith.

CTS Corporation, Excess Benefit Retirement Plan, filed herewith.

Portions of the 2002 Annual Report to shareholders incorporated herein, filed herewith.

Subsidiaries filed herewith.

Consent of PricewaterhouseCoopers LLP to incorporation by reference of their report dated January 27, 2003 relating to the financial statements and financial statement schedule in certain registration statements, filed herewith.

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Description of stock filed herewith.

Risk Factors, filed herewith.

(b)  Reports on Forms 8-K

During the three-month period ending December 31, 2002, CTS did not file any reports on Form 8-K.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CTS Corporation
Date:  February 14, 2003	By	/s/ Vinod M. Khilnani
		Vinod M. Khilnani Senior Vice President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date:  February 14, 2003	/s/ Donald K. Schwanz
	Donald K. Schwanz President and Chief Executive Officer (Principal Executive Officer)
Date:  February 14, 2003	/s/ Walter S. Catlow
	Walter S. Catlow, Director
Date:  February 14, 2003	/s/ Lawrence J. Ciancia
	Lawrence J. Ciancia, Director
Date:  February 14, 2003	/s/ Thomas G. Cody
	Thomas G. Cody, Director
Date:  February 14, 2003	/s/ Gerald H. Frieling, Jr.
	Gerald H. Frieling, Jr., Director
Date:  February 14, 2003	/s/ Roger R. Hemminghaus
	Roger R. Hemminghaus, Director
Date:  February 14, 2003	/s/ Michael A. Henning
	Michael A. Henning, Director
Date:  February 14, 2003	/s/ Robert A. Profusek
	Robert A. Profusek, Director
Date:  February 14, 2003	/s/ Randall J. Weisenburger
	Randall J. Weisenburger, Director
Date:  February 14, 2003	/s/ Vinod M. Khilnani
	Vinod M. Khilnani Senior Vice President and Chief Financial Officer (Principal Financial Officer)
Date:  February 14, 2003	/s/ Thomas A. Kroll
	Thomas A. Kroll Vice President and Controller

15

Certifications

I, Donald K. Schwanz, certify that:

1. I have reviewed this annual report on Form 10-K of CTS Corporation;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  February 14, 2003	/s/ Donald K. Schwanz
	Donald K. Schwanz, Director President and Chief Executive Officer (Principal Executive Officer)

16

Certifications

I, Vinod M. Khilnani, certify that:

1. I have reviewed this annual report on Form 10-K of CTS Corporation;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  February 14, 2003		/s/ Vinod M. Khilnani
	17	Vinod M. Khilnani Senior Vice President and Chief Financial Officer (Principal Financial Officer)

FORM 10-K - ITEM 15 (a) (1) AND (2) AND ITEM 15 (d)

CTS CORPORATION AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA

AND FINANCIAL STATEMENT SCHEDULE

The following consolidated financial statements of CTS Corporation and subsidiaries included in the 2002 Annual Report are referenced in Part II, Item 8, filed herewith as Exhibit (13) and incorporated herein by reference:

Consolidated balance sheets - December 31, 2002 and December 31, 2001

Consolidated statements of earnings (loss) - Years ended December 31, 2002, December 31, 2001 and December 31, 2000

Consolidated statements of shareholders' equity - Years ended December 31, 2002, December 31, 2001 and December 31, 2000

Consolidated statements of cash flows - Years ended December 31, 2002, December 31, 2001 and December 31, 2000

Notes to consolidated financial statements

Supplementary Financial Data:

Quarterly Results of Operations (Unaudited) - Years ended December 31, 2002 and December 31, 2001

Per Share Data (Unaudited) - Years ended December 31, 2002 and December 31, 2001

The following consolidated financial statement schedule of CTS Corporation and subsidiaries is included in item 15 (d):

Schedule II - Valuation and qualifying accounts Page
 S-3

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not applicable, not required or the information is included in the consolidated financial statements or notes thereto.

S-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Shareholders of CTS Corporation

In our opinion, the consolidated financial statements listed in the index appearing under item 15(a)(1) and (2) on page S-1 present fairly, in all material respects, the financial position of CTS Corporation and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 15(d) on page S-1 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
January 27, 2003

S-2

CTS CORPORATION

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

(In thousands of dollars)

Description	Balance at Beginning of Period		Charged (Credited) to Income			Charged (Credited) to Other Accounts		Deductions(1)			Balance at End of Period
Year ended December 31, 2002:
Allowance for
doubtful receivables	$	1,470	$	228		$	0	$	(4	)	$	1,694
Year ended December 31, 2001:
Allowance for
doubtful receivables	$	1,837	$	(83	)	$	0	$	(284	)	$	1,470
Year ended December 31, 2000:
Allowance for
doubtful receivables	$	2,628	$	(115	)	$	0	$	(676	)	$	1,837

⁽¹⁾     Uncollectible accounts written off.

S-3

EX-10

EXHIBIT (10)(k)

SEVERANCE AGREEMENT
(Tier 1)

THIS SEVERANCE AGREEMENT (this “Agreement”), dated as of _________________ is made and entered by and between CTS Corporation, an Indiana corporation (the “Company”), and ________________ (the “Executive”).

WITNESSETH:

WHEREAS, the Executive is a senior executive or a key employee of the Company or one or more of its Subsidiaries and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth and financial strength of the Company;

WHEREAS, the Company recognizes that, as is the case for most publicly held companies, the possibility of a Change in Control (as defined below) exists;

WHEREAS, the Company desires to assure itself of both present and future continuity of management and desires to establish certain minimum severance benefits for certain of its senior executives and key employees, including the Executive, applicable in the event of a Change in Control;

WHEREAS, the Company wishes to ensure that its senior executives and key employees are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change in Control; and

WHEREAS, the Company desires to provide additional inducement for the Executive to continue to remain in the ongoing employ of the Company.

NOW, THEREFORE, the Company and the Executive agree as follows:

1.     Certain Defined Terms. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters:

(a)     “Base Pay” means the Executive’s annual base salary at a rate not less than the Executive’s annual fixed or base compensation as in effect for the Executive immediately prior to the occurrence of a Change in Control or such higher rate as may be determined from time to time by the Board or a committee thereof.

(b)     “Board” means the Board of Directors of the Company.

(c)     “Cause” means that, prior to any termination pursuant to Section 3(b), the Executive:

(i)     has been convicted of a criminal violation involving fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company or any Subsidiary;

(ii)     has intentionally and wrongfully damaged property of the Company or any Subsidiary;

(iii)     has intentionally and wrongfully disclosed secret processes, trade secrets or confidential information of the Company or any Subsidiary; or

1

(iv)     has intentionally and wrongfully engaged in any Competitive Activity; and any such act has been demonstrably and materially harmful to the Company. For purposes of this Agreement, no act or failure to act on the part of the Executive will be deemed to be “intentional” if it was due primarily to an error in judgment or negligence, and will be deemed to be “intentional” only if done or omitted to be done by the Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive will not be deemed to have been terminated for “Cause” hereunder unless and until there is delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the Board then in office at a meeting of the Board called and held for such purpose, after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel (if the Executive chooses to have counsel present at such meeting), to be heard before the Board, finding that, in the good faith opinion of the Board, the Executive committed an act constituting “Cause” as herein defined and specifying the particulars thereof in detail. Nothing herein will limit the right of the Executive or his beneficiaries to contest the validity or propriety of any such determination.

(d)     “Change in Control” means the occurrence during the Term of any of the following events:

(i)     the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of aggregate beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the combined voting power of the then outstanding Voting Stock of the Company (including, for this purpose, any Voting Stock of the Company acquired prior to the Term); provided, however, that for purposes of this Section 1(d)(i), the following will not be deemed to result in a Change in Control: (A) any acquisition of Voting Stock of the Company directly from the Company that is approved by the Incumbent Board (as defined below), (B) any acquisition of Voting Stock of the Company by the Company or any Subsidiary and any change in the percentage ownership of Voting Stock of the Company that results from such acquisition, (C) any acquisition of Voting Stock of the Company by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, or (D) any acquisition of Voting Stock of the Company by any Person pursuant to a Business Combination that complies with clauses (I), (II) and (III) of Section 1(d)(iii); or

(ii)     individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a Director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the Directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) will be deemed to have been a member of the Incumbent Board, but excluding, for this purpose, any such individual becoming a Director as a result of an actual or threatened election contest (as described in Rule 14a-12(c) of the Exchange Act) with respect to the election or removal of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (collectively, an “Election Contest”); or

(iii)     consummation of (A) a reorganization, merger or consolidation of the Company, or (B) a sale or other disposition of all or substantially all of the assets of the Company, (such reorganization, merger, consolidation or sale each, a “Business Combination”), unless, in each case, immediately following such Business Combination, (I) all or substantially all of the individuals and entities who were the beneficial owners of Voting Stock of the Company immediately prior to such Business Combination beneficially own, directly or indirectly, more than 75% of the then outstanding shares of common stock and the combined voting power of the then outstanding Voting Stock of the Company entitled to vote generally in the election of Directors of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries), (II) no Person (other than the Company, such entity resulting from such Business Combination, or any employee benefit plan (or related trust) sponsored or maintained by the Company, any Subsidiary or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, 15% or more of the then outstanding shares of Voting Stock of the entity resulting from such Business Combination, and (III) at least a majority of the members of the Board of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or

(iv)     approval by the shareholders of the Company of a complete liquidation or dissolution of the Company, except pursuant to a Business Combination that complies with clauses (I), (II) and (III) of Section 1(d)(iii).

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(e)     “Competitive Activity” means the Executive’s participation, without the written consent of an officer of the Company, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company and such enterprise’s sales of any product or service competitive with any product or service of the Company amounted to 25% of such enterprise’s net sales for its most recently completed fiscal year and if the Company’s net sales of said product or service amounted to 25% of the Company’s net sales for its most recently completed fiscal year. “Competitive Activity” does not include (i) the mere ownership of securities in any such enterprise and the exercise of rights appurtenant thereto or (ii) participation in the management of any such enterprise other than in connection with the competitive operations of such enterprise.

(f)     “Employee Benefits” means the perquisites, benefits and service credit for benefits as provided under any and all employee benefit, including retirement income and welfare benefit, policies, plans, programs or arrangements in which Executive is entitled to participate, including without limitation any stock option, performance share, performance unit, stock purchase, stock appreciation, restricted stock, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist or any equivalent successor policies, plans, programs or arrangements that may be adopted hereafter by the Company, providing perquisites, benefits and service credit for benefits at least as great in the aggregate as are payable thereunder prior to a Change in Control.

(g)     “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(h)     “Incentive Pay” means an annual amount equal to not less than the greater of: (i) the average aggregate annual bonus, incentive or other payments of cash compensation, in addition to Base Pay, made or to be made in regard to services rendered during the three consecutive fiscal years immediately preceding the fiscal year in which the Change in Control occurred pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar agreement, policy, plan, program or arrangement (whether or not funded) of the Company, or any successor thereto (including, without limitation, any matching cash payment made with respect to restricted stock awards vesting during such three-year period), providing benefits at least as great as the benefits payable thereunder prior to a Change in Control or (ii) the Target Annual Incentive Pay. “Target Annual Incentive Pay” means the target incentive pay for the Executive’s position as set forth in the CTS Corporation Management Incentive Plan for the fiscal year in which the Change in Control occurred (without regard to any amendment to such Plan made subsequent to a Change in Control which adversely affects in any manner the benefits or amounts payable thereunder) and calculated with respect to the Executive’s Base Pay or, if the Management Incentive Plan is no longer in effect, the target annual cash incentive compensation, in addition to Base Pay, to be paid in regard to services rendered during the fiscal year in which the Change in Control occurred as set forth in the Company’s annual budget for such fiscal year.

(i)     “Retirement Plans” means the retirement income, supplemental executive retirement, excess benefits and retiree medical, life and similar benefit plans providing retirement perquisites, benefits and service credit for benefits at least as great in the aggregate as are payable thereunder prior to a Change in Control.

(j)     “Severance Period” means the period of time commencing on the date of the first occurrence of a Change in Control and continuing until the earlier of (i) the third anniversary of the occurrence of the Change in Control, or (ii) the Executive’s death; provided, however, that on each anniversary of the Change in Control, the Severance Period will automatically be extended for an additional year unless, not later than 90 calendar days prior to such anniversary date, either the Company or the Executive gives written notice to the other that the Severance Period is not to be so extended.

(k)     “Subsidiary” means an entity in which the Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock.

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(l)     “Term” means the period commencing as of the date hereof and expiring as of the later of (i) the close of business on ______________, or (ii) the expiration of the Severance Period; provided, however, that (A) commencing on ______________ and each ____________ thereafter, the term of this Agreement will automatically be extended for an additional year unless, not later than ______________ of the immediately preceding year, the Company or the Executive gives written notice that it or the Executive, as the case may be, does not wish to have the Term extended; and (B) subject to the last sentence of Section 9, if, prior to a Change in Control, the Executive ceases for any reason to be an employee of the Company and any Subsidiary, thereupon without further action the Term will be deemed to have expired and this Agreement will immediately terminate and be of no further effect. For purposes of this Section 1(l), the Executive will not be deemed to have ceased to be an employee of the Company or any Subsidiary by reason of the transfer of Executive’s employment between the Company and any Subsidiary, or among any Subsidiaries.

(m)     “Termination Date” means the date on which the Executive’s employment is terminated (the effective date of which will be the date of termination, or such other date that may be specified by the Executive if the termination is pursuant to Section 3(b)).

(n)     “Voting Stock” means securities entitled to vote generally in the election of directors.

2.     Operation of Agreement. This Agreement will be effective and binding immediately upon its execution, but, anything in this Agreement to the contrary notwithstanding, this Agreement will not be operative unless and until a Change in Control occurs. Upon the occurrence of a Change in Control at any time during the Term, without further action, this Agreement will become immediately operative, including without limitation, for purposes of the last sentence of Section 9 notwithstanding that the Term may have theretofore expired.

3.     Termination Following a Change in Control. (a) In the event of the occurrence of a Change in Control, the Executive’s employment may be terminated by the Company during the Severance Period and the Executive will be entitled to the benefits provided by Section 4 unless such termination is the result of the occurrence of one or more of the following events:

(i)     The Executive’s death;

(ii)     The Executive becoming permanently disabled within the meaning of, and beginning to actually receive disability benefits pursuant to, the long-term disability plan in effect for, or applicable to, Executive immediately prior to the Change in Control; or

(iii)     Cause.

If, during the Severance Period, the Executive’s employment is terminated by the Company or any Subsidiary other than pursuant to Section 3(a)(i), 3(a)(ii) or 3(a)(iii), the Executive will be entitled to the benefits provided by Section 4 hereof.

(b)     In the event of the occurrence of a Change in Control, the Executive may terminate employment with the Company and any Subsidiary during the Severance Period with the right to severance compensation as provided in Section 4 upon the occurrence of one or more of the following events (regardless of whether any other reason, other than Cause as hereinabove provided, for such termination exists or has occurred, including without limitation other employment):

(i)     Failure to elect or reelect or otherwise to maintain the Executive in the office or the position, or a substantially equivalent or better office or position, of or with the Company and/or a Subsidiary, as the case may be, which the Executive held immediately prior to a Change in Control, or the removal of the Executive as a member of the Board of Directors of the Company (or any successor thereto) if the Executive was a Director of the Company immediately prior to the Change in Control;

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(ii)     (A) A significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position with the Company and any Subsidiary which the Executive held immediately prior to the Change in Control, (B) a reduction in the aggregate of the Executive’s Base Pay and Incentive Pay received from the Company and any Subsidiary, or (C) the termination or denial of the Executive’s rights to Employee Benefits or a reduction in the scope or value thereof, any of which is not remedied by the Company within 10 calendar days after receipt by the Company of written notice from the Executive of such change, reduction or termination, as the case may be;

(iii)     A determination by the Executive (which determination will be conclusive and binding upon the parties hereto provided the determination was made in good faith and, in all events, will be presumed to have been made in good faith unless otherwise shown by the Company by clear and convincing evidence) that a change in circumstances has occurred following a Change in Control, including, without limitation, a change in the scope of the business or other activities for which the Executive was responsible immediately prior to the Change in Control, which has rendered the Executive substantially unable to carry out, has substantially hindered Executive’s performance of, or has caused Executive to suffer a substantial reduction in, any of the authorities, powers, functions, responsibilities or duties attached to the position held by the Executive immediately prior to the Change in Control, which situation is not remedied within 10 calendar days after written notice to the Company from the Executive of such determination;

(iv)     The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer or otherwise) to which all or substantially all of its business and/or assets have been transferred (directly or by operation of law) assumed all duties and obligations of the Company under this Agreement pursuant to Section 11(a);

(v)     The Company requires the Executive to have his principal location of work changed to any location that is in excess of 35 miles from the location thereof immediately prior to the Change in Control, or requires the Executive to travel away from his office in the course of performing his responsibilities or duties attached to his position at least 20% more (in terms of aggregate days in any calendar year or in any calendar quarter when annualized for purposes of comparison to any prior year) than was required of Executive in any of the three full years immediately prior to the Change in Control without, in either case, his prior written consent;

(vi)     Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto which is not remedied by the Company within 10 calendar days after receipt by the Company of written notice from the Executive of such breach; or

(vii)     Without limiting the generality or effect of the foregoing, any Change in Control that results in (A) the Company’s Voting Stock ceasing to be (x) registered under Section 12 of the Exchange Act or (y) listed on the New York Stock Exchange or (z) authorized for quotation on the Nasdaq National Market System, or (B) the Company no longer being required to file periodic reports with the Securities and Exchange Commission pursuant to Sections 13(a) or 15(d) of the Exchange Act, shall be conclusively presumed to give rise to the Executive’s right to terminate employment pursuant to subsections (ii) and (iii) of this Section 3(b).

(c)     A termination by the Company pursuant to Section 3(a) or by the Executive pursuant to Section 3(b) that entitles the Executive to the benefits provided by Section 4 will not affect any rights that the Executive may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits, which rights will be governed by the terms thereof; provided, however, that if the Executive also becomes entitled to receive severance payments under any employment or severance agreement (other than this Agreement), then the Executive’s termination payments under this Agreement shall be reduced by any corresponding payments made to the Executive under such other agreement. For the avoidance of doubt, payments made as reimbursement or in lieu of perquisite benefits, for outplacement advice or for relocation of the type described in Paragraphs (4), (5), (6) and (7) of Annex A to this Agreement shall not be considered as corresponding to severance payments calculated with respect to Base Pay or Incentive Pay, or any multiple thereof.

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4.     Severance Compensation. (a) If, following the occurrence of a Change in Control, the Executive’s employment is terminated by the Company during the Severance Period other than pursuant to Sections 3(a)(i), 3(a)(ii) or 3(a)(iii), or if the Executive terminates his employment pursuant to Section 3(b), the Company will pay to the Executive (or other Person as appropriate) as severance benefits the appropriate amounts described on Annex A within five business days after the Termination Date and will continue to provide to the Executive the continuing and other benefits described on Annex A for the periods described therein.

(b)     Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided hereunder on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite “prime rate” as quoted from time to time during the relevant period in the Midwest Edition of The Wall Street Journal. Such interest will be payable as it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change.

(c)     If Executive’s employment is terminated by the Company following a Change in Control for any reason other than pursuant to Sections 3(a)(i), 3(a)(ii) or 3(a)(iii), or if the Executive terminates his employment pursuant to Section 3(b), notwithstanding anything to the contrary contained in this Agreement or in the CTS Corporation Management Incentive Plan, the Company will pay in cash to the Executive a lump sum amount equal to (a) the Executive’s target incentive pay for Executive’s position under the CTS Corporation Management Incentive Plan for the year in which the Termination Date occurs, and (b) prorated on the basis of the ratio of the number of months of the Executive’s participation during the applicable performance period to which the incentive pay related to the aggregate number of months in such performance period, taking into account service rendered through the payment date. Such payment shall be made within five business days after the Termination Date.

(d)     Notwithstanding anything to the contrary contained in this Agreement or in any applicable plan, program or agreement, immediately upon the occurrence of a Change in Control, all equity awards (including restricted stock awards, stock options and appreciation rights) held by the Executive will become fully vested and any risk of forfeiture and prohibitions or restrictions on transfer pertaining to any restricted shares granted to the Executive will lapse and all stock options held by the Executive will become fully exercisable.

(e)     Notwithstanding any provision of this Agreement to the contrary, the parties’ respective rights and obligations under this Section 4 and under Sections 5, 7 and 8 will survive any termination or expiration of this Agreement or the termination of the Executive’s employment following a Change in Control for any reason whatsoever.

5.     Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, but subject to Section 5(h), in the event that this Agreement becomes operative and it is determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, performance share, performance unit, stock appreciation right or similar right, or the lapse or termination of any restriction on, or the vesting or exercisability of, any of the foregoing (a “Payment”), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”) (or any successor provision thereto) by reason of being considered “contingent on a change in ownership or control” of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the “Excise Tax”), the Executive will be entitled to receive an additional payment or payments (collectively, a “Gross-Up Payment”); provided, however, that no Gross-up Payment will be made with respect to the Excise Tax, if any, attributable to (i) any incentive stock option, as defined by Section 422 of the Code (“ISO”) granted prior to the execution of this Agreement, or (ii) any stock appreciation or similar right, whether or not limited, granted in tandem with any ISO described in clause (i). The Gross-Up Payment will be in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment.

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(b)     Subject to the provisions of Section 5(f), all determinations required to be made under this Section 5, including whether an Excise Tax is payable by the Executive and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to the Executive and the amount of such Gross-Up Payment, if any, will be made by a nationally recognized accounting firm (the “Accounting Firm”) selected by the Executive in his sole discretion. The Executive will direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Executive within 30 calendar days after the Termination Date, if applicable, and any such other time or times as may be requested by the Company or the Executive. If the Accounting Firm determines that any Excise Tax is payable by the Executive, the Company will pay the required Gross-Up Payment to the Executive within five business days after receipt of such determination and calculations with respect to any Payment to the Executive. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it will, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an “Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 5(f) and the Executive thereafter is required to make a payment of any Excise Tax, the Executive will direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and the Executive as promptly as possible. Any such Underpayment will be promptly paid by the Company to, or for the benefit of, the Executive within five business days after receipt of such determination and calculations.

(c)     The Company and the Executive will each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or the Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by Section 5(b). Any determination by the Accounting Firm as to the amount of the Gross-Up Payment will be binding upon the Company and the Executive.

(d)     The federal, state and local income or other tax returns filed by the Executive will be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by the Executive. The Executive will make proper payment of the amount of any Excise Payment, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of the Executive’s federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, the Executive will, within five business days, pay to the Company the amount of such reduction.

(e)     The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 5(b) will be borne by the Company. If such fees and expenses are initially paid by the Executive, the Company will reimburse the Executive the full amount of such fees and expenses within five business days after receipt from the Executive of a statement therefor and reasonable evidence of his payment thereof.

(f)     The Executive will notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification will be given as promptly as practicable but no later than 10 business days after the Executive actually receives notice of such claim and the Executive will further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Executive). The Executive will not pay such claim prior to the earlier of (i) the expiration of the 30-calendar-day period following the date on which he gives such notice to the Company and (ii) the date that any payment of amount with respect to such claim is due. If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive will:

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(i)     provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company;

(ii)     take such action in connection with contesting such claim as the Company reasonably requests in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company;

(iii)     cooperate with the Company in good faith in order effectively to contest such claim; and

(iv)     permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company will bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and will indemnify and hold harmless the Executive, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 5(f), the Company will control all proceedings taken in connection with the contest of any claim contemplated by this Section 5(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that the Executive may participate therein at his own cost and expense) and may, at its option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company determines; provided, however, that if the Company directs the Executive to pay the tax claimed and sue for a refund, the Company will advance the amount of such payment to the Executive on an interest-free basis and will indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and provided further, however, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of any such contested claim will be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive will be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

(g)     If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(f), the Executive receives any refund with respect to such claim, the Executive will (subject to the Company’s complying with the requirements of Section 5(f)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 5(f), a determination is made that the Executive will not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial or refund prior to the expiration of 30 calendar days after such determination, then such advance will be forgiven and will not be required to be repaid and the amount of any such advance will offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to the Executive pursuant to this Section 5.

6.     No Mitigation Obligation. The Company hereby acknowledges that it will be difficult and may be impossible for the Executive to find reasonably comparable employment following the Termination Date and that the non-competition covenant contained in Section 8 will further limit the employment opportunities for the Executive. Accordingly, the payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement is hereby acknowledged by the Company to be reasonable, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise, except as expressly provided in the penultimate sentence of Paragraph 2 set forth on Annex A.

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7.     Legal Fees and Expenses. It is the intent of the Company that the Executive not be required to incur legal fees and the related expenses associated with the interpretation, enforcement or defense of Executive’s rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of Executive’s choice, at the expense of the Company as hereafter provided, to advise and represent the Executive in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive’s entering into an attorney-client relationship with such counsel and, in that connection, the Company and the Executive agree that a confidential relationship will exist between the Executive and such counsel. Without respect to whether the Executive prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys’ and related fees and expenses incurred by the Executive in connection with any of the foregoing, regardless of amount.

8.     Competitive Activity. During a period ending one year following the Termination Date, if the Executive has received or is receiving benefits under Section 4, the Executive will not, without the prior written consent of the Company, which consent will not be unreasonably withheld, engage in any Competitive Activity.

9.     Employment Rights. Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company or any Subsidiary prior to or following any Change in Control. Any termination of employment of the Executive or the removal of the Executive from the office or position in the Company or any Subsidiary following the commencement of any discussion with a third person that ultimately results in a Change in Control will be deemed to be a termination or removal of the Executive after a Change in Control for purposes of this Agreement.

10.     Withholding of Taxes. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling.

11.     Successors and Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor will thereafter be deemed the “Company” for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company.

(b)     This Agreement will inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees.

(c)     This Agreement is personal in nature and neither of the parties hereto will, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 11(a) and 11(b). Without limiting the generality or effect of the foregoing, the Executive’s right to receive payments hereunder is not assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive’s will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 11(c), the Company will have no liability to pay any amount so attempted to be assigned, transferred or delegated.

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12.     Notices. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or one business day after having been sent by a nationally recognized overnight courier service such as Federal Express, UPS, or Purolator, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to the Executive at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt.

13.     Governing Law. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Indiana, without giving effect to the principles of conflict of laws of such State.

14.     Validity. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal.

15.     Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement.

16.     Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same agreement.

17.     Prior Agreement. This Agreement amends and restates the Agreement, dated as of _______________ (the “Prior Agreement”), between CTS Corporation and the Executive, which Prior Agreement will, without further action, be superseded as of the date first above written.

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written.

	CTS CORPORATION
By

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Annex A

Severance Compensation

(1)     A lump sum payment in an amount equal to three (3) times the sum of (A) Base Pay (at the rate in effect immediately prior to the Change in Control or, if greater, the average Base Pay over the three years prior to the Termination Date), plus (B) Incentive Pay (determined in accordance with the standards set forth in Section 1(h)).

(2)     For a period of 36 months following the Termination Date (the “Continuation Period”), the Company will arrange to provide the Executive with Employee Benefits that are welfare benefits (but not stock option, performance share, performance unit, stock purchase, stock appreciation, restricted stock or similar compensatory benefits) substantially similar to those that the Executive was receiving or entitled to receive immediately prior to the Termination Date (or, if greater, immediately prior to the reduction, termination, or denial described in Section 3(b)(ii)). If and to the extent that any benefit described in this Paragraph 2 is not or cannot be paid or provided under any policy, plan, program or arrangement of the Company or any Subsidiary, as the case may be, then the Company will itself pay or provide for the payment to the Executive, his dependents and beneficiaries, of such Employee Benefits along with, in the case of any benefit described in this Paragraph 2 which is subject to tax because it is not or cannot be paid or provided under any such policy, plan, program or arrangement of the Company or any Subsidiary, an additional amount such that after payment by the Executive, or his dependents or beneficiaries, as the case may be, of all taxes so imposed, the recipient retains an amount equal to such taxes. Notwithstanding the foregoing, or any other provision of the Agreement, for purposes of determining the period of continuation coverage to which the Executive or any of his dependents is entitled pursuant to Section 4980B of the Code under the Company’s medical, dental and other group health plans, or successor plans, the Executive’s “qualifying event” will be the termination of the Continuation Period and the Executive will be considered to have remained actively employed on a full-time basis through that date. Without otherwise limiting the purposes or effect of Section 6, Employee Benefits otherwise receivable by the Executive pursuant to this Paragraph 2 will be reduced to the extent comparable welfare benefits are actually received by the Executive from another employer during the Continuation Period following the Executive’s Termination Date, and any such benefits actually received by the Executive will be reported by the Executive to the Company.

(3)     In addition to the retirement, supplemental executive retirement, and other benefits, if any, to which the Executive is entitled under the Company’s Retirement Plans, a lump sum payment in an amount equal to the excess of (x) the actuarial present value of the retirement, medical, life and other benefits to which the Executive would have been entitled under the Retirement Plans, without regard to any amendment to the Retirement Plans made subsequent to a Change in Control which affects in any way the computation of retirement or welfare benefits thereunder in a manner adverse to the Executive, if the Executive had continued to be employed, and had been credited with age and service credits for all purposes under the Retirement Plans, through the Continuation Period, and to have received during such Continuation Period the Executive’s Base Pay (as determined in Paragraph 1 of this Annex A) and Incentive Pay (as determined in Paragraph 1 of this Annex A); and provided that (i) to the extent that a cash bonus earned under the 1988 Restricted Stock and Cash Bonus Plan (as amended and restated on May 9, 1997) and payable upon a Change in Control is not otherwise included in determining the Executive’s compensation for purposes of calculating the amount of the Executive’s aggregate benefits under the Company’s Salaried Employees’ Pension Plan and Excess Retirement Benefit Plan, the amount of such cash bonus shall be included in determining compensation for purposes of such plans in the calculations under this subparagraph (x), and (ii) the calculations under this subparagraph (x) shall be made as if the Executive were fully vested in such benefits, over (y) the actuarial present value of the retirement, medical, life and other benefits that the Executive is entitled to receive (either immediately or on a deferred basis) under the Retirement Plans. For purposes of this subsection, “actuarial present value” will be determined by applying a discount factor equal to the annual rate of interest provided by 30-year Treasury securities, determined for the second calendar month preceding the first day of the Plan Year which includes the date on which the distribution is paid, and by using the mortality table as prescribed in Revenue Ruling 2001-62.

(4)     In lieu of the Executive’s right, if any, to receive benefits constituting “perquisites” (other than as set forth in Paragraphs (5), (6) and (7) below), including annual physicals, tax return preparation and car allowances, a lump sum payment in an amount equal to $__________.

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(5)     An amount up to $_________ for outplacement services that are obtained during the Continuation Period by a firm selected by the Executive.

(6)     Reimbursement for fees and expenses incurred during the Continuation Period by the Executive in seeking legal, tax and estate planning advice in connection with the regular operation of this Agreement and the payment of benefits and amounts hereunder. The benefits and payments provided pursuant to this Paragraph 6 shall be in addition to, and not in lieu or in limitation of, the right to reimbursement of amounts payable pursuant to Section 7 of this Agreement.

(7)     Reimbursement for relocation expenses incurred by the Executive for any relocation made during the Continuation Period on a basis consistent with the Company’s relocation policies and practices for senior executives, as in effect immediately prior to the Change in Control.

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SEVERANCE AGREEMENT
(Tier 2)

THIS SEVERANCE AGREEMENT (this “Agreement”), dated as of _______________ is made and entered by and between CTS Corporation, an Indiana corporation (the “Company”), and _______________ (the “Executive”).

WITNESSETH:

WHEREAS, the Executive is a senior executive or a key employee of the Company or one or more of its Subsidiaries and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth and financial strength of the Company;

WHEREAS, the Company recognizes that, as is the case for most publicly held companies, the possibility of a Change in Control (as defined below) exists;

WHEREAS, the Company desires to assure itself of both present and future continuity of management and desires to establish certain minimum severance benefits for certain of its senior executives and key employees, including the Executive, applicable in the event of a Change in Control;

WHEREAS, the Company wishes to ensure that its senior executives and key employees are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change in Control; and

WHEREAS, the Company desires to provide additional inducement for the Executive to continue to remain in the ongoing employ of the Company.

NOW, THEREFORE, the Company and the Executive agree as follows:

1.     Certain Defined Terms. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters:

(a)     “Base Pay” means the Executive’s annual base salary at a rate not less than the Executive’s annual fixed or base compensation as in effect for the Executive immediately prior to the occurrence of a Change in Control or such higher rate as may be determined from time to time by the Board or a committee thereof.

(b)     “Board” means the Board of Directors of the Company.

(c)     “Cause” means that, prior to any termination pursuant to Section 3(b), the Executive:

(i)     has been convicted of a criminal violation involving fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company or any Subsidiary;

(ii)     has intentionally and wrongfully damaged property of the Company or any Subsidiary;

(iii)     has intentionally and wrongfully disclosed secret processes, trade secrets or confidential information of the Company or any Subsidiary; or

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(iv)     has intentionally and wrongfully engaged in any Competitive Activity;

and any such act has been demonstrably and materially harmful to the Company. For purposes of this Agreement, no act or failure to act on the part of the Executive will be deemed to be “intentional” if it was due primarily to an error in judgment or negligence, and will be deemed to be “intentional” only if done or omitted to be done by the Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive will not be deemed to have been terminated for “Cause” hereunder unless and until there is delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the Board then in office at a meeting of the Board called and held for such purpose, after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel (if the Executive chooses to have counsel present at such meeting), to be heard before the Board, finding that, in the good faith opinion of the Board, the Executive committed an act constituting “Cause” as herein defined and specifying the particulars thereof in detail. Nothing herein will limit the right of the Executive or his beneficiaries to contest the validity or propriety of any such determination.

(d)     “Change in Control” means the occurrence during the Term of any of the following events:

(i)     the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of aggregate beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the combined voting power of the then outstanding Voting Stock of the Company (including, for this purpose, any Voting Stock of the Company acquired prior to the Term); provided, however, that for purposes of this Section 1(d)(i), the following will not be deemed to result in a Change in Control: (A) any acquisition of Voting Stock of the Company directly from the Company that is approved by the Incumbent Board (as defined below), (B) any acquisition of Voting Stock of the Company by the Company or any Subsidiary and any change in the percentage ownership of Voting Stock of the Company that results from such acquisition, (C) any acquisition of Voting Stock of the Company by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, or (D) any acquisition of Voting Stock of the Company by any Person pursuant to a Business Combination that complies with clauses (I), (II) and (III) of Section 1(d)(iii); or

(ii)     individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a Director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the Directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) will be deemed to have been a member of the Incumbent Board, but excluding, for this purpose, any such individual becoming a Director as a result of an actual or threatened election contest (as described in Rule 14a-12(c) of the Exchange Act) with respect to the election or removal of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (collectively, an “Election Contest”); or

(iii) consummation of (A) a reorganization, merger or consolidation of the Company, or (B) a sale or other disposition of all or substantially all of the assets of the Company, (such reorganization, merger, consolidation or sale each, a “Business Combination”), unless, in each case, immediately following such Business Combination, (I) all or substantially all of the individuals and entities who were the beneficial owners of Voting Stock of the Company immediately prior to such Business Combination beneficially own, directly or indirectly, more than 75% of the then outstanding shares of common stock and the combined voting power of the then outstanding Voting Stock of the Company entitled to vote generally in the election of Directors of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries), (II) no Person (other than the Company, such entity resulting from such Business Combination, or any employee benefit plan (or related trust) sponsored or maintained by the Company, any Subsidiary or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, 15% or more of the then outstanding shares of Voting Stock of the entity resulting from such Business Combination, and (III) at least a majority of the members of the Board of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or

(iv)     approval by the shareholders of the Company of a complete liquidation or dissolution of the Company, except pursuant to a Business Combination that complies with clauses (I), (II) and (III) of Section 1(d)(iii).

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(e)     “Competitive Activity” means the Executive’s participation, without the written consent of an officer of the Company, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company and such enterprise’s sales of any product or service competitive with any product or service of the Company amounted to 25% of such enterprise’s net sales for its most recently completed fiscal year and if the Company’s net sales of said product or service amounted to 25% of the Company’s net sales for its most recently completed fiscal year. “Competitive Activity” does not include (i) the mere ownership of securities in any such enterprise and the exercise of rights appurtenant thereto or (ii) participation in the management of any such enterprise other than in connection with the competitive operations of such enterprise.

(f)     “Employee Benefits” means the perquisites, benefits and service credit for benefits as provided under any and all employee benefit, including retirement income and welfare benefit, policies, plans, programs or arrangements in which Executive is entitled to participate, including without limitation any stock option, performance share, performance unit, stock purchase, stock appreciation, restricted stock, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist or any equivalent successor policies, plans, programs or arrangements that may be adopted hereafter by the Company, providing perquisites, benefits and service credit for benefits at least as great in the aggregate as are payable thereunder prior to a Change in Control.

(g)     “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(h)     “Incentive Pay” means an annual amount equal to not less than the greater of: (i) the average aggregate annual bonus, incentive or other payments of cash compensation, in addition to Base Pay, made or to be made in regard to services rendered during the three consecutive fiscal years immediately preceding the fiscal year in which the Change in Control occurred pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar agreement, policy, plan, program or arrangement (whether or not funded) of the Company, or any successor thereto (including, without limitation, any matching cash payment made with respect to restricted stock awards vesting during such three-year period), providing benefits at least as great as the benefits payable thereunder prior to a Change in Control or (ii) the Target Annual Incentive Pay. “Target Annual Incentive Pay” means the target incentive pay for the Executive’s position as set forth in the CTS Corporation Management Incentive Plan for the fiscal year in which the Change in Control occurred (without regard to any amendment to such Plan made subsequent to a Change in Control which adversely affects in any manner the benefits or amounts payable thereunder) and calculated with respect to the Executive’s Base Pay or, if the Management Incentive Plan is no longer in effect, the target annual cash incentive compensation, in addition to Base Pay, to be paid in regard to services rendered during the fiscal year in which the Change in Control occurred as set forth in the Company’s annual budget for such fiscal year.

(i)     “Retirement Plans” means the retirement income, supplemental executive retirement, excess benefits and retiree medical, life and similar benefit plans providing retirement perquisites, benefits and service credit for benefits at least as great in the aggregate as are payable thereunder prior to a Change in Control.

(j)     “Severance Period” means the period of time commencing on the date of the first occurrence of a Change in Control and continuing until the earlier of (i) the second anniversary of the occurrence of the Change in Control, or (ii) the Executive’s death.

(k)     “Subsidiary” means an entity in which the Company directly or indirectly beneficially owns 50% or more of the outstanding Voting Stock.

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(l)     “Term” means the period commencing as of the date hereof and expiring as of the later of (i) the close of business on ________________, or (ii) the expiration of the Severance Period; provided, however, that (A) commencing on ________________ and each ____________ thereafter, the term of this Agreement will automatically be extended for an additional year unless, not later than ____________ of the immediately preceding year, the Company or the Executive gives written notice that it or the Executive, as the case may be, does not wish to have the Term extended; and (B) subject to the last sentence of Section 9, if, prior to a Change in Control, the Executive ceases for any reason to be an employee of the Company and any Subsidiary, thereupon without further action the Term will be deemed to have expired and this Agreement will immediately terminate and be of no further effect. For purposes of this Section 1(l), the Executive will not be deemed to have ceased to be an employee of the Company or any Subsidiary by reason of the transfer of Executive’s employment between the Company and any Subsidiary, or among any Subsidiaries.

(m)     “Termination Date” means the date on which the Executive’s employment is terminated (the effective date of which will be the date of termination, or such other date that may be specified by the Executive if the termination is pursuant to Section 3(b)).

(n)     “Voting Stock” means securities entitled to vote generally in the election of directors.

2.     Operation of Agreement. This Agreement will be effective and binding immediately upon its execution, but, anything in this Agreement to the contrary notwithstanding, this Agreement will not be operative unless and until a Change in Control occurs. Upon the occurrence of a Change in Control at any time during the Term, without further action, this Agreement will become immediately operative, including without limitation, for purposes of the last sentence of Section 9 notwithstanding that the Term may have theretofore expired.

3.     Termination Following a Change in Control. (a) In the event of the occurrence of a Change in Control, the Executive’s employment may be terminated by the Company during the Severance Period and the Executive will be entitled to the benefits provided by Section 4 unless such termination is the result of the occurrence of one or more of the following events:

(i)     The Executive’s death;

(ii)     The Executive becoming permanently disabled within the meaning of, and beginning to actually receive disability benefits pursuant to, the long-term disability plan in effect for, or applicable to, Executive immediately prior to the Change in Control; or

(iii)     Cause.

If, during the Severance Period, the Executive’s employment is terminated by the Company or any Subsidiary other than pursuant to Section 3(a)(i), 3(a)(ii) or 3(a)(iii), the Executive will be entitled to the benefits provided by Section 4 hereof.

(b)     In the event of the occurrence of a Change in Control, the Executive may terminate employment with the Company and any Subsidiary during the Severance Period with the right to severance compensation as provided in Section 4 upon the occurrence of one or more of the following events (regardless of whether any other reason, other than Cause as hereinabove provided, for such termination exists or has occurred, including without limitation other employment):

(i)     Failure to elect or reelect or otherwise to maintain the Executive in the office or the position, or a substantially equivalent or better office or position, of or with the Company and/or a Subsidiary, as the case may be, which the Executive held immediately prior to a Change in Control, or the removal of the Executive as a member of the Board of Directors of the Company (or any successor thereto) if the Executive was a Director of the Company immediately prior to the Change in Control;

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(ii)     (A) A significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position with the Company and any Subsidiary which the Executive held immediately prior to the Change in Control, (B) a reduction in the aggregate of the Executive’s Base Pay and Incentive Pay received from the Company and any Subsidiary, or (C) the termination or denial of the Executive’s rights to Employee Benefits or a reduction in the scope or value thereof, any of which is not remedied by the Company within 10 calendar days after receipt by the Company of written notice from the Executive of such change, reduction or termination, as the case may be;

(iii)     A determination by the Executive (which determination will be conclusive and binding upon the parties hereto provided the determination was made in good faith and, in all events, will be presumed to have been made in good faith unless otherwise shown by the Company by clear and convincing evidence) that a change in circumstances has occurred following a Change in Control, including, without limitation, a change in the scope of the business or other activities for which the Executive was responsible immediately prior to the Change in Control, which has rendered the Executive substantially unable to carry out, has substantially hindered Executive’s performance of, or has caused Executive to suffer a substantial reduction in, any of the authorities, powers, functions, responsibilities or duties attached to the position held by the Executive immediately prior to the Change in Control, which situation is not remedied within 10 calendar days after written notice to the Company from the Executive of such determination;

(iv)     The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer or otherwise) to which all or substantially all of its business and/or assets have been transferred (directly or by operation of law) assumed all duties and obligations of the Company under this Agreement pursuant to Section 11(a);

(v)     The Company requires the Executive to have his principal location of work changed to any location that is in excess of 35 miles from the location thereof immediately prior to the Change in Control, or requires the Executive to travel away from his office in the course of performing his responsibilities or duties attached to his position at least 20% more (in terms of aggregate days in any calendar year or in any calendar quarter when annualized for purposes of comparison to any prior year) than was required of Executive in any of the three full years immediately prior to the Change in Control without, in either case, his prior written consent;

(vi)     Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto which is not remedied by the Company within 10 calendar days after receipt by the Company of written notice from the Executive of such breach; or

(vii)     Without limiting the generality or effect of the foregoing, any Change in Control that results in (A) the Company’s Voting Stock ceasing to be (x) registered under Section 12 of the Exchange Act or (y) listed on the New York Stock Exchange or (z) authorized for quotation on the Nasdaq National Market System, or (B) the Company no longer being required to file periodic reports with the Securities and Exchange Commission pursuant to Sections 13(a) or 15(d) of the Exchange Act, shall be conclusively presumed to give rise to the Executive’s right to terminate employment pursuant to subsections (ii) and (iii) of this Section 3(b).

(c)     A termination by the Company pursuant to Section 3(a) or by the Executive pursuant to Section 3(b) that entitles the Executive to the benefits provided by Section 4 will not affect any rights that the Executive may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits, which rights will be governed by the terms thereof; provided, however, that if the Executive also becomes entitled to receive severance payments under any employment or severance agreement (other than this Agreement), then the Executive’s termination payments under this Agreement shall be reduced by any corresponding payments made to the Executive under such other agreement.

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4.     Severance Compensation. (a) If, following the occurrence of a Change in Control, the Executive’s employment is terminated by the Company during the Severance Period other than pursuant to Sections 3(a)(i), 3(a)(ii) or 3(a)(iii), or if the Executive terminates his employment pursuant to Section 3(b), the Company will pay to the Executive (or other Person as appropriate) as severance benefits the appropriate amounts described on Annex A within five business days after the Termination Date and will continue to provide to the Executive the continuing and other benefits described on Annex A for the periods described therein.

(b)     Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided hereunder on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite “prime rate” as quoted from time to time during the relevant period in the Midwest Edition of The Wall Street Journal. Such interest will be payable as it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change.

(c)     If Executive’s employment is terminated by the Company following a Change in Control for any reason other than pursuant to Sections 3(a)(i), 3(a)(ii) or 3(a)(iii), or if the Executive terminates his employment pursuant to Section 3(b), notwithstanding anything to the contrary contained in this Agreement or in the CTS Corporation Management Incentive Plan, the Company will pay in cash to the Executive a lump sum amount equal to (a) the Executive’s target incentive pay for Executive’s position under the CTS Corporation Management Incentive Plan for the year in which the Termination Date occurs, and (b) prorated on the basis of the ratio of the number of months of the Executive’s participation during the applicable performance period to which the incentive pay related to the aggregate number of months in such performance period, taking into account service rendered through the payment date. Such payment shall be made within five business days after the Termination Date.

(d)     Notwithstanding anything to the contrary contained in this Agreement or in any applicable plan, program or agreement, immediately upon the occurrence of a Change in Control, all equity awards (including restricted stock awards, stock options and appreciation rights) held by the Executive will become fully vested and any risk of forfeiture and prohibitions or restrictions on transfer pertaining to any restricted shares granted to the Executive will lapse and all stock options held by the Executive will become fully exercisable.

(e)     Notwithstanding any provision of this Agreement to the contrary, the parties’ respective rights and obligations under this Section 4 and under Sections 5, 7 and 8 will survive any termination or expiration of this Agreement or the termination of the Executive’s employment following a Change in Control for any reason whatsoever.

5.     Limitation on Payments and Benefits. Notwithstanding any provision of this Agreement to the contrary, if any amount or benefit to be paid or provided under this Agreement would be an “Excess Parachute Payment,” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), or any successor provision thereto, but for the application of this sentence, then the payments and benefits to be paid or provided under this Agreement will be reduced to the minimum extent necessary (but in no event to less than zero) so that no portion of any such payment or benefit, as so reduced, constitutes an Excess Parachute Payment; provided, however, that the foregoing reduction will be made only if and to the extent that such reduction would result in an increase in the aggregate payment and benefits to be provided, determined on an after-tax basis (taking into account the excise tax imposed pursuant to Section 4999 of the Code, or any successor provision thereto, any tax imposed by any comparable provision of state law, and any applicable federal, state and local income and employment taxes). Whether requested by the Executive or the Company, the determination of whether any reduction in such payments or benefits to be provided under this Agreement or otherwise is required pursuant to the preceding sentence will be made at the expense of the Company by the Company’s independent accountants. The fact that the Executive’s right to payments or benefits may be reduced by reason of the limitations contained in this Section 5 will not of itself limit or otherwise affect any other rights of the Executive other than pursuant to this Agreement. In the event that any payment or benefit intended to be provided under this Agreement or otherwise is required to be reduced pursuant to this Section 5, the Executive will be entitled to designate the payments and/or benefits to be so reduced in order to give effect to this Section 5. The Company will provide the Executive with all information reasonably requested by the Executive to permit the Executive to make such designation. In the event that the Executive fails to make such designation within 10 business days of the Termination Date, the Company may effect such reduction in any manner it deems appropriate.

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6.     No Mitigation Obligation. The Company hereby acknowledges that it will be difficult and may be impossible for the Executive to find reasonably comparable employment following the Termination Date and that the non-competition covenant contained in Section 8 will further limit the employment opportunities for the Executive. Accordingly, the payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement is hereby acknowledged by the Company to be reasonable, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise, except as expressly provided in the penultimate sentence of Paragraph 2 set forth on Annex A.

7.     Legal Fees and Expenses. It is the intent of the Company that the Executive not be required to incur legal fees and the related expenses associated with the interpretation, enforcement or defense of Executive’s rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of Executive’s choice, at the expense of the Company as hereafter provided, to advise and represent the Executive in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive’s entering into an attorney-client relationship with such counsel and, in that connection, the Company and the Executive agree that a confidential relationship will exist between the Executive and such counsel. Without respect to whether the Executive prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys’ and related fees and expenses incurred by the Executive in connection with any of the foregoing, regardless of amount.

8.     Competitive Activity. During a period ending one year following the Termination Date, if the Executive has received or is receiving benefits under Section 4, the Executive will not, without the prior written consent of the Company, which consent will not be unreasonably withheld, engage in any Competitive Activity.

9.     Employment Rights. Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company or any Subsidiary prior to or following any Change in Control. Any termination of employment of the Executive or the removal of the Executive from the office or position in the Company or any Subsidiary following the commencement of any discussion with a third person that ultimately results in a Change in Control will be deemed to be a termination or removal of the Executive after a Change in Control for purposes of this Agreement.

10.     Withholding of Taxes. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling.

11.     Successors and Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor will thereafter be deemed the “Company” for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company.

(b)     This Agreement will inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees.

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(c)     This Agreement is personal in nature and neither of the parties hereto will, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 11(a) and 11(b). Without limiting the generality or effect of the foregoing, the Executive’s right to receive payments hereunder is not assignable, transferable or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by Executive’s will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 11(c), the Company will have no liability to pay any amount so attempted to be assigned, transferred or delegated.

12.     Notices. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or one business day after having been sent by a nationally recognized overnight courier service such as Federal Express, UPS, or Purolator, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to the Executive at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt.

13.     Governing Law. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Indiana, without giving effect to the principles of conflict of laws of such State.

14.     Validity. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal.

15.     Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement.

16.     Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same agreement.

17.     Prior Agreement. This Agreement amends and restates the Agreement, dated as of ________________ (the “Prior Agreement”), between CTS Corporation and the Executive, which Prior Agreement will, without further action, be superseded as of the date first above written.

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written.

	CTS CORPORATION
By

20

Annex A

Severance Compensation

(1)     A lump sum payment in an amount equal to one and one half (1.5) times the sum of (A) Base Pay (at the rate in effect immediately prior to the Change in Control or, if greater, the average Base Pay over the three years prior to the Termination Date), plus (B) Incentive Pay (determined in accordance with the standards set forth in Section 1(h)).

(2)     For a period of 12 months following the Termination Date (the “Continuation Period”), the Company will arrange to provide the Executive with Employee Benefits that are welfare benefits (but not stock option, performance share, performance unit, stock purchase, stock appreciation, restricted stock or similar compensatory benefits) substantially similar to those that the Executive was receiving or entitled to receive immediately prior to the Termination Date (or, if greater, immediately prior to the reduction, termination, or denial described in Section 3(b)(ii)). If and to the extent that any benefit described in this Paragraph 2 is not or cannot be paid or provided under any policy, plan, program or arrangement of the Company or any Subsidiary, as the case may be, then the Company will itself pay or provide for the payment to the Executive, his dependents and beneficiaries, of such Employee Benefits along with, in the case of any benefit described in this Paragraph 2 which is subject to tax because it is not or cannot be paid or provided under any such policy, plan, program or arrangement of the Company or any Subsidiary, an additional amount such that after payment by the Executive, or his dependents or beneficiaries, as the case may be, of all taxes so imposed, the recipient retains an amount equal to such taxes. Notwithstanding the foregoing, or any other provision of the Agreement, for purposes of determining the period of continuation coverage to which the Executive or any of his dependents is entitled pursuant to Section 4980B of the Code under the Company’s medical, dental and other group health plans, or successor plans, the Executive’s “qualifying event” will be the termination of the Continuation Period and the Executive will be considered to have remained actively employed on a full-time basis through that date. Without otherwise limiting the purposes or effect of Section 6, Employee Benefits otherwise receivable by the Executive pursuant to this Paragraph 2 will be reduced to the extent comparable welfare benefits are actually received by the Executive from another employer during the Continuation Period following the Executive’s Termination Date, and any such benefits actually received by the Executive will be reported by the Executive to the Company.

    (3)        In addition to the retirement, supplemental executive retirement, and other benefits, if any, to which the Executive is entitled under the Company’s Retirement Plans, a lump sum payment in an amount equal to the excess of (x) the actuarial present value of the retirement, medical, life and other benefits to which the Executive would have been entitled under the Retirement Plans, without regard to any amendment to the Retirement Plans made subsequent to a Change in Control which affects in any way the computation of retirement or welfare benefits thereunder in a manner adverse to the Executive, if the Executive had continued to be employed, and had been credited with age and service credits for all purposes under the Retirement Plans, through the Continuation Period, and to have received during such Continuation Period the Executive’s Base Pay (as determined in Paragraph 1 of this Annex A) and Incentive Pay (as determined in Paragraph 1 of this Annex A); and provided that (i) to the extent that a cash bonus earned under the 1988 Restricted Stock and Cash Bonus Plan (as amended and restated on May 9, 1997) and payable upon a Change in Control is not otherwise included in determining the Executive’s compensation for purposes of calculating the amount of the Executive’s aggregate benefits under the Company’s Salaried Employees’ Pension Plan and Excess Retirement Benefit Plan, the amount of such cash bonus shall be included in determining compensation for purposes of such plans in the calculations under this subparagraph (x), and (ii) the calculations under this subparagraph (x) shall be made as if the Executive were fully vested in such benefits, over (y) the actuarial present value of the retirement, medical, life and other benefits that the Executive is entitled to receive (either immediately or on a deferred basis) under the Retirement Plans. For purposes of this subsection, “actuarial present value” will be determined by applying a discount factor equal to the annual rate of interest provided by 30-year Treasury securities, determined for the second calendar month preceding the first day of the Plan Year which includes the date on which the distribution is paid, and by using the mortality table as prescribed in Revenue Ruling 2001-62.

(4)     An amount up to $__________ for outplacement services that are obtained during the Continuation Period by a firm selected by the Executive.

21

EX-10

EXHIBIT (10)(t)

CTS CORPORATION

SALARIED EMPLOYEES’ PENSION PLAN

Table of Contents

Section 1
Section 1.1
Section 1.2
Section 1.3
Section 2
Section 2.1
Section 2.2
Section 3
Section 3.1
Section 3.2
Section 4
Section 4.1
Section 4.2
Section 4.3
Section 4.4
Section 4.5
Section 4.6
Section 4.7
Section 4.8
Section 4.9
Section 4.10
Section 4.11
Section 4.12
Section 4.13
Section 4.14
Section 5
Section 5.1
Section 5.2
Section 5.3
Section 5.4
Section 5.5
Section 6
Section 6.1
Section 6.2
Section 6.3
Section 6.4
Section 6.5
Section 6.6
Section 6.7
Section 6.8
Section 6.9
Section 6.10
Section 6.11
Section 6.12
Section 6.13
Section 6.14
Section 6.15
Section 7
Section 7.1
Section 7.2
Section 7.3
Section 7.4
Section 7.5
Section 7.6
Section 7.7
Section 7.8
Section 8
Section 8.1
Section 8.2
Section 8.3
Section 8.4
Section 8.5
Section 9
Section 9.1
Section 9.2
Section 9.3
Section 10
Section 10.1
Section 10.2
Section 10.3
Section 11
Section 11.1
Section 11.2
Section 11.3
Section 12
Establishment of the Plan
Establishment of the Plan
Plan Fiduciaries
Applicability
Definitions
Definitions
Gender and Number.
Eligibility and Participation.
Eligibility for Participation
Permanent Inactive Disability Status
Eligibility, Vesting and Benefit Accrual
Vested Credited Service
Credited Service
Past Service
Future Service
Breaks in Service
Military Leave
Leave of Absence or Layoff
Transfers to Monthly Salary Pay Status of an Employer
Transfers from an Employer
Transfers to an Employer
Transfers from Employer to Employer
Employee on Permanent Inactive Disability Status
Company Records Conclusive
Service with Other CTS Companies
Eligibility for Benefits
Normal Retirement
Early Retirement
Disability Retirement
Termination of Employment
Retirement After Normal Retirement Age
Amount of Benefits .
Normal Pension Benefit
Early Pension Benefit
Disability Pension Benefit
Termination of Employment Benefit
Supplemental Pension Benefit
Joint and Survivor Annuity Requirements
Increase in Certain Retirement Benefits on October 1, 1981
Commencement of Benefits Within60 Days
Automatic Cash-Out of Small Benefits
Consent to Distributions
Accruals After a Specified Age
Actuarial Assumptions
Supplemental Benefit
Minimum Benefit Accrual
Direct Rollover to Another Plan
Payment of Benefits .
Commencement and Duration of Monthly Benefits
Required Distributions
Reemployment After Disability Retirement
Benefits Inalienable
Benefit Limitations.
Restrictions on Benefits Payable to Highly Compensated Employees
Top-Heavy Provisions
Designation of Beneficiary
Financing of Benefits
Trust Fund
Employer's Fund
Contributions
Reversion in Company or Employer
Mistake in Contributions
Amendment and Termination
Amendment and Termination by the Company
Vesting, Allocation and Distribution on termination
Plan Merger, Consolidation, etc.
Miscellaneous
Application for Monthly Benefits and Information by Employees
No Enlargement of Employment Rights
Employment after Retirement
Administration
General
Plan Administrator's Powers and Duties
Claims Procedure
Involuntary Early Retirement Pension

i

CTS CORPORATION

SALARIED EMPLOYEES’ PENSION PLAN

SECTION 1

Establishment of the Plan

1.1  Establishment of the Plan.  On August 13, 1957, CTS Corporation established a pension plan, and as may be amended from time to time, shall be known as the “CTS Corporation Salaried Employees’ Pension Plan” (hereinafter referred to as the “Plan”).

1.2 Plan Fiduciaries.  The fiduciary responsibilities under the Plan are assigned and allocated as follows:

A.     Administrator. The CTS Corporation Employee Benefits Committee, 905 N. West Boulevard, Elkhart, Indiana, 46514, is the Plan Administrator of the Plan and shall have full authority and responsibility for operation of the Plan.

B.     Trustee. The Harris Trust and Savings Bank, 111 West Monroe Street, Chicago, Illinois 60603, is the Trustee of the Plan.

C.     Investment Managers. Certain investment managers may be designated from time to time by the Plan Administrator or Trustee to invest and manage assets of the Plan.

D.     Actuary. Hewitt Associates, 100 Half Day Road, Lincolnshire, Illinois 60015, in the actuary for the Plan.

1.3  Applicability.  The Plan, shall determine the rights, duties, eligibility for benefits and amounts of benefits, if any, only as relates to an Employee: (a) whose employ with the Company and Subsidiaries is terminated, (b) who retires from employment with the Company and Subsidiaries, or (c) who dies, on or after January 1, 1998, except as to those provisions which may specify a different date. The rights, duties eligibility for benefits and amounts of benefits, if any, for each former Employee and for each retired Employee, including the Spouse of any such Employee receiving, or who may become eligible to receive, any benefit under the Plan, has been, or shall be, determined in accordance with the Plan as in effect on the date of the first to occur of the Employee’s (a) termination of employment with the Company and Subsidiaries, (b) retirement from employment with the Company and Subsidiaries, or (c) death.

SECTION 2

Definitions

2.1  Definitions.  Whenever used herein, the following terms shall have the respective meanings set forth below; whenever a term which is defined herein is used, but is not capitalized, it shall have the meaning ascribed thereto by the context:

(a)     “Adjustment Factor” shall mean the cost of living adjustment factor prescribed by the Secretary of the Treasury under Section 415(d) of the Code for the years beginning after December 31, 1987, applied to such items and in such manner as the Secretary shall prescribe.

(b)     “Affiliated Employer” shall mean the Employer and any corporation which is a member of a controlled group of corporations (as defined in Section 414(b) of the Code) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in Section 414(c) of the Code) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Section 414(m) of the Code) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to regulations under Section 414(o) of the Code.

1

(c)     “Annual Retirement Benefit” means a benefit payment annually in the form of a straight life annuity, with no ancillary benefits, beginning at Normal Retirement Age;

(d)     “Annuity Starting Date” shall mean

(A)     IN GENERAL — The term “annuity starting date” means (i) the first day of the first period for which an amount is payable as an annuity, or (ii) in the case of a benefit not payable in the form of an annuity, the first day on which all events have occur-red which entitle the Participant to such benefit.

(B)     SPECIAL RULE FOR DISABILITY BENEFITS — For purposes of subparagraph (A), the first day of the first period for which a benefit is to be received by reason of disability shall be treated as the annuity starting date only if such benefit is not an auxiliary benefit.

(e)     “Company” means CTS Corporation and its subsidiaries, divisions and affiliates;

(f)     “Compensation” means the highest average monthly Pay received by an Employee for any three calendar years during his last ten calendar Years of Service;

(g)     “Current Accrued Benefit” shall mean an Employee’s accrued benefit under the plan, determined as if the Employee had separated from service as of the close of the last Limitation Year beginning before January 1, 1987, when expressed as an annual benefit within the meaning of Section 415(b)(2) of the Code. In determining the amount of a Participant’s Current Accrued Benefit, the following shall be disregarded:     (i)   any change in the terms and conditions of the plan after May 5, 1986; and (ii) any cost of living adjustment occurring after May 5, 1986.

(h)     RESERVED

(i)     RESERVED

(j)     “Determination Date” means, with respect to any Plan Year, the last day of the preceding Plan Year, or, in the case of the first Plan Year of any plan, the last day of such Plan Year;

(k)     “Disability Retirement Date” means the first day of the month coincident with or next following the date an Employee retires because of his Total and Permanent Disability;

(l)     “Earliest Retirement Age” means the earliest date on which, under the Plan, the Employee would be eligible to receive retirement benefits, i.e., the date on which an Employee has five or more years of Vested Credited Service;

(m)     “Early Retirement Date” means the first day of the month coincident with or next following the date an Employee retires before his Normal Retirement Age and is eligible to retire under the Plan;

(n)     “Effective Date” means July 1, 1957, as to the Company or means the date an Employer, other than the Company, adopts the Plan or a similar plan for which the Plan is substituted, or means the date so designated in the resolution of adoption by an Employer;

(o)     “Election Period” means the period which begins on the first day of the Plan Year in which the Employee attains age 35 and ends on the date of the Employee’s death. If an Employee separates from Service prior to the first day of the Plan Year in which age 35 is attained, with respect to benefits accrued prior to separation, the Election Period shall begin on the date of separation;

2

(p)     “Employee” means a person, who is either employed to work or who in fact does work 1,000 or more Hours of Service for an Employer on monthly salary pay status during his first year of employment, which is a period of twelve consecutive months beginning on the date an Employee is first credited with an Hour of Service, or, thereafter, during the Plan Year; provided, however, that the first Plan Year shall include the last day of the Employee’s first year of employment. For purposes of Section 414(n)(3) of the Code, “Employee” shall include leased employees. The term “leased employee” means any person (other than an employee of the Employer) who, pursuant to an agreement between an Employer and any other person (“leasing organization”), has performed services for an Employer on a substantially full-time basis for a period of at least one year, and such services are performed under the primary direction or control of an Employer. Notwithstanding the foregoing, if such leased employees constitute less than twenty percent of the Employer’s nonhighly compensated work force within the meaning of Section 414(n)(1)(C)(ii) of the Code, the term “Employee” shall not include those leased employees covered by a plan maintained by the leasing organization which meets the following requirements: (a) such plan has a non-integrated employer contribution rate for each participant of at least 10% of compensation, (b) such plan provides for full and immediate vesting, and (c) each employee of the leasing organization (other than employees who perform substantially all of their services for the leasing organization) immediately participates in such plan.

However, “Employee” shall exclude any individual who is retained by an Employer to perform services for such Employer (for either a definite or indefinite duration) and who is characterized by the Employer as a fee-for-service worker or independent contractor or in a similar capacity (rather than in the capacity of an employee), regardless of such individual’s status under common law. This exclusion shall apply, without limitation, to any individual who is or who has been determined by a third party, including, without limitation, a government agency or board or court or arbitrator, to be an employee of an Employer for any purpose, including, without limitation, for purposes of any employee benefit plan of an Employer (including this Plan) or for purposes of federal, state or local tax withholding, employment tax or employment law.

(q)     “Employer” means the Corporate Office of the Company and each subsidiary, division or affiliate of the Company which adopts the Plan;

(r)     “Employer’s Fund” means all of the assets of every kind held by the Trustee to provide benefits under the Plan for the Employees of an Employer;

(s)     RESERVED

(t)     “Highly Compensated Employee” means, an individual determined in accordance with Code Section 414(q) (and with such rules and regulations as shall be promulgated by the Internal Revenue Service pursuant to such Code Section), and shall mean an Employee who, (a) was a 5% owner (as defined in Code Section 416(i)(1)) with respect to the Employer during the Plan Year being tested or the preceding Plan Year; or (b) for Plan Years beginning on or before December 31, 1996, received compensation from the Employer, during the Plan Year or the preceding Plan Year, in excess of (i) $75,000 (as adjusted pursuant to Code Section 415(d)); or (ii) $50,000 (as adjusted pursuant to Code Section 415(d)) and was in the top-paid group of employees for such year; or (iii) 50 percent of the amount in effect under Code Section 415(b)(1)(A) for such year and was at any time an officer; or (c) for Plan Years beginning after December 31, 1996, earned more than $80,000 of Code Section 414(q) compensation (as defined in Code Section 414(q)(4)) in the preceding Plan Year and was in the top-paid group of employees for such year. For purposes of this provision, the $80,000 amount is subject to adjustment as provided under Code Section 415(d), except that the base period shall be the calendar quarter ending September 30, 1996.

For purposes of this subsection 2.1(t), a former employee shall be treated as a Highly Compensated Employee if (i) such former employee was a Highly Compensated Employee when such former employee separated from service, or (ii) such former employee was a Highly Compensated Employee at any time after attaining age 55.

3

(u) “Hour of Service” means (a)     each hour for which an Employee is paid, or entitled to payment, for the performance of duties for an Employer; and (b) each hour for which an Employee is paid, or entitled to payment, by an Employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity or disability, layoff, jury duty, Military Leave or other leave of absence, no more than 501 Hours of Service to be counted per Plan Year for any continuous period, including (i) 10 hours for each one day period, or (ii) 45 hours for each week period, or (iii) 190 hours for each month period, and (c) each hour for which back Pay, irrespective of mitigation of damages, is either awarded or agreed to by an Employer. (d) each hour worked by an Employee for a predecessor Employer required to be credited by law, and (e) each hour required to be credited to an Employee under Subsections 4.8, 4.9, 4.10 or 4.11. No Hour of Service required to be credited to an Employee shall be counted more than once. Hours of Service shall be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor regulations, which are incorporated herein by reference.

(v)     “Key Employee” means any Employee or former Employee (and the beneficiaries of such Employees) who, at any time during the Plan Year or any of the four preceding Plan Years, is (i) an officer of CTS Corporation, (ii) one of the ten Employees owning (or considered as owning within the meaning of Section 318 of the Internal Revenue Code of 1954, as amended) the largest interests in CTS Corporation, (iii) a person who owns (or is considered as owning under Section 318 of the Code) more than 5 percent of the outstanding stock of CTS Corporation or stock possessing more than 5 percent of the total combined voting power of all stock of CTS Corporation, or (iv) a person having an annual compensation from an Employer of more than $150,000 who owns (or is considered as owning under Section 318 of the Code) more than 1 percent of the outstanding stock of CTS Corporation or stock possessing more than 1 percent of the total combined voting power of the stock of CTS Corporation. For purposes of Subsection 2.1(n)(i), an officer is any Employee or former Employee (and the Beneficiaries of such Employee) who at any time during the determination period was an officer of CTS Corporation and such Employee’s annual compensation exceeded 50 percent of the dollar limitation under Section 415(b)(1)(A) for such year. For the purposes of this section, Compensation shall include elective or salary reduction contributions to a cafeteria plan, cash or deferred arrangement or tax-sheltered annuity (Code sections 125, 402(a)(8) and 402(h)(1)(B);

(w)     “Limitation Year” means (for federal income tax purposes) the Plan Year;

(x)     “Long Term Disability Plan” means any long term disability benefit plan provided by an Employer for the benefits of any group of Employees;

(y)     “Non-highly Compensated Employee” shall mean an Employee of the Employer who (i) for Plan Years beginning on or before December 31, 1996, is neither a Highly Compensated Employee nor a Family Member, or (ii) for Plan Years beginning after December 31, 1996, is not a Highly Compensated Employee.

(z)     “Normal Retirement Age” means the Employee’s 65th birthday, or if later, the date the Employee has completed 5 Years of Service, at which time such Employee shall have a fully vested and nonforfeitable interest in his accrued benefit.

(aa)     “Normal Retirement Date” means the first day of the month coincident with or next following the date an Employee retires after attaining Normal Retirement Age;

(bb)     “Pay” means the total of all amounts of cash paid to an Employee by the Employer for personal services, including pre-tax and after-tax payroll deductions, commissions, bonuses and short term disability benefits, but excluding compensation paid in a form other than cash and all special or unusual compensation including but not limited to compensation for the reimbursement of expenses and Long Term Disability Plan benefits.

For Plan Years beginning on or after January 1, 1989, and before January 1, 1994, the annual compensation of each Participant taken into account for determining all benefits provided under the Plan shall not exceed $200,000. This limitation shall be adjusted by the Secretary at the same time and in the same manner as under section 415(d) of the Code, except that the dollar increase in effect on January 1 of each calendar year is effective for Plan Years beginning in such calendar year and the first adjustment to the $200,000 limitation is effective on January 1, 1990.

4

For any Plan Year beginning after December 31, 1993, a Participant’s Pay in excess of $150,000 shall be excluded for purposes of the Plan. The $200,000 limitation and $150,000 limitation shall be adjusted at the same time and in the same manner as is provided in Section 401(a)(17) of the Code. In determining the Pay of a Participant for purposes of this limitation in Limitation Years beginning on or before December 31, 1996, the rules of Section 414(q)(6) of the Code (as in effect prior to its repeal by Section 1431(b) of the Small Business Job Protection Act of 1996, Pub. L. 104-188)” shall apply, except in applying such rules, the term “family” shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the Plan Year. If, as a result of the application of such rules, the adjusted $200,000 or $150,000 limitation is exceeded, then the limitation shall be prorated among the affected individuals in proportion to each such individual’s Pay as determined under this section 2.1

(bb)     prior to the application of the limitation; For Plan Years beginning on or after July 1, 2002, notwithstanding anything herein to the contrary, the Pay for each Employee taken into account under the Plan shall not exceed the Code Section 401(a)(17) annual compensation limit. The Code Section 401(a)(17) annual compensation limit is $200,000 (for the Plan Year beginning July 1, 2002, adjusted by the Commissioner for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Pay is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the Code Section 401(a)(17) annual compensation limit will be multiplied by a fraction, the numerator of which is the number of completed months in the determination period, and the denominator of which is 12: provided, however, that no such proration shall be required for an Employee who is covered under the Plan for less than the full Plan Year. In determining benefit accruals in plan years beginning on or after July 1, 2002, the annual compensation limit, for determination periods beginning before July 1, 2002, shall be $200,000.

(cc)     “Permanent Inactive Disability Status” means the status into which an Employee of an Employer is placed after he is removed from the Employer’s payroll and has been totally separated from employment with his Employer due to disability and is receiving Long Term Disability benefits;

(dd)     “Permissive Aggregation Group” means the Required Aggregation Group of plans plus any other plan or plans of the Employer which, when considered as a part of the Required Aggregation Group, would continue to satisfy the requirements of Sections 401(a)(4) and 410 of the Code;

(ee)     “Plan Year” means the twelve month period commencing July 1 of a year and ending June 30 of the following year;

(ff)     “Qualified Election” shall mean a waiver of a Qualified Joint and Survivor Annuity or a Qualified Preretirement Survivor Annuity. The waiver may be made at any time during the applicable election period and may be revoked at any time during the applicable election period. Such a waiver will not be valid unless (i) the Employee’s Spouse consents in writing to such election; (ii) such election designates a form of benefits which may not be changed without Spousal consent (or the consent of the Spouse expressly permits designations by the Employee without any requirement of further consent by the Spouse), and (iii) the Spouse’s consent acknowledges the effect of such election and is witnessed by a plan representative or notary public. Not-with-standing this consent requirement, if the Employee establishes to the satisfaction of a plan representative that such written con-sent may not be obtained because there is no Spouse or the Spouse cannot be located, or because of any other circumstances as the Secretary may by regulations prescribe, a waiver will be deemed a Qualified Election. Any consent by a Spouse (or establishment that the consent of a Spouse may not be obtained) under this provision will be effective only with respect to such Spouse.

For purposes of this Section 2.1(ff), the “applicable election period” means the ninety (90) day period ending on the annuity starting date (as defined by Code Section 417(f)); however, the Notice described in Section 6.6D(1) may be provided after the annuity starting date. In the event the Notice described in Section 6.6D(1) is provided after the annuity starting date, the applicable election period described above shall not end before the thirtieth (30th) day after the date on which such Notice is provided. A Participant may elect to waive the 30-day minimum waiting period provided that the distribution commences more than 7 days following the date on which the Notice is provided.

5

(gg)     “Qualified Joint and Survivor Annuity” means a benefit commencing at a time provided in Section 7 with monthly payments for the life of the Participant, and, if the Participant dies after the date for commencement of his benefit payments, with monthly payments for the life of the Spouse of the Participant after the Participant’s death which are each fifty percent of the amount of the payments which are payable during the joint lives of the Participant and the Spouse and which is the amount of benefit which can be purchased with the Participant’s vested accrued benefit;

(hh)     “Required Aggregation Group” means a group consisting each of qualified plans of the Company in which a Key Employee is a Participant, and each other qualified plan of the Company which enables this Plan to meet the requirements of Sections 401(a)(4) or 410 of the Code;

(ii)     “Service” means the period of an Employee’s employment by the Company;

(jj)     “Service Date” means the date on which an Employee’s Service commenced;

(kk)     “Spouse” means a person to whom an Employee has been continuously married for one year or more (i) on the first date a monthly benefit is payable to the Employee under Subsections 6.1, 6.2, 6.3, or 6.4, or, if later, on the first day of the month following or coincident with the date the Employee attains age 55 years, or (ii) on the date an Employee, described in Subsection 6.6D(1) and (2), dies; provided, however, that a former Spouse will be treated as a Spouse where required by, and to the extent provided by, a qualified domestic relations order as described in I.R.C. ‘414(p);

(ll)     “Social Security Retirement Age” shall mean the age used as the retirement age for the Employee under Section 216(1) of the Social Security Act, except that such section shall be applied without regard retirement age under Section 216(1)(2) of such Act were 62.

(mm)     “Total and Permanent Disability” means a disability that would entitle the Employee to permanent long-term disability benefits under the Employer’s long-term disability plan.

(nn)     “Trust Fund” means all assets of any kind held by the Trustee to provide benefits under the Plan;

(oo)     “Beneficiary” means, where applicable, an individual or entity designated by the Participant on a designation of beneficiary form filed with the Employer and, in all other cases, means the Participant’s spouse.

(pp)     “Participant” means an Employee or former Employee who is eligible to participate in the Plan

2.2  Gender and Number.  Whenever the context permits, words in the masculine gender shall include the feminine gender, and the definition of any term or phrase shall apply to the singular and the plural.

SECTION 3

Eligibility and Participation

3.1  Eligibility for Participation.   Each Employee of an Employer shall be eligible to participate in the Plan commencing immediately upon performing an Hour of Service for an Employer.

3.2  Permanent Inactive Disability Status.  An Employee, who is on Permanent Inactive Disability Status, is not eligible to participate in the Plan or eligible for a benefit under Subsection 5.1, 5.2, 5.3, or 5.4 of this Plan, provided, however, if (a) after he has attained 65 years of age or more, or any age with regard to Subsection 5.4 of this Plan, he is removed from Permanent Inactive Disability Status and ceases to receive benefits under a Long Term Disability Plan, (b) he is not reinstated to employment with an Employer under Subsection 7.2 of this Plan, and (c) he would, except for the foregoing, be eligible for a benefit under Subsection 5.1, 5.2, 5.3 or 5.4 of this Plan, such Employee shall become eligible for a benefit under Subsection 5.1, 5.2, 5.3 or 5.4 of this Plan on the date he ceases to receive benefits under a Long Term Disability Plan.

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SECTION 4

Eligibility, Vesting and Benefit Accrual

4.1  Vested Credited Service.  An Employee’s Years of Vested Credited Service shall be used to determine an Employee’s vesting and shall be equal to: (a)an Employee’s Credited Service, if any, at July 1, 1976, the date the Plan became subject to the requirements of the Employee Retirement Income Security Act of 1974, plus (b) Vested Credited Service required to be credited to an Employee who transfers to salaried pay status of an Employer, under Subsection 4.8, plus (c) each Plan Year during which an Employee works 1,000 or more Hours of Service with an Employer as an Employee, plus (d) any Vested Credited Service credited under Subsections 4.6, 4.7, 4.9, 4.10, 4.11 or 4.12; plus (e) any Vested Credited Service, not otherwise credited to an Employee hereunder, reinstated or required to be reinstated under Subsection 4.5, less (f) any Vested Credited Service forfeited under Subsection 4.5. No Vested Credited Service required to be credited to an Employee shall be counted more than once.

4.2  Credited Service.  An Employee’s Years of Credited Service will be used to calculate an Employee’s benefit accruals and monthly benefits and will be the sum of an Employee’s credited past Service and credited future Service.

4.3  Past Service.  An Employee will be credited with past Service at the rate of one year for each year of Service, not otherwise credited as Credited Service under the Plan on the Effective Date of his Employer, including a period of military leave, leave of absence or layoff as defined and limited in Subsections 4.6 and 4.7. For any months and days in excess of a whole number of years, such Service will be credited as a decimal portion of a year in the proportion that the number of such excess months and days bear to 12 months and to 365 days, respectively. 4.4. Future Service. Commencing on the Effective Date of his Employer, an Employee will be credited for future Service in each Plan Year prior to his retirement at the rate of:

Hours of Service	Credited Service
1,561 or more	1.0 year
1,041 to 1,560	0.78 year
700 to 1,040	0.52 year
Less than 700	No Credit

4.5.   Breaks in Service.  An Employee who is credited with less than 501 Hours of Service during a Plan Year shall incur a one year Break-in-Service. If an Employee’s employment with an Employer terminates and such Employee is subsequently reemployed by an Employer, the following shall apply:

(a)     If a Break-in-Service is not incurred as a result of the Employee’s period of severance, then the Employee will become a Participant again on his date of reemployment, and the Vested Credited Service and Credited Service of the Employee at the time of termination shall be reinstated.

(b)     If the Employee was eligible for a monthly retirement or deferred benefit at the time of termination, then the Employee will become a Participant again on his date of reemployment, and the Vested Credited Service and Credited Service of the Employee at the time of termination shall be reinstated.

(c)     If the Employee was not entitled to a monthly retirement or deferred benefit at the time of termination, then (i) if the Employee has incurred a one-year Break-in-Service, such an Employee will participate immediately upon reinstatement but his pre-break Vested Credited Service and Credited Service before such Break will not be taken into account until the Employee has completed a Year of Service after such Break-in-Service; (ii) the Employee’s pre-break Vested Credited Service and Credited Service shall not be taken into account if the number of consecutive one-year Breaks-in-Service equals or exceeds the greater of five or the aggregate number of years of Vested Credited Service before such Breaks-in-Service; provided, however, that such aggregate number of years of Vested Credited Service shall not include any such Service disregarded under the preceding sentence by reason of prior Breaks-in- Service. Such an

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Employee will be considered a new Participant for all purposes of the Plan, and his prior Vested Credited Service and Credited Service shall be disregarded. If such an Employee’s pre-break Vested Credited Service and Credited Service cannot be disregarded pursuant to this Subsection 4.5(c)(ii), such an Employee shall participate immediately upon reemployment.

(d)     Solely for purposes of determining whether a Break-in-Service, for participation and vesting purposes, has occurred in a computation period, an individual, who (1) is absent from work for maternity or paternity reasons or (2) is absent from work, up to 12 weeks, on or after August 5, 1993 and such absence qualifies for leave under the Family and Medical Leave Act of 1993, shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, ten Hours of Service per day of such absence. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the individual, (2) by reason of a birth of a child of the individual, (3) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this paragraph shall be credited (1) in the computation period in which the absence begins if the crediting is necessary to prevent a Break-in-Service in that period, or (2) in all other cases, in the following computation period. This section is intended to comply with the Family and Medical Leave Act of 1993. In the event of any conflict, the Family and Medical Leave Act shall prevail.

4.6  Military Leave.  >An Employee of the Company who enters the United States Armed Forces on or after the Effective Date and who, by law, has the right of reemployment on the termination of his military service or relief from active duty in such Armed Forces will be on “Military Leave” for purposes of the Plan until the end of the period specified by law within which he is entitled to reemployment with the Company. Otherwise, the voluntary enlistment or reenlistment of an Employee in the United States Armed Forces after the Effective Date may be considered a termination of employment by resignation. The term “United States

Armed Forces” means the United States Army, United States Navy, United States Marine Corps, United States Air Force, United States Coast Guard, United States Public Service, or any other government services designated by the Company. Notwithstanding any provision of the Plan to the contrary, contributions, benefits, and service credit with respect to qualified military service (within the meaning of Code Section 414(u)(5)) will be provided in accordance with Section 414(u) of the Code, effective for reemployment on or after December 12, 1994.

4.7  Leave of Absence or Layoff.   Neither temporary absences from work granted by the Company to an Employee in writing as a leave of absence and not treated by the Company as a termination of employment nor a layoff will interrupt continuity of employment or result in a loss of Vested Credited Service or Credited Service; however, if such an Employee does not return to the employ of the Employer within the period granted for such leave of absence, it shall be conclusively presumed that his employment terminated as of the date of expiration of such leave of absence. In the event that such an Employee incurs a Break-in-Service, the provisions of Section 4.5 shall apply.

4.8  Transfers to Monthly Salary Pay Status of an Employer.  An Employee of the Company who is transferred to monthly salary pay status with an Employer from another pay status with the Company and thereby becomes an Employee under this Plan, shall be credited with Vested Credited Service, but no Credited Service, under this Plan at the rate of one year of Vested Credited Service for each Plan Year during which the Employee has been credited with 1,000 or more Hours of Service with the Company subject to the provisions of Subsection 4.5 of the Plan and further subject to the period of severance rules of the Plan as effective during periods of the Employee’s prior Service. An Employee under this Subsection who was not a participant in a qualified defined benefit or defined contribution retirement plan maintained by the previous Employer shall receive one year of Credited Service, measured from the date of transfer, for each Plan Year during which the Employee has been employed by an Employer. No Vested Credited Service or Credited Service is required to be credited to an Employee under this Subsection for any period of employment prior to the Effective Date of this Plan.

4.9  Transfers from an Employer.  An Employee of an Employer who is transferred from monthly salary pay status with an Employer to another pay status with the Company, or who is transferred to a subsidiary, division or affiliate of the Company which is not an Employer hereunder, and thereby becomes ineligible to continue participation in this Plan, shall retain all Vested Credited Service and Credited Service under this Plan, and will continue to receive Vested Credited Service, subject to the provisions of Subsection 4.5, for all subsequent Service with the Company. An Employee under this Subsection who becomes eligible to receive a benefit under Section 5 or who receives a benefit under Section 6 shall remain subject to the provisions of Section 5 and Section 6 in effect as of the last date

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of transfer from an Employer . 4.10 Transfers to an Employer. An Employee who is transferred from monthly salaried pay status with a subsidiary, division or affiliate of the Company which is not an Employer to an Employer hereunder and becomes an Employee under this Plan, shall be credited with Vested Credited Service, but no Credited Service, under this Plan at the rate of one year of Vested Credited Service for each Plan Year during which the Employee has been credited with 1,000 or more Hours of Service with the Company, subject to the provisions of Subsection 4.6 of the Plan and further subject to the period of severance rules of the Plan as effective during the periods of the Employee’s prior Service. An Employee under this Subsection who was not a participant in a qualified defined benefit or defined contribution retirement plan maintained by the previous Employer or Subsidiary shall receive one year of Credited Service, measured from the date of transfer, for each Plan Year during which the Employee has been employed by an Employer or Subsidiary. No Vested Credited Service or Credited Service is required to be credited to an Employee under this Subsection for any period of employment prior to the Effective Date of this Plan.

4.11  Transfers from Employer to Employer.  An Employee who is transferred from an Employer to another Employer, and who remains eligible to participate in the Plan, shall receive Vested Credited Service in the Plan as maintained by the Employer to which such Employee is transferred equal to the Vested Credited Service under this Plan, and will continue to receive Vested Credited Service in the Plan as maintained by both Employers for all subsequent Service with the Company, subject only to the provisions of Subsection 4.5. An Employee under this Subsection will retain Credited Service in this Plan, subject to the provisions of Section 5 and Section 6 in effect at the time of the transfer, and such Employee will commence accruing Credited Service in the Plan maintained by the Employer to which the Employee is transferred immediately after the transfer.

4.12  Employee on Permanent Inactive Disability Status.  An Employee on Permanent Inactive Disability Status and who is reinstated to employment with an Employer no later than the calendar quarter next following the calendar quarter during which he was last removed from Permanent Inactive Disability Status shall be credited with his Vested Credited Service and Credited Service as of the date he was last placed on Permanent Inactive Disability Status. In addition, such an Employee may receive Credited Service in accordance with the provisions of Subsection 6.3.

4.13  Company Records Conclusive.  The records of the Company as to the facts concerning an Employee’s Vested Credited Service, Credited Service, Service and compensated hours will be conclusive unless shown beyond a reasonable doubt to be incorrect.

4.14  Service with Other CTS Companies.  For purposes of computing Vested Credited Service, Hours of Service and Service under this Plan, an Employee shall be credited with Service for all members of a controlled group of corporations or commonly controlled trades or businesses, as defined in ‘414(b) and (c) of the Code as modified by ‘415(h) of the Code, of which the adopting Employer is a part.

SECTION 5

Eligibility for Benefits

5.1  Normal Retirement.  An Employee who (a) has attained age 65, (b) has five or more years of Vested Credited Service, and (c) retires from employment with the Company, will be entitled to nonforfeitable monthly normal retirement benefits.

5.2  Early Retirement.  An Employee who (a) has attained age 55 years but not Normal Retirement Age, (b) has five or more years of Vested Credited Service, and (c) retires from employment with the Company before his Normal Retirement Age, will be entitled to monthly early pension benefits.

5.3  Disability Retirement.  An Employee who (a) has five or more years of Vested Credited Service, (b) incurs a Total and Permanent Disability, and (c) retires from employment with the Company before his Normal Retirement Date because of such Total and Permanent Disability, will be entitled to monthly disability pension benefits.

5.4  Termination of Employment.  An Employee who (a) has five or more years of Vested Credited Service, and (b) by resignation or by dismissal terminates his employment with the Company, shall be entitled to a termination of employment benefit.

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5.5  Retirement After Normal Retirement Age.  An Employee may continue employment after attaining Normal Retirement Age if able to perform efficiently the work assigned.

SECTION 6

Amount of Benefits

6.1  Normal Pension Benefit.  The monthly normal pension benefit payable from the Employer’s Fund to an Employee eligible under Subsection 5.1 and 5.5 shall be 1.0% of his Compensation multiplied by his Credited Service. The monthly normal pension benefit payable from the Employer’s Fund to the Employee who becomes eligible under Subsection 5.1 and 5.5 on or after July 1, 1999, shall be 1.25% of his Compensation multiplied by his Credited Service.

6.2  Early Pension Benefit.  The monthly pension benefit payable from the Employer’s Fund to an Employee eligible under Subsection 5.2 shall be 1.0% of his Compensation multiplied by his Credited Service, reduced by the applicable monthly percentage reduction for each full month the Employee is under Normal Retirement Age at the date his first early pension benefit is paid. The monthly percentage reduction shall be 1/4 of 1% for each month between age 60 and 65 and 5/9 of 1% for each month between age 55 and 60. The monthly pension benefit payable from the Employer’s Fund to the Employee who becomes eligible under Subsection 5.2 on or after July 1, 1999, shall be 1.25% of his Compensation multiplied by his Credited Service, reduced by the applicable monthly percentage reduction for each full month the Employee is under Normal Retirement Age at the date his first early pension benefit is paid and for this purpose, the monthly percentage reduction shall be 3 of 1% for each month between age 55 and 65.

Solely for purposes of computing the monthly early pension benefit under this Subsection, an Employee who is eligible for early retirement and retires between January 1, 1981, and June 30, 1981, shall be credited with 36 months of age in addition to his actual age, to a maximum of 65 years of age. An Employee’s Credited Service shall not be increased as a result of the foregoing sentence.

In addition, solely for purposes of computing the monthly early pension benefit under this Subsection, an Employee who is eligible for early retirement and retires between March 18, 1982, and June 30, 1982, shall be credited with 48 months of age in addition to his actual age, to a maximum of 65 years of age. An Employee’s Credited Service shall not be increased as a result of the foregoing sentence.

6.2A  Early Pension Benefit.  (1) The monthly pension benefit payable from the Employer’s Fund to an Employee eligible under Subsection 5.2 shall be 1.0% of his Compensation multiplied by his Credited Service, reduced by the applicable monthly percentage reduction for each full month the Employee is under Normal Retirement Age at the date his first early pension benefit is paid. The monthly percentage reduction shall be 1/4 of 1% for each month between age 60 and 65 and 5/9 of 1% for each month between age 55 and 60. The monthly pension benefit payable from the Employer’s Fund to an Employee who becomes eligible under Subsection 5.2 on or after July 1, 1999, shall be 1.25% of his Compensation multiplied by his Credited Service, reduced by the applicable monthly percentage reduction for each full month the Employee is under Normal Retirement Age at the date his first early pension benefit is paid, and for this purpose, the monthly percentage reduction shall be 3 of 1% for each month between age 55 and 65.

(2)     Solely for purposes of computing the monthly early pension benefit under this subsection, an Employee who is eligible for early retirement under Subsection 5.2 and elects to retire between June 20, 1986 and July 31, 1986, and actually retires on or after June 20, 1986 and before July 31, 1986, shall be credited with seven (7) years of age in addition to his actual age, to a maximum of 65 years of age. An Employee’s Credited Service shall not be increased as a result of the foregoing sentence. A survivor annuity shall be computed on the basis of the above seven (7) year age credit.

(3)     Solely for the purposes of computing the monthly early pension benefit under this subsection, an Employee who is eligible for early retirement under Subsection 5.2 and elects to retire between June 29, 1987 and July 15, 1987, and actually retires on or after June 29, 1987 and before July 31, 1987, shall be credited with seven (7) years of age in addition to his actual age, to a maximum of 65 years of age. An Employee’s Credited Service shall not be increased as a result of the foregoing sentence. A survivor annuity shall be computed on the basis of the above seven (7) year age credit. 6.2B Supplemental Early Pension Benefit. An Employee who elects

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to retire under Subsection 5.2 between June 20, 1986 and July 31, 1986 and actually retires on or after June 20, 1986 and before July 31, 1986 and an employee who elects to retire under Subsection 5.2 between June 29, 1987 and July 15, 1987 and actually retires on or after June 29, 1987 and before July 31, 1987, shall receive a supplement to his monthly early pension benefit which shall be determined as the regular monthly early pension benefit, calculated without a survivor’s benefit and inclusive of the age credit under Subsection 6.2A(2) or (3) above, multiplied by a percentage in accordance with the following table:

Monthly Early	Supplement to Monthly
Pension Benefit	Early Pension Benefit
Less than or equal to $499.99	10%
$500.00 to $599.99	9%
$600.00 to $699.99	8%
$700.00 to $799.99	7%
$800.00 to $899.99	6%
$900.00 to $999.99	5%
$1,000.00 or more	0

This supplement shall be paid through the last month prior to the month in which the Employee reaches age 62 years. This supplement is payable to the Employee only and not as part of any survivor annuity or benefit.

An Employee’s election to retire on or after June 20, 1986 and before July 31, 1986 and on or after June 29, 1987 and before July 15, 1987 and to receive the benefits of Subsections 6.2A(2) or (3) and 6.2(B) shall be irrevocable and to be effective, shall be made in accordance with procedures required by the Plan Administrator.

6.3  Disability Pension Benefit.  The monthly disability pension benefit payable from the Employer’s Fund to an Employee eligible under Subsection 5.3 shall be 1.0% of his Compensation multiplied by his Credited Service. An Employee shall receive Credited Service (in increments of .52, .78 or 1.0 years of Credited Service) during the period that he receives benefits under a Long Term Disability Plan until he reaches age 65; provided, however, that the number of Years of Credited Service credited to such an Employee under this Subsection shall in no event exceed his Credited Service at the time he began to receive benefits under a Long Term Disability Plan. The monthly disability pension benefit payable from the Employer’s Fund to an Employee who becomes eligible under Subsection 5.3 on or after July 1, 1999 shall be 1.25% of his Compensation multiplied by his Credited Service.

6.4  Termination of Employment Benefit.

(1)     At the election of the Employee, the termination of employment benefit payable from the Employer’s Fund to an Employee eligible under Subsection 5.4 shall be, either (a) at his Normal Retirement Age, a monthly deferred benefit equal to 1.0% of his Compensation multiplied by his Credited Service, or (b) at age 55 and until reaching Normal Retirement Age, a monthly deferred benefit calculated in accordance with Section 6.2 above.

(2)     At the election of the Employee, the termination of employment benefit payable from the Employer’s Fund to an Employee who becomes eligible under Subsection 5.4 on or after July 1, 1999, shall be, either (a) at his Normal Retirement Age, a monthly deferred benefit equal to 1.25% of his Compensation multiplied by his Credited Service, or (b) at age 55 and until reaching Normal Retirement Age, a monthly deferred benefit calculated in accordance with Section 6.2, as amended effective July 1, 1999.

6.5  Supplemental Pension Benefit.  An Employee (i) who has 30 or more years of Credited Service on July 1, 1973, and who retires or terminates with more than 31.667 years of Credited Service, or (ii) who retires or terminates on or before July 1, 1978 with more than 31.667 years of Credited Service shall be entitled to a supplemental pension benefit which will increase his monthly benefit under the

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applicable Subsection 6.1, 6.2, 6.3 or 6.4 of the Plan equal to  (1)  the monthly benefit he would have been entitled to under the Plan just prior to July 1, 1973, and based on his Compensation and Credited Service at retirement or termination, plus (2) the retirement benefit he would have been entitled to under the Retirement Plan of the same Employer on January 1, 1974, and based on his Credited Service at retirement or termination.

6.6  Joint and Survivor Annuity Requirements.

A.     The provisions of this Subsection shall take precedence over any conflicting provision in this Plan. The provisions of this Subsection shall apply to any Employee who is credited with at least one Hour of Service with the Company on or after August 23, 1984, and such other Employees as provided in Subsection 6.6E.

B.     Qualified Joint and Survivor Annuity. Unless an optional form of benefit is selected pursuant to a Qualified Election within the 90-day period ending on the date benefit payments would commence, an Employee’s vested accrued benefit will be paid in the form of a Qualified Joint and Survivor Annuity. An Employee who is not married will be provided a single life annuity unless the Employee elects in writing another form of benefit during the 90-day period ending on the Annuity Starting Date.

C.     Qualified Preretirement Survivor Annuity.

(1)     Unless an optional form of benefit is selected within the Election Period pursuant to a Qualified Election, if an Employee dies after the Earliest Retirement Age, the Employee’s surviving Spouse (if any) will receive the same benefit that would be payable if the Employee had retired with an immediate Qualified Joint and Survivor Annuity on the day before the Employee’s date of death.

(2)     Unless an optional form of benefit is selected within the Election Period pursuant to a Qualified Election, if an Employee dies on or before the Earliest Retirement Age, the Employee’s surviving Spouse (if any) will receive the same benefit that would be payable if the Employee had: (i) separated from Service on the date of death; (ii) survived to the Earliest Retirement Age; (iii) retired with an immediate Qualified Joint and Survivor Annuity at the Earliest Retirement Age; and (iv) died on the day after the Earliest Retirement Age.

(3)     For purposes of Subsection 6.6C(2) a surviving Spouse will begin to receive payments at the Earliest Retirement Age unless such surviving Spouse elects a later date. Provided, however, if the surviving Spouse elects a date other than the Earliest Retirement Age, benefits payable under this Section 6.6C shall be adjusted in the same manner as a Participant’s benefits would be adjusted under this Article VI to take into account the earlier or later payment date.

D.     Notice Requirements.

(1)     In the case of a Qualified Joint and Survivor Annuity as described in Section 2 of this Article, the Plan Administrator shall provide each Employee within a reasonable period prior to the commencement of benefits, a written explanation of: (i) the terms and conditions of a Qualified Joint and Survivor Annuity; (ii) the Employee’s right to make and the effect of an election to waive their Qualified Joint and Survivor Annuity form of benefit; (iii) the rights of an Employee’s Spouse; and (iv) the right to make, and the effect of, a revocation of a previous election to waive the Qualified Joint and Survivor Annuity.

(2)     In the case of a Qualified Preretirement Survivor Annuity as described in Subsection 6.6(C) of this Article, the Plan Administrator shall provide each Employee, within the applicable period, a written explanation of the Qualified Preretirement Survivor Annuity in such terms and in such manner as would be comparable to the explanation provided for meeting the requirements of Section 6.6D(1)applicable to a Qualified Joint and Survivor Annuity. For the purposes of this subsection, the term “Applicable Period” means, with respect to an Employee, whichever of the following periods ends last: (i) the period beginning on the first day of the Plan Year in which the Employee attains age 32 and ending with the close of the Plan Year preceding the Plan Year in which the Employee attains age 35; (ii) a reasonable period after the individual becomes an Employee; (iii) a reasonable period ending after the requirement of the Qualified Joint and Survivor Annuity and Qualified Preretirement Survivor Annuity applies to the Employee.

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(3)     Notwithstanding the other requirements of this Section 6.6D, the respective notices prescribed by this Section need not be given to an Employee if this Plan “fully subsidizes” the costs of a Qualified Joint and Survivor Annuity or Qualified Preretirement Survivor Annuity. For purposes of this Section 6.6D(3), a Plan fully subsidizes the costs of a benefit if under the Plan the failure to waive such benefit by an Employee would not result in a decrease in any Plan benefits with respect to such Employee and would not result in increased contributions from the Employee.

E.     Transitional Rules.

(1)     Any living Employee not receiving benefits on August 23, 1984, who would otherwise not receive the benefits prescribed by the previous Sections of this Article, must be given the opportunity to elect to have the above Sections of this Article apply if such Employee is credited with at least one Hour of Service under this Plan or a predecessor plan in a Plan Year beginning on or after January 1, 1976, and such Employee had at least 10 years of vesting Service when he or she separated from Service.

(2)     Any living Employee not receiving benefits on August 23, 1984, who was credited with at least one Hour of Service under this Plan or a predecessor Plan on or after September 2, 1974, and who is not otherwise credited with any Service in a Plan Year beginning on or after January 1, 1976, must be given the opportunity to have his or her benefits paid in accordance with Subsection 6.6E(4) of this Article.

(3)     The respective opportunities to elect (as described in Subsections 6.6E(1) and (2) above) must be afforded to the appropriate Employees during the period commencing on August 23, 1984, and ending on the date benefits would otherwise commence to said Employees.

(4)     Any Employee who has elected pursuant to Subsection 6.6E(2) of this Article and any Employee who does not elect under Section 6.6E(1) shall have his or her benefits distributed in accordance with all of the following requirements if benefits would have all of the following requirements if benefits would have been payable in the form of a life annuity: (a) Automatic Joint and Survivor Annuity — if benefits in the form of a life annuity become payable to a married Employee who: (i) begins to receive payments under the Plan on or after Normal Retirement Age; or (ii) dies on or after Normal Retirement Age while still working for the Employer; or (iii) begins to receive payments on or after the Qualified Early Retirement Age; or (iv) separates from Service on or after attaining Normal Retirement Age (or the Qualified Early Retirement Age) and after satisfying the eligibility requirements for the payment of benefits under the Plan and thereafter dies before beginning to receive such benefits; then such benefits will be received under this Plan in the form of a Qualified Joint and Survivor Annuity, unless the Employee has elected otherwise during the Election Period. The Election Period must begin at least six months before the Participant attains Qualified Early Retirement Age and end not more than 90 days before the commencement of benefits. Any election hereunder will be in writing and may be changed by the Employee at any time. (b) Election of early survivor annuity — an Employee who is employed after attaining the Qualified Early Retirement Age will be given the opportunity to elect, during the Election Period to have a survivor annuity payable on death. If the Employee elects the survivor annuity, payments under such annuity must not be less than the payments which would have been made to the Spouse under the Qualified Joint and Survivor Annuity if the Employee had retired on the day before his death. Any election under this provision will be in writing and may be changed by the Employee at any time. The Election Period begins on the later of: (1) the 90th day before the Employee attains the qualified Early Retirement Age, or (2) the date on which participation begins, and ends on the date the Employee terminates employment.

(c)     For purposes of this Subsection 6.6E(4): Qualified Early Retirement Age is the latest of:

(i)     the earliest date, under the Plan, on which the Employee may elect to receive retirement benefits, (ii) the first day of the 120th month beginning before the Employee reaches Normal Retirement Age, or (iii) the date on which the Employee begins participation.

F.     Reduced Monthly Benefit.

The reduced monthly benefit payable from the Employer’s Fund to an Employee, who has not elected against a Qualified Joint and Survivor Annuity, shall be the applicable monthly benefit that would have been payable under the applicable Subsection

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6.1, 6.2, 6.3 or 6.4, reduced by 10%, further reduced by 1/2 of 1% for each full year that the Spouse’s age is less than the Employee’s age, or increased by 1/2 of 1% for each full year, up to 20 years, that the Spouse’s age exceeds the Employee’s age. For the purposes of this Subsection, the age of the Employee and his Spouse shall be the age of each of their respective birthdays nearest the date the reduced monthly benefit first becomes payable. Such reduced monthly benefit shall be applicable for all monthly benefits payable to the Employee on or after the date the first monthly benefit is payable to the Employee under Subsection 6.1, 6.2, 6.3 or 6.4, or, if later, on the first day of the month following or coincident with the date the Employee attains age 55 years.

G.     Monthly Survivor’s Benefit.

The monthly survivor’s benefit payable from the Employee’s Fund to the surviving Spouse shall be 50% of the reduced monthly benefit of the Employee determined under Subsection 6.6F and such monthly survivor’s benefit shall commence on the first day of the month following the death of the Employee, who is eligible under 6.6A above, who has not elected against a monthly survivor’s benefit, and who received or was eligible to receive a reduced monthly benefit until his death, and the monthly survivor’s benefit shall continue on the first day of each calendar month thereafter, for life, with the final payment on the first day of the month in which the surviving Spouse dies.

H.     Survivor’s Election of Lump Sum Distribution.

In lieu of receiving a monthly survivor’s benefit under Subsection 6.6G, the surviving Spouse of an Employee may irrevocably elect to receive a lump sum payment the present value of which shall be determined in accordance with the provisions of Subsection 6.9. Such an irrevocable election must be made, on a form provided by the Plan Administrator, within thirty days after the date of death of the Employee. If an election is made by a surviving Spouse to receive a lump sum payment under this Subsection, then such payment will be made by the Plan Administrator within sixty (60) days of receiving such election, provided that the Employee was eligible at the time of death to retire under Subsection 5.1, 5.2, 5.3 or 5.5 or was receiving a monthly benefit under Subsection 6.1, 6.2, 6.3 or 6.4 and had not elected against a Qualified Joint and Survivor Annuity; but if the Employee was eligible to receive a deferred benefit under Subsection 5.4, then such lump sum payment will be made by the Plan Administrator within sixty (60) days of the date when the Employee would have attained age 55. If a surviving Spouse, who is entitled to receive a monthly benefit under Subsection 6.6, has not elected to receive a lump sum distribution within thirty days following the date of death of the Employee, then a monthly survivor’s benefit shall automatically be paid. 6.7 Increase in Certain Retirement Benefits on October 1, 1981.

Effective October 1, 1981, an Employee who has separated from employment with an Employer and who has retired under Subsection 5.1, 5.2 or 5.3 shall receive or be eligible to receive an additional monthly retirement benefit in accordance with the following schedule:

Percent Increase Over Monthly Retirement Benefits

Date of Retirement	Previously Payable
June 30, 1973 and Earlier	1%
$500.00 to $599.99	12%
$600.00 to $699.99	10%
$700.00 to $799.99	8%
$800.00 to $899.99	6%
$900.00 to $999.99	4%
$1,000.00 or more	2%
$1,000.00 or more	0%

Any survivor’s benefit payable under Subsection 6.6 shall also be increased based upon the Employee’s date of retirement. Notwithstanding the above schedule, the minimum monthly additional retirement benefit payable to an Employee shall be $5.00. An Employee, or Spouse of an Employee, who separated from employment with an Employer under Subsection 5.4 and who is eligible to receive or is receiving monthly termination of employment benefits under Subsection 6.4, shall not be eligible for an additional benefit under this Subsection.

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6.8  Commencement of Benefits Within 60 Days.  Benefits payable under this Section shall be payable no later than sixty (60) days after an Employee’s retirement or termination under Section 5, unless otherwise elected by an Employee.

6.9  Automatic Cash-Out of Small Benefits.  Notwithstanding any provision of the Plan to the contrary, if the single sum actuarial equivalent value of any benefit that is not yet in pay status does not exceed $5,000 (or such other amount as may be established by the Secretary of the Treasury), and for distributions occurring before October 17, 2000, at the time of any prior distribution did not exceed $5,000, the Trustee shall pay such benefit with respect to the terminated Participant as soon as practicable (whether or not the Participant has reached a retirement date) in a single sum cash payment which shall be the actuarial equivalent of the retirement income otherwise payable. For purposes of this Section 6.9, if the present value of a Participant’s vested accrued benefit is zero (0), the Participant shall be deemed to have received a distribution of such vested accrued benefit under this Section 6.9, as of his termination of employment and the non-vested remainder of his accrued benefit (one hundred percent) shall be treated as a forfeiture. If such individual is reemployed prior to incurring five (5) consecutive one year Breaks in Service, his prior accrued benefit shall be restored.

6.10  Consent to Distributions. Pursuant to the Code, no distribution of the present value of the non-forfeitable portion of an accrued benefit may be made if such present value exceeds $5,000, unless the consent of the Employee (and in the case of an annuity the Employee and the Spouse or surviving Spouse) is obtained. Nothing in this provision shall be construed to entitle an Employee or Spouse to any optional form of benefit not otherwise provided under the Plan .

6.11   Accruals After a Specified Age.  Notwithstanding any other provision of this plan, no benefit accrual on behalf of any Employee will be discontinued, nor will the rate of benefit accrual be reduced, because of said Employee’s attainment of any age.

6.12  Actuarial Assumptions.  Actuarial Assumptions shall mean

(a)     The present value of an Employee’s vested accrued benefit is based on the 1971 Group Annuity Table, using an interest rate of 6.5% per annum. (b) To determine the actuarial equivalent of a single sum distribution (as such term is used in Section 6.9), the Applicable Interest Rate and the Applicable Mortality Table shall be used.

For this purpose, the Applicable Interest Rate means the average annual yield on 30-year Treasury securities as specified in the Internal Revenue Bulletin for the second calendar month immediately preceding the first day of the Plan Year (the stability period) containing the Annuity Starting Date as defined by Code Section 417. The Applicable Mortality Table means the table prescribed by the Secretary of the Treasury based on the prevailing Commissioners’ standard table (described in Code Section 807(d)(5)(A)) used to determine reserves for group annuity contracts issued on the date as of which present value is being determined (without regard to any other subparagraph of Code Section 807(d)).

Notwithstanding the foregoing, in no event will a Participant’s single sum distribution value be less than that required under Treasury Regulation Section 1.417(e)-1(d)(10).

6.13     Supplemental Benefit. For each Plan Year beginning July 1, 1996, the Annual Retirement Benefit of each Participant listed in Appendix A to the Plan will be increased by the dollar amount shown in Appendix A subject, however, to reduction for early retirement in accordance with subsection 6.2 of the Plan.

6.14  Minimum Benefit Accrual.  For each Plan Year beginning July 1, 1996, the Annual Retirement Benefit of each Employee of the Employer who is neither a Highly Compensated Employee nor a Transferred Participant listed in Exhibit B-E1 of Appendix B will be the greater of: (1) $400.00 or (2) such Employee’s Annual Retirement Benefit under the Plan.

6.15  Direct Rollover to Another Plan.  An Employee who is receiving a distribution under the Plan that constitutes an Eligible Rollover Distribution may elect to have such payment rolled over directly to the trustee or custodian of an Eligible Retirement Plan pursuant to this Section 6.15. Before making a Direct Rollover, the Administrator may require a written statement from the designated transferee plan that it is an Eligible Retirement Plan, as described in Code Section 401(a)(31)(D) and regulations thereunder, that will accept

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Direct Rollovers. At least 30 days (but no more than 90 days) before an Employee is to receive an Eligible Rollover Distribution, the Administrator shall notify the Employee of the tax consequences of making or not making a Direct Rollover. If the Employee has received the notice described above and makes an election to make, or not to make, a Direct Rollover within 30 days of the date he receives such notice, the Administrator may implement such election within 30 days after the Employee has received the notice, provided the Administrator notifies the Employee of his right to an election period of at least 30 days following his receipt of the notice.

“Direct Rollover” means a payment by the Plan to the Eligible Retirement Plan specified by the Employee. “Eligible Rollover Distribution” means a distribution to an Employee under the Plan other than (a) any distribution that is one of a series of substantially equal payments (not less frequently than annually) made for the life (or life expectancy) of the Employee, or for a specified period of ten years or more; (b) any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; or (c) the portion of any distribution that is not includable in gross income. “Eligible Retirement Plan” means an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the Employee’s eligible rollover distribution. Effective for Plan Years beginning after December 31, 2001, an Eligible Retirement Plan shall also mean an annuity contract described in section 403(b) of the Code and an eligible plan under section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this Plan

SECTION 7

Payment of Benefits

7.1 Commencement and Duration of Monthly Benefits.

A.     Normal and Early Pension Benefits. Except as otherwise provided, the monthly pension benefit payable at or after normal or early retirement shall commence on the Employee’s Normal Retirement Date or Early Retirement Date, whichever is applicable, and shall continue thereafter, on the first day of each calendar month, for life, with the final payment on the first day of the month in which the retired Employee dies. An Employee with an Early Retirement Date may elect to have his monthly early pension benefit commence on the first day of any month between his Early Retirement and Normal Retirement Age. The monthly percentage reduction of Subsection 6.2 shall be adjusted to the date the pension benefit is first paid. An Employee may not defer payment under this Subsection beyond Normal Retirement Age.

B.     Disability Pension Benefits. Except as otherwise provided, the monthly disability pension benefit payable to an Employee shall commence on the Employee’s Disability Retirement Date and shall continue on the first day of each calendar month thereafter, until the last day of the month after the retired Employee recovers or dies. At the discretion of the Employer, the Total and Permanent Disability of an Employee may be reverified at any time prior to his Normal Retirement Age by physical examination by a physician or physicians selected by his Employer, except that no Employee receiving monthly disability pension benefits shall be required to submit to a medical examination more often than twice in one year. In the event that such Employee refuses to submit to a physical examination, payments of disability pension benefits will be discontinued until he submits to such examination. Monthly disability pension benefits will cease in the event the Employee is determined by physical examination prior to his Normal Retirement Age to no longer suffer a total and Permanent Disability or if the Employee engages in regular gainful employment prior to his Normal Retirement Age.

C.     Monthly Deferred Termination of Employment Benefits. The monthly deferred termination of employment benefit payable under Subsection 6.4(a) shall commence (1) if the former Employee is living, on the first day of the month coincident with or next following after he attains Normal Retirement Age, provided that he shall have filed a written application for such monthly benefit with his Employer not earlier than six months before such monthly benefit could become payable nor later than his 70th birthday, or (2) if the former Employee is living, on the first day of any month coincident with or next following the date he attains age 55 years and before he shall attain Normal Retirement Age, provided that he shall has filed a written application for such monthly benefits with his Employer not earlier than six months before such benefits could become payable nor later than Normal Retirement Age, in which event the monthly deferred termination of employment benefit shall be reduced by 5/9 of 1% for each full month the former Employee is under less than Normal Retirement Age on the date the monthly termination of employment benefit commences.

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7.2  Required Distributions.

A.     Limits on Settlement Options. Distributions, if not made in a lump-sum, may only be made over one of the following periods (or a combination thereof): (1) the life of the Employee, (2) the life of the Employee and a designated beneficiary, (3) a period certain not extending beyond the life expectancy of the Employee, or (4) a period certain not extending beyond the joint and last survivor expectancy of the Employee and a designated beneficiary. Unless the Employee otherwise elects with his or her Spouse’s consent, a married Employee’s accrued benefit will be paid in the form of a Qualified Joint and Survivor Annuity if benefits become payable in the form of a life annuity. The Spouse’s consent must comply with the requirements relating to joint and survivor annuity requirements.

B.     Minimum Amounts to be Distributed. If the Employee’s entire interest is to be distributed in other than a lump-sum, then the amount to be distributed each year must be at least an amount equal to the quotient obtained by dividing the Employee’s entire interest by the life expectancy of the Employee or joint and last survivor expectancy of the Employee and designated beneficiary. Life expectancy and joint and last survivor expectancy are computed by the use of the return multiples contained in Section 1.72-9 of the Income Tax Regulations. For purposes of this computation, an Employee’s life expectancy may be recalculated no more frequently than annually, however, the life expectancy of a non-Spouse beneficiary may not be recalculated. If the Employee’s Spouse is not the designated beneficiary, the method of distribution selected must assure that at least 50 percent of the present value of the amount available for distribution is paid within the life expectancy of the Employee.

C.     Commencement of Distributions. Notwithstanding anything else to the contrary herein, an Employee’s accrued benefit may not be distributed under a method of payment which, as of the “required beginning date” (as defined in section 401(a)(9) of the Code and applicable guidance promulgated by the Internal Revenue Service), does not satisfy the minimum distribution requirements under section 401(a)(9) of the Code and the applicable Treasury regulations. The Employee’s accrued benefit will be distributed, beginning not later than the required beginning date, over the life of the Employee or over the lives of the Employee and his Beneficiary (or over a period not extending beyond the Employee’s life expectancy or the life expectancy of the Employee and his Beneficiary).

Employees attaining age 70 ½ in 1996 and prior years shall have a required beginning date of the April 1 following the calendar year in which they attain age 70 ½. Employees attaining age 70 ½ in 1997 and later years shall have the following required beginning date:

(a)     an Employee who is a 5% owner (as defined in Section 416(i) of the Code), shall commence to receive payment of his benefit no later than the April 1 of the calendar year following the calendar year in which such Employee attains 70 ½; and (b) an Employee who attained age 70 ½ after December 31, 1996 and who is not a 5% owner, shall commence to receive payment of his benefit no later than the April 1 of the calendar year following the later of (i) the calendar year in which the Employee attains age 70 ½, or (ii) his termination of employment with the Employer.

In the case of an Employee described in subsection 7.2C(b) who retires in a calendar year after the calendar year in which the Employee attains age 70 ½ the Employee’s accrued benefit shall be actuarially increased to take into account the period after the required beginning date in which the Employee was not receiving any benefits under the Plan.

Applicable life expectancies will be determined under the unisex life expectancy multiples under Treasury Regulation section 1.72-9. If the Employee’s Spouse is not his designated Beneficiary, a method of payment to the Employee must satisfy the minimum distribution incidental benefit requirements in the Treasury regulations issued pursuant to section 401(a)(9) of the Code.

D.     Death Distribution Provisions. Upon the death of the Employee, the following distribution provisions shall take effect: (1) If the Employee dies after distribution of his or her interest has commenced, the remaining portion of such interest will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Employee’s death. (2) If the Employee dies before distribution of his or her interest commences, the Employee’s entire interest will be distributed no later than five years after the Employee’s death except to the extent that an election is made to receive distributions in accordance with (a) or (b) below:

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(a)     if any portion of the Employee’s interest is payable to a designated beneficiary, distributions may be made in substantially equal installments over the life or life expectancy of the designated beneficiary commencing no later than one year after the Employee’s death; (b) if the designated beneficiary is the Employee’s surviving Spouse, the date distributions are required to begin in accordance with (a) above shall not be earlier than the date on which the Employee would have attained age 70-1/2, and, if the Spouse dies before payments begin, subsequent distributions shall be made as if the Spouse had been the Employee. (3) For purposes of (2) above, payments will be calculated by use of the return multiples specified in Section 1.72-9 of the regulations. Life expectancy of a surviving Spouse may be recalculated annually, however, in the case of any other designated beneficiary, such life expectancy will be calculated at the time payment first commences without further recalculation. (4) For purposes of (1), (2) and (3) above, any amount paid to a child of the Employee will be treated as if it had been paid to the surviving Spouse if the amount becomes payable to the surviving Spouse when the child reaches the age of majority.

E.     Transitional Rule. Notwithstanding the above distribution requirements, distribution on behalf of any Employee, including a five-percent owner, may be made in accordance with all of the following requirements (regardless of when such distribution commences):

(1)     The distribution by the trust is one which would not have disqualified such trust under Section 401(a)(9) of the Internal Revenue Code as in effect prior to amendment by the Deficit Reduction Act of 1984.

(2)     The distribution is in accordance with a method of distribution designated by the Employee whose interest in the trust is being distributed or, if the Employee is deceased, by a beneficiary of such Employee.

(3)     Such designation was in writing, was signed by the Employee or the beneficiary, and was made before January 1, 1984.

(4)     The Employee had accrued a benefit under the Plan as of December 31, 1983.

(5)     The method of distribution designated by the Employee or the beneficiary specifies the time at which distribution will commence, the period over which distributions will be made, and in the case of any distribution upon the Employee’s death, the beneficiaries of the Employee listed in order of priority.

Unless paid to a surviving Spouse under a Qualified Joint and Survivor Annuity, the method of distribution selected must assure that at least fifty percent of the present value of the amount available for distribution is paid within the life expectancy of the Participant.

A distribution upon death will not be covered by this transitional rule unless the information in the designation contains the required information described above with respect to the distributions to be made upon the death of the Employee.

For any distribution which commences before January 1, 1984, but continues after December 31, 1983, the Employee, or the beneficiary, to whom such distribution is being made, will be presumed to have designated the method of distribution under which the distribution is being made if the method of distribution was specified in writing and the distribution satisfies the requirements in Subsections (1) and (5) above.

If a designation is revoked any subsequent distribution must satisfy the requirements of Section 401(a)(9) as amended. Any changes in the designation will be considered to be a revocation of the designation. However, the mere substitution or addition of another beneficiary (one not named in the designation) under the designation will not be considered to be a revocation of the designation, so long as such substitution or addition does not alter the period over which distributions are to be made under the designation, directly or indirectly (for example, by altering the relevant measuring life).

7.3  Reemployment After Disability Retirement.  An Employee who was placed on Permanent Inactive Disability Status and who is reinstated to employment with an Employer no later than the calendar quarter next following the calendar quarter during which he was last removed from Permanent Inactive Disability Status shall be credited with the same amount of Vested Credited Service and Credited Service he had accrued under the Plan as of the date he was last placed on Permanent Inactive Disability Status.

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7.4  Benefits Inalienable.  Benefits under the Plan are not subject to the debts or obligations of the persons entitled to such benefits, and may not be voluntarily or involuntarily sold, transferred or assigned. The preceding sentence shall also apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, unless such order is determined to be a qualified domestic relations order, as defined in Section 414(p) of the Code. A domestic relations order entered before January 1, 1985, will be treated as a qualified domestic relations order of payment of benefits pursuant to the order has commenced as of such date, and may be treated as a qualified domestic relations order of payment of benefits has not commenced as of such date, even though the order does not satisfy the requirements of Section 414(p).

The Company, however, may direct the Trustee to make any payment or distribution due to any person under a legal disability or who, in the Company’s opinion, is in any way incapacitated so as to be unable to manage his financial affairs, directly to such person or his legal representative, or to a relative or friend of such person for his benefit, or the Company may direct the application of the payment for the benefit of such person. Any payment made in accordance with the preceding sentence shall be a full and complete discharge of any liability under the Plan for such payment.

Notwithstanding the foregoing, a Participant’s benefit provided under the Plan may be reduced pursuant to a judgment, order, decree or settlement agreement as described in Code Section 401(a)(13)(C) regarding the Participant’s conviction for a crime involving the Plan or violations of any fiduciary responsibility under Part 4 of subtitle B of Title I of ERISA. The preceding sentence is effective for judgments, orders, or decrees issued, and settlements agreements entered into, on or after August 5, 1997.

7.5  Benefit Limitations.

(a)     For Limitation Years ending after December 31, 2001, solely for Employees who have at least one Hour of Service on or after the first day of the first Limitation Year ending after December 31, 2001, and for purposes of compliance with Section 415 of the Code (or any successor to said Section), the following limitations on Plan benefits are hereby imposed:

(b) Definitions.

(1)     Defined Benefit Dollar Limitation. The “Defined Benefit Dollar Limitation” is $160,000, as adjusted, effective January 1 of each year, under Section 415(d) of the Code in such manner as the Secretary shall prescribe, and payable in the form of a straight life annuity. A limitation as adjusted under Section 415(d) will apply to Limitation Years ending with or within the calendar year for which the adjustment applies.

(2)     Maximum permissible benefit: The “maximum permissible benefit” is the lesser of the Defined Benefit Dollar Limitation or the defined benefit compensation limitation (both adjusted where required, as provided in (i) and, if applicable, in (ii) or (iii) below).

(i)     If the Employee has fewer than 10 years of participation in the Plan, the Defined Benefit Dollar Limitation shall be multiplied by a fraction, (i) the numerator of which is the number of years (or part thereof) of participation in the Plan and (ii) the denominator of which is 10. In the case of an Employee who has fewer than 10 years of service with the Company, the defined benefit compensation limitation shall be multiplied by a fraction, (i) the numerator of which is the number of years (or part thereof) of service with the Company and (ii) the denominator of which is 10.

(ii)     If the benefit of an Employee begins prior to age 62, the Defined Benefit Dollar Limitation applicable to the Employee at such earlier age is an annual benefit payable in the form of a straight life annuity beginning at the earlier age that is the actuarial equivalent of the Defined Benefit Dollar Limitation applicable to the Employee at age 62 (adjusted under (i) above, if required). The Defined Benefit Dollar Limitation applicable at an age prior to age 62 is determined as the lesser of (A) the actuarial equivalent (at such age) of the Defined Benefit Dollar Limitation computed using the interest rate and mortality table (or other tabular factor) specified in the Plan and (B) the actuarial equivalent (at such age) of the Defined Benefit Dollar Limitation computed using a 5 percent interest rate and the Applicable Mortality Table as defined in Section 6.12 of the Plan. Any decrease in the Defined Benefit Dollar Limitation determined in accordance with this paragraph (ii) shall not reflect a mortality decrement if benefits are not forfeited upon the death of the Employee. If any benefits are forfeited upon death, the full mortality decrement is taken into account.

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(iii)     If the benefit of an Employee begins after the Employee attains age 65, the Defined Benefit Dollar Limitation applicable to the Employee at the later age is the annual benefit payable in the form of a straight life annuity beginning at the later age that is actuarially equivalent to the Defined Benefit Dollar Limitation applicable to the Employee at age 65 (adjusted under (i) above, if required). The actuarial equivalent of the Defined Benefit Dollar Limitation applicable at an age after age 65 is determined as (A) the lesser of the actuarial equivalent (at such age) of the Defined Benefit Dollar Limitation computed using the interest rate and mortality table (or other tabular factor) specified in the Plan and (B) the actuarial equivalent (at such age) of the Defined Benefit Dollar Limitation computed using a 5 percent interest rate assumption and the Applicable Mortality Table as defined in Section 6.12 of the Plan. For these purposes, mortality between age 65 and the age at which benefits commence shall be ignored.

(3)     “Compensation” means compensation as defined in Section 415(c)(3) of the Code and Treas. Reg. sec. 1.415-2(d).

7.6  Restrictions on Benefits Payable to Highly Compensated Employees.  This Subsection sets forth limitations required by the Internal Revenue Service on the benefits payable to certain Highly Compensated Employees. In the event of a plan termination, the benefit of any Highly Compensated Employee or former Highly Compensated Employee is limited to a benefit that is nondiscriminatory under section 401(a)(4)

Benefits distributed to or on behalf of any of the 25 most Highly Compensated Employees or former Highly Compensated Employees with the greatest compensation in the current or any prior year are restricted such that the annual payments are no greater than an amount equal to the payment that would be made on behalf of the employee under a straight life annuity that is the actuarial equivalent of the sum of the Highly Compensated Employee’s accrued benefit, his other benefits under the Plan (other than a social security supplement, within the meaning of section 1.411(a)-7(c)(4)(ii) of the Income Tax Regulations), and the amount he is entitled to receive under a social security supplement, if any.

The preceding paragraph shall not apply if: (1) after taking into account payment of the benefit to a Highly Compensated Employee described in the preceding paragraph, the value of plan assets equals or exceeds 110% of the value of current liabilities, as defined in section 412(l)(7) of the Internal Revenue Code, (2) the value of the benefits to or on behalf of a Highly Compensated Employee described above is less than 1% of the value of current liabilities before distribution, or (3) the value of the benefits payable under the Plan to or on behalf of a Highly Compensated Employee described above does not exceed $5,000.

For purposes of this section, the term benefits includes, among other benefits, loans in excess of the amount set forth in section 72(p)(2)(A) of the Internal Revenue Code, any periodic income, any withdrawal values payable to such living Highly Compensated Employees or former Highly Compensated Employees, and any death benefits not provided for by insurance on the Highly Compensated Employee’s or former Highly Compensated Employee’s life.

7.7  Top-Heavy Provisions.  The following provisions shall become effective in any Plan Year after the Plan Year ending June 30, 1984 in which the Plan is determined to be a Top-Heavy Plan. Whenever used in this Section 7.7, the term compensation shall mean the Participant’s compensation as defined in Section 7.5(g).

A.     Top-Heavy Determination. The Plan will be determined to be a Top-Heavy Plan for the Plan Year if, as of the Determination Date: (1) the present value of the accumulated accrued benefits for Key Employees for the Plan Year exceeds 60 percent of the present value of the accumulated accrued benefits for all Employees under the Plan, or

(2)     the Plan is part of a Required Aggregation Group and the Required Aggregation Group is top-heavy; however, notwithstanding the results of the 60 percent test set forth in (1) above, the Plan shall not be considered a Top-Heavy Plan for any Plan Year in which the Plan is part of a required or Permissive Aggregation Group which is not top-heavy. The actuarial assumptions used to calculate the present value of accrued benefits in determining top-heavy status are an interest rate of 6.5% per annum, using the 1971 Group Annuity Table, which assumptions shall be identical for all defined benefit plans being tested for Top-Heavy Plan status. For purposes of making the top-heavy determination, all distributions that were made during the five-year period ending on the Determination Date must be taken into account.

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(3)     Solely for the purpose of determining if the Plan, or any other plan included in a Required Aggregation Group of which this Plan is a part, is top-heavy (within the meaning of Section 416(g) of the Code) the accrued benefit of an Employee other than a Key Employee (within the meaning of Section 416(i)(1) of the Code) shall be deter-mined under (a) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Affiliated Employers, or (b) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rule of Section 411(b)(1) of the Code.

B.     Top-Heavy Ratio. The top-heavy ratio is a fraction, the numerator of which is the sum of the account balances under the defined contribution plans of the Employer for all Key Employees and the present value of accrued benefits under the defined benefit plans of the Employer for all Key Employees, and the denominator of which is the sum of the account balances under the defined contribution plans for all Employees and the present value of accrued benefits under the defined benefit plans for all Employees. Both the numerator and the denominator of the top-heavy ratio shall be adjusted for any distribution made in the five-year period ending on the Determination Date and any contribution due but unpaid as of the Determination Date.

The value of account balances and the present value of accrued benefits will be determined as of the Determination Date. The account balances and accrued benefits of an Employee who is not a Key Employee but who was a Key Employee in a prior year will be disregarded. The calculation of the top-heavy ratio, and the extent to which distributions, rollovers and transfers are taken into account will be made in accordance with Section 416 of the Code and the regulations thereunder. Deductible Employee’s contributions shall not be taken into account for purposes of computing the top-heavy ratio. When aggregating plans, the value of account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. For Plan Years beginning after December 31, 1984, the account balances of Employees who have not received compensation from the Company during the five-year period ending on the Determination Date shall be disregarded.

C.     Minimum benefit. For any Plan Year in which the Plan is determined to be a Top-Heavy Plan, each Employee who is not a Key Employee shall receive an accrued benefit which expressed as an Annual Retirement Benefit, is not less than the lesser of (1) two percent, multiplied by the Employee’s years of Service with the Employer, or (2) twenty percent of the Employees’ average annual compensation from the Company during the Employee’s consecutive Years of Service (not exceeding five) during which the Employee had the greatest aggregate compensation from the Company. For purposes of this paragraph, a Year of Service shall not be taken into account if (1) the Plan was not top-heavy for any Plan Year ending during such Year of Service or (2) such Year of Service was completed in a Plan Year beginning before January 1, 1984.

The provisions of this Subsection 7.7C shall not apply to any Employee who does not have at least 1,000 Hours of Service for the year. Each Employee who is not a Key Employee who is a participant in both a defined benefit top-heavy plan and a defined contribution top-heavy plan shall receive a minimum defined contribution under the defined contribution plan of 5% of his compensation for each year that the Plan is top-heavy. This Subsection 4.8C shall not apply to any Employee to the extent that the Employee is covered under any other plan or plans of the Employer, if the minimum contribution or benefit requirement applicable to top-heavy plans is met in the other plan or plans in accordance with the preceding sentence.

D.     Minimum Vesting. Notwithstanding any other provisions of this Plan, if the Plan is a Top-Heavy Plan an Employee has a nonforfeitable right to a percentage of his accrued benefit derived from Employer contributions determined under the following table:

Years of Service	Vested Percentage	Forfeited Percentage
Less than 2	0%	100%
2 but less than 3	20%	80%
3 but less than 4	40%	60%
4 but less than 5	60%	40%
5 but less than 6	80%	20%
6 or more	100%	0%

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E.     Compensation Limitation. For any Plan Year before January 1, 1994, in which the Plan is determined to be a Top-Heavy Plan, the annual compensation of each Employee taken into account in determining benefits under the Plan shall not exceed the first $200,000 as adjusted at the same time and in the same manner as provided in section 415(d) of the Code. Effective for Plan Years beginning after December 31, 1993 in which the plan year is determined to be Top Heavy, the annual compensation of each Employee taken into account in determining benefits under the Plan shall not exceed the first $150,000 as adjusted at the same time and in the same manner as provided in section 415(d) of the Code.

F.     Benefit Limitations for Top-Heavy Plan Year. The provisions of this subsection 7.7F are applicable to Limitation Years beginning on or before December 31, 1999. For Limitation Years beginning on or after January 1, 2000, the provisions of this subsection 7.7F are repealed. For any Plan Year in which the Plan is determined to be a Top-Heavy Plan, Sections 415(e)(2) and (3) of the Code, as referred to in Subsection 7.5(4), shall be read by substituting the number “1.00” for the number “1.25" wherever it appears therein except such substitution shall not have the effect of reducing any benefit accrued prior to the first day of the Plan Year in which this provision becomes applicable. In the event that the Plan Administrator elects to apply the special transitional rules of Section 415(e)(6) of the Code, Section 415(e)(6)(B)(i) of the Internal Revenue Code of 1954, as amended, shall be applied by substituting “$41,500” for “$51,875".

G.     Distribution to Key Employees. For any Plan Year in which the Plan is determined to be a Top-Heavy Plan, any benefits to which a Key Employee is entitled shall commence not later than the Key Employee’s taxable year in which he attains age 70-1/2, whether or not his employment has terminated in such year. If a benefit distribution under the Plan is made to a Key Employee before he attains age 59-1/2, and during a Plan Year in which the Plan is determined to be a Top-Heavy Plan, the Key Employee shall be advised by the Plan Administrator that an additional income tax may be imposed equal to ten percent of the portion of the amount so received which is included in his gross income for such taxable year, unless such distribution is made on account of death or disability.

Notwithstanding anything contained herein to the contrary, for any Plan Year in which the Plan is determined to be a Top-Heavy Plan any benefits to which a Key Employee who is a five-percent owner (as described in Section 416(i) of the Code) is entitled shall commence not later than the April 1 following the calendar year in which the Key Employee attains age 70-1/2, whether or not his employment had terminated in such year. If a benefit distribution under the Plan is made to a Key Employee who is a five-percent owner before he attains age 59-1/2, and during a Plan Year in which the Plan is determined to be a Top-Heavy Plan, the Key Employee shall be advised by the Plan Administrator that an additional income tax may be imposed equal to ten percent of the portion of the amount so received which is included in his gross income for such taxable year and which is attributable to benefits accrued while he was a five-percent owner, unless such distribution is made on account of death or Disability.

H.     Change in Top-Heavy Status. If the Plan becomes a Top-Heavy Plan and subsequently ceases to be such, each Employee who has completed at least three years of Service on the effective date of the change in status shall have his or her vesting percentage computed in accordance with the vesting schedule which produces the highest vested benefit. For other Employees, said schedule shall apply only to their accrued benefits as of the effective date of the change in status.

I.     The following language shall apply for purposes of determining whether the Plan is a top-heavy Plan under Section 416(g) of the Code for Plan Years beginning on or after July 1, 2002, and whether the Plan satisfies the minimum benefits requirements of Section 416(c) of the Code for such years. The following replaces applicable language in this Section 7.7 of the Plan. (a) Determination of top-heavy status.

(1)     Key Employee. “Key Employee” means any Employee or former Employee (including any deceased Employee) who at any time during the Plan Year that includes the determination date was an officer of the Company having annual compensation greater than $130,000 (as adjusted under Section 416(i)(1) of the Code for Plan Years beginning after December 31, 2002), a 5-percent owner of the Company, or a 1-percent owner of the Company having annual compensation of more than $150,000. For this purpose, annual compensation means compensation within the meaning of Section 415(c)(3) of the Code. The determination of who is a Key Employee will be made in accordance with Section 416(i)(1) of the Code and the applicable regulations and other guidance of general applicability issued thereunder.

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(2)     Determination of present values and amounts. This Section 7.7(a)(2) shall apply for purposes of determining the present values of accrued benefits and the amounts of account balances of Employees as of the determination date. (i) Distributions during year ending on the determination date. The present values of accrued benefits and the amounts of account balances of an Employee as of the determination date shall be increased by the distributions made with respect to the Employee under the Plan and any plan aggregated with the Plan under Section 416(g)(2) of the Code during the 1-year period ending on the determination date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the Plan under Section 416(g)(2)(A)(i) of the Code. In the case of a distribution made for a reason other than separation from service, death, or disability, this provision shall be applied by substituting “5-year period” for “1-year period.” (ii) Employees not performing services during year ending on the determination date. The accrued benefits and accounts of any individual who has not performed services for the Company during the 1-year period ending on the determination date shall not be taken into account.

(3)     Minimum benefits. For purposes of satisfying the minimum benefit requirements of Section 416(c)(1) of the Code and the Plan, in determining years of service with the Company, any service with the Company shall be disregarded to the extent that such service occurs during a Plan Year when the Plan benefits (within the meaning of Section 410(b) of the Code) no Key Employee or former Key Employee.

7.8  Designation of Beneficiary.

A.     If the Participant may choose a Beneficiary other than the Participant’s Spouse, upon commencement of participation in the Plan, each Employee shall complete, sign and file a Designation of Beneficiary on a form to be provided by the Employer, a true copy of which shall be filed with the Employee Benefits Committee. On said form, the Employee shall designate a Beneficiary or Beneficiaries, which may be an individual, the Employee’s estate, or a trust to whom shall be paid any sum which may be payable on account of the Employee’s death (reserving, however, to the Employee the power to change the designation of Beneficiary from time to time). In no event shall the Employer be named as a Beneficiary.

No Beneficiary designation shall be effective under the Plan unless the Employee’s Spouse consents in writing to such designation, the Spouse’s consent acknowledges the effect of such designation and the Spouse’s signature is witnessed by a plan representative or a notary public. Consequently, any Beneficiary designation previously made by an Employee shall be automatically revoked upon the marriage or remarriage of an Employee.

A Spouse’s consent shall be valid under this Plan only with respect to the specified Beneficiary or Beneficiaries designated by the Employee. If the Beneficiary or Beneficiaries are subsequently changed by the Employee, a new consent by the Spouse will be required. A Beneficiary designation may not be changed without Spousal consent unless the consent of the Spouse expressly permits designation by the Employee without any requirement of further consent. The Spouse’s consent to any Beneficiary pursuant to this Plan, once given, may not be revoked by the Spouse. Notwithstanding the foregoing, Spousal consent to an Employee’s Beneficiary designation shall not be required if:

(i)     the Spouse is designated as the sole primary Beneficiary by the Employee, or (ii) it is established to the satisfaction of the Committee that Spousal consent cannot be obtained because there is no Spouse, because the Spouse cannot be located or because of such other circumstances as may be prescribed in regulations issued by the Secretary of the Treasury.

Any consent by a Spouse or any determination that the consent is not required pursuant to paragraphs (i) or (ii) above, shall be effective only with respect to such Spouse.

SECTION 8

Financing of Benefits

8.1  Trust Fund.  The Company will execute a trust agreement with a Trustee selected by the Company to manage and operate the Trust Fund created pursuant to such trust agreement. The Trustee will receive, hold, and disburse such contributions, interest, and other

23

income as may be available to pay the benefits provided under the Plan. Any Trustee may act on the basis of information furnished by the Company without further inquiry and without liability to any Employee. The trust agreement may authorize the inclusion of obligations and stock (common and preferred) of the Company among investments of the Trust Fund. The Company may modify any trust agreement from time to time to accomplish the purposes of the Plan, may remove any Trustee, and may select any successor Trustee.

8.2  Employer’s Fund.  Unless otherwise directed by the Company the Employer’s Fund of each Employer shall be commingled for investment but shall be accounted for separately from the Employer’s Fund of each other Employer .

8.3   Contributions.  It is contemplated that the Plan shall be permanent and that each Employer shall make such contributions to the Trustee for the purpose of providing benefits under the Plan for its Employees as shall be required under accepted actuarial principles to maintain the Plan as to each Employer as a qualified plan under Section 401(a) of the Internal Revenue Code of 1954, as amended. The certificate of any actuary selected by the Company as to the sufficiency of any amount contributed by each Employer for its Employees on the basis of separate actuarial valuations shall be conclusive on all persons, and the contributions made on such basis shall be the extent of liability of the Company and the Employers under the Plan. No Employee shall be required to make any contribution under the Plan.

8.4  Reversion in Company or Employer.   Neither the Company nor any Employer shall have any right, title or interest in the Trust Fund or any Employer’s Fund nor will any part of the Trust Fund or any Employer’s Fund at any time revert to the Company or any Employer unless all liabilities attributable to the Company and/or the appropriate Employer have been paid in full, except as provided in Section 9.

8.5  Mistake in Contributions.   Notwithstanding any provisions of the Plan, Employer contributions, or portions thereof, may revert back to an Employer if such contributions were based in whole or in part upon a mistake in fact or upon a good faith mistake in determining the deductibility of the contribution under Section 404 of the Internal Revenue Code of 1954, as amended, from time to time. Any reversion under this Section must be made within one year after the mistaken payment of the contribution, or disallowance of the deduction, whichever occurs later. The amount which may revert to an Employer is equal to the amount contributed less the amount which would have been contributed but for a mistake in fact or a mistake in determining a deduction. Earnings attributable to an excess contribution shall not revert to an Employer, but any loss attributable thereto will reduce the amount subject to this reversion.

SECTION 9

Amendment and Termination

9.1  Amendment and Termination by the Company.   The Company reserves the right to amend, modify, suspend or terminate the Plan at any time by resolution of the Board of Directors and such amendment, modification, suspension or termination by the Company shall be effective with respect to each Employer, unless otherwise provided by the Company. No amendment to the Plan (including a change in the actuarial basis for determining optional or early retirement benefits) shall be effective to the extent that it has the effect of decreasing an Employee’s accrued benefit. Notwithstanding the preceding sentence, an Employee’s accrued benefit may be reduced to the extent permitted under Section 412(c)(8) of the Code. For purposes of this paragraph, a Plan amendment which has the effect of (1) eliminating or reducing an early retirement benefit or a retirement-type subsidy, or (2) eliminating an optional form of benefit, with respect to benefits attributable to Service before the amendment shall be treated as reducing accrued benefits. In the case of a retirement-type subsidy, the preceding sentence shall apply only with respect to an Employee who satisfied (either before or after the amendment) the preamendment conditions for the subsidy. In general, a retirement-type subsidy is a subsidy that continues after retirement, but does not include a qualified disability benefit, a medical benefit, a social security supplement, a death benefit (including life insurance), or a plant shutdown benefit (that does not continue after retirement age). Furthermore, no amendment to the Plan shall have the effect of decreasing an Employee’s vested interest determined without regard to such amendment as of the later of the date such amendment is adopted, or becomes effective.

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Notwithstanding anything in this Section 9.1 to the contrary, effective December 8, 1994, no amendment to the Plan shall be effective to the extent that it has the effect of increasing liabilities of the Plan with respect to Employees of the Employer by reason of (1) any increase in benefits, (2) any change in the accrual of benefits, or (3) any change in the rate at which benefits become nonforfeitable under the Plan, if such amendment is adopted while the Employer is a debtor in a case under title 11, United States Code, or similar Federal or State law and such amendment is effective prior to the effective date of such Employer’s plan of reorganisation; provided however, that this sentence shall not apply to any amendment if (1) the Plan would have a funded current liability percentage (as defined in Code Section 412(l)(8)) of 100 percent or more if such amendment were to take effect, (2) the Secretary of the Treasury determines that such amendment is reasonable and provides for only de minimis increases in the liabilities of the Plan with respect to Employees of the Employer, (3) such amendment only repeals an amendment described in Code Section 412(c)(8), or (4) such amendment is required as a condition of qualification under Subchapter D, Part I of the Code.

9.2  Vesting, Allocation and Distribution of Assets on Termination.

(a)     In the event of the termination or partial termination of the Plan with regard to any Employer, each affected Participant in the Plan shall thereupon have a full 100% vested interest in his then accrued Normal Pension Benefit, to the extent then funded. The Plan Administrator will direct the allocation and distribution of Plan assets allocable to Employees employed by that Employer and to retired or terminated Employees and other persons entitled to benefits under the Plan to the extent of their benefits attributable to employment with the Employer.

(b)     Upon termination of the Plan all assets of the Plan, to the extent that they are sufficient after the payment of and reasonable reserves for expenses of administration or liquidation of the Trust, shall be allocated for the purpose of paying benefits to Participants and their Beneficiaries in the order of precedence consistent with the provisions of ERISA Section 4044. Distribution may be made in cash or property or partly in each, provided that property is distributed at its fair market value as of the date of distribution as determined by the Trustee. Furthermore, if the Plan Administrator so determines, and with the consent of the Company, the benefits attributable to any Employee under this Subsection who is employed by an Employer may be retained in the Trust Fund until the Employee’s employment with the Employer is terminated.

9.3  Plan Merger, Consolidation, etc.   In the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each Employee’s benefit, if the Plan terminated after such merger, consolidation or transfer shall be equal to or greater than the benefit he would have been entitled to receive if the Plan had terminated immediately before the merger, consolidation or transfer. Notwithstanding anything herein to the contrary, this Plan shall not accept any direct or indirect transfers from any plan which provides for an optional form of benefit not provided in this Plan.

SECTION 10

Miscellaneous

10.1  Application for Monthly Benefits and Information by Employees.  Each Employee entitled to a monthly benefit shall apply for such benefit by signing an application form to be furnished by the Company. Each Employee shall also furnish his Employer with such documents, evidence, data or information in support of such application as the Company considers necessary or desirable for the purpose of administering the Plan or to protect the Company and the Employer, and the provisions of the Plan for each Employee are upon the condition that the Employee will furnish full, true and complete evidence, data or information and promptly sign any appropriate documents furnished to him for his signature.

10.2  No Enlargement of Employment Rights.  The Employer’s right to discipline or discharge Employees shall not be affected by reason of any of the provisions of the Plan.

10.3  Employment after Retirement.   Except as provided in Subsections 7.1B and 7.2, a retired Employee will be entitled to receive his monthly benefit from the Employer’s Fund regardless of self-employment or other employment.

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SECTION 11

Administration

11.1  General.  The CTS Corporation Employee Benefits Committee, whose members are appointed by and serve at the discretion of the Chief Executive Officer of CTS Corporation, is the Plan Administrator and shall be responsible for the general administration of the Plan and shall exercise such powers as may be necessary to carry out the provisions thereof. The Plan Administrator may, however, delegate any or all of its administrative powers, duties and discretions to such persons or boards as may be appointed by the Plan Administrator except that any such persons or the members of such boards shall be Employees of the Company or an Employer, and no compensation will be paid to them as such. Any decisions made by the Plan Administrator or by any persons or boards appointed by the Plan Administrator, to the extent such decisions are within the powers, duties and discretions delegated, shall be binding on the Company, Employers, Employees and any other person claiming, receiving or entitled to receive benefits under the Plan.

11.2  Plan Administrator’s Powers and Duties.  The primary responsibility of the Plan Administrator is to administer the Plan for the exclusive benefit of the Participants and their Beneficiaries, subject to the specific terms of the Plan. The Plan Administrator shall administer the Plan in accordance with its terms and shall have the power and discretion to construe the terms of the Plan and to determine all questions arising in connection with the administration, interpretation, and application of the Plan. Any such determination by the Plan Administrator shall be conclusive and binding upon all persons. The Plan Administrator may establish procedures, correct any defect, supply any information, or reconcile any inconsistency in such manner and to such extent as shall be deemed necessary or advisable to carry out the purpose of the Plan; provided, however, that any procedure, discretionary act, interpretation or construction shall be done in a nondiscriminatory manner based upon uniform principles consistently applied and shall be consistent with the intent that the Plan shall continue to be deemed a qualified plan under the terms of Code Section 401(a), and shall comply with the terms of ERISA and all regulations issued pursuant thereto. The Plan Administrator shall have all powers necessary or appropriate to accomplish its duties under this Plan.

The Plan Administrator shall be charged with the duties of the general administration of the Plan, including, but not limited to the following: (a) the discretion to determine all questions relating to the eligibility of an Employee to participate or remain a Participant hereunder and to receive benefits under the Plan; (b) to compute, certify, and direct the Trustee with respect to the amount and the kind of benefits to which any Participant shall be entitled hereunder; (c) to authorize and direct the Trustee with respect to all disbursements from the Trust; (d) to maintain all necessary records for the administration of the Plan; (e) to interpret the provisions of the Plan and to make and publish such rules for regulation of the Plan as are consistent with the terms hereof; and (f) to take any other action necessary or appropriate to administer the

11.3  Claims Procedure.

(a)     In General. Each Participant or Beneficiary (for purposes of this Section called a “Claimant”) may submit his claim for benefits to the Plan Administrator in writing in such form as is allowed by the Administrator. A Claimant shall have no right to seek review of a denial of benefits, or to bring any action in any court to enforce a claim for benefits, before he has filed a claim for benefits and exhausted his rights to review according to this Section.

Subject to the Supplemental Claims Procedures for Disability Pension Benefits set forth in subsection 11.3(b), when a claim for benefits has been filed properly, such claim for benefits shall be evaluated by the Plan Administrator. The Plan Administrator shall notify the Claimant of the approval or the denial of the claim within ninety (90) days after the receipt of such claim unless special circumstances require an extension of time for processing the claim. If the Plan Administrator needs such an extension, the Plan Administrator shall furnish a written notice of the extension to the Claimant before the termination of the initial ninety (90) day period. The written notice shall specify the special circumstances requiring an extension and the date by which a final decision shall be reached (which date shall not be later than one hundred and eighty (180) days after the date on which the claim was filed).

A Claimant shall be given a written notice in which he shall be advised as to whether the claim is granted or denied, in whole or in part. Subject to the Supplemental Procedures for Disability Pension Benefits set forth in subsection 11.3(b), if a claim is denied, in whole or

26

in part, the Claimant shall be given written notice that shall contain (1) the specific reasons for the denial, (2) references to pertinent Plan provisions on which the denial is based, (3) a description of any additional material or information necessary to perfect the claim and an explanation of why such material or information is necessary, and (4) a description of the Plan’s review procedures, including a statement of the Claimant’s rights to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.

(b)     Supplemental Claims Procedures for Disability Pension Benefits. Effective for all claims filed on or after January 1, 2002, in the case of a claim for Disability Pension Benefits, the Plan Administrator shall notify the Claimant of the approval or the denial of the claim within forty-five (45) days after the receipt of such claim unless, due to circumstances beyond the control of the Plan Administrator, an extension of time for processing the claim is required. If the Plan Administrator needs such an extension, the Plan Administrator shall furnish a written notice to the Claimant that the review period will be extended by thirty (30) days before the end of the initial forty-five (45) day period. If, prior to the end of the first extension period, the Plan Administrator determines that circumstances beyond the control of the Plan prevent a decision from being rendered within that extension period, the period for making the determination may be extended for an additional thirty (30) days, provided that the Administrator notifies the Claimant prior to the end of the first extension period.

In the case of either extension under this subsection 11.3(b), the written notice shall specify the special circumstances requiring an extension and the date by which the Administrator expects to reach a final decision. The date by which a decision is expected to be rendered shall not be later than (1) seventy-five (75) days after the date on which the claim was filed in the case of the first extension, or (2) one hundred and five (105) days after the date on which the claim was filed in the case of the second extension. The notice of extension shall specifically explain (1) the standards on which entitlement to a benefit is based, (2) the unresolved issues that prevent a final decision from being rendered on the claim, (3) the additional information needed to resolve those issues, and (4) that the Claimant shall be afforded forty-five (45) days within which to provide the specified information. If the Claimant must provide additional information to allow the Plan Administrator to make a decision on the claim, the review period shall be tolled until such information is provided.

In addition to the requirements for a notice of denial of benefits specified in subsection 11.3(a), a notice of denial of Disability Pension Benefits shall contain the following: (1) If an internal rule, guideline, protocol, or other similar criterion was relied upon in making the adverse determination, either the specific rule, guideline, protocol, or other similar criterion; or a statement that such a rule, guideline, protocol, or other similar criterion was relied upon in making the adverse determination and that a copy of such rule, guideline, protocol or other criterion will be provided free of charge to the Claimant upon request; or (2) If the adverse determination is based on a medical necessity or experimental treatment or similar exclusion or limit, either an explanation of the scientific or clinical judgment for the determination, applying the terms of the Plan to the Claimant’s medical circumstances, or a statement that such explanation will be provided free of charge upon request. (c) Review of Denial of Claims in General. Subject to the Supplemental Procedures for Review of Denial of Claims for Disability Pension Benefits set forth in subsection 11.3(d), if a claim is denied, in whole or in part, the Claimant shall have the right to request that the Plan Administrator review the denial, provided that he files a written request for review with the Plan Administrator within sixty (60) days after the date on which he received written notification of the denial. A Claimant (or his duly authorized representative) may review pertinent documents and submit issues, comments or other information in writing to the Plan Administrator. A Claimant shall be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant’s claim for benefits.

The review shall take into account all comments, documents, records, and other information submitted by the claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. Within sixty (60) days after a request for review is received, the review shall be made and the Plan Administrator shall advise the Claimant in writing of the decision on review, unless special circumstances require an extension of time for processing the review. If the Plan Administrator needs such an extension, the Plan Administrator shall furnish a written notice to the Claimant before the termination of the initial sixty (60) day period. The written notice shall specify the reasons for the extension and when the review shall be completed (provided that such review shall be completed within one hundred and twenty (120) days after the date on which the request for review was filed). The decision on review shall be forwarded to the Claimant in writing and shall include specific reasons for the decision and references to Plan provisions upon which the decision is based. A decision on review shall be final and binding on all persons for all purposes. If a Claimant shall fail to file a request for review according to the procedures herein outlined, such Claimant shall have no rights to review and shall have no right to bring action in any court, and the denial of the claim shall become final and binding on all persons for all purposes.

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(d)     Supplemental Procedures for Review of Denial of Claims for Disability Pension Benefits. Effective for all claims filed on or after January 1, 2002, if a claim for Disability Pension Benefits is denied, in whole or in part, the Claimant shall have the right to request that the Plan Administrator review the denial, provided that he files a written request for review with the Plan Administrator within one hundred eighty (180) days after the date on which he received written notification of the denial.

In addition to the requirements for a review of a denial of a claim specified in subsection 11.3(c), a review of a denial of a claim for Disability Pension Benefits shall not afford deference to the initial adverse benefit determination and shall be conducted by an appropriate named fiduciary of the Plan who is neither the individual who made the adverse benefit determination that is the subject of the review, nor a subordinate of such individual.

In reviewing an adverse determination of a claim for disability Pension Benefits, that is based in whole or in part on a medical judgment, the Plan Administrator shall consult with a health care professional who has appropriate experience in the field of medicine involved in the medical judgment. The health care professional engaged for purposes of this consultation shall be an individual who is neither an individual who was consulted in connection with the initial adverse benefit determination that is the subject of the review, nor a subordinate of any such individual. In addition, the Plan Administrator shall provide the identification of medical or vocational experts whose advice was obtained on behalf of the Plan in connection with the Claimant’s adverse benefit determination, without regard to whether the advice was relied upon in making the benefit determination.

Within forty-five (45) days after a request for review is received, the review shall be made and the Plan Administrator shall advise the Claimant in writing of the decision on review, unless special circumstances require an extension of time for processing the review. If the Plan Administrator needs such an extension, the Plan Administrator shall furnish a written notice to the Claimant before the termination of the initial forty-five (45) day period. The written notice shall specify the reasons for the extension and when the review shall be completed (provided that such review shall be completed within ninety (90) days after the date on which the request for review was filed). The decision on review shall be forwarded to the Claimant in writing and shall include specific reasons for the decision and references to Plan provisions upon which the decision is based. A decision on review shall be final and binding on all persons for all purposes. If a Claimant shall fail to file a request for review according to the procedures herein outlined, such Claimant shall have no rights to review and shall have no right to bring action in any court, and the denial of the claim shall become final and binding on all persons for all purposes.

SECTION 12

Involuntary Early Retirement Pension

12.1  An individual shall be eligible to receive a supplemental “Involuntary Early Retirement Pension,” as provided below, if each of the following conditions are met: (a) on December 1, 1997, the individual, regardless of whether or not such individual is an Employee, is a salaried or hourly non-union common law employee at the Company’s Bentonville plant, excluding the Plant Manager, hereinafter referred to as “Early Retirement Member;” and (b) the Early Retirement Member’s termination of employment with the Company is not the result of (i) voluntary resignation, including acceptance of another position with the Company or any related company; or (ii) dismissal for cause as determined, in its discretion, by the Company.

12.2  An eligible Early Retirement Member shall receive the supplemental Involuntary Early Retirement Pension described in Section 12.4, commencing as of the Early Retirement Member’s Normal Retirement Date, subject to the conditions below.

12.3  Regardless of his actual years of service, each eligible Early Retirement Member under this Section 12 shall, as of December 1, 1997, be 100% vested in his entire accrued benefit, as determined under the Plan, including the Involuntary Early Retirement Pension.

12.4  The amount of the Involuntary Early Retirement Pension payable to an eligible Early Retirement Member at his Normal Retirement Date shall be determined in accordance with Section 12.4(a). The form of distribution with respect to the Involuntary Early Retirement Pension shall be determined in accordance with Section 12.4(b).

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(a)     The amount of the Involuntary Early Retirement Pension payable to an Early Retirement Member at his Normal Retirement Date shall be equal to his Single Sum Value converted to a single life annuity using, for conversion purposes, the 1983 Group Annuity Mortality table and the annual interest rate on thirty (30) year Treasury Bonds for the first full calendar month preceding the first day of the Plan Year during which benefits are to commence.

(b)     For purposes of Section 12.4(a), an Early Retirement Member’s “Single Sum Value” is equal to 1.0392 times the product of the Early Retirement Member’s Earnings Rate and the number of weeks for such Early Retirement Member as determined in Section 12.4(b)(ii).

(i)     “Earnings Rate” is (A) for an Early Retirement Member who is a salaried exempt employee, 23.1% of the Early Retirement Member’s monthly base salary without salary reductions; (B) for an Early Retirement Member who is a salaried non-exempt employee, his weekly base salary without salary reductions; or (C) for an Early Retirement Member who is an hourly employee, the Early Retirement Member’s hourly rate of pay as of December 1, 1997 multiplied by 40 hours.

(ii)     An Early Retirement Member’s number of weeks shall be (A) for an Early Retirement Member who is a salaried exempt employee, based on the following schedule counting continuous service since the Early Retirement Member’s most recent date of hire:

Full Years	Number
of Service	of Weeks
0-1	2
2	4
3	5
4	6
5	7
6	8
8	10
9	11
10	12
11	13
12	14
13	15
14	16
15	17
16	18
17	19
18	20
19	21
20	22
21	23
22	24
23	25
24	26
25	27

and (B) for an Early Retirement Member who is either a salaried non-exempt or an hourly employee, one week for each full year of continuous service since the Early Retirement Member’s most recent date of hire.

12.5  The normal form of distribution for a single Early Retirement Member shall be a single life annuity commencing on his Normal Retirement Date. The normal form of distribution for a married Early Retirement Member shall be a joint and 50% survivor benefit commencing on his Normal Retirement Date.

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In lieu of the normal form of distribution, a Member may elect, in accordance with applicable election procedures set forth in the Plan, to receive the Involuntary Early Retirement Pension in:

(a)     A cash single sum distribution of the Actuarial Equivalent of the Early Retirement Member’s Involuntary Early Retirement Pension determined as of the distribution date, in accordance with the mortality and interest rate assumptions specified in Section 12.4(a).

(b)     For a married Early Retirement Member, an immediate joint and 50% survivor annuity commencing on the first day of any month following December 1, 1997 and on or before the Member’s Normal Retirement Date, as elected by the Member, calculated by converting the value of the cash single sum distribution determined above to an immediate joint and 50% survivor annuity using the mortality and interest rate assumptions specified in Section 12.4(a); or (c) For a single Early Retirement Member or a married Early Retirement Member with his spouse’s consent, an immediate single life annuity commencing on the first day of any month following December 1, 1997 and on or before the Member’s Normal Retirement Date, as elected by the Member, calculated by converting the value of the cash single sum distribution determined above to an immediate annuity using the mortality and interest rate assumptions specified in Section 12.4(a). Notwithstanding the foregoing, if as of his termination of employment, (i) an Early Retirement Member is not entitled to any other benefit under the Plan in addition to his Involuntary Early Retirement Pension, and (ii) the amount determined under Section 12.5(a) is less than or equal to $5,000 then the Plan shall as soon as administratively feasible pay such single sum amount to the Early Retirement Member.

IN WITNESS WHEREOF, CTS Corporation has caused the CTS Corporation Salaried Employees’ Pension Plan to be executed by its proper officer duly authorized by its Board of Directors.

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EX-10

EXHIBIT (10)(u)

CTS CORPORATION

EXCESS BENEFIT RETIREMENT PLAN
As Adopted Effective July 1, 1996

CTS CORPORATION

EXCESS BENEFIT RETIREMENT PLAN

ARTICLE I

Purpose

        1.01 Purpose. It is the intention of CTS Corporation (the “Company”) to maintain appropriate levels of retirement benefits for employees of the Company or any of its subsidiaries who are entitled to benefits under the CTS Corporation Salaried Employees Pension Plan (the “Pension Plan”). Accordingly, the Company hereby establishes the CTS Corporation Excess Benefit Retirement Plan (the “Plan”). This Plan is intended to provide benefits to eligible persons in order to maintain the level of total retirement benefits which, but for the limitation on compensation which may be taken into account under the Internal Revenue Code of 1986, as amended, (the “Code”) would otherwise be payable under, or as a consequence of, the provisions of the Pension Plan.

        1.02 Effective Date. This Plan is effective as of July 1, 1996. However, in calculating the amounts described in Sections 3.01(a) and 3.01(b), amounts which accrued (or would have accrued) but for the Code limitations referred to in Section 3.01 prior to the Effective Date shall be taken into account.

ARTICLE II

Eligibility

        2.01 Persons Eligible to Receive Benefits. Every individual who is listed on Appendix A shall be eligible to receive a “Benefit” as described in Section 3.01. Each such individual shall be known as a “Member”.

        2.02 Beneficiary. Every individual who is eligible to receive a Benefit under the Pension Plan by reason of being the Beneficiary of another individual who was a Member under this Plan, shall be known as a “Beneficiary” and shall likewise be entitled to receive any Benefits which such Member was entitled under this Plan. The term “Beneficiary” shall include joint pensioners, heirs-at-law, legal representative, fiduciaries, and every other person (other than a Member) to whom Benefits may be distributed, as determined under the Pension Plan.

ARTICLE III

Benefits

        3.01 Amount of Benefit. The amount of the Benefit which a Member (or Beneficiary, if applicable) is eligible to receive under this Plan shall be equal to the excess of (a) over (b):

(a)  The amount of benefit which such Member would be entitled to receive under the Pension Plan if such benefit were computed without giving effect to the limitation then currently imposed by Code Section 401(a)(17) and regulations thereunder and without regard to the benefit accrual determined under Section 6.13 of the Pension Plan.

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(b)   The amount of benefit which such Member actually receives under the Pension Plan.

        3.02 Payment of Benefits. Payment of benefits shall be accomplished by means of unfunded payments directly from the Company. Distribution of any such benefits shall be made in the same manner and form and subject to the same conditions as the benefit provided by the Pension Plan.

ARTICLE IV

Authority of Committee

        4.01 Committee.  The Plan, as approved by the Board of Directors, shall be administered by the CTS Corporation Employee Benefits Committee (the "Committee");

        4.02 Authority of Committee. The Committee shall have authority to control, delegate and manage the operation and administration of the Plan, including all rights and powers necessary or convenient to the carrying out of its functions hereunder, whether or not such rights and powers are specifically enumerated herein.

        Without limiting the foregoing, and in addition to the other powers set forth in this Article IV, the Committee shall have the following express authorities:

(a)   To construe and interpret the Plan and determine the amount, manner and time of payment of any Benefits hereunder;

(b)   To prescribe procedures to be followed by Members or Beneficiaries filing any requests or applications in connection with Benefits hereunder;

(c)   To prepare and distribute, in such manner as the Committee determines to be appropriate, information explaining the Plan;

(d)   receive from the Company and from Members and Beneficiaries such information as shall be necessary for the proper administration of the Plan; and

(e)   To furnish the Company, upon request, such annual and other reports with respect to the administration of the Plan as are reasonable and appropriate.

        4.03 Disqualification of Committee Member. No member of the Committee shall vote upon any question or upon the exercise of any discretion under the Plan relating specifically to himself or his Beneficiaries.

        4.04 Records and Reports. The Committee shall take all such action as it deems necessary or appropriate to comply with any laws or regulations now or hereafter in existence relating to the maintenance of records, notifications or registrations.

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ARTICLE V

Amendment or Termination

        The Company intends the Plan to be permanent, but reserves the right, at any time, to modify, amend or terminate the Plan, provided, however, that no termination, amendment or modification of or to the Plan may, without written approval of a Member, reduce the total benefit payable under this Plan or the Pension Plan, assuming the Member retired, died or otherwise terminated employment as of the date of such termination, amendment or modification. Such amount shall constitute an irrevocable obligation of the Company. The Company hereby delegates to the Chief Executive Officer of the Company the authority to add, in the Officer’s sole discretion, individuals to Appendix A who become members of the Company’s senior management after the Effective Date of the Plan.

        Notwithstanding any other provision of this Plan, upon a Change in Control, as defined in Appendix B to this Plan, all benefits hereunder will immediately become fully vested and payable to the Members or Beneficiaries, as the case may be.

ARTICLE VI

Miscellaneous

        6.01 No Guarantee of Employment. Neither the creation of this Plan nor anything contained herein shall be construed (a) to give any Member the right to remain in the employ of the Company or any of its subsidiaries, (b) to give any Member or Beneficiary any benefits not specifically provided by the Plan, or (c) to modify, in any manner, the right of the Company or any of its subsidiaries to modify, amend, or terminate any of its employee benefit plans.

        6.02 Rights of Participants and Beneficiaries. Payment of Benefits to which any Member or Beneficiary is entitled shall be made only to such Member or Beneficiary. The expectation of such Benefits shall not be assignable by Member or Beneficiaries or by operation of law, or be subject to reduction for the debts or defaults of such Members or Beneficiaries whether to the Company or to others, or be subject to execution or attachment. The preceding sentence shall not apply to portions of Benefits applied at the direction of the person eligible to receive such Benefits to the payment of premiums on life or health insurance provided under any Company program, or to the withholding of federal income taxes.

        6.03 No Requirement to Fund. No provisions in the Plan, either directly or indirectly, shall be construed to require the Company to reserve, or otherwise set aside, funds for the payment of benefits hereunder.

        6.04 Controlling Law. To the extent not preempted by the laws of the United States of America, the laws of the State of Indiana shall be the controlling state law in all matters relating to the Plan and shall apply.

        6.05 Severability. If any provisions of the Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts of the Plan; and the Plan shall be construed and enforced as if said illegal and invalid provisions had never been included herein.

        6.06 Provisions of Pension Plan Unchanged. Any benefit payable under the Pension Plan shall be paid solely in accordance with the terms and provisions of the Pension Plan; and nothing in the Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Pension Plan.

        6.07 Nature of Payments. Any benefits provided hereunder shall constitute nonqualified deferred compensation payments to the Member and shall not be taken into account in computing the amount of salary or compensation of the Member for the purposes of determining any pension, retirement, death or other benefits under (a) any pension, retirement, profit-sharing, bonus, life insurance or other employee benefit plan of the Company or any of its subsidiaries or (b) any agreement between the Company or any subsidiary and the Member except as such plan or agreement shall otherwise expressly provide.

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        6.08 Gender and Number. Masculine gender shall include the feminine; and the singular shall include the plural, unless the context clearly indicated otherwise.

        IN WITNESS WHEREOF, CTS Corporation has caused the CTS Corporation Excess Benefit Retirement Plan to be executed by its proper officer duly authorized by its Board of Directors.

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EX-13

EXHIBIT (13)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (2000-2002)

CTS’ Management’s Discussion and Analysis is based on its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. CTS evaluates its estimates on an ongoing basis, based on historical experience and other assumptions believed to be relevant under the circumstances. Actual results may differ, perhaps materially, from the estimates under different assumptions or conditions.

At the beginning of the fourth quarter of 2002, the Company renamed the reportable business segments and realigned the product lines included in each segment to reflect changes in its organizational structure and the manner that results are evaluated and resources allocated by the chief operating decision maker. All segment data included in this Management’s Discussion and Analysis reflects the reportable business segments adopted in 2002. CTS has two reportable business segments: 1) Components and Sensors and 2) Electronics Manufacturing Services (EMS).

CTS is a global manufacturer of components and sensors and a supplier of electronics manufacturing services to the automotive, communications and computer markets. The communications and computer markets are characterized by rapid technological change and frequent new product introductions and enhancements. These characteristics, along with global economic conditions, are risks that require management judgement when determining appropriate accounting decisions.

Critical Accounting Policies

Management believes that judgement and estimates related to the following critical accounting policies could materially affect its consolidated financial statements:

Estimating inventory valuation, the allowance for doubtful accounts and other accrued liabilities

CTS management makes estimates of the carrying value of its inventory based upon historical usage, new product introductions and projected customer purchase levels. The ever-changing technology environment of the markets we serve affects these estimates. Similarly, management makes estimates of the collectability of its accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Finally, CTS is involved in litigation in the normal course of business and is regulated under a number of environmental and safety laws. Accruals for known exposures are established based on management’s best estimate after considering the advice of legal counsel.

Valuation of long-lived and intangible assets and depreciation/amortization periods

CTS assesses the carrying value of long-lived and intangible assets and the remaining useful lives whenever events or changes in circumstances indicate the carrying value may not be recoverable or the estimated useful life may no longer be appropriate. Factors considered important which could trigger this review include significant decreases in operating results, significant changes in its use of the assets, competitive factors and the strategy of its business, and significant negative industry or economic trends. The Company cannot predict the occurrence of future impairment-triggering events nor the impact such events might have on the reported asset values. Such events may include strategic decisions made in response to the economic conditions relative to product lines, operations and the impact of the economic environment on our customer base.

When the Company determines that the carrying value of long-lived and intangible assets may not be recoverable based on an assessment of future undiscounted cash flows from the use of assets, an impairment charge to record the assets at fair value may be recorded. Impairment is measured based on fair values utilizing estimated discounted cash flows, published third party sources, third party offers and information furnished by third party brokers/dealers.

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Most assets identified for impairment are taken out of service and held for sale. In those instances where impaired assets remain in service, it generally is the result of a significant reduction in the estimated remaining useful life of the asset. The Company routinely reviews all assets held for sale and adjusts the carrying value as required. CTS is taking measures it considers appropriate to sell these assets at amounts approximating the recorded fair values; however, there are no assurances that CTS will be able to sell the assets for these amounts.

Income Taxes

Deferred tax assets and liabilities are determined based on the difference between the financial statement and income tax bases of assets and liabilities and carryforwards using currently enacted tax rates. CTS must also estimate its current tax exposure for situations where taxing authorities would assert tax positions different than those taken by the Company. Such reserves are routinely reviewed and adjusted when required to reflect changes in estimates based on factors such as changes in tax laws, results of tax authority reviews and statutory limitations. CTS estimates its income tax valuation allowance by assessing which deferred tax assets are more likely than not to be recovered in the future. The valuation allowance is based on CTS’ estimates of taxable income in each jurisdiction in which it operates and the period over which the deferred tax assets will be recoverable.

No valuation allowance was recorded in 2002 related to the U.S. net operating loss carryforwards of $102 million expiring in 2021 - 2022. The Company assessed the future realization of these deferred tax assets utilizing taxable income projections for the years 2003 through 2007. Those projections applied taxable income estimates consistent with historical earnings patterns of its traditional automotive and electronic component product lines and a return to levels of profitability in its communications components product lines consistent with management and independent consensus views of the moderate recovery expected in the markets served by CTS. The projections resulted in the net operating losses being utilized no later than 2007. Management believes that, based upon the historical operating performance of its business units and the successful cost reduction efforts, the Company more likely than not, will realize the benefits from its U.S. net operating loss carryforwards.

In the event that actual results differ from these estimates in future periods, CTS may need to establish an additional valuation allowance or reduce the valuation allowance, which could materially impact the results of operations and financial position.

Retirement Plans

Actuarial assumptions are used in determining pension income and expense and the pension benefit obligation. CTS, after considering the recommendations of its actuaries, assumes a discount rate, expected rate of return on plan assets and a rate of compensation increase in determining its annual pension income and expense and the projected benefit obligation. Experience gains/losses arising from any variance between the expected rate of return of fund assets and the actual results are amortized over periods ranging from 6 to 15 years. During the fourth quarter of each year, CTS reviews its actuarial assumptions in light of current economic factors to determine if the assumptions need to be adjusted. Changes in the actuarial assumptions could have a material affect on CTS’ results of operations in future years.

In December 2002, CTS changed its actuarial assumptions related to employee pension plans as noted below:

Assumption	December 31, 2002			December 31, 2001
Discount rate		6.75	%		7.25	%
Expected rate of return		9.00	%		9.75	%
Rate of compensation increase		4%-6	%		5%-7	%

The impact of these changes, combined with the lower pension asset balance at the end of 2002, will reduce 2003 projected pension income by approximately $4-6 million.

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Results of Operations

Overview

During 2002, the global economic slowdown continued to impact the markets we serve as evidenced by a 21% decline in annual revenues. Our industry was affected by the continued general economic recession in both soft consumer and business spending. The continued drop in information and communication-related technology spending and lagging effects of the lack of consumer confidence and spending from the depressed economy also contributed to the decline. We aggressively implemented cost reduction actions throughout the year including restructuring actions during the third quarter. The cost reductions and restructuring actions resulted in operational improvements, organizational realignments and product line rationalization. As a result, over the last three quarters, we improved quarter over quarter earnings performance and our annual sales breakeven continued to drop. Our priority continues to be positioning the Company to be successful as the economy recovers and market growth returns.

Certain of our product lines, particularly those focused on the communications market, including personal handsets and the infrastructure products that support wireless technologies, experienced decreases in demand levels. Other product lines, such as those serving the automotive market did not experience such dramatic declines in customer buying patterns. However, we believe negative general economic conditions made OEMs and our other customers generally more cautious in 2002, often delaying new product introduction, as they worked to reduce excess inventory levels.

Business Segment Discussion

	(In thousands of dollars)
				Electronics
	Components			Manufacturing
	& Sensors			Services
2002
Sales	$	270,919		$	186,885
Segment operating earnings (loss) (1)		(5,927	)		10,790
% of segment sales (1)		(2.2	)%		5.8	%
2001
Sales	$	366,096		$	211,558
Segment operating earnings (loss) (2)		(8,231	)		10,457
% of segment sales (2)		(2.2	)%		4.9	%
2000
Sales	$	626,288		$	240,235
Segment operating earnings		108,171			20,459
% to segment sales		17.3	%		8.5	%

(1)	Excludes restructuring and asset impairment charges of $18.3 million pre-tax, and related one-time charges of $1.3 million pre-tax. Refer also to Note I, “Business Segments.”
(2)	Excludes restructuring and asset impairment charges of $40.0 million pre-tax, and related one-time charges of $10.7 million pre-tax. Refer also to Note I, “Business Segments.”

The 2002 Components and Sensors business segment sales decreased by $95.2 million, or 26%, from 2001. The decrease was due to weak economic conditions in the markets served by CTS, primarily for handset devices in the communications market. Segment operating loss improved by $2.3 million from 2001 primarily due to the positive impact of reduced operating expenses.

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The 2002 EMS business segment sales decreased $24.7 million, or 12%, from 2001 primarily due to softness in the communications infrastructure market. Segment operating earnings increased by $0.3 million, driven primarily through reduced operating expenses.

The 2001 Components and Sensors business segment sales decreased by $260.2 million, or 42%, from 2000; segment operating earnings decreased by $116.4 million from 2000 primarily due to reduced customer demand for hand-held wireless devices. End-product demand for the Company’s components and sensors products which address the served markets of computer, automotive and the infrastructure segment of the communications market also decreased during 2001, though to a lesser degree. The Company believes the overall causes of the lower end-product demand were primarily due to the recessionary market conditions and excess levels of inventory held by customers.

The 2001 EMS business segment sales decreased $28.7 million, or 12%, from 2000; while the segment operating earnings decreased $10.0 million from 2000. These decreases were driven by the substantial reduction in the capital budgets of companies that use computer and communications equipment.

The following tables provide a breakdown of net sales by business segment and market in dollars and as a percent of consolidated net sales:

		Components
		& Sensors									EMS									Total
(Net sales $ in millions)		2002			2001			2000			2002			2001			2000			2002			2001			2000
	Markets
Automotive		$	115.9		$	114.3		$	131.3		$	—		$	—		$	—		$	115.9		$	114.3		$	131.3
Communications			112.7			196.8			391.1			28.2			51.8			60.9			140.9			248.6			452.0
Computer			16.9			22.8			51.4			156.1			156.6			176.7			173.0			179.4			228.1
Other			25.4			32.2			52.5			2.6			3.2			2.6			28.0			35.4			55.1
Consolidated net sales		$	270.9		$	366.1		$	626.3		$	186.9		$	211.6		$	240.2		$	457.8		$	577.7		$	866.5
		Components
		& Sensors									EMS									Total
(As a % of consolidated net sales)		2002			2001			2000			2002			2001			2000			2002			2001			2000
Markets
Automotive			25	%		20	%		15	%		—			—			—			25	%		20	%		15	%
Communications			25	%		34	%		45	%		6	%		9	%		7	%		31	%		43	%		52	%
Computer			4	%		4	%		6	%		34	%		27	%		21	%		38	%		31	%		27	%
Other			5	%		5	%		6	%		1	%		1	%		—			6	%		6	%		6	%
Net sales by segment as a % of consolidated net sales			59	%		63	%		72	%		41	%		37	%		28	%		100	%		100	%		100	%

Within the Components and Sensors business segment, sales into the automotive market increased in terms of percent of net sales, and sales slightly increased in 2002, benefited by automotive incentives offered to customers. Sales of components and sensors over the three year period into the communications market declined primarily due to downward pricing pressure caused by industry-wide excess manufacturing capacity, particularly for components used in hand-held devices, and reduced end-customer demand for hand-held wireless devices and related infrastructure systems. Sales declines of components into the computer market were driven primarily by reduced demand for computing infrastructure products and the impact of above average price reductions.

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Within the EMS segment, sales into the communications market decreased over the three-year period, resulting from lower demand for integrated systems for infrastructure equipment. EMS sales into the computer market decreased over the three-year period, although 2002 sales have stabilized and were essentially flat from 2001. The EMS sales decrease from 2000 to 2001 resulted from a decrease in the demand for integrated interconnect systems for mass data storage systems, internet access systems and network servers.

Most Recent Three Fiscal Years Discussion

The following table highlights significant information with regard to CTS’ overall results of operations during the past three fiscal years:

	(In thousands of dollars)
	December 31,
	2002			2001			2000
Net sales	$	457,804		$	577,654		$	866,523
Cost of goods sold, excluding one-time charges		365,486			455,687			605,598
Cost of goods sold, one-time charges(1)		1,289			10,676			—
Gross margin		91,029			111,291			260,925
Gross margin as a percent of sales		19.9	%		19.3	%		30.1	%
Operating expenses		87,455			119,741			132,295
Restructuring and impairment charges		18,343			40,039			—
Operating earnings (loss)		(14,769	)		(48,489	)		128,630
Interest expense		10,240			12,775			13,050
Other income		813			29			701
Earnings (loss) before income taxes		(23,800	)		(60,491	)		117,127
Earnings (loss) from continuing operations		(17,850	)		(45,375	)		84,331
Net loss from discontinued operations		—			—			(529	)
Net earnings (loss)	$	(17,850	)	$	(45,375	)	$	83,802

⁽¹⁾ Cost of goods sold, one-time charges, includes restructuring-related one-time charges consisting primarily of inventory write downs, equipment relocations and other employee-related costs.

The 2002 net sales decreased $119.9 million, or 21%, from 2001. Of this decrease, $95.2 million resulted primarily from weak demand for components serving communications and computer markets, offset by automotive market sales. In addition, $24.7 million of the decrease is due to softness in the demand for EMS products for the communications markets.

The 2001 net sales decreased $288.9 million, or 33%, from 2000. Of this decrease, approximately $260.2 million resulted primarily from overall softness in the demand for components for wireless handsets, the associated infrastructure equipment serving the communications market, and automotive market. In addition, $28.7 million of the decrease is due to lower demand for EMS products serving both the computer and communications markets.

CTS’ 15 largest customers represented approximately 73% of net sales in 2002 and 75% of net sales in 2001 and 2000. Sales to Hewlett-Packard, which acquired Compaq in May 2002, accounted for 33% of net sales in 2002. Sales to Compaq accounted for 28% of net sales in 2001 and 21% in 2000. Sales to Motorola accounted for 12% of net sales in 2002, 17% in 2001 and 21% in 2000.

CTS’ products are usually priced with consideration to expected or required profit margins, customer expectations and market competition. Pricing for most of CTS’ components and sensors and EMS products generally decreases over time and also fluctuates in accordance with total industry utilization of manufacturing capacity. During 2002 and 2001, pricing pressure for some of CTS’ components products, particularly components utilized in communications, was more significant than in prior periods due to excess capacity within the electronics industry.

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In 2002, gross margin decreased by $20.3 million from 2001 primarily due to unfavorable pricing and product mix of $34.7 million, favorably offset by lower restructuring-related one-time charges of $9.4 million and $5.0 million of other favorable changes primarily due to the 2001 and 2002 restructuring actions (refer to Note B, “Restructuring and Impairment Charges”). The 2002 gross margin includes $1.3 million in restructuring-related one-time charges, consisting primarily of equipment relocation and other employee-related costs. The 2001 gross margin includes $10.7 million of restructuring-related one-time charges consisting primarily of inventory write downs, equipment relocation and other employee-related costs. In 2001, gross margin decreased by $149.6 million from 2000 primarily due to $74.3 million unfavorable pricing and mix, $57.9 million of volume reductions, and $10.7 million related to higher restructuring-related one-time charges.

Selling, general and administrative expenses decreased to $63.3 million in 2002 versus $87.0 million in 2001, reflecting Company initiatives to reduce costs in the face of declining sales. This compares to $99.7 million in 2000.

Research and development expenses were $24.1 million in 2002 versus $32.8 million in 2001 and $32.6 million in 2000. The reduction reflects savings due to organizational consolidation of certain products. Significant ongoing research and development activities continue in our Components and Sensors business segment to support current product and process enhancements, expanded applications and new product development. Research and development expenditures in the EMS business segment are typically much lower.

Interest expense decreased $2.5 million in 2002 as compared to 2001 primarily due to lower average outstanding debt balances during 2002. Other income increased by $0.8 million primarily due to foreign currency transaction gains.

Restructuring, Asset Impairment and Related One-Time Charges

In the third quarter of 2002, CTS recorded $18.3 million of pre-tax restructuring and impairment charges. The restructuring and impairment charges were incurred in order to effect operational improvements and related organizational realignments primarily in the Components and Sensors business segment. CTS followed the provisions of Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity,” when accounting for these restructuring actions.

Significant actions under the 2002 restructuring plan include operational improvements and organizational realignments involving the relocation of certain manufacturing operations from a leased facility to a CTS-owned facility in Tianjin, China; the relocation of engineering and design activities from a leased engineering and design facility in Chung-Li, Taiwan to other CTS-owned facilities; and the transfer of certain production processes from CTS’ Albuquerque, New Mexico facility to its Tianjin, China facility. Additionally, the charges reflect CTS’ decision to terminate all design activities related to new custom variations for Voltage Controlled Oscillators (VCO) and 9x11mm and 5x7mm Temperature Compensated Crystal Oscillators (TCXO). CTS will continue to manufacture existing designs of these products to satisfy current customer requirements. CTS completed substantially all of these restructuring actions by the end of 2002.

The following table displays the 2002 restructuring activity for actions initiated in 2002:

													Total
													Restruct-
				Other		Total			Asset		Pension		uring and
	Workforce			Exit		Restruct-			Impair-		Curtail-		Asset
($ in millions)	Reductions			Costs		uring			ment		ment Loss		Impairment
2002 Charge	$	4.6		$	0.4	$	5.0		$	12.5	$	0.8	$	18.3
Items paid or utilized in 2002		(3.4	)		—		(3.4	)
Accrual balance at December 31, 2002	$	1.2		$	0.4	$	1.6

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The restructuring charge of $5.0 million recorded in the third quarter of 2002 relates primarily to organizational realignment in the Components and Sensors business segment, and reductions in support staff for the design of new custom variations of certain VCO and TCXO product lines. Included in this amount is $4.6 million of severance costs associated with the separation of approximately 300 employees, of which approximately 250 employees had been severed as of December 31, 2002. Approximately 67% of the employees severed were salary and indirect employees and 33% were hourly production employees.

The 2002 restructuring plan also includes $12.5 million of asset impairment charges. Approximately $9.8 million of the impairment charge is the adjustment needed to recognize impairments resulting from the reduction in the remaining useful lives of certain manufacturing equipment following the decision to terminate the design of new custom variations of certain VCO and TCXO product lines. CTS will continue to manufacture existing designs of these products to satisfy current customer requirements. Approximately $2.1 million of the impairment charge relates to the write-off of leasehold improvements at its engineering and design facility in Taiwan and at its manufacturing facility in China. Approximately $0.2 million relates to impairment of certain intangible assets acquired in the 1999 acquisition of the Component Products Division of Motorola. The remaining $0.4 million impairment charge relates to adjustments to the estimated fair value of certain assets held for sale.

CTS also recognized a pension plan curtailment loss of approximately $0.8 million in 2002, resulting from reduced employment levels as a result of the restructuring activities.

The expected 2003 pre-tax profitability improvement associated with the 2002 restructuring and asset impairment charges is estimated to be approximately $17 million.

In 2001, CTS recorded $40.0 million of pre-tax restructuring and impairment charges, $14.0 million in the second quarter and $26.0 million in the fourth quarter. Plan actions were designed to permit the Company to operate more efficiently in the then-existing environment and, at the same time, position the Company for success when the economy improves. Major actions under the restructuring plan included closing its Chung-Li, Taiwan, manufacturing facility in the fourth quarter of 2001 and a decision to dispose of its Longtan, Taiwan, building. The plan also covered ceasing production at its Sandwich, Illinois; and Carlisle, Pennsylvania, facilities in 2002 and discontinuing the manufacture of intermediate frequency surface acoustical wave (IF SAW) filters. IF SAW filter production was stopped at the end of the second quarter of 2001. Amounts included in the Consolidated Statement of Earnings (Loss) relating to the manufacture of IF SAW filters were insignificant in 2001. The restructuring plan provided that production formerly completed at its Chung-Li, Taiwan; Sandwich, Illinois; and Carlisle, Pennsylvania, facilities be transferred to other existing CTS manufacturing locations. CTS has completed these consolidations and transfers in fiscal 2002.

The following table displays the restructuring activity for actions initiated in 2001:

															Total
															Restruct-
				Other			Total			Asset		Pension			uring and
	Workforce			Exit			Restruct-			Impair-		Curtail-			Asset
($ in millions)	Reductions			Costs			uring			ment		ment Gain			Impairment
Second quarter charge	$	6.4		$	2.0		$	8.4		$	7.4	$	(1.8	)	$	14.0
Fourth quarter charge		3.2			0.4			3.6			23.6		(1.2	)		26.0
Total 2001 re-structuring charge		9.6			2.4			12.0		$	31.0	$	(3.0	)	$	40.0
Items paid or utilized in 2001		(6.8	)		(1.4	)		(8.2	)
Items paid or utilized in 2002		(2.8	)		(1.0	)		(3.8	)
Reserve balance at December 31, 2002	$	—		$	—		$	—

7

The restructuring charge recorded in 2001 included $12.0 million related to facility consolidations, including plant closures and product consolidations. Included in this amount is approximately $9.6 million of severance benefits associated with the separation of approximately 1,500 employees. Approximately 12% of the employees terminated were salary and indirect employees and 88% were hourly production employees. The $2.4 million of other exit costs consisted primarily of costs associated with the closing of the plants.

The restructuring plan also included $31.0 million of asset impairment charges. Approximately $26.9 million of the impairment charge was the adjustment needed to reduce certain assets held for sale to their estimated fair value. An additional $1.2 million related to the write-off of leasehold improvements, primarily at its Chung-Li, Taiwan, manufacturing facility. The remaining $2.9 million related to impairment of certain intangible assets associated with obsolete products and technology acquired in the 1999 acquisition of the Component Products Division of Motorola.

CTS also recognized pension plan curtailment gains of approximately $3.0 million in 2001 resulting from plant closures under the restructuring plan.

Also during 2002 and 2001, CTS recorded in cost of sales, $1.3 million and $10.7 million, respectively, of restructuring-related, one-time charges, consisting primarily of inventory write downs, equipment relocation and other employee-related costs.

The expected 2002 pre-tax profitability improvement associated with the 2001 restructuring, asset impairment and related one-time charges was estimated to be approximately $20 million based on volume levels and mix in the fourth quarter of 2000. However, based on the expected lower 2002 volumes, the 2002 pre-tax profitability estimate was reduced to approximately $15 million in the first quarter of 2002. The 2002 actual pre-tax savings were approximately $15 million.

Liquidity and Capital Resources

Net cash provided by operating activities in 2002 was $22.4 million, as CTS’ net loss of $17.9 million, adjusted for depreciation and amortization, restructuring and impairment charges and deferred income taxes, provided $33.0 million. Favorable working capital was offset by other changes for a use of $10.6 million.

Net cash provided by operating activities in 2001 was $65.9 million, as CTS’ net loss of $45.4 million, adjusted for depreciation and amortization, restructuring and impairment charges and deferred income taxes, provided $20.2 million. Favorable working capital and other changes added $45.7 million.

The 2002 cash used in investing activities was $10.0 million. This consisted primarily of $12.8 million of capital expenditures for new products, including automotive’s belt tension sensor and ClearONE™ components and investments in cost reduction programs. During 2002, the Company sold assets held for sale of $1.6 million and other fixed assets for $1.3 million.

The 2001 use of $66.9 million for investing activities consisted primarily of $77.7 million of capital expenditures, including approximately $37.6 million for new products, technologies and selected capacity expansion, and $40.1 million for land and building projects primarily in Asia. During 2001, certain manufacturing equipment and the Company aircraft were sold for $15.5 million. These proceeds were used to reduce outstanding indebtedness. These same assets were subsequently leased back by the Company.

CTS expects its 2003 capital expenditures to be less than $20 million. These capital expenditures will primarily support new products and investments in cost reduction programs.

In 2002, CTS’ net cash used by financing activities totaled $18.2 million, consisting primarily of an increase in borrowings of $26.1 million, representing the issuance of $25 million of five-year, 6.5% convertible, subordinated debentures, and issuance of common stock of $42.7 million. This was offset by the repayment of long-term obligations of $83.2 million and dividend payments of $3.9 million.

8

In 2001, CTS’ net cash used by financing activities totaled $6.3 million, consisting primarily of an increase in borrowings of $34.0 million under the revolving credit facility, net proceeds of 1.8 million shares issued to an institutional investor for $25.8 million, and proceeds of stock option exercises of $10.7 million. This was offset by the repayment of long-term obligations of $69.5 million, repayment of short-term borrowings of $7.4 million and dividend payments of $3.4 million.

Undistributed earnings of certain non-U.S. subsidiaries amounted to approximately $168 million at December 31, 2002. Prior year earnings are intended to be invested indefinitely and, accordingly, no provision has been made for non-U.S. withholding taxes. In the event all undistributed earnings were remitted, approximately $8 million of withholding tax would be imposed.

In 1999, CTS acquired certain assets and liabilities of the Component Products Division of Motorola. The acquisition was accounted for under the purchase method of accounting. As part of the purchase agreement, CTS may be obligated to pay additional amounts. No amounts were due to Motorola in 2003 for 2002 under the agreement. CTS does not expect to make a material payment under this agreement in 2004 for 2003, the final year. The maximum remaining potential payment under the acquisition agreement was $17.4 million at December 31, 2002.

In October 2002, CTS amended its credit agreement with its existing nine banks. The agreement consists of a revolving credit facility commitment totaling $85 million which expires in December 2003. CTS will likely refinance some portion of its expiring credit agreement with a new agreement in 2003.

The credit agreement contains financial covenants as described in Note E, “Debt,” to the consolidated financial statements. The covenants under the credit agreement become more restrictive at quarterly intervals, as CTS’ forecasted earnings before interest, taxes, depreciation and amortization and projected debt repayments reduce CTS’ need for additional borrowings under the credit agreement. While CTS management currently expects to be in compliance with all financial covenants through December 31, 2003, there can be no assurance of this since certain factors, such as forecasted future operating results, are dependent upon events, some of which are beyond CTS’ ability to control. If CTS is unable to comply with the financial covenants, it will seek to obtain amendments or waivers from the lenders and/or identify other sources of liquidity such as raising additional capital and/or the sale of certain assets, including assets held for sale.

In April 2002, the Company issued $25 million of five-year, 6.5% convertible, subordinated debentures. These debentures are unsecured and convert into CTS common stock at a conversion price of $20.05 per share. At any time after the three-year anniversary of the issue date, the purchasers may accelerate the maturity of the debentures. CTS also has the right after such three-year anniversary and under certain circumstances, to force conversion of the debentures into common stock. CTS used the net proceeds from the offering to repay the outstanding term loans in full under its then-existing credit facility, and the balance was applied to its revolving credit facility.

On December 14, 1999, CTS’ shelf registration statement on Form S-3 was declared effective by the Securities and Exchange Commission. CTS could initially offer up to $500.0 million in any combination of debt securities, common stock, preferred stock or warrants under the registration statement.

During 2002, CTS issued $28.2 million of common stock under this registration statement and received net proceeds of $28.1 million. CTS used the net proceeds of these equity issuances to repay term loans under its credit agreement. As of December 31, 2002, CTS could offer up to $445.8 million of additional debt and/or equity securities under this registration statement.

On November 13, 2001, CTS’ Form S-3 registration statement registering two million shares of CTS common stock to be issued under CTS’ Direct Stock Purchase Plan was declared effective by the Securities and Exchange Commission. During 2002, CTS issued $14.6 million of common stock under this registration statement. CTS used the net proceeds of these equity issuances to repay term and revolving loans under its credit agreement and for working capital. As of December 31, 2002, CTS could issue up to approximately 595,000 additional shares of common stock under this registration statement.

9

The following table sets forth the aggregate maturities of long-term debt (including the revolving credit facility of $28.4 million) and operating leases for the five years subsequent to December 31, 2002:

	(In millions of dollars)
	2003		2004		2005		2006		2007		Thereafter		Total
Long-term debt	$	28.4	$	—	$	—	$	—	$	25.0	$	42.0	$	95.4
Operating leases		5.9		5.9		5.3		4.4		3.5		6.5		31.5
	$	34.3	$	5.9	$	5.3	$	4.4	$	28.5	$	48.5	$	126.9

CTS has historically been able to fund its capital and operating needs through its cash flows from operations and available credit under its bank credit facilities. CTS will likely refinance some portion of the $28.4 million long-term debt due in 2003 with a new agreement.

CTS believes that cash flows from operations and available borrowings under its revolving credit facility will be adequate to fund its working capital, capital expenditures and debt service requirements through December 31, 2003. However, if customer demand decreases significantly from forecasted levels or pricing pressures continue to reduce revenues or profit margins significantly, CTS may need to find an alternative funding source. In this event, CTS may choose to pursue additional equity and/or debt financing. CTS may not be able to obtain additional financing, which would be affected by general economic and market conditions, on terms acceptable to CTS or at all.

Market Risk

CTS is exposed to market risk, including changes in foreign currency exchange rates and interest rates. As discussed in Note A, “Summary of Significant Accounting Policies” to the consolidated financial statements, the financial statements of all CTS’ non-U.S. subsidiaries, except the United Kingdom subsidiary, are remeasured into U.S. dollars using the U.S. dollar as the functional currency. The market risk associated with foreign currency exchange rates is not material in relation to CTS’ consolidated financial position, results of operations or cash flows. The Company does not have any significant trade accounts receivable, trade accounts payable, commitments, or borrowings in a currency other than that of the reporting unit’s functional currency. As such, CTS does not utilize a significant number of derivative financial instruments to manage the exposure in the United Kingdom or its other non-U.S. operations.

As part of CTS’ risk management program, CTS performs sensitivity analyses to assess potential gains and losses in earnings and changes in fair value relating to hypothetical movements in interest rates. A 61-basis-point increase in interest rates (approximately 10% of CTS’ weighted-average interest rate) on variable-rate debt instruments would have increased CTS’ 2002 and 2001 interest expense by $0.5 million and $1.1 million, respectively, and would have an immaterial effect on the fair value of the debt instruments as of the end of such fiscal years.

# # # # # # #

Statements about the Company’s earnings outlook and its plans, estimates and beliefs concerning the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations. Actual results may differ materially from those reflected in the forward-looking statements due to a variety of factors which could affect the Company’s operating results, liquidity and financial condition. We undertake no obligations to publicly update or revise any forward-looking statements. Factors that could impact future results include among others: the general market conditions in the automotive, communications and computer markets, and in the overall economy; reliance on key customers; whether the Company is able to implement measures to improve its financial condition and flexibility; pricing pressures and demand for the Company’s products, especially if economic conditions worsen or do not recover in the key markets for the Company’s products; and risks associated with our international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks.

10

Consolidated Statements of Earnings (Loss)
(In thousands of dollars except per share amounts)

			Year Ended December 31,
			2002			2001			2000
Net sales			$	457,804		$	577,654		$	866,523
Costs and expenses:
	Cost of goods sold			366,775			466,363			605,598
	Selling, general and administrative expenses			63,337			86,979			99,712
	Research and development expenses			24,118			32,762			32,583
	Restructuring and impairment charges — Note B			18,343			40,039			—
		Operating earnings (loss)		(14,769	)		(48,489	)		128,630
Other (expense) income:
	Interest expense			(10,240	)		(12,775	)		(13,050	)
	Interest income			396			744			846
	Other			813			29			701
		Total other expense		(9,031	)		(12,002	)		(11,503	)
		Earnings (loss) before income taxes		(23,800	)		(60,491	)		117,127
Income tax expense (benefit) — Note H				(5,950	)		(15,116	)		32,796
		Earnings (loss) from continuing operations		(17,850	)		(45,375	)		84,331
Discontinued operations:
	Loss from discontinued operations, net of income tax benefit of $355			—			—			(529	)
		Net earnings (loss)	$	(17,850	)	$	(45,375	)	$	83,802
Earnings (loss) per share — Note N
	Basic:
		Continuing operations	$	(0.54	)	$	(1.61	)	$	3.05
		Discontinued operations		—			—			(0.02	)
		Net earnings (loss) per share	$	(0.54	)	$	(1.61	)	$	3.03
	Diluted:
		Continuing operations	$	(0.54	)	$	(1.61	)	$	2.94
		Discontinued operations		—			—			(0.02	)
		Net earnings (loss) per share	$	(0.54	)	$	(1.61	)	$	2.92

The accompanying notes are an integral part of the consolidated financial statements.

CTS CORPORATION

11

Consolidated Balance Sheets
(In thousands of dollars)

				December 31,
				2002			2001
ASSETS
Current Assets
	Cash and equivalents			$	9,225		$	13,255
	Accounts receivable, less allowances (2002 — $1,694; 2001 — $1,470)				63,802			81,563
	Inventories
		Finished goods			15,630			19,660
		Work-in-process			8,346			8,747
		Raw materials			12,286			21,742
			Total inventories		36,262			50,149
	Other current assets				7,212			4,371
	Deferred income taxes — Note H				35,833			51,336
			Total current assets		152,334			200,674
Property, Plant and Equipment
	Buildings and land				112,243			111,346
	Machinery and equipment				287,819			287,824
			Total property, plant and equipment		400,062			399,170
	Accumulated depreciation				(251,430	)		(207,212	)
			Net property, plant and equipment		148,632			191,958
Other Assets
	Prepaid pension asset — Note G				120,277			102,196
	Intangible assets, net — Note C				39,923			44,004
	Assets held for sale — Note D				23,135			21,940
	Other				5,731			7,159
			Total other assets		189,066			175,299
Total Assets				$	490,032		$	567,931
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Current maturities of long-term debt — Note E			$	28,350		$	27,500
	Accounts payable				44,490			50,842
	Accrued salaries, wages and vacation				7,608			12,847
	Income taxes payable				23,517			23,921
	Other accrued liabilities				30,591			38,747
			Total current liabilities		134,556			153,857
Long-term debt — Note E					67,000			125,013
Other long-term obligations — Note G					11,501			7,274
Deferred income taxes — Note H					11,955			38,914
Contingencies — Note L					—			—
Shareholders’ Equity
	Preferred stock — authorized 25,000,000 shares without par value; none issued — Note J				—			—
	Common stock — authorized 75,000,000 shares without par value; 50,718,883 shares issued at December 31, 2002 and 48,531,936 shares issued at December 31, 2001 — Note J				241,393			213,947
	Additional contributed capital				23,514			24,153
	Retained earnings				255,085			276,988
	Accumulated other comprehensive loss				(835	)		(1,702	)
					519,157			513,386
			Cost of common stock held in treasury (2002 — 16,618,373 shares; 2001 —17,630,192 shares) — Note K		(254,137	)		(270,513	)
			Total shareholders’ equity		265,020			242,873
Total Liabilities and Shareholders’ Equity				$	490,032		$	567,931

The accompanying notes are an integral part of the consolidated financial statements.

CTS CORPORATION

12

Consolidated Statements of Cash Flows
(In thousands of dollars)

					Year Ended December 31,
					2002			2001			2000
Cash flows from operating activities:
	Net earnings (loss)				$	(17,850	)	$	(45,375	)	$	83,802
	Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
		Depreciation and amortization				43,373			51,674			44,325
		Restructuring and impairment charges				18,343			40,039			—
		Deferred income taxes				(10,802	)		(26,201	)		3,077
		Income tax benefit related to exercised stock options				—			3,687			6,395
		Changes in assets and liabilities:
			Accounts receivable			17,761			64,357			(21,238	)
			Inventories			13,887			44,780			(26,278	)
			Prepaid pension asset			(14,803	)		(14,937	)		(15,311	)
			Accounts payable and accrued liabilities			(24,767	)		(62,275	)		30,505
			Income taxes payable			(404	)		5,547			6,187
		Net loss from discontinued operations				—			—			529
		Other				(2,289	)		4,556			(1,456	)
			Total adjustments			40,299			111,227			26,735
				Net cash provided by continuing operations		22,449			65,852			110,537
			Net cash provided by discontinued operations			—			—			318
				Net cash provided by operating activities		22,449			65,852			110,855
Cash flows from investing activities:
	Proceeds from sale of assets					2,954			15,499			7,000
	Payment for purchase of CTS Wireless					—			—			(11,200	)
	Capital expenditures					(12,833	)		(77,654	)		(119,216	)
	Other					(145	)		(4,758	)		(2,922	)
				Net cash used in investing activities		(10,024	)		(66,913	)		(126,338	)
Cash flows from financing activities:
	Payments of short-term borrowings					—			(7,396	)		(31	)
	Proceeds from issuance of long-term debt					26,050			34,000			26,000
	Payments of long-term debt					(83,213	)		(69,487	)		(5,000	)
	Issuance of common stock					42,711			29,304			—
	Dividends paid					(3,947	)		(3,429	)		(3,337	)
	Purchases of treasury stock					—			—			(9,284	)
	Exercise of stock options and other					170			10,684			4,221
				Net cash provided by (used in) financing activities		(18,229	)		(6,324	)		12,569
Effect of exchange rate changes on cash						1,774			76			(741	)
Net decrease in cash						(4,030	)		(7,309	)		(3,655	)
Cash and equivalents at beginning of year						13,255			20,564			24,219
Cash and equivalents at end of year					$	9,225		$	13,255		$	20,564
Supplemental cash flow information
	Cash paid (received) during the year for:
		Interest			$	8,348		$	13,285		$	13,094
		Income taxes — net				5,882			(1,661	)		13,914
Noncash investing and financing activities
		Common stock issued in connection with DCA acquisition			$	110		$	1,090		$	199

The accompanying notes are an integral part of the consolidated financial statements.

CTS CORPORATION

13

Consolidated Statements of Shareholders’ Equity
(In thousands of dollars)

											Accumulated
											Other
					Additional						Comprehensive			Comprehensive
		Common			Contributed			Retained			Earnings			Earnings			Treasury
		Stock			Capital			Earnings			(Loss)			(Loss)			Stock			Total
	Balances at December 31, 1999	$	193,612		$	9,005		$	245,414		$	291					$	(283,558	)	$	164,764
Net earnings									83,802					$	83,802						83,802
Cumulative translation adjustment (net of tax of $556)												(1,852	)		(1,852	)					(1,852	)
	Comprehensive earnings														81,950
Cash dividends of $0.12 per share									(3,366	)											(3,366	)
Returned 41,800 shares to treasury forfeited from restricted stock and cash bonus plan — net			47			123												(170	)
Issued 519,247 shares on exercise of stock option — net			4,369			4,632												1,615			10,616
Stock compensation			650			798												30			1,478
Acquired 190,000 shares for treasury stock—Note K																		(9,284	)		(9,284	)
Issued 17,304 shares to former DCA shareholders			199																		199
	Balances at December 31, 2000		198,877			14,558			325,850			(1,561	)					(291,367	)		246,357
Net loss									(45,375	)					(45,375	)					(45,375	)
Cumulative translation adjustment (net of tax of $203)												(474	)		(474	)					(474	)
Deferred gain on forward contract (net of tax of $222)												333			333						333
	Comprehensive loss														(45,516	)
Cash dividends of $0.12 per share									(3,487	)											(3,487	)
Returned 16,950 shares to treasury forfeited from restricted stock and cash bonus plan — net			59			(17	)											(42	)
Issued 1,015,531 shares on exercise of stock option — net			13,575			(3,026	)											3,822			14,371
Stock compensation			346			408															754
Issued 1,800,000 shares under shelf registration						9,585												16,208			25,793
Issued 226,948 shares under Direct Stock Purchase Plan						2,645												866			3,511
Issued 94,956 shares to former DCA shareholders			1,090																		1,090
	Balances at December 31, 2001		213,947			24,153			276,988			(1,702	)					(270,513	)		242,873
Net loss									(17,850	)					(17,850	)					(17,850	)
Cumulative translation adjustment (net of tax of $712)												1,661			1,661						1,661
Reversal of deferred gain on forward contract (net of tax of $222)												(333	)		(333	)					(333	)
Minimum pension liability adjustment (net of tax of $215)												(461	)		(461	)					(461	)
	Comprehensive loss													$	(16,983	)
Cash dividends of $0.12 per share									(4,053	)											(4,053	)
Issued 11,230 shares on restricted stock and cash bonus plan — net			(713	)		151												562
Stock compensation						362															362
Issued 2,000,000 shares under shelf registration			13,450			(1,029	)											15,804			28,225
Issued 1,177,996 shares under Direct Stock Purchase Plan			14,599			(123	)											10			14,486
Issued 9,540 shares to former DCA shareholders			110																		110
	Balances at December 31, 2002	$	241,393		$	23,514		$	255,085		$	(835	)				$	(254,137	)	$	265,020

The accompanying notes are an integral part of the consolidated financial statements.

CTS CORPORATION

14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A—Summary of Significant Accounting Policies

Principles of Consolidation: The consolidated financial statements include the accounts of CTS and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition: Revenues from product sales are recognized when title transfers at the time of shipment to the customer.

Cash Equivalents: CTS considers all highly liquid investments with a maturity of three months or less from the purchase date to be cash equivalents.

Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.

Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets using the straight-line method. Useful lives for buildings and improvements range from 10 to 45 years. Machinery and equipment useful lives range from three to eight years. Amounts expended for maintenance and repairs are charged to expense as incurred. Upon disposition, any related gain or loss is recognized as other income or expense.

CTS assesses the carrying value of long-lived assets and the remaining useful lives whenever events or changes in circumstances indicate an impairment may have occurred. If the future cash flows (undiscounted and without interest) expected to result from the use of the related assets are less than the carrying value of such assets, an impairment charge may be required to reduce the carrying value of the long-lived assets to fair value.

Retirement Plans: CTS has various defined benefit and defined contribution retirement plans covering a majority of its employees. CTS’ policy is to annually fund the defined benefit pension plans at or above the minimum required by law. Refer also to Note G, “Employee Retirement Plans.”

Intangible Assets: CTS assesses useful lives of its intangible assets based on the period over which the asset is expected to contribute to CTS’ cash flows. Intangible assets with a finite life are amortized over that life on a straight-line basis. Intangible assets with an indefinite life are not amortized, but are reviewed at least annually to determine if events and circumstances continue to support an indefinite useful life or to determine if an impairment has occurred. The Company reviews the carrying value of the intangible assets whenever events or changes in circumstances indicate an impairment may have occurred. Refer also to Note C, “Intangible Assets.”

Assets Held for Sale: As required by the Financial Accounting Standards Board’s (FASB) Financial Accounting Standard (FAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” CTS classifies actively marketed assets, that have been removed from operations and are available for immediate sale under a management approved plan, as assets held for sale. Refer also to Note D, “Assets Held for Sale.”

Research and Development: Research and development costs include expenditures for planned search and investigation aimed at discovery of new knowledge to be used to develop new products or processes or to significantly enhance existing products or production processes. It also includes the implementation of the new knowledge through design, testing of product alternatives or construction of prototypes. CTS expenses all research and development costs as incurred.

Income Taxes: CTS provides deferred income taxes pursuant to the requirements of FAS No. 109, “Accounting for Income Taxes.” Under FAS No. 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and income tax bases of assets and liabilities and carryforwards using currently enacted tax rates. CTS estimates its income tax valuation allowance by assessing which deferred tax assets are more likely than not to be recovered in the future. Refer also to Note H, “Income Taxes.”

15

Translation of Foreign Currencies: The financial statements of CTS’ non-U.S. subsidiaries, except the United Kingdom subsidiary, are remeasured into U.S. dollars using the U.S. dollar as the functional currency with all remeasurement adjustments included in the determination of net earnings. The assets and liabilities of CTS’ United Kingdom subsidiary are translated into U.S. dollars at the current exchange rate at period end, with resulting translation adjustments made directly to the “accumulated other comprehensive loss” component of shareholders’ equity. Statements of earnings accounts are translated at the average rates during the period.

Financial Instruments: CTS’ financial instruments consist primarily of cash, cash equivalents, trade receivables and payables and obligations under long-term debt. The carrying value for cash and equivalents, trade receivables and payables approximates fair value based on the short-term maturities of these instruments. The carrying value for all long-term debt outstanding at December 31, 2002 and 2001 approximates fair value where fair value is based on market prices for the same or similar debt and maturities.

At December 31, 2001, the Company had forward contracts in place to mitigate the risk of market price fluctuations of palladium, which is used in its manufacturing process. Changes in the market value of these contracts, which expired monthly in 2002, were deferred until the gain or loss was recognized on the hedged commodity. The estimated fair value of the palladium forward contracts at December 31, 2001 was based on the difference between the contractual forward rate and the applicable forward rate on December 31, 2001. In accordance with FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” CTS had classified these forward contracts as cash-flow hedges and recorded them at their estimated fair value at December 31, 2001, and recorded the fair value as a component of comprehensive earnings (loss) as shown in the Consolidated Statements of Shareholders’ Equity. CTS had no such forward contracts at December 31, 2002. The Consolidated Statements of Earnings (Loss) do not contain any material amounts related to these forward contracts.

Concentration of Credit Risk: Trade receivables subject CTS to the potential for credit risk with major customers. CTS sells its products to customers principally in the automotive, communications and computer markets, primarily in North America, Europe and Asia. CTS performs ongoing credit evaluations of its customers to minimize credit risk. CTS does not require collateral. Sales to Hewlett-Packard Company (Hewlett-Packard) were 33% and sales to Motorola, Inc. (Motorola) were 12% of net sales for the year ended December 31, 2002. Amounts due from Hewlett-Packard and Motorola aggregated $24 million at December 31, 2002. Sales to Compaq Computer Corporation (Compaq), which was acquired by Hewlett-Packard in May 2002, and Motorola were 28% and 17%, respectively, of net sales for the year ended December 31, 2001. Sales to Motorola and Compaq were each 21% of net sales for the year ended December 31, 2000. Significant sales to a single customer expose CTS to a concentration of credit risk. Management, however, believes the likelihood of incurring material losses due to concentration of credit risk is remote.

Stock-Based Compensation: CTS accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and its related Interpretations. The following table shows proforma net earnings and net earnings per share date required by FAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.”

	Year ended December 31, ($ in thousands, except per share amounts)
	2002			2001			2000
Net earnings (loss), as reported	$	(17,850	)	$	(45,375	)	$	83,802
Net earnings (loss) per share — basic, as reported	$	(0.54	)	$	(1.61	)	$	3.03
Net earnings (loss) per share — diluted, as reported	$	(0.54	)	$	(1.61	)	$	2.92
Stock-based employee compensation cost, net of tax, included in net earnings (loss)		—			—			—
Stock-based employee compensation cost, net of tax, if fair value based method were used		3,063			2,654			1,888
Proforma net earnings (loss)	$	(20,913	)	$	(48,029	)	$	81,914
Proforma net earnings (loss) per share — basic	$	(0.63	)	$	(1.70	)	$	2.97
Proforma net earnings (loss) per share — diluted	$	(0.63	)	$	(1.70	)	$	2.86

16

Earnings Per Share: Basic and diluted earnings per common share are reported in conformity with FAS No. 128, “Earnings per Share.” Basic earnings per share excludes any dilution and is computed by dividing net earnings available to common shareholders by the weighted-average number of common shares outstanding for the period.

Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock resulted in the issuance of common stock that shared in the earnings of CTS. Diluted earnings per share is computed by dividing net earnings by the weighted-average number of common shares outstanding during the period plus the incremental shares that would have been outstanding upon the assumed exercise of dilutive securities. If the common stock equivalents have an anti-dilutive effect, they are excluded from the computation of diluted earnings per share. Refer also to Note N, “Earnings Per Share.”

Comprehensive Earnings: CTS reports comprehensive earnings in accordance with FAS No. 130, “Reporting Comprehensive Income.” The components of comprehensive earnings for CTS include foreign translation adjustments, unrealized gains on forward contracts, minimum pension liability adjustments and net earnings and are reported within the Statements of Shareholders’ Equity in the columns titled “Comprehensive Earnings (Loss)” and “Accumulated Other Comprehensive Earnings (Loss).”

Accounting Pronouncements: In June 2002, the FASB issued FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” FAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This standard requires a liability be recognized at fair value for costs associated with exit or disposal activities only when the liability is incurred as opposed to at the time the Company commits to an exit plan as permitted under Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity”. FAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect that the adoption of this standard in 2003 will have a material impact on the Company’s financial position, results of operations or cash flows.

In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others.” FIN No. 45 relates to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN No. 45 is effective prospectively for guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002.

On January 17, 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB 51.” The primary objectives of FIN No. 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (Variable Interest Entities) and how to determine when and which business enterprise should consolidate the VIE (the Primary Beneficiary). The transitional disclosure requirements of FIN No. 46 take effect immediately and are required in all financial statements initially issued after January 31, 2003, if certain conditions are met. CTS does not have any variable interest entities, and therefore, FIN No. 46 will not impact its financial statements.

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, the 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 materially from those estimates.

Reclassifications: Certain reclassifications have been made for the periods presented in the financial statements to conform to the classifications adopted in 2002.

17

NOTE B—Restructuring and Impairment Charges

In the third quarter of 2002, CTS recorded $18.3 million of pre-tax restructuring and impairment charges. The restructuring and impairment charges were incurred in order to effect operational improvements and related organizational realignments primarily in the Components and Sensors business segment.

Significant actions under the 2002 restructuring plan include operational improvements and organizational realignments involving the relocation of certain manufacturing operations from a leased facility to a CTS-owned facility in Tianjin, China; the relocation of engineering and design activities from a leased engineering and design facility in Chung-Li, Taiwan to other CTS-owned facilities; and the transfer of certain production processes from CTS’ Albuquerque, New Mexico facility to its Tianjin, China facility. Additionally, the charges reflect CTS’ decision to terminate all design activities related to new custom variations for Voltage Controlled Oscillators (VCO) and 9x11mm and 5x7mm Temperature Compensated Crystal Oscillators (TCXO). CTS will continue to manufacture existing designs of these products to satisfy current customer requirements. CTS completed substantially all of these restructuring actions by the end of 2002.

The restructuring charge of $5.0 million recorded in the third quarter of 2002 relates primarily to organizational realignment in the Components and Sensors business segment, and reductions in support staff for the design of new custom variations of certain VCO and TCXO product lines. Included in this amount is $4.6 million of severance costs associated with the separation of approximately 300 employees, of which approximately 250 employees had been severed as of December 31, 2002. Approximately 67% of the employees severed were salary and indirect employees and 33% were hourly production employees.

The following table displays the restructuring activity and restructuring reserve balances as of December 31, 2002 for actions initiated in 2002:

	Workforce			Other
	Reductions			Exit Costs		Total
	($ in millions)
Third quarter of 2002 charge	$	4.6		$	0.4	$	5.0
Items paid or utilized in 2002		(3.4	)		—		(3.4	)
Reserve balance at December 31, 2002	$	1.2		$	0.4	$	1.6

The 2002 restructuring plan also includes $12.5 million of asset impairment charges. Approximately $9.8 million of the impairment charge is the adjustment needed to recognize impairments resulting from the reduction in the remaining useful lives of certain manufacturing equipment following the decision to terminate the design of new custom variations of certain VCO and TCXO product lines. CTS will continue to manufacture existing designs of these products to satisfy current customer requirements. Approximately $2.1 million of the impairment charge relates to the write-off of leasehold improvements at its engineering and design facility in Taiwan and at its manufacturing facility in China. Approximately $0.2 million relates to impairment of certain intangible assets acquired in the 1999 acquisition of the Component Products Division of Motorola. The remaining $0.4 million impairment charge relates to adjustments to the estimated fair value of certain assets held for sale. Refer also to Note D, “Assets Held for Sale.”

CTS also recognized a pension plan curtailment loss of approximately $0.8 million in 2002, resulting from reduced employment levels as a result of the restructuring activities.

18

In 2001, CTS recorded $40.0 million of pre-tax restructuring and impairment charges, $14.0 million in the second quarter and $26.0 million in the fourth quarter. Plan actions were designed to permit the Company to operate more efficiently in the then-existing environment and, at the same time, position the Company for success when the economy improves. Major actions under the restructuring plan included closing its Chung-Li, Taiwan, manufacturing facility in the fourth quarter of 2001 and a decision to dispose of its Longtan, Taiwan, building. The plan also covered ceasing production at its Sandwich, Illinois; and Carlisle, Pennsylvania, facilities in 2002 and discontinuing the manufacture of intermediate frequency surface acoustical wave (IF SAW) filters. IF SAW filter production was stopped at the end of the second quarter of 2001. Amounts included in the Consolidated Statements of Earnings (Loss) relating to the manufacture of IF SAW filters were insignificant in 2001. The restructuring plan provided that production formerly completed at its Chung-Li, Taiwan; Sandwich, Illinois; and Carlisle, Pennsylvania, facilities be transferred to other existing CTS manufacturing locations. CTS has completed these consolidations and transfers in fiscal 2002.

The following table displays the restructuring activity for actions initiated in 2001:

	Workforce			Other
	Reductions			Exit Costs			Total
	($ in millions)
Second quarter charge	$	6.4		$	2.0		$	8.4
Fourth quarter charge		3.2			0.4			3.6
Total 2001 restructuring charge		9.6			2.4			12.0
Items paid or utilized in 2001		(6.8	)		(1.4	)		(8.2	)
Items paid or utilized in 2002		(2.8	)		(1.0	)		(3.8	)
Reserve balance at December 31, 2002	$	—		$	—		$	—

The restructuring charge recorded in 2001 included $12.0 million related to facility consolidations, including plant closures and product consolidations. Included in this amount is approximately $9.6 million of severance benefits associated with the separation of approximately 1,500 employees. Approximately 12% of the employees terminated were salary and indirect employees and 88% were hourly production employees. The $2.4 million of other exit costs consisted primarily of costs associated with the closing of the plants.

The restructuring plan also included $31.0 million of asset impairment charges. Approximately $26.9 million of the impairment charge was the adjustment needed to reduce certain assets held for sale to their estimated fair value. Refer also to Note D, “Assets Held for Sale.” An additional $1.2 million related to the write-off of leasehold improvements, primarily at its Chung-Li, Taiwan, manufacturing facility. The remaining $2.9 million related to impairment of certain intangible assets associated with obsolete products and technology acquired in the 1999 acquisition of the Component Products Division of Motorola.

CTS also recognized pension plan curtailment gains of approximately $3.0 million in 2001 resulting from plant closures under the restructuring plan.

Also during 2002 and 2001, CTS recorded in cost of sales $1.3 million and $10.7 million, respectively, of restructuring-related, one-time charges, consisting primarily of inventory write downs, equipment relocation and other employee-related costs.

19

Note C—Intangible Assets

Effective January 1, 2002, CTS adopted the provisions of FAS No. 142, “Goodwill and Other Intangibles.” CTS had no transitional effect of adopting this statement. CTS has the following intangible assets, all relating to the Components and Sensors business segment, as of December 31:

			2002					2001
			Gross					Gross
			Carrying		Accumulated			Carrying		Accumulated
($ in thousands)			Amount		Amortization			Amount		Amortization
Amortized intangible assets:
	Customer lists		$	36,405	$	(4,003	)	$	36,405	$	(2,763	)
	Patents			10,319		(3,465	)		10,319		(2,388	)
	Technology			12,014		(11,891	)		12,014		(10,164	)
	Other			300		(269	)		300		(232	)
		Total		59,038		(19,628	)		59,038		(15,547	)
Unamortized goodwill				513		—			513		—
		Total intangibles	$	59,551	$	(19,628	)	$	59,551	$	(15,547	)

CTS recorded amortization expense of $3.9 million, $6.8 million and $5.2 million for the years ended December 31, 2002, 2001 and 2000, respectively. The decrease in amortization expense in 2002, as compared to 2001, primarily results from the impairments recorded by CTS in connection with its 2001 and 2002 restructuring actions. CTS estimates amortization expense of $2.4 million in 2003, and $2.3 million each in 2004 through 2007. Goodwill amortization was deminimous in prior years.

Note D—Assets Held for Sale

Assets held for sale at December 31, 2002 are comprised of facilities, primarily the Longtan, Taiwan, building, production equipment for the 3.2x5mm TCXO production line, and other machinery and equipment that has been removed from service and is to be disposed of pursuant to the Company’s restructuring activities (refer also to Note B, “Restructuring and Impairment Charges”). The assets are held by the Components and Sensors business segment. These assets are recorded at amounts not in excess of what management currently expects to receive upon sale, less cost of disposal; however, the amounts the Company will ultimately realize are dependent on numerous factors, some of which are beyond management’s ability to control, and could differ materially from the amounts currently recorded.

The Company has entered into a definitive agreement to sell the production equipment from its 3.2x5mm TCXO production line. CTS expects the sale to be completed in the first quarter of 2003 at no gain or loss.

During the fourth quarter of 2001, CTS completed an assessment of the carrying value of its assets in light of then-existing and expected market conditions. The review highlighted certain assets for which no production demand or use existed or was forecasted to exist before economic obsolescence of the asset. Such assets have been removed from service. An impairment loss was recorded to reduce these assets to their then-estimated fair value. The Company routinely monitors the estimated value of all assets held for sale and records adjustments to these values as required. During the third quarter of 2002, CTS reduced their estimate of the fair value of these assets by an additional $0.4 million. During 2002, CTS sold machinery and equipment classified as assets held for sale for approximately $1.6 million, which approximated the carrying value of these assets held for sale.

20

NOTE E—Debt

Long-term debt was comprised of the following at December 31:

($ in thousands)		2002		2001
Revolving credit agreement, average interest rate of 3.95% (2002)     and 4.77% (2001), due in 2003		$	28,350	$	54,000
Term loans at 5.5% (2001)			—		56,513
Industrial revenue bonds at a weighted-averaged rate of 7.5%, due in 2013			42,000		42,000
Convertible, subordinated debt at a weighted- averaged rate of 6.5%, due in 2007			25,000		—
			95,350		152,513
Less current maturities			28,350		27,500
	Total long-term debt	$	67,000	$	125,013

The debt matures as follows: 2003 — $28.4 million, 2007 — $25.0 million, thereafter — $42.0 million.

In October 2002, CTS amended its credit agreement with its existing nine banks. The agreement consists of a revolving credit facility commitment totaling $85 million which expires in December 2003.

The credit agreement categorized all existing debt on December 20, 2001, as senior to any future debt. The debt is collaterized by substantially all U.S. assets and a pledge of 65% of the stock of certain non-U.S. subsidiaries. Interest rates on these borrowings fluctuate based upon LIBOR. CTS pays a fixed commitment fee of 0.50 percent per annum on the undrawn portion of the revolving credit agreement. The credit agreement requires, among other things, that CTS maintain a minimum net worth, a minimum fixed charge coverage ratio and a maximum leverage ratio. Failure of CTS to comply with these covenants could reduce the borrowing availability under the credit agreement. Additionally, the credit agreement limits the amount allowed for dividends, capital expenditures and acquisitions and requires the proceeds of all asset sales be applied against outstanding borrowings. Furthermore, it requires repayment in an amount of 90% of excess cash flow, as defined therein.

While CTS management currently expects to be in compliance with all financial covenants through December 31, 2003, there can be no assurance of this since certain factors, such as forecasted future operating results, are dependent upon events, some of which are beyond CTS’ ability to control. If CTS is unable to comply with the financial covenants, it will seek to obtain amendments or waivers from the lenders and/or identify other sources of liquidity such as raising additional capital and/or the sale of certain assets, including assets held for sale.

Debt relating to the industrial revenue bonds was assumed in connection with the acquisition of the Component Products Division of Motorola in 1999, and is collateralized by the land, building and equipment acquired with the bonds.

In April 2002, the Company issued $25 million of five-year, 6.5% convertible, subordinated debentures. These debentures are unsecured and convert into CTS common stock at a conversion price of $20.05 per share. At any time after the three-year anniversary of the issue date, the purchasers may accelerate the maturity of the debentures. CTS also has the right after such three-year anniversary and under certain circumstances, to force conversion of the debentures into common stock.

CTS also had unsecured line of credit arrangements of $16,338 and $21,817 at December 31, 2002 and 2001, respectively. These arrangements are generally subject to annual renewal and renegotiations, and may be withdrawn at the banks’ option.

21

NOTE F—Stock Plans

At December 31, 2002, CTS had five stock-based compensation plans. CTS applies APB Opinion No. 25 in determining compensation costs for its plans. Had compensation cost for CTS’ fixed, stock-based compensation plans been determined based on the fair value method, as defined in FAS No. 123, CTS’ net earnings (loss) and net earnings (loss) per share would have been adjusted to the pro forma amounts indicated below:

($ in thousands, except per share amounts)		2002			2001			2000
Net earnings (loss)	As reported	$	(17,850	)	$	(45,375	)	$	83,802
	Pro forma	$	(20,913	)	$	(48,029	)	$	81,914
Net earnings (loss) Per share—diluted	As reported	$	(0.54	)	$	(1.61	)	$	2.92
	Pro forma	$	(0.63	)	$	(1.70	)	$	2.86

The weighted-average fair value of each option grant (which is amortized over the option vesting period for purposes of determining the pro forma impact) is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2002			2001			2000
	Grants			Grants			Grants
Dividend yield		1.48	%		0.52	%		0.23	%
Expected volatility		214.65	%		74.87	%		33.17	%
Risk-free interest rate		2.87	%		4.51	%		5.12	%
Expected life	4.4 years			4.6 years			5.1 years

CTS has two plans, the 1996 Stock Option Plan (1996 Plan) and the 2001 Stock Option Plan (2001 Plan), which provide for grants of incentive stock options or nonqualified stock options to officers, key employees and nonemployee members of CTS’ board of directors. Options are granted at the fair market value on the grant date and are exercisable in cumulative annual installments over a maximum ten-year period, commencing at least one year from the date of grant. The following table summarizes the status of these plans as of December 31, 2002:

	2001 Plan		1996 Plan
Options originally available		2,000,000		1,200,000
Options outstanding		808,875		509,350
Options exercisable		105,800		278,300

During 1997, CTS granted to certain officers and key employees 2,400,000 options to acquire common shares. These options were fully vested and are exercisable through December 31, 2003. Of the 2,400,000 options granted under the nonqualified plan, 242,564 were exercisable at December 31, 2002.

22

A summary of the status of stock options as of December 31, 2002, 2001 and 2000, and changes during the years ended on those dates, is presented below:

		2002					2001					2000
					Weighted-					Weighted-						Weighted-
					Average					Average						Average
					Exercise					Exercise						Exercise
		Shares			Price		Shares			Price			Shares			Price
Outstanding at beginning of year			1,287,939		$	23.69		1,736,197		$	17.53			2,103,460		$	12.61
	Granted		448,500			8.10		724,800			22.92			193,500			51.44
	Exercised		—			—		(1,017,633	)		10.59			(533,813	)		9.64
	Expired or canceled		(175,650	)		27.55		(155,425	)		36.48			(26,950	)		33.79
Outstanding at end of year			1,560,789		$	18.74		1,287,939		$	23.69			1,736,197		$	17.53
Options exercisable at end of year			626,664					452,614						1,341,497
Weighted-average fair value of options granted during the year					$	7.22				$	12.79					$	19.14

The following table summarizes information about stock options outstanding at December 31, 2002:

		Options Outstanding						Options Exercisable
				Weighted-
				Average		Weighted-				Weighted-
Range of		Number		Remaining		Average		Number		Average
Exercise		Outstanding		Contractual		Exercise		Exercisable		Exercise
Prices		at 12/31/02		Life (Years)		Price		at 12/31/02		Price
$	7.70 - 10.42		641,314		6.34	$	8.73		242,564	$	10.42
	13.85 - 18.90		283,600		4.80		14.78		122,900		14.56
	22.60 - 33.63		486,875		7.95		25.14		186,300		27.83
	35.97 - 50.00		143,500		7.64		47.85		71,000		48.48
	55.06 - 79.25		5,500		7.08		63.40		3,900		64.73

CTS has a discretionary Restricted Stock and Cash Bonus Plan (Plan) which originally reserved 2,400,000 shares of CTS’ common stock for sale, at market price or below, or award to key employees. Under the plan, 236,000 shares were available for award or sale as of December 31, 2002. Shares sold or awarded are subject to restrictions against transfer and repurchase rights of CTS. In general, restrictions lapse at the rate of 20% per year beginning one year from the award or sale. In addition, the Plan provides for a cash bonus to the participant equal to the fair market value of the shares on the dates restrictions lapse, in the case of an award, or the excess of the fair market value over the original purchase price if the shares were purchased. The total bonus paid to any participant during the restricted period is limited to twice the fair market value of the shares on the date of award or sale. CTS recorded income of $0.9 million, $0.6 million, and $0.1 million in 2002, 2001 and 2000, respectively, under the formula provisions of the Plan which are based on the fair market value of a share of common stock.

CTS has a Stock Retirement Plan for Nonemployee Directors. This retirement plan provides for a portion of the total compensation payable to nonemployee directors to be deferred and paid in CTS stock. Under this plan, the amount of compensation expense was $0.1 million in 2002 and 2001 and $0.2 million in 2000.

23

NOTE G—Employee Retirement Plans

Defined benefit plans

CTS has a number of noncontributory defined benefit pension plans (Pension Plans) covering approximately 29% of its employees. Plans covering salaried employees provide pension benefits that are based on the employees’ compensation prior to retirement. Plans covering hourly employees generally provide benefits of stated amounts for each year of service.

CTS provides postretirement life insurance benefits for certain retired employees. Domestic employees who were hired prior to 1982 and certain domestic union employees are eligible for life insurance benefits upon retirement. CTS funds life insurance benefits through term life insurance policies. CTS plans to continue funding premiums on a pay-as-you-go basis.

24

The following provides a reconciliation of benefit obligations, plan assets, and the funded status of the Pension Plans and other postretirement benefits:

		Pension						Other
		Plans						Postretirement Benefits
($ in thousands)		2002			2001			2002			2001
Change in benefit obligation:
	Benefit obligation at January 1	$	162,585		$	155,711		$	4,529		$	4,196
	Service cost		6,059			6,527			33			40
	Interest cost		11,467			11,333			318			305
	Curtailment gains		(2,275	)		(4,742	)		—			—
	Actuarial (gain) loss		(1,448	)		1,929			246			266
	Benefits paid		(8,941	)		(8,173	)		(288	)		(278	)
Benefit obligation at December 31		$	167,447		$	162,585		$	4,838		$	4,529
Change in plan assets:
	Assets at fair value at January 1	$	264,709		$	303,090		$	—		$	—
	Actual return on assets		(32,730	)		(30,893	)		—			—
	Company contributions		656			1,118			288			278
	Benefits paid		(8,941	)		(8,173	)		(288	)		(278	)
	Administrative and other		(1,259	)		(433	)		—			—
Assets at fair value at December 31		$	222,435		$	264,709		$	—		$	—
Reconciliation of prepaid (accrued) cost:
	Funded status of the plans	$	54,988		$	102,124		$	(4,838	)	$	(4,529	)
	Unrecognized net (gain) loss		56,625			(5,939	)		80			(165	)
	Unrecognized prior service cost		5,653			7,064			7			7
	Unrecognized transition asset		(1,244	)		(1,053	)		—			—
Prepaid (accrued) cost, net		$	116,022		$	102,196		$	(4,751	)	$	(4,687	)
The components of the prepaid (accrued) cost, net are classified in the following lines in the Consolidated Balance Sheets:
Prepaid pension asset		$	120,277		$	102,196		$	—		$	—
Other accrued liabilities			(410	)		—			(322	)		(250	)
Other long-term obligations			(4,521	)		—			(4,429	)		(4,437	)
Accumulated other comprehensive loss			676			—			—			—
		$	116,022		$	102,196		$	(4,751	)	$	(4,687	)

The Pension Plans included above with accumulated benefit obligations in excess of assets had accumulated benefit obligations of $9.8 million, projected benefit obligations of $11.4 million and plan assets of $4.9 million at December 31, 2002.

25

Net pension (income)/postretirement expense in 2002, 2001 and 2000 includes the following components:

		Pension Plans									Other Postretirement Benefits
($ in thousands)		2002			2001			2000			2002			2001			2000
Service cost-benefits earned during the year		$	6,059		$	6,527		$	6,303		$	33		$	40		$	38
Interest cost on projected benefit obligation			11,467			11,333			10,641			318			305			297
Curtailment (gains) loss			768			(2,958	)		—			—			—			—
Expected return on plan assets			(29,786	)		(28,448	)		(26,873	)		—			—			—
Net amortization and deferral			(2,543	)		(3,368	)		(4,598	)		1			—			(1	)
Net (income) expense		$	(14,035	)	$	(16,914	)	$	(14,527	)	$	352		$	345		$	334
Actuarial assumptions as of December 31:
	Discount rate		6.75	%		7.25	%		7.50	%		6.75	%		7.25	%		7.50	%
	Expected return on plan assets (1)		9.00	%		9.75	%		9.75	%		—			—			—
	Rate of compensation increase		4%-6	%		5%-7	%		5%-7	%		—			—			—

⁽¹⁾ Expected return on plan assets is net of expected investment expenses and certain administrative expenses.

During the fourth quarter of each year, CTS reviews its actuarial assumptions in light of current economic factors to determine if the assumptions need to be adjusted. Net pension income is determined using assumptions as of the beginning of each year. Funded status is determined using assumptions as of the end of each year.

The 2002 and 2001 pension curtailment loss and gains resulted from plant closings and reductions in employment levels that occurred as part of the restructuring actions.

The majority of U.S. defined benefit pension plan assets are invested in common stock, including approximately $11 million and $23 million in CTS common stock at December 31, 2002 and 2001, respectively. The balance is invested in corporate bonds, U.S. government backed mortgage securities and bonds, asset backed securities, a private equity fund, non-U.S. corporate bonds and convertible issues.

Defined contribution plans

CTS sponsors a 401(k) plan that covers substantially all of its U.S. employees. Additionally, CTS sponsors several other defined contribution plans covering certain non-U.S. employees. Contributions and costs are generally determined as a percentage of the covered employee’s annual salary. Amounts expensed for the 401(k) plan and the other plans totaled $3.0 million in 2002, $3.7 million in 2001 and $4.1 million in 2000.

26

NOTE H—Income Taxes

Earnings (loss) from continuing operations before income taxes consist of the following:

($ in thousands)		2002			2001			2000
Domestic		$	(8,670	)	$	(54,700	)	$	39,568
Non-U.S			(15,130	)		(5,791	)		77,559
	Total	$	(23,800	)	$	(60,491	)	$	117,127

Significant components of income tax provision (benefit) are as follows:

($ in thousands)		2002			2001			2000
Current:
	Federal	$	—		$	—		$	1,158
	State		368			259			619
	Non-U.S		4,484			9,162			27,941
	Total current		4,852			9,421			29,718
Deferred:
	Federal		(7,834	)		(16,622	)		4,604
	State		(1,275	)		(3,077	)		597
	Non-U.S		(1,693	)		(4,838	)		(2,123	)
	Total deferred		(10,802	)		(24,537	)		3,078
	Total provision (benefit) for income taxes	$	(5,950	)	$	(15,116	)	$	32,796

27

Significant components of CTS’ deferred tax liabilities and assets at December 31, 2002 and 2001 are:

($ in thousands)	2002			2001
Pensions	$	44,018		$	38,439
Depreciation		5,834			4,941
Basis difference-acquired assets		1,281			1,981
Other		313			475
Gross deferred tax liabilities		51,446			45,836
Postretirement benefits		1,659			1,810
Inventory items		3,512			7,377
Loss carryforwards		43,912			15,851
Credit carryforwards		2,509			6,639
Nondeductible accruals		9,588			14,307
Nonrecurring compensation charge		572			572
Restructuring and asset impairment		8,437			11,072
Other		12,150			12,249
Gross deferred tax assets		82,339			69,877
Net deferred tax assets		30,893			24,041
Deferred tax asset valuation allowance		(2,379	)		(6,708	)
Total	$	28,514		$	17,333

During 2002, the valuation allowance was decreased as a result of an election to deduct certain foreign taxes for U.S. purposes, rather than claiming them as credits, and increased for valuation allowances provided in certain foreign taxing jurisdictions.

The overall effective income tax rate (expressed as a percentage of income before income taxes) varied from the U.S. statutory income tax rate as follows:

	2002			2001			2000
Taxes at the U.S. statutory rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal income tax benefit		2.5	%		3.0	%		0.7	%
Non-U.S. income taxed at rates different than the U.S. statutory rate		(25.1	)%		(14.1	)%		(2.0	)%
Tax exempt earnings		4.1	%		—			(1.2	)%
Benefit of scheduled tax credits and adjustment of valuation allowance		7.4	%		0.8	%		(1.3	)%
Other		1.1	%		0.3	%		(3.2	)%
Provision for income taxes		25.0	%		25.0	%		28.0	%

28

Undistributed earnings of certain non-U.S. subsidiaries amounted to approximately $168 million at December 31, 2002. Prior year earnings are intended to be invested indefinitely and, accordingly, no provision has been made for non-U.S. withholding taxes. In the event all undistributed earnings were remitted, approximately $8 million of withholding tax would be imposed.

CTS qualifies for income tax holidays in certain taxing jurisdictions. As a result, certain earnings of CTS are subject to tax at reduced rates for a specified period of time. These tax holidays, unless extended, are scheduled to expire in 2004.

No valuation allowance was recorded in 2002 related to the U.S. net operating loss carryforwards of $102 million expiring in 2021 - 2022. The Company assessed the future realization of these deferred tax assets utilizing taxable income projections for the years 2003 through 2007. Those projections applied taxable income estimates consistent with historical earnings patterns of its traditional automotive and electronic component product lines and a return to levels of profitability in its communications components product lines consistent with management and independent consensus views of the moderate recovery expected in the markets served by CTS. The projections resulted in the net operating losses being utilized no later than 2007. Management believes that, based upon the historical operating performance of its business units and the successful cost reduction efforts, the Company more likely than not, will realize the benefits from its U.S. net operating loss carryforwards.

CTS had non-U.S. net operating loss carryforwards of $41 million. Of this amount, approximately $31 million expires 2006-2007. The remainder has an unlimited carryforward period.

NOTE I—Business Segments

FAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires companies to provide certain information about their operating segments. At the beginning of the fourth quarter of 2002, the Company renamed the reportable business segments and realigned the product lines included in each segment to reflect changes in its organizational structure and the manner that results are evaluated and resources allocated by the chief operating decision maker. All segment data included in these financial statements reflects the reportable business segments adopted in 2002. CTS has two reportable business segments: 1) Components and Sensors and 2) Electronics Manufacturing Services (EMS).

Components and sensors are products which perform specific electronic functions for a given product family and are intended for use in customer assemblies. Components and sensors consist principally of automotive sensors and actuators used in commercial or consumer vehicles; wireless components used in cellular handsets; quartz crystals and oscillators used in the communications and computer markets; low temperature cofired ceramics (LTCC) used in global positioning systems (GPS) and electronic substrates used in various communications and automotive applications; pointing sticks/cursor controls for computers and games for the computer market; terminators, including ClearONE™ terminators, used in computer and other high speed applications, switches, resistor networks and potentiometers used to serve multiple markets.

EMS includes the higher level assembly of electronic and mechanical components into a finished subassembly or assembly performed under a contract manufacturing agreement with an OEM or other contract manufacturer. EMS also includes design of interconnect systems and complex backplanes, global supply-chain management services and related manufacturing and design services as may be required by the customer.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Management evaluates performance based upon operating earnings before interest and income taxes.

29

Summarized financial information concerning CTS’ reportable segments, including reclassification of prior years, is shown in the following table:

	Components
($ in thousands)	& Sensors			EMS		Total
2002
Net sales to external customers	$	270,919		$	186,885	$	457,804
Segment operating earnings (loss)		(5,927	)		10,790		4,863
Total assets		419,628			70,404		490,032
Depreciation and amortization		40,553			2,820		43,373
Capital expenditures	$	12,298		$	535	$	12,833
2001
Net sales to external customers	$	366,096		$	211,558	$	577,654
Segment operating earnings (loss)		(8,231	)		10,457		2,226
Total assets		498,482			69,449		567,931
Depreciation and amortization		49,050			2,624		51,674
Capital expenditures	$	70,195		$	7,459	$	77,654
2000
Net sales to external customers	$	626,288		$	240,235	$	866,523
Segment operating earnings		108,171			20,459		128,630
Total assets		560,051			112,878		672,929
Depreciation and amortization		42,356			1,969		44,325
Capital expenditures	$	111,524		$	7,692	$	119,216

Reconciling information between reportable segments’ operating earnings and CTS’ consolidated pre-tax income (loss) is shown in the following table:

($ in thousands)	2002			2001			2000
Total segment operating earnings	$	4,863		$	2,226		$	128,630
Restructuring, asset impairment and related one-time charges — Components & Sensors		(19,498	)		(50,210	)		—
Restructuring, asset impairment and related one-time charges — EMS		(134	)		(505	)		—
Interest expense		(10,240	)		(12,775	)		(13,050	)
Interest income		396			744			846
Other income		813			29			701
Earnings (loss) before income taxes	$	(23,800	)	$	(60,491	)	$	117,127

30

Financial information relating to CTS’ operations by geographic area was as follows:

($ in thousands)	2002		2001		2000
Net Sales
United States	$	199,982	$	246,653	$	414,571
United Kingdom		125,252		154,466		158,018
China		80,615		87,038		145,609
Singapore		21,330		35,487		38,611
Taiwan		10,424		38,519		84,166
Other non-U.S		20,201		15,491		25,548
Consolidated net sales	$	457,804	$	577,654	$	866,523

Sales are attributed to countries based upon the origin of the sale.

($ in thousands)	2002		2001		2000
Long-Lived Assets
United States	$	58,017	$	74,451	$	109,134
China		55,723		68,633		29,829
Taiwan		21,265		20,086		42,724
United Kingdom		17,967		20,993		18,390
Singapore		14,856		25,154		21,136
Other non-U.S		3,939		4,581		3,648
Consolidated long-lived assets	$	171,767	$	213,898	$	224,861

The Components and Sensors business segment revenues from Motorola represent $38.6 million, or 14%, $84.3 million, or 23%, and $180.4 million, or 29%, of the segment’s revenue for the years ended December 31, 2002, 2001 and 2000, respectively. The EMS business segment revenues from Hewlett-Packard, which acquired Compaq in May 2002, represent $150.4 million, or 80%, of the segment’s revenue for the year ended December 31, 2002. The EMS business segment revenues from Compaq represent $160.2 million, or 76%, and $177.6 million, or 74%, of the segment’s revenue for the years ended December 31, 2001 and 2000, respectively.

NOTE J—Capital Stock

CTS adopted a Rights Plan on August 28, 1998. The Rights Plan was implemented by declaring a dividend, distributable to shareholders of record on September 10, 1998, of one common share purchase right (Right) for each outstanding share of common stock held at the close of business on that date. Each Right under the Rights Plan will initially entitle registered holders of common stock to purchase one one-hundredth of a share of CTS’ Series A Junior Participating Preferred Stock for a purchase price of $125, subject to adjustment. The Rights will be exercisable only if a person or group (1) acquires or obtains the right to acquire 15% or more of the common stock or (2) announces a tender offer that would result in any person or group acquiring beneficial ownership of 15% or more of the outstanding common stock. The Rights are redeemable for $0.01 per Right (subject to adjustment) at the option of the Board of Directors. Until a Right is exercised, the holder of the Right, as such, has no rights as a shareholder of CTS. The Rights will expire on August 27, 2008, unless redeemed or exchanged by CTS prior to that date.

31

NOTE K—Treasury Stock

Common stock held in treasury at December 31, 2002 totaled 16,618,373 shares with a cost of $254.1 million, compared to 17,630,192 shares with a cost of $270.5 million at December 31, 2001.

During 2000, CTS repurchased 190,000 of its common stock under a common stock repurchase plan previously authorized by the Board of Directors. The remaining shares authorized for repurchase were approximately 240,000 shares at December 31, 2002. There can be no assurance as to the number of shares CTS may repurchase or the timing of such purchases.

NOTE L—Contingencies

Certain processes in the manufacture of CTS’ current and past products create hazardous waste by-products as currently defined by federal and state laws and regulations. CTS has been notified by the U.S. Environmental Protection Agency, state environmental agencies and, in some cases, generator groups, that it is or may be a Potentially Responsible Party (PRP) regarding hazardous waste remediation at several non-CTS sites. In addition to these non-CTS sites, CTS has an ongoing practice of providing reserves for probable remediation activities at certain of its manufacturing locations and for claims and proceedings against CTS with respect to other environmental matters. In the opinion of management, based upon presently available information relating to all such matters, either adequate provision for probable costs has been made, or the ultimate costs resulting will not materially affect the consolidated financial position, results of operations or cash flows of CTS.

Certain claims are pending against CTS with respect to matters arising out of the ordinary conduct of its business. For all claims, in the opinion of management, based upon presently available information, either adequate provision for anticipated costs has been made by insurance, accruals or otherwise, or the ultimate anticipated costs resulting will not materially affect CTS’ consolidated financial position or results of operations.

In one case, a claim made by one business unit of a major customer regarding a possible performance-related issue with a particular product is pending. In the opinion of management, CTS is not responsible for the customer’s performance-related issue associated with its application of the CTS product which met or exceeded all of the customer’s specifications. CTS and the customer are in discussions to resolve the issue. If CTS is unable to resolve this claim in a manner that is acceptable to both parties, it is possible that future revenues could be reduced and that could have a material adverse effect on CTS’ results of operations.

In 1999, CTS acquired certain assets and liabilities of the Component Products Division of Motorola. The acquisition was accounted for under the purchase method of accounting. As part of the purchase agreement, CTS may be obligated to pay additional amounts.  No amounts are due to Motorola in 2003 for 2002 under the agreement. CTS does not expect to make a material payment under this agreement in 2004 for 2003, the final year. The maximum remaining potential payment under the acquisition agreement was $17.4 million at December 31, 2002.

NOTE M—Leases

CTS incurred approximately $7.4 million of rent expense in 2002, $6.1 million in 2001, and $4.8 million in 2000. The future minimum lease payments under the Company’s operating leases are $5.9 million in 2003, $5.9 million in 2004, $5.3 million in 2005, $4.4 million in 2006, $3.5 million in 2007 and $6.5 million thereafter.

In 2001, CTS sold certain manufacturing equipment and the Company’s aircraft for $15.5 million, which approximated the net book value of the assets. These assets were subsequently leased back by the Company. The leases are considered operating leases as defined by FAS No. 13, “Accounting for Leases.”

32

NOTE N—Earnings Per Share

FAS No. 128, “Earnings per Share,” requires companies to provide a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations. The following table shows the potentially dilutive securities which have been excluded from the 2002 and 2001 diluted loss per share calculation because their effect would reduce the loss per share:

	Year ended
	December 31,
(Number of shares in thousands)		2002		2001
Securities issuable in connection with stock purchase plans (1)			232		285
Stock options where the exercise price exceeds the average market price of common shares during the period			1,185		662
Stock options where the exercise price is below the average market price of common shares during the period which would be anti-dilutive			50		388
Securities related to the subordinated convertible debt			935		—

⁽¹⁾ Includes 153 shares of CTS common stock to be issued to the former DCA shareholders who have not yet tendered their stock certificates for exchange at December 31, 2002.

The calculation below provides net earnings, average common shares outstanding and the resultant earnings per share for both basic and diluted EPS for the year ended December 31, 2000.

		Net		Shares
($, except per share amounts,		Earnings		(In thousands)		Per Share
in thousands)		(Numerator)		(Denominator)		Amount
2000
Basic EPS		$	83,802		27,623	$	3.03
Effect of Dilutive Securities:
	Stock Options				651
	Other				401
Diluted EPS		$	83,802		28,675	$	2.92

33

Shareholder Information
(In thousands of dollars except per share data)

Quarterly Results of Operations
(Unaudited)

					Operating			Net
	Net		Gross		Earnings			Earnings
	Sales		Margins		(Loss)			(Loss)
2002
1st quarter (a)	$	112,593	$	22,678	$	228		$	(1,901	)
2nd quarter (b)		117,725		21,109		(1,475	)		(2,673	)
3rd quarter (c)		110,944		23,885		(16,499	)		(13,821	)
4th quarter		116,542		23,357		2,977			545
	$	457,804	$	91,029	$	(14,769	)	$	(17,850	)
2001
1st quarter	$	176,988	$	40,565	$	5,765		$	1,697
2nd quarter (d)		143,723		22,878		(19,685	)		(17,173	)
3rd quarter (e)		131,153		28,602		(886	)		(2,890	)
4th quarter (f)		125,790		19,246		(33,683	)		(27,009	)
	$	577,654	$	111,291	$	(48,489	)	$	(45,375	)

Per Share Data
(Unaudited)

					Dividends		Net Earnings (Loss)
	High (g)		Low (g)		Declared		Basic			Diluted
2002
1st quarter (a)	$	17.60	$	12.90	$	0.03	$	(0.06	)	$	(0.06	)
2nd quarter (b)		19.56		10.80		0.03		(0.08	)		(0.08	)
3rd quarter (c)		12.50		4.30		0.03		(0.41	)		(0.41	)
4th quarter		9.00		3.65		0.03		0.02			0.02
					$	0.12	$	(0.54	)	$	(0.54	)
2001
1st quarter	$	47.88	$	19.70	$	0.03	$	0.06		$	0.06
2nd quarter (d)		28.96		18.00		0.03		(0.62	)		(0.62	)
3rd quarter (e)		24.00		13.49		0.03		(0.10	)		(0.10	)
4th quarter (f)		18.00		13.62		0.03		(0.93	)		(0.93	)
					$	0.12	$	(1.61	)	$	(1.61	)

(a)	The first quarter 2002 results include customer reimbursements for expenses incurred in previous quarters of approximately $3.1 million pre-tax, $2.3 million after-tax, or $0.07 per diluted share, and restructuring related one-time charges of $0.8 million pre-tax, $0.6 million after-tax, or $0.02 per diluted share.
(b)	The second quarter 2002 results include restructuring related one-time charges of $0.4 million pre-tax, $0.3 million after-tax, or $0.01 per diluted share.
(c)	The third quarter 2002 results include restructuring and related one-time charges of $18.5 million pre-tax, $13.8 million after-tax, or $0.41 per diluted share.
(d)	The second quarter 2001 results include restructuring and related one-time charges of $19.4 million pre-tax, $14.6 million after-tax, or $0.53 per diluted share.
(e)	The third quarter 2001 results include customer reimbursements for expenses incurred in previous quarters of approximately $2.5 million pre-tax, $1.9 million after-tax, or $0.06 per diluted share, and restructuring related one-time charges of $0.8 million pre-tax, $0.6 million after-tax, or $0.02 per diluted share.
(f)	The fourth quarter 2001 results include restructuring and related one-time charges of $28.4 million pre-tax, $21.3 million after-tax, or $0.73 per diluted share.
(g)	The market prices of CTS common stock presented reflect the highest and lowest prices on the New York Stock Exchange for each quarter of the last two years.

CTS CORPORATION

34

Five-Year Summary
(In thousands of dollars except per share and other data)

						% of						% of						% of						% of						% of
			2002			Sales			2001			Sales			2000			Sales			1999			Sales			1998			Sales
Summary of Operations
Net sales			$	457,804			100.0		$	577,654			100.0		$	866,523			100.0		$	677,076			100.0		$	370,441			100.0
	Cost of goods sold			366,775			80.1			466,363			80.7			605,598			69.9			471,543			69.6			255,844			69.1
	Selling, general and administrative expenses			59,467			13.0			80,214			13.9			94,501			10.9			80,866			12.0			51,300			13.8
	Research and development expenses			24,118			5.3			32,762			5.7			32,583			3.8			25,348			3.8			13,387			3.6
	Acquired in-process research and development (IPR&D)			—			—			—			—			—			—			12,940			1.9			—			—
	Amortization of intangible assets			3,870			0.8			6,765			1.2			5,211			0.6			3,583			0.5			302			0.1
	Restructuring and impairment charges			18,343			4.0			40,039			6.9			—			—			—			—			—			—
		Operating earnings (loss)		(14,769	)		(3.2	)		(48,489	)		(8.4	)		128,630			14.8			82,796			12.2			49,608			13.4
Other expense—net				(9,031	)		(2.0	)		(12,002	)		(2.1	)		(11,503	)		(1.3	)		(8,741	)		(1.3	)		(167	)		(0.1	)
		Earnings (loss) before income taxes		(23,800	)		(5.2	)		(60,491	)		(10.5	)		117,127			13.5			74,055			10.9			49,441			13.3
Income tax expense (benefit)				(5,950	)		(1.3	)		(15,116	)		(2.6	)		32,796			3.8			22,587			3.3			15,368			4.1
		Earnings (loss) from continuing operations		(17,850	)		(3.9	)		(45,375	)		(7.9	)		84,331			9.7			51,468			7.6			34,073			9.2
Discontinued operations:
	Net earnings (loss) from discontinued operations			—			—			—			—			(529	)		—			—			—			3,401			0.9
		Net earnings (loss)		(17,850	)		(3.9	)		(45,375	)		(7.9	)		83,802			9.7			51,468			7.6			37,474			10.1
Retained earnings—beginning of year				276,988						325,850						245,414						197,285						163,169
Dividends declared				(4,053	)					(3,487	)					(3,366	)					(3,339	)					(3,358	)
Retained earnings—end of year			$	255,085					$	276,988					$	325,850					$	245,414					$	197,285
Earnings (loss) per share:
	Basic:
		Continuing operations	$	(0.54	)				$	(1.61	)				$	3.05					$	1.87					$	1.22
		Discontinued operations		—						—						(0.02	)					—						0.12
		Net earnings (loss) per share	$	(0.54	)				$	(1.61	)				$	3.03					$	1.87					$	1.34
	Diluted:
		Continuing operations	$	(0.54	)				$	(1.61	)				$	2.94					$	1.80					$	1.17
		Discontinued operations		—						—						(0.02	)					—						0.11
		Net earnings (loss) per share	$	(0.54	)				$	(1.61	)				$	2.92					$	1.80					$	1.28
Average basic shares outstanding (000’s)				33,148						28,231						27,623						27,498						28,028
Average diluted shares outstanding (000’s)				33,148						28,231						28,675						28,589						29,228
Cash dividends per share			$	0.12					$	0.12					$	0.12					$	0.12					$	0.12
Capital expenditures				12,833						77,654						119,216						32,896						21,330
Depreciation and amortization				43,373						51,674						44,325						33,907						19,155
Financial Position at Year End
Current assets			$	152,334					$	200,674					$	305,696					$	254,297					$	117,683
Current liabilities				134,556						153,857						202,891						154,461						82,377
Current ratio			1.1 to 1						1.3 to 1						1.5 to 1						1.6 to 1						1.4 to 1
Working capital			$	17,778					$	46,817					$	102,805					$	99,836					$	35,306
Inventories				36,262						50,149						104,316						78,942						33,322
Property, plant and equipment—net				148,632						191,958						224,861						139,692						68,086
Total assets				490,032						567,931						672,929						522,652						293,189
Short-term notes payable				—						—						7,397						7,428						—
Long-term debt				67,000						125,013						178,000						162,000						42,000
Long-term obligations, including long-term debt				78,501						132,287						189,069						176,164						59,828
Shareholders’ equity				265,020						242,873						246,357						164,764						123,839
Common shares outstanding (000’s)				34,101						30,902						27,781						27,462						27,243
Equity (book value) per share			$	7.77					$	7.86					$	8.87					$	6.00					$	4.55
Other Data
Stock price range			$	3.65-$19.56					$	47.88-$13.49					$	82.75-$31.50					$	86.25-20.44					$	21.94-$11.82
Number of employees				5,313						5,837						9,008						7,662						4,105
Number of shareholders at year end				1,585						1,549						1,492						1,498						1,379

CTS CORPORATION

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EX-21

EXHIBIT (21)

CTS CORPORATION AND SUBSIDIARIES

CTS Corporation (Registrant), an Indiana corporation

Subsidiaries:

CTS Corporation (Delaware), a Delaware corporation

CTS of Panama, Inc., a Republic of Panama corporation

CTS Components Taiwan, Ltd., a Taiwan, Republic of China corporation

CTS Electro de Matamoros, S.A., ¹ a Republic of Mexico corporation

CTS Japan, Inc., a Japan corporation

CTS International B.V., a Netherlands corporation

CTS Singapore Pte., Ltd., a Republic of Singapore corporation

CTS Electronics Hong Kong Ltd., ¹ a Hong Kong corporation

CTS (Tianjin) Electronics Company Ltd., a Peoples’ Republic of China corporation

CTS of Canada, Ltd., a Province of Ontario (Canada) corporation

CTS Manufacturing (Thailand) Ltd., ¹ a Thailand corporation

CTS Corporation U.K. Ltd., a United Kingdom corporation

CTS Printex, Inc., a California corporation

CTS Communications Components, Inc., a Delaware corporation

Dynamics Corporation of America, a New York corporation

International Electronic Research Corporation, a California corporation

LTB Investment Corporation, a Delaware corporation

Corporations whose names are indented are subsidiaries of the preceding non-indented corporations. Except as indicated, each of the above subsidiaries is wholly-owned by its parent company. Operations of all subsidiaries and divisions are consolidated in the financial statements filed.

¹  Less than 1% of the outstanding shares of stock is owned of record by nominee shareholders pursuant to national laws regarding resident or nominee ownership.

EX-23

EXHIBIT (23)

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-90697, No. 333-72146, No. 333-88448), Registration Statement on Form S-4 (No. 333-34861), and Registration Statement on Form S-8 (No. 33-62202, No. 333-5730 and No. 333-91335) of CTS Corporation of our report dated January 27, 2003 relating to the financial statements and financial statement schedule, which appears in this Form 10-K for the year ended December 31, 2002.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
February 14, 2003 EX-99 9 exhibit99-a.htm EXHIBIT (99)(A) CERTIFICATION-906

EXHIBIT (99)(a)

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of CTS Corporation (the Company) on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the Report), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 14, 2003	/s/ Donald K. Schwanz
	Donald K. Schwanz
	Chairman of the Board &
	Chief Executive Officer
	/s/ Vinod M. Khilnani
	Vinod M. Khilnani
	Sr. Vice President &
	Chief Financial Officer

EX-99

     
     
     
     
     
     
     
     Exhibit (99)(a), Certification-906

EX-99

EXHIBIT (99)(b)

DESCRIPTION OF STOCK

Our authorized capital stock is comprised of 100 million shares, consisting of 75 million shares of common stock, without par value, and 25 million shares of preferred stock, without par value, including 750,000 shares of Series A Junior Participating Preferred Stock designated for potential issuance as described below.

Common Stock

CTS common stock is traded on the New York Stock Exchange under the symbol “CTS.” The registrar and transfer agent is EquiServe Trust Company N.A. The holders of our common stock are entitled to one vote for each share of common stock held of record on all matters submitted to a vote of our shareholders. Common shareholders have no conversion, preemptive, subscription or redemption rights. All outstanding shares of our common stock are duly authorized, validly issued, fully paid and nonassessable.

Upon satisfaction of our obligations to preferred shareholders, the common shareholders may receive dividends when declared by the board of directors. If we liquidate, dissolve or wind-up our business, holders of our common stock will share equally in the assets remaining after we pay all of our creditors and satisfy all our obligations to preferred shareholders.

Preferred Stock

We are authorized to issue up to 25 million shares of preferred stock. Our board of directors can, without approval of shareholders, issue these shares in one or more series and determine the number of shares of each series and the rights, preferences and limitations of each series, including dividend rights, voting rights, conversion rights, redemption rights and any liquidation preferences, and the terms and conditions of issue. In some cases, the issuance of preferred stock could delay, defer or prevent a change in control of CTS and make it harder to remove present management, without further action by our shareholders. Under some circumstances, preferred stock could also decrease the amount of earnings and assets available for distribution to holders of our common stock if we liquidate or dissolve and could also restrict or limit dividend payments to holders of our common stock.

Our board of directors has designated 750,000 shares of Series A Junior Participating Preferred Stock for potential issuance in connection with our rights agreement described below. We have not issued any shares of preferred stock to date, and we do not plan to issue any shares of preferred stock other than pursuant to the rights agreement described below.

Indiana Business Corporation Law, Rights Agreement and the Articles of Incorporation and Bylaws.

General

In general, our articles of incorporation and bylaws provide that:

o the board of directors fixes the number of directors within a specified range;

o the existing directors will fill any vacancy or newly created directorship with any new director; and

o only the chairman of the board, the board of directors or the president may call a board of directors meeting.

We are an Indiana corporation, and we are subject to the Indiana Business Corporation Law. Under the laws of Indiana, the articles of incorporation generally can be amended only with the approval of our board of directors and our shareholders. Our bylaws provide that the articles of incorporation cannot be amended without the approval of a majority of our board of directors.

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Provisions of the Indiana Business Corporation Law, our articles of incorporation, bylaws and the Rights Agreement described below may discourage or make more difficult the acquisition of control of CTS through a tender offer, open market purchase, proxy contest or otherwise. These provisions are intended to discourage or may have the effect of discouraging certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of CTS first to negotiate with us. Our management believes that the foregoing measures, many of which are substantially similar to the takeover-related measures in effect for many other publicly-held companies, provide benefits by enhancing our ability to negotiate with a person making an unfriendly or unsolicited proposal to take over or restructure CTS. We believe that these benefits outweigh the disadvantages of discouraging these proposals because, among other things, negotiation of these proposals could result in an improvement of their terms.

Provisions of the Indiana Business Corporation Law, in addition to provisions of our articles of incorporation, bylaws and rights agreement, address corporate governance issues, including the rights of shareholders. Some of these provisions could hinder management changes while others could have an anti-takeover effect. We have summarized the key provisions below.

Rights Agreement

On August 28, 1998, our board of directors adopted a Rights Agreement and declared a dividend distribution of one “Right” for each share of our common stock outstanding on September 10, 1998. Each Right entitles the registered holder to purchase from us one one-hundredth of a share of our Series A Junior Participating Preferred Stock at a purchase price of $125.00 per Right, subject to adjustment in certain circumstances (the “Purchase Price”). The description and terms of the Rights are set forth in the Rights Agreement.

The Rights are non-exercisable, non-transferable and non-separable from our common stock until the “Distribution Date,” which occurs on the earlier of:

o the public announcement that a person or group of affiliated or associated persons, referred to as an "Acquiring Person," has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of our then-outstanding common stock (the date of such public announcement being the "Share Acquisition Date") or

o ten business days following the commencement of a tender offer or exchange offer by a person or group of associated or affiliated persons which would result in beneficial ownership by such person or group of 15% or more of our then-outstanding common stock.

Each share of Series A Junior Participating Preferred Stock, when issued, will be non-redeemable and entitled to cumulative dividends and will rank junior to any series of preferred stock senior to it. In connection with the declaration of a dividend on our common stock, a preferential dividend will be payable on the Series A Junior Participating Preferred Stock in an amount equal to the greater of:

o $1.00 per share; and

o an amount equal to 100 times the dividend declared on the common stock, subject to adjustment in certain circumstances.

Subject to customary anti-dilution provisions, in the event of liquidation, the holders of the Series A Junior Participating Preferred Stock will be entitled to a preferential liquidation payment equal to the greater of (a) 100 times the then applicable Purchase Price for the Rights plus accrued and unpaid dividends thereon and (b) an amount equal to 100 times the liquidation payment made on the common stock, if any.

In the event, such an event is defined in the Rights Agreement as a “Flip-In Event,” that

o any person or group becomes an Acquiring Person,

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o any Acquiring Person or its affiliate or associate, directly or indirectly,

- merges into or combines with us and we are the continuing or surviving corporation,

- merges into or combines with any of our subsidiaries,

- in one or more transactions, transfers cash, securities or other property to us in exchange for, or the right to acquire, our capital stock or that of any of our subsidiaries,

- engages in certain transactions with us which are not at arm's length,

- receives any compensation from us other than as a director or full-time employee, or

- receives any financial assistance or tax credits or advantages from us or any of our subsidiaries, or

o during such time as there is an Acquiring Person, there is a reclassification of our securities or we consummate a recapitalization or any other transaction, which in each case has the effect of increasing by more than 1% the proportionate share of any Acquiring Person or any affiliate or associate thereof with respect to any class of our outstanding securities,

o then each holder of a Right will have the right to receive, upon exercise, that number of shares of our common stock as equals the result obtained by:

o multiplying the Purchase Price by the number of one-hundredths of a share of Series A Junior Participating Preferred Stock for which a Right was exercisable prior to the Flip-In Event, and

o dividing that product by 50% of the market price per share of our common stock on the date the Flip-In Event occurs.

In the event, such an event is defined in the Rights Agreement as a “Flip-Over Event,” that at any time after any person or group becomes an Acquiring Person,

o we consolidate with or merge with or into any person and we are not the continuing or surviving corporation,

o any person consolidates with or merges with or into us and we are the continuing or surviving corporation, but all or part of our common stock is changed or exchanged for stock or securities of any other person or cash or any other property, or

o we sell or transfer, in one or more transactions, 50% or more of our assets or earning power to any person,

then each holder of a Right will have the right to receive, upon exercise, that number of shares of common stock of such other person as equals the result obtained by:

o multiplying the Purchase Price by the number of one-hundredths of a share of Series A Junior Participating Preferred Stock for which a Right was exercisable prior to the Share Acquisition Date, and

o dividing that product by 50% of the market price per share of the common stock of such other person on the date the Flip-Over Event occurs.

Upon the occurrence of a Flip-In Event or a Flip-Over Event, all Rights held by any Acquiring Person or any of its affiliates or associates, or any transferee of any of them, will become null and void.

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In general, at any time prior to the Share Acquisition Date, our board of directors may, in its discretion, redeem the Rights in whole, but not in part, at a price of $.01 per Right. In addition, at any time after the Distribution Date but prior to the acquisition by any person or group of affiliated or associated persons of 50% or more of our then outstanding shares of common stock, we may exchange all or a portion of the Rights other than any Rights that have become void at an exchange ratio of one share of common stock per Right. We may also amend the Rights Agreement without the approval of any holders of Rights, except that no amendment may be made that decreases the redemption price to an amount less than $0.01 per Right.

The Rights will expire on the earliest of (a) August 27, 2008, (b) the time at which the Rights are redeemed as provided in the Rights Agreement and (c) the time at which all exercisable Rights are exchanged as provided in the Rights Agreement.

The Rights may have certain anti-takeover effects, including deterring someone from acquiring control of CTS in a manner or on terms not approved by our board of directors. The Rights would not interfere with any merger or other business combination approved by our board of directors, because the Rights may generally be redeemed by us as described above or the Rights Agreement may be amended.

Bylaw Provisions

The Indiana Business Corporation Law permits the board of directors to issue rights, options or warrants for the purchase of shares or other securities of the corporation or any successor in interest. Article XXI of our bylaws provides that our board of directors may include provisions in the terms of those rights, options or warrants that, in any transaction or proposed transaction that would result in a change in control if consummated, require the approval of the “continuing directors” of the corporation for the redemption or exchange of the rights, options or warrants or the amendment of the corresponding contracts, warrants or instruments. The period requiring this approval may not exceed three years after the later of:

o the time that the "continuing directors" no longer constitute the majority of the directors of the corporation; or

o there is an "interested shareholder."

Under our bylaws, a “continuing director” is defined as a director who:

o is not an "interested shareholder" or any affiliate, associate, representative or nominee of an "interested shareholder" or any affiliate of an "interested shareholder;" and

o is either a member of our board of directors as of the date of issuance of the rights, options or warrants or subsequently becomes a member of our board of directors if his or her election or nomination was approved or recommended by a majority of our board of directors (including a majority of continuing directors then on our board and excluding any member whose election resulted from any actual or threatened proxy or other election contest).

Under Chapter 43 of the Indiana Business Corporation Law, an “interested shareholder” is defined as any person that is:

o the beneficial owner of 10% or more of the voting power of the corporation; or

o an affiliate or associate of the corporation who at any time within the 5 years preceding the date in question was the beneficial owner of 10% or more of the voting power of the corporation at that time.

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Business Combinations

Chapter 43 of the Indiana Business Corporation Law restricts certain “business combinations,” including mergers, sale of assets, recapitalizations and reverse stock splits, with interested shareholders. Under Chapter 43, a corporation cannot engage in any business combination with an interested shareholder within five years of the date the person became an interested shareholder unless the corporation’s board of directors approves, in advance of the person becoming an interested shareholder, either (i) the business combination or (ii) the purchase of shares that made the person an interested shareholder. In the absence of the board’s approval, a corporation may engage in a business combination with an interested shareholder after the date that is five years after the date the person became an interested shareholder if either (x) the disinterested shareholders approve the business combination (but they cannot do so until five years after the date the person became an interested shareholder) or (y) among other things, the consideration to be received by the disinterested shareholders in the business combination, which must be in cash or the same form as the interested shareholder used to acquire the largest number of his, her or its shares, is at least equal to the higher of the highest price paid for shares by the interested shareholder or the highest market value per share on either the date of the business combination or the date the person became an interested shareholder.

Chapter 42 of the Indiana Business Corporation Law also contains provisions regulating “control share acquisitions,” which are transactions causing the voting strength of any person acquiring beneficial ownership of shares of a public corporation in Indiana to meet or exceed certain threshold voting percentages (20%, 33% or 50%). Shares acquired in a control share acquisition have no voting rights unless the voting rights are granted by a majority vote of all outstanding shares other than those held by the acquiring person or any officers or employee-directors of the corporation. As permitted under the Indiana Business Corporation Law, our bylaws opt out of Chapter 42 for all control share acquisitions after March 3, 1987. A majority of our board of directors may amend the bylaws so that Chapter 42 would apply, if consistent with the board’s fiduciary responsibilities.

The Indiana Business Corporation Law specifically authorizes directors, in considering whether an action is for the best interest of a corporation, to consider the effects of any corporate action on shareholders, employees, suppliers and customers of the corporation, communities in which offices or other facilities of the corporation are located and any other factors the directors consider pertinent. Under the Indiana Business Corporation Law, directors may be held liable for breaches of their duties as directors only if their actions constitute willful misconduct or if they recklessly disregard their duties.

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EX-99

EXHIBIT 99(c)

RISK FACTORS

Investing in our common stock involves significant risks. Before making an investment, you should read and carefully consider the risks and uncertainties described below. The risks and uncertainties we described are not the only ones we face. Additional risks and uncertainties not currently known to us or that we currently consider immaterial may also affect our business operations. If any of the following risks actually occur, our business, results of operations and financial conditions could be materially adversely affected, and you could lose all or part of your investment.

We may be unable to keep up with rapid technological changes which could make some of our products or processes obsolete before we realize a return on our investment.

The technologies relating to our research and development activities have undergone rapid and significant technological development. Specifically, the market for products in the communications industry is characterized by technological change, frequent new product introductions and enhancements, changes in customer requirements and emerging industry standards. The introduction of products embodying new technologies and the emergence of new industry standards could render our existing products obsolete and unmarketable before we can recover any or all of our research, development and commercialization expenses or the capital invested. The life cycles of our products are difficult to estimate.

Our future success will depend upon our ability to develop and introduce new products and product enhancements on a timely basis that keep pace with technological developments and emerging industry standards and address increasingly sophisticated requirements of our customers. We may be unsuccessful in developing and marketing new products or product enhancements that respond to technological changes or evolving industry standards. We also cannot assure you that we will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products or product enhancements, or that our new products or product enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. If we are unable, for technological or other reasons, to develop and market new products or product enhancements in a timely and cost-effective manner, our business, financial condition and results of operations could be materially adversely affected.

Because a substantial portion of our sales comes from customers in the automotive, communications and computer industries, we are susceptible to trends and factors affecting those industries.

Net sales to the automotive, communications and computer industries represent a substantial portion of our revenues. Factors negatively affecting these industries and the demand for their products, including the current economic slowdown, also negatively affect our business, results of operations and stock price. Any adverse occurrence, including industry slowdown, recession, political instability, armed hostilities, terrorism, excessive inflation, prolonged disruptions in one or more of our customers’ production, or labor disturbances, that results in significant decline in the volume of sales in these industries, or in an overall downturn in the business and operations of our customers in these industries, could have a material adverse effect on our business, financial condition and results of operations. For example, the trend toward consolidation in the communications and computer industries could result in a lower level of acceptance of our products, reduced product requirements, purchasing delays by the combined entity or the loss of a customer. Also, the automotive industry is generally highly unionized and some of our customers have, in the past, experienced labor disruptions. Furthermore, the automotive industry is highly cyclical in nature and sensitive to changes in general economic conditions.

Because a significant portion of our sales currently comes from a small number of customers, any decrease in sales from these customers could adversely affect our operating results.

We depend on a small number of customers for a large portion of our business, and changes in the level of our customers’ orders have, in the past, had a significant impact on our operating results. If a major customer reduces the amount of business it does with us, there would be an adverse impact on our operating results. Our 15 largest customers represent a substantial portion of our sales. Our two largest customers in recent periods were Hewlett Packard Company (Compaq Computer Corporation prior to acquisition by Hewlett Packard in May 2002) and Motorola, Inc.

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We expect to continue to depend on sales to our major customers. Some of our customers are increasingly outsourcing their purchasing activities, with the result that a greater emphasis is being placed on cost while maintaining an emphasis on quality. Since it is difficult to replace lost business on a timely basis, it is likely that our operating results would be adversely affected if one or more of our major customers were to cancel, delay or reduce a large amount of business with us in the future. If one or more of our customers were to become insolvent or otherwise unable to pay for our services, our operating results, financial condition and cash flows could be adversely affected.

We face risks resulting from the global economic slowdown.

The global economic downturn has slowed demand in the CTS-served automotive, communications and computer markets. These served markets for our electronic components and sensor and Electronics Manufacturing Services (EMS) products have softened and may continue to soften.

As a result, our revenues and earnings have been negatively affected and this softening demand may create additional pricing pressures which could further affect our revenues and earnings.

Further deterioration of revenues and earnings, beyond current levels, could have a negative effect on our business, results of operations, cash flows and financial condition. This could also have a negative effect on the price of our common stock and could also make it difficult for us to service our debt and to comply with the covenants in our credit facility. Violation of the covenants in our credit facility could require substantial fees to our banks until the violation is corrected. In the event the violation cannot be corrected, we could be required to negotiate a new credit facility with a new bank group or raise equity or additional debt in public or private transactions.

Because we have significant non-U.S. operations, our financial condition and operating results could be adversely affected by economic, political, regulatory and other factors existing in non-U.S. countries in which we operate.

We have substantial international operations, which are subject to inherent risks, which may adversely affect us, including:

o political and economic instability in countries in which we have manufacturing facilities;

o expropriation;

o currency controls;

o changes in government regulation;

o high levels of inflation or deflation;

o changes in labor conditions and difficulties in staffing and managing our non-U.S. operations;

o greater difficulty in collecting our accounts receivable and longer payment cycles;

o less favorable intellectual property laws;

o increases in the duties and taxes we pay;

o exposure to different legal standards; and

o fluctuations in exchange rates.

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In addition, these same factors may also place us at a competitive disadvantage to some of our non-U.S. competitors.

We face risks relating to the protection of our intellectual property.

The success of our business depends, in part, upon our ability to protect trade secrets, copyrights, and patents, obtain or license patents and operate without infringing on the rights of others. We rely on a combination of trade secrets, copyrights, patents, nondisclosure agreements and technical measures to protect our proprietary rights in our products and technology. The steps taken by us in this regard may not be adequate to prevent misappropriation of our technology, and our competitors may independently develop technologies that are substantially equivalent or superior to our technology. In addition, the laws of some non-U.S. countries do not protect our proprietary rights to the same extent as do the laws of the United States. Although we continue to evaluate and implement protective measures, we cannot assure you that these efforts will be successful.

We believe that patents will play an increasingly important role in our commercial business. However, we cannot assure you that any issued patent will provide us with any competitive advantages nor can we assure you that the patents will not be challenged by third parties or that the patents of others will not adversely affect our ability to do business.

There is also a risk that infringement claims may be brought against us or our customers in the future. If someone does successfully assert an infringement claim, we may be required to spend significant time and money to develop a product or process that does not infringe upon the rights of that other person or to obtain licenses for the technology, process or information from the owner. We may not be successful in the development, or licenses may not be available on commercially acceptable terms, if at all.

We may be unable to compete effectively against larger competitors.

We operate in a highly competitive industry. We compete against many domestic and non-U.S. companies, some of which have substantially greater manufacturing, financial, research and development and marketing resources than we do. Although no single competitor competes with us along all product lines, we compete with a variety of suppliers with respect to different subsets of our products. Additionally, many of our customers are seeking to consolidate their business among one or more preferred or qualified suppliers. If any customer becomes dissatisfied with our prices, quality or timeliness of delivery, among other things, it could award future business or, in an extreme case, move existing business to our competitors. Moreover, some of our customers could choose to manufacture and develop particular components themselves rather than purchase them from us. Increased competition could result in price reductions, reduced profit margins and loss of market share, each of which could adversely affect our results of operations and financial condition. In addition, certain of our competitors have also been engaged in merger and acquisition transactions. Consolidations by competitors are likely to create entities with increased market share, customer bases, proprietary technology and marketing expertise and expanded sales force size. These developments may adversely affect our ability to compete against these competitors, many of which are significantly larger and have greater financial and other resources. We cannot assure you that our products will continue to compete successfully with our competitors’ products.

Customer pressure to reduce prices may cause reductions in sales or profit margins.

Many of our customers are under pressure to reduce the price of their products or services, and, therefore, we expect to continue to experience pressure from our customers to reduce the prices of our products. In many of our markets, average sales prices of established products have declined in the past. We anticipate that prices will continue to decline, especially within the electronics industry primarily due to excess capacity, which could negatively impact our sales and/or gross profit margins. Accordingly, to remain competitive, we believe that we must continue to develop product enhancements and new technologies, and improve manufacturing efficiencies, that will slow the price declines of our products or reduce the cost of producing and delivering our products. If we fail to do so, our results of operations and financial condition would be adversely affected.

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We are subject to a variety of environmental laws that expose us to potential financial liability.

Our operations are regulated under a number of federal, state and non-U.S. environmental and safety laws and regulations that govern, among other things, the discharge of hazardous materials into the air and water as well as the handling, storage and disposal of these materials. These laws and regulations include the Clean Air Act, the Clean Water Act, the Resource, Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation and Liability Act, as well as analogous state and foreign laws. Compliance with these environmental laws is a major consideration for us because we use hazardous materials in our manufacturing process. In addition, because we are a generator of hazardous wastes, we, along with any other person who arranges for the disposal of our wastes, may be subject to financial exposure for costs associated with an investigation and any remediation of our former and existing manufacturing sites, as well as sites at which we have arranged for the disposal of hazardous wastes, even if we fully comply with applicable environmental laws. If we violate environmental laws, we could be liable for fines, damages and costs of remedial actions and could also be subject to revocation of our environmental permits. Any revocation could require us to cease or limit production at one or more of our facilities, thereby negatively impacting our revenues and potentially causing our common stock price to decline. Environmental laws, including environmental laws in the European Union and other non-U.S. countries, could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violation, which also could negatively impact our operating results.

The price of our common stock has been volatile and may continue to fluctuate significantly.

The market price for our common stock has been and may continue to be volatile. From January 2, 2001 to February 11, 2003 the last sale price of our common stock ranged from a low of $3.73 per share to a high of $46.13 per share. We expect our stock to continue to be subject to fluctuations as a result of a variety of factors, including factors beyond our control. These include:

o changes in financial estimates by securities analysts;

o changes in market valuations of related companies;

o announcements by us or our competitors of new products or technical innovations or of significant acquisitions, strategic partnerships or joint ventures;

o general and industry stock market conditions, particularly in the communications industry;

o general U.S. and worldwide economic conditions;

o conditions in our industries such as competition, demand for services and technological advances;

o changes in our revenues and earnings;

o changes in our customer base, including any loss of a major customer or a significant decrease in business from a major customer, and our contracts with customers;

o introduction and market acceptance of our customers' new products and changes in demand for our customers' existing products;

o effectiveness in managing our manufacturing processes and related assets, including our inventory and fixed assets;

o adverse or unfavorable publicity regarding us or our products;

o additions or departures of key personnel;

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o any deviations in net revenues or in losses from levels expected by securities analysts; and

o future sales of common stock.

We may fail to meet expectations of our shareholders or of analysts at some time in the future, and our stock price could decline as a result.

In addition, sales of a substantial number of shares of our common stock in the public market, or the appearance that such shares are available for sale, could adversely affect the market price for our common stock.

Our credit facility contains provisions that could materially restrict our business.

Our credit facility contains a number of significant covenants that, among other things, restrict our ability to:

o dispose of assets;

o incur additional debt;

o guarantee third-party obligations;

o repay other debt or amend other debt instruments;

o create liens on assets;

o enter into capital leases;

o make investments, loans or advances;

o make acquisitions or engage in mergers or consolidations;

o make capital expenditures; and

o engage in certain transactions with our subsidiaries and affiliates.

In addition, under our credit facility, we are required to meet a number of financial ratios and tests. Our ability to comply with these covenants may be affected by events beyond our control. If we breach any of these covenants or restrictions, it could result in an event of default under our credit facility. Any breach might permit our lenders to declare all amounts owing thereunder to be due and payable, and our senior lenders could terminate their commitments to make further extensions of credit under our credit facility. Additionally, if we were unable to repay debt to our secured lenders, they could proceed against the collateral securing the debt.

Anti-takeover provisions could delay, deter or prevent a change in control.

We are an Indiana corporation subject to Indiana state law. Some of these state laws could interfere with or restrict takeover bids or other change-in-control events affecting us. One statutory provision prohibits, except under specified circumstances, us from engaging in certain business combinations, including any mergers, sale of assets and recapitalizations with any shareholder who owns 10% or more of our common stock or any affiliate of the shareholder.

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We have opted out of Indiana’s “control share acquisition” provisions, which restrict the voting rights of shares acquired in transactions which cause the beneficial owner of the shares to exceed specified ownership thresholds. We could, however, by action of the board of directors, elect to have those provisions apply.

In addition, our articles of incorporation allow us to issue up to an additional 24.3 million shares of common stock and 25 million shares of preferred stock without shareholder approval. The board of directors has the authority to determine the price and terms under which the additional common or preferred stock may be issued. Issuance of this common and preferred stock could make it more difficult for a third party to acquire control of CTS.

Also, provisions in our articles of incorporation, bylaws, and other agreements to which we are a party, could delay, deter or prevent a change in control of CTS. These provisions, alone or in combination with each other and with the rights agreement described below, may discourage transactions involving actual or potential changes in control, including transactions that otherwise could involve payment of a premium over the prevailing market price to shareholders for their common stock.

On August 28, 1998, our board of directors adopted a shareholder rights agreement, pursuant to which uncertificated stock purchase rights were distributed to our shareholders at a rate of one right for each share of common stock held of record as of September 10, 1998. The rights agreement is designed to enhance the board’s ability to prevent an acquirer from depriving shareholders of the long-term value of their investment and to protect shareholders against attempts to acquire CTS by means of unfair or abusive takeover tactics. However, the existence of the rights agreement may impede a takeover of CTS not supported by the board, including a takeover that may be desired by a majority of our shareholders or involving a premium over the prevailing stock price.

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