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, 2003
       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.   X 

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 June 27, 2003, was approximately $339.2 million. There were 36,071,509 shares of Common Stock, without par value, outstanding on February 17, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the 2003 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 April 28, 2004, are incorporated by reference in Part 3.

   TABLE OF CONTENTS

ITEM		PAGE
	PART 1
1.	Business	1
2.	Properties	8
3.	Legal Proceedings	9
4.	Submission of Matters to a Vote of Security Holders	9
	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	10
9A.	Controls and Procedures	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.	Principal Accounting Fees and Services	13
	PART 4
15.	Exhibits, Financial Statements Schedules, and Reports on Form 8-K	14
SIGNATURES		17

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PART 1

Item 1.     Business

CTS Corporation (CTS) 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. Filings 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 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. CTS’ 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.

BUSINESS SEGMENTS AND PRODUCTS BY MAJOR MARKET

CTS has two reportable business segments: 1) Components and Sensors and 2) Electronics Manufacturing Services (EMS).

Components and sensors are products that 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 duplexers used in communications and computer markets;

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

• piezoceramics substrates and assemblies used in medical, industrial and other applications; and

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

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.

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Electronics Manufacturing Services (EMS) include the higher level assembly of electronic and mechanical components into a finished subassembly, including printed circuit assembly, or the final assembly of a product performed under a contract manufacturing agreement with OEMs or other contract manufacturers. EMS also includes the design of interconnect systems and complex backplanes, global supply-chain management services, such as bill-of-material development and sourcing, related manufacturing and design services as may be required by the customer, and logistical and transportation services related to delivery completion. EMS services are principally sold into the computer and communications OEM markets. In addition, the CTS EMS segment also serves the networking, medical diagnostic and imaging, industrial and automotive industries.

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)		2003		2002		2001		2003		2002		2001		2003		2002		2001
Markets
Automotive	$	118.1	$	115.9	$	114.3	$	—	$	—	$	—	$	118.1	$	115.9	$	114.3
Communications		74.4		112.7		196.8		44.3		28.2		51.8		118.7		140.9		248.6
Computer		29.8		16.9		22.8		161.2		156.1		156.6		191.0		173.0		179.4
Other		30.6		25.4		32.2		4.6		2.6		3.2		35.2		28.0		35.4
Consolidated net sales	$	252.9	$	270.9	$	366.1	$	210.1	$	186.9	$	211.6	$	463.0	$	457.8	$	577.7

	Components & Sensors				EMS				Total
(As a % of consolidated net sales)		2003	2002	2001		2003	2002	2001		2003	2002	2001
Markets
Automotive		26%	25%	20%		—	—	—		26%	25%	20%
Communications		16%	25%	34%		9%	6%	9%		25%	31%	43%
Computer		6%	4%	4%		35%	34%	27%		41%	38%	31%
Other		7%	5%	5%		1%	1%	1%		8%	6%	6%
% of consolidated net sales		55%	59%	63%		45%	41%	37%		100%	100%	100%

2

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 notes to the consolidated 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 markets 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 and Duplexers	•	•	•	•
Quartz Crystals, Clocks,    Precision Oscillators and    Frequency Modules	•	•	•	•
Automotive Sensors	•
Resistor Networks	•	•	•	•
ClearONE™ Terminators		•	•	•
DIP Switches and    Potentiometers	•	•	•	•
Actuators	•
Pointing Sticks/    Cursor Controls			•	•
Low Temperature    Cofired Ceramics (LTCC)	•	•		•
Piezoceramics Products				•
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, Scotland, Singapore, Taiwan and the United States. Approximately 82% of 2003 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 2003, 14% 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 2003, independent distributors accounted for approximately 4% of net sales.

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 (primarily silver and palladium), 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 2003, substantially all of these materials were available in adequate quantities to meet CTS’ production demands.

CTS does not currently anticipate any raw material shortages that 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 than optimal prices 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.

4

WORKING CAPITAL

Working capital requirements are generally dependent on the overall level of business activities. 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 that 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 26 new U.S. patents in 2003 and currently holds in excess of 355 U.S. patents with hundreds of non-U.S. counterpart patents.

CTS has licensed the right to use several of its patents to both U.S. and non-U.S. companies. In 2003, 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 71% of net sales in 2003, 73% of net sales in 2002 and 75% of net sales in 2001. This percentage is decreasing as the Company continues efforts to broaden its customer base, particularly in automotive and wireless infrastructure offerings. Sales to Hewlett-Packard Company (Hewlett-Packard) amounted to 33% of net sales in 2003 and 2002. Hewlett-Packard acquired Compaq Computer Corporation (Compaq) in May 2002. The Compaq sales are included in the Hewlett-Packard percentages in 2003 and 2002. In 2001, sales to Compaq were 28% of net sales while sales to Hewlett-Packard were not significant. Sales to Motorola, Inc. (Motorola) accounted for 13% of net sales in 2003, 12% of net sales in 2002, and 17% of net sales in 2001.

The Components and Sensors business segment revenues from Motorola represent $38.6 million, or 14%, and $84.3 million, or 23%, of the segment’s revenue for the years ended December 31, 2002 and 2001, respectively. Components and Sensors business segment revenues from Motorola were less than 10% of the segment’s revenue in 2003.

EMS business segment revenues from Hewlett-Packard represent $151.8 million, or 72%, and $150.4 million, or 80% of the segment’s revenue for the years ended December 31, 2003 and 2002, respectively. EMS business segment revenues from Motorola were $40.2 million, or 19%, of the segment’s revenue for the year ended December 31, 2003. EMS business segment revenues from Compaq were $160.2 million, or 76% of the segment’s revenue for the year ended December 31, 2001.

5

Although the Company is making efforts to broaden its customer base, we depend on a small number of customers for a large portion of our business. 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, or substantially changes the terms of that business, there would be an adverse impact on our operating results.

Although the Company is making efforts to broaden its customer base, we expect to continue to depend on sales to our major customers. As our customers are under no obligation to continue to do business with us on a long-term basis, there is always the possibility that one or more customers may choose to work with a competitor and reduce their business with us. Customers may also reduce or delay their business with us because of economic or other conditions or decisions that reduce their need for CTS products or services. 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 products and/or services, 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 25, 2004 and January 26, 2003.

($ in millions)	January 25, 2004		January 26, 2003
Components and Sensors	$	52.1	$	52.3
EMS		18.5		10.9
Total	$	70.6	$	63.2

Order backlog at the end of January 2004 will generally be filled during the 2004 fiscal year.

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 process capability, price, technology, quality, reliability, delivery and service in the markets in which we participate.  Some of its competitors have greater manufacturing and financial resources.  However, CTS generally does not pursue extremely high volume, highly price sensitive business, as do some of its major competitors.  Some competitors are also CTS customers for components and sensors, as well as EMS services.

6

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 its competitors. These trends create opportunities for CTS, but also increase the risk of loss of business to competitors. CTS is subject to competitive risks that are part of 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 and with EMS services oriented toward high mix and low to medium volume outsourcing needs of OEMs.

NON-U.S. REVENUES AND RISKS

In 2003, 60% of net sales to external customers originated from non-U.S. operations compared to 56% in 2002 and 57% in 2001. At December 31, 2003, approximately 37% of total CTS assets were located at non-U.S. operations compared to 39% of total CTS assets at the end of 2002. 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 $144.0 million in 2003, compared to $153.8 million in 2002 and $210.4 million in 2001. Net sales to external customers originating from non-U.S. operations for the EMS business segment were $132.3 million in 2003, compared to $104.0 million in 2002 and $120.6 million in 2001. 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 notes to the consolidated financial statements as noted in the Index appearing under Item 15 (a) (1) and (2).

RESEARCH AND DEVELOPMENT ACTIVITIES

In 2003, 2002 and 2001, CTS spent $21.5 million, $24.1 million, and $32.8 million, respectively, for research and development. The reductions in research and development spending from 2001 to 2003 reflect savings due to organizational consolidation, changing business mix and streamlining of research and development activities. Significant ongoing research and development activities continue in CTS’ Components and Sensors business segment, particularly for automotive products in support of growth initiatives. Our research and development investment is primarily focused at expanded applications and new product development, as well as current product and process enhancements. Research and development expenditures in the EMS business segment are typically very low.

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 460 engineers and technicians who are specifically assigned to the development and engineering support 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 5,041 people at December 31, 2003, and 75% of these people were employed outside the United States. Approximately 255 CTS employees at one location in the United States were covered by two collective bargaining agreements as of December 31, 2003. One agreement will expire in 2010 and the other will expire in 2008. CTS employed 5,313 people at December 31, 2002.

7

ADDITIONAL INFORMATION

Information responsive to Item 401(b) of Regulation S-K is contained under the caption "Directors and Executive Officers of the Registrant" in Item 10 of this Annual Report on Form 10-K and is incorporated herein by reference.

Exhibit 99(a) 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(b) 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 16, 2004, 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	267,000	Owned (1)	Components and Sensors
Berne, Indiana	249,000	Owned (2)	Components and Sensors
Burbank, California	9,200	Owned	Components and Sensors
Burbank, California	4,850	Leased	Components and Sensors
Dongguan, China	36,380	Leased	Components and Sensors
Elkhart, Indiana	319,000	Owned (2)	Components and Sensors
Glasgow, Scotland	75,000	Owned	Components and Sensors and EMS
Glasgow, Scotland	20,000	Leased	Components and Sensors and EMS
Glasgow, Scotland	37,000	Leased	Components and Sensors and EMS
Kaohsiung, Taiwan	133,000	Owned	Components and Sensors
Londonderry, New Hampshire	83,000	Leased	EMS
Matamoros, Mexico	51,000	Owned	Components and Sensors
Singapore	159,000	Owned (3)	Components and Sensors and EMS
Streetsville, Ontario, Canada	112,000	Owned	Components and Sensors
Tianjin, China	210,000	Owned (4)	Components and Sensors and EMS
West Lafayette, Indiana	102,500	Owned (2)	Components and Sensors
Total Manufacturing	1,867,930

⁽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.

8

Non-Manufacturing Facilities	Square Footage	Owned/ Leased	Description	Business Segment
Baldwin, Wisconsin	39,000	Owned	Held for Sale	Components and Sensors
Bloomingdale, Illinois	110,000	Leased	Administrative Offices     and Research	Components and Sensors
Brownsville, Texas	85,000	Owned	Warehousing Facility	Components and Sensors
Carlisle, Pennsylvania	114,200	Leased	Idle Facility	Components and Sensors
Elkhart, Indiana	93,000	Owned (1)	Administrative Offices     and Research	Components and Sensors     and EMS
Kowloon, Hong Kong	600	Leased	Sales Office	Components and Sensors
Longtan, Taiwan	280,000	Owned	Held for Sale	Components and Sensors
Sandwich, Illinois	94,000	Owned (1)	Held for Sale	Components and Sensors
Shanghai, China	1,708	Leased	Sales Office	Components and Sensors
Southfield, Michigan	1,700	Leased	Sales Office	Components and Sensors
Taipei, Taiwan	1,250	Leased	Sales Office	Components and Sensors
Yokohama, Japan	1,400	Leased	Sales Office	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 certain 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 notes to the consolidated 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.

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

During the fourth quarter of 2003, no matter was submitted to a vote of CTS security holders.

9

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 is located in “Shareholder Information,” appearing in the 2003 Annual Report to Shareholders, portions of which are filed herewith as Exhibit (13) and are incorporated herein by reference (2003 Annual Report). On February 17, 2004, there were approximately 1,529 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 new 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 2003 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 years, is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations (2001-2003),” included in the 2003 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 (2001-2003),” included in the 2003 Annual Report and incorporated herein by reference and in Note A, “Summary of Significant Accounting Policies — Financial Instruments,” of the notes to the consolidated 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 are included in the 2003 Annual Report and incorporated herein by reference.

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

None.

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Item 9A.     Controls and Procedures

CTS maintains a set of disclosure controls and procedures designed to ensure information required to be disclosed by CTS in reports that it files or submits under the Securities Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Management recognizes that 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. As of December 31, 2003, the end of the year covered by 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 upon that evaluation, the chief executive officer and chief financial officer have concluded that CTS’ disclosure controls and procedures are effective at the reasonable assurance level referred to above. 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.

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 under the caption “Item 1. — Election of Directors” in the 2004 Proxy Statement for the 2004 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission (2004 Proxy Statement), 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 2004 Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference.

Information responsive to Items 401(h) and 401(i) of Regulation S-K pertaining to the Audit Committee of the Board of Directors is contained under the caption "2003 Committees of the Board, Audit Committee" in the 2004 Proxy Statement, and is incorporated herein by reference.

CTS has adopted a Code of Ethics that applies to all of its employees, including its principal executive officer, principal financial officer and principal accounting officer or controller. CTS’ Code of Ethics is posted on its website at www.ctscorp.com/governance/code_of_ethics.htm.

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, 2003. They are expected to serve as executive officers until the next annual meeting of the Board of Directors, scheduled on April 28, 2004, at which time the election of officers will be considered again by the Board of Directors.

LIST OF OFFICERS

Name	Age	Positions and Offices
Donald K. Schwanz	59	Chairman, President and Chief Executive Officer
Donald R. Schroeder	55	Executive Vice President and Chief Technology Officer
Vinod M. Khilnani	51	Senior Vice President and Chief Financial Officer
H. Tyler Buchanan	51	Senior Vice President
James L. Cummins	48	Senior Vice President Administration
Richard G. Cutter, III	57	Vice President, General Counsel and Secretary
George T. Newhart	61	Vice President Investor Relations
Thomas A. Kroll	49	Vice President and Controller
Matthew W. Long	42	Treasurer

11

BRIEF HISTORY OF OFFICERS

Donald K. Schwanz  was elected President in January 2001 and named Chief Executive Officer effective October 1, 2001. Mr. Schwanz was appointed Chairman of the Board of Directors on January 1, 2002. From January 2001 through October 1, 2001, Mr. Schwanz served as Chief Operating Officer of CTS. 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.

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 through 1994, he served as Director of Human Resources.

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 through 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 Treasurer effective May 1, 2003. From December 2000 through May 2003, Mr. Long served as Assistant Treasurer. 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 through July 2000.

Item 11.     Executive Compensation

Information responsive to Item 402 of Regulation S-K pertaining to management remuneration is contained in the 2004 Proxy Statement under the captions “Director Compensation” and “Executive Compensation,” 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 2004 Proxy Statement under the caption “Stock Ownership Information,” and is incorporated herein by reference.

12

Equity Compensation Plan Information

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

		(a)			(b)			(c)
	Number of securities to be issued upon exercise of outstanding Options, warrants and rights			Weighted-average exercise price of outstanding options, warrants and rights.			Number of securities remaining available for future insurance under equity compensation plans (excluding securities reflected in Column (a))
Plan Category
Equity compensation plans approved by security holders		1,621,925			$17.33			1,139,778
Equity compensation plans not approved by security holders		52,981	(1)		—	(1)		—	(1)
Total		1,674,906						1,139,778

_________________

⁽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, CTS annually credits each deferred stock account with an additional number of common stock units representing the amount of dividends which would have been paid on an equivalent number of shares of CTS common stock for each quarter during the preceding calendar year. 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, 2003, the deferred stock accounts contained a total of 52,981 units.

Item 13.     Certain Relationships and Related Transactions

Information responsive to Item 404 of Regulation S-K is contained in the 2004 Proxy Statement under the caption "Certain Business Relationships" and is incorporated herein by reference.

Item 14.     Principal Accounting Fees and Services

The information contained in the 2004 Proxy Statement under the caption "Independent Public Accountants" is incorporated herein by reference.

13

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) 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).

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

(10)(a) 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). *

(10)(b) 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).

(10)(c) 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). *

(10)(d) 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). *

(10)(e) 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). *

(10)(f) 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).

(10)(g) Rights Agreement between CTS Corporation and National City Bank, N.A., (successor to EquiServe Trust Company, N.A.) 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).

(10)(h) CTS Corporation Stock Retirement Plan for Non-Employee Directors, effective April 30, 1990, as amended (incorporated by reference to Exhibit (10)(a) to the Quarterly Report on Form 10-Q for the quarter ended March 30, 2003, filed with the Commission on April 23, 2003). *

14

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

(10)(i) Prototype Severance Agreements between CTS Corporation and its officers, general managers and managing directors (incorporated by reference to Exhibit (10)(k) to the Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Commission on February 14, 2003). *

(10)(j) 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). *

(10)(k) 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).

(10)(l) Form of 6½% 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).

(10)(m) Amendment to Rights Agreement, dated October 15, 2001, to the Rights Agreement dated as of August 28, 1998, between CTS Corporation and National City Bank, N.A., (successor to EquiServe Trust Company, N.A.) (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).

(10)(n) Amendment No. 2, dated as of April 22, 2002, to the Rights Agreement, dated as of August 28, 1998, between CTS Corporation and National City Bank, N.A., (successor to EquiServe Trust Company, N.A.), 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).

(10)(o) 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). *

(10)(p) CTS Corporation Retirement Plan (formerly the CTS Corporation Salaried Employees´ Pension Plan) (incorporated by reference to Exhibit (10)(t) to the Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Commission on February 14, 2003). *

(10)(q) Credit Agreement dated as of July 14, 2003 by and among CTS Corporation, the Lenders named therein and Harris Trust and Savings Bank as L/C Issuer and Administrative Agent (incorporated by reference to Exhibit 10(a) to the Quarterly Report on Form 10-Q for the quarter ended June 29, 2003, filed with the Commission on July 25, 2003).

(10)(r) CTS Corporation 2003 Excess Benefit Retirement Plan, as adopted effective July 1, 2003 (incorporated by reference to Exhibit 10(a) to the Quarterly Report on Form 10-Q for the quarter ended September 28, 2003, filed with the Commission on October 29, 2003). *

(10)(s) Amendments to the CTS Corporation Retirement Plan (formerly known as the CTS Corporation Salaried Employees’ Pension Plan) (incorporated by reference to Exhibit 10(b) to the Quarterly Report on Form 10-Q for the quarter ended June 29, 2003, filed with the Commission on July 25, 2003). *

(13) Portions of the 2003 Annual Report to shareholders incorporated herein, filed herewith.

(21) Subsidiaries filed herewith.

15

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

(23) Consent of PricewaterhouseCoopers LLP to incorporation by reference of their report dated January 26, 2004 relating to the financial statements and financial statement schedule in certain registration statements, filed herewith.

(31)(a) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(31)(b) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

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

(99)(a) Description of stock filed herewith.

(99)(b) Risk Factors, filed herewith.

_________________

* Management contract or compensatory plan or arrangement.

(b)  Reports on Forms 8-K

During the three-month period ending December 31, 2003, CTS filed the following reports on Form 8-K:

• Report dated October 23, 2003, under item 7., Financial Statements and Exhibits, containing the press release announcing third quarter 2003 financial results. The Form 8-K also contained a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP financial measures.

• Report dated November 5, 2003, under Item 7., Financial Statements and Exhibits, and under Item 9., Regulation FD Disclosure, containing a copy of material used in an investor relations presentation. The Form 8-K also contained a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP financial measures.

16

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 18, 2004	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 18, 2004	/s/ Donald K. Schwanz
	Donald K. Schwanz, Chairman, President and Chief Executive Officer (Principal Executive Officer)
Date:  February 18, 2004	/s/ Walter S. Catlow
	Walter S. Catlow, Director
Date:  February 18, 2004	/s/ Lawrence J. Ciancia
	Lawrence J. Ciancia, Director
Date:  February 18, 2004	/s/ Thomas G. Cody
	Thomas G. Cody, Director
Date:  February 18, 2004	/s/ Gerald H. Frieling, Jr.
	Gerald H. Frieling, Jr., Director
Date:  February 18, 2004	/s/ Roger R. Hemminghaus
	Roger R. Hemminghaus, Director
Date:  February 18, 2004	/s/ Michael A. Henning
	Michael A. Henning, Director
Date:  February 18, 2004	/s/ Robert A. Profusek
	Robert A. Profusek, Director
Date:  February 18, 2004	/s/ Patricia K. Vincent
	Patricia K. Vincent, Director
Date:  February 18, 2004	/s/ Vinod M. Khilnani
	Vinod M. Khilnani Senior Vice President and Chief Financial Officer (Principal Financial Officer)
Date:  February 18, 2004	/s/ Thomas A. Kroll
	Thomas A. Kroll Vice President and Controller

17

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 2003 Annual Report are referenced in Part II, Item 8, filed herewith as Exhibit (13) and incorporated herein by reference:

Consolidated statements of earnings (loss) - Years ended December 31, 2003, December 31, 2002 and December 31, 2001

Consolidated balance sheets - December 31, 2003 and December 31, 2002

Consolidated statements of shareholders’ equity - Years ended December 31, 2003, December 31, 2002 and December 31, 2001

Consolidated statements of cash flows - Years ended December 31, 2003, December 31, 2002 and December 31, 2001

Notes to consolidated financial statements

Supplementary Financial Data:

Quarterly Results of Operations (Unaudited) - Years ended December 31, 2003 and December 31, 2002

Per Share Data (Unaudited) - Years ended December 31, 2003 and December 31, 2002

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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, 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 26, 2004

S-2

CTS CORPORATION

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

			Additions
(In thousands of dollars)	Balance at Beginning of Period		Charged to Expense			Charged to Other Accounts		Deductions			Balance at End of Period
Year ended December 31, 2003:
Allowance for doubtful receivables	$	1,694	$	396		$	0	$	(505	)	$	1,585
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

S-3

EX-13

CTS Corporation
Form 10-K 2003

EXHIBIT (13)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (2001-2003)

Overview

CTS is a global manufacturer of components and sensors to the automotive, communications and computer markets. The Company also offers specialized electronic manufacturing, design and supply-chain services to industrial, communications and computing infrastructure OEMs. Sales and marketing is accomplished through CTS sales engineers, independent manufacturers’ representatives and distributors. Total sales in 2003 of $463 million were reported through two business segments, Components and Sensors and Electronics Manufacturing Services (EMS), which represent 55% and 45% of CTS’ total sales in 2003, respectively.

In 2003, the Company experienced a year-to-year sales increase and returned to full-year profitability for the first time in two years. During this period, the Company focused on three key priorities: (1) increasing net earnings even at current sales volumes; (2) strengthening the balance sheet; and (3) developing new sources of revenue to drive future growth. During 2003, CTS saw an upturn in some of its served markets especially late in the year. Additionally, CTS saw continued progress in growth initiatives which include new automotive platform positions and precision frequency products for the communications infrastructure market.

As discussed in more detail throughout the MD&A:

• After two years of significant decline, CTS’ revenues increased by 1% during 2003 compared to 2002. This followed a sales decline of 21% during 2002. Sales increased $5.2 million in 2003. However, sales growth in 2003 was impacted by our decision, announced late in 2002, to go end-of-life in certain low margin products. Sales of these end-of-life products declined substantially between 2002 and 2003. Included in net sales were end-of-life product sales of $6.7 million in 2003 and $22.9 million in 2002.

• Gross margins were 21% and 20% during 2003 and 2002, respectively. The steady improvement in 2003 and 2002 resulted primarily from cost reduction and restructuring initiatives, including the consolidation of certain operations into Asia. Margin improvement was partially offset by the increase in sales for our EMS business segment relative to the total sales. EMS margins are generally lower than the margins in Components and Sensors. However, it should be noted that the investment intensity in EMS also tends to be lower; and, as a result, the expectations for return on assets are comparable in both segments.

• The Company also continued to reduce selling, general and administrative and research and development expenses through restructuring initiatives.

• The pre-tax cost of business restructuring, asset impairment and related one-time charges was $4.6 million, $19.6 million and $50.7 million during 2003, 2002, and 2001, respectively.

• Net earnings of $12.6 million in 2003 followed losses of $17.9 million and $45.4 million in 2002 and 2001 respectively.

• Debt balances were $75.9 million at the end of 2003, versus $95.4 million in 2002. Funds used to reduce debt were generated primarily from equity placements. Interest expense decreased over the last two years, benefiting primarily from the lower debt balances. Interest expense was $7.7 million in 2003, $10.2 million in 2002 and $12.8 million in 2001.

1

Outlook

CTS expects continued improvement in financial results in 2004 based on sales growth and operational improvements.

• Sales are expected to grow in the 3 - 6% range in 2004 due primarily to improved shipments of automotive and EMS products.

• Net earnings are expected to improve in 2004 from increased volumes and additional expense reductions. Gross margins are anticipated to improve up to one percentage point primarily due to a reduction in depreciation of approximately $4 million. Pension income is expected to decline further in 2004. However, the decrease will be partially offset by an anticipated gain on the sale of excess land in Canada. In addition, CTS expects interest expense will decrease approximately $1 million in 2004 primarily due to lower outstanding debt balances. As a result, 2004 earnings per share is expected to be in the $0.40 - $0.44 range.

These forward-looking statements are based on management’s expectations, certain assumptions and currently available information. Actual results may differ materially from those reflected in the forward-looking statements due to a variety of geopolitical, economic, health, industry and other factors which could affect the Company’s operating results, liquidity and financial condition.

Critical Accounting Policies

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.

CTS’ served 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. 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 served markets 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.

2

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.

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 necessary. 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 2003 against the U.S. net deferred tax assets including the U.S. net operating loss carryforward asset of $47 million expiring in 2021-2023. The Company assessed the future realization of these deferred tax assets utilizing taxable income projections for years 2004 through 2010. 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. 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 of its U.S. net deferred tax assets.

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.

The annual effective income tax rate is based on CTS’ current legal organization and forecasted earnings in the various taxing jurisdictions in which the Company operates. Changes in CTS’ legal organization, the amount or the location of global earnings could impact its future effective income tax rate.

3

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 plan assets and the actual results are amortized over periods ranging from 5 to 14 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.

For 2003, CTS assumed a weighted-average discount rate of 6.67% for pension income and expense. CTS reduced the discount rate assumption for 2004 to reflect the interest rate decline on high-quality corporate bonds. The Company reduced the discount rate on its domestic plans from 6.75% at January 1, 2003 to 6.25% at January 1, 2004. The range of discount rates utilized by its foreign plans was also reduced from 3.75% - 6.00% in 2003 to 3.50% - 5.40% in 2004.

The Company also revised its long-term expected return on plan asset assumption as a result of its evaluation of long-term returns. The expected return on domestic plan assets at January 1, 2004 was lowered to 8.75% from 9.00% and the range of expected returns on foreign plan assets to 3.50% - 7.00% from 3.75% - 7.00%.

CTS expects these changes in actuarial assumptions, combined with the pension asset balance at the end of 2003, will reduce 2004 consolidated pension income by approximately $3 - $4 million.

Results of Operations

Business Segment Discussion

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 the 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.

For additional information on business segments, refer to "Note I - Business Segments."

4

The following table summarizes net sales and operating earnings by business segment:

	Components
($ in thousands)	& Sensors			EMS			Total
2003
Net sales to external customers	$	252,911		$	210,076		$	462,987
Segment operating earnings		7,394			10,985			18,379
% of segment sales		2.9	%		5.2	%		4.0	%
2002
Net sales to external customers	$	270,919		$	186,885		$	457,804
Segment operating earnings (loss)		(5,927	)		10,790			4,863
% of segment sales		(2.2	)%		5.8	%		1.1	%
2001
Net sales to external customers	$	366,096		$	211,558		$	577,654
Segment operating earnings (loss)		(8,231	)		10,457			2,226
% of segment sales		(2.2	)%		4.9	%		0.4	%

Components and Sensors 2003 business segment sales decreased $18.0 million, or 6.7%, from the prior year. The decrease was primarily due to a reduction of end-of-life product sales of $16.2 million and continuing softness in the communications market. End-of-life product sales represent the final shipments of products that have been replaced by newer technologies or no longer meet the company’s profit objectives and the decision is made by the company to cease manufacturing. Sales into the automotive market increased slightly in 2003, benefited by the introduction of new product and sales into Asia.

Despite the sales decrease, segment operating earnings improved $13.3 million primarily from $10.1 million of lower depreciation and amortization expense and reduced operating expenses of $11.9 million mainly in wages and related benefits. These improvements were partially reduced by the impact of lower volume of approximately $4.6 million and $4.1 million of favorable items occurring in 2002, primarily related to a $3.1 million customer reimbursement.

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.

EMS business segment sales increased $23.2 million, or 12.4%, from the prior year. Sales into the communications market increased, due primarily to stronger shipments in infrastructure end markets in China and Europe. Additionally, shipments of computer products increased in 2003, following a decline in the prior year. Segment operating earnings of $11.0 million increased $0.2 million from the prior year primarily from favorable volume impacts of $2.8 million, partially offset by $1.6 million of unfavorable product mix in lower margin Asia-Pacific sales, and $1.0 million of higher general and administrative and selling and marketing expenses.

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.

5

Sales in Geographic Regions

CTS has continued its expansion into the Asia-Pacific markets. Geographically, sales in the Asia-Pacific region are now 29% of CTS’ total net sales versus 24% in 2002. Sales in Europe and the Americas decreased to 23% from 24% of total net sales and 48% from 52% of total net sales, respectively. The following table presents the percentage of net sales into each geographic region within each segment and consolidated:

	Components & Sensors									EMS									Consolidated Total
Geographic	2003			2002			2001			2003			2002			2001			2003			2002			2001
Americas		55	%		56	%		52	%		41	%		45	%		56	%		48	%		52	%		53	%
Europe		15	%		17	%		17	%		32	%		35	%		35	%		23	%		24	%		24	%
Asia-Pacific		30	%		27	%		31	%		27	%		20	%		9	%		29	%		24	%		23	%
Total		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%

Discussion - Most Recent Three Years

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

	Year ended December 31,
(In thousands of dollars)	2003			2002			2001
Net sales	$	462,987		$	457,804		$	577,654
Cost of goods sold		366,275			366,775	1		466,363	1
Gross margin		96,712			91,029			111,291
% of net sales		20.9	%		19.9	%		19.3	%
Selling, general and administrative expenses		56,857			63,337			86,979
% of net sales		12.3	%		13.8	%		15.0	%
Research and development expenses		21,476			24,118			32,762
% of net sales		4.6	%		5.3	%		5.7	%
Restructuring and impairment charges		4,563			18,343			40,039
Operating earnings (loss)		13,816			(14,769	)		(48,489	)
Interest expense		7,688			10,240			12,775
Other (expense) income		(237	)		813			29
Earnings (loss) before income taxes		6,248			(23,800	)		(60,491	)
Income tax benefit		(6,327	) 2		(5,950	)		(15,116	)
Net earnings (loss)	$	12,575		$	(17,850	)	$	(45,375	)
% of net sales		2.7	%		(3.9	)%		(7.9	)%

⁽¹⁾ Cost of goods sold includes restructuring-related, one-time charges consisting primarily of inventory write downs, equipment relocations and other employee-related costs of $1.3 million in 2002 and $10.7 million in 2001.

⁽²⁾ Includes a $7.9 million benefit for the reversal of tax reserves.

6

The 2003 net sales increased $5.2 million, or 1%, from 2002. This increase was primarily due to higher EMS product sales of $23.2 million, partially offset by an $18.0 million decrease in Components and Sensors product sales. The improved sales volume in the EMS business segment was driven by growth in shipments of communication products primarily in infrastructure end markets in China. The decreased sales volume in the Components and Sensors business segment principally reflects the decision to end-of-life certain products in the third quarter of 2002.

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 shipped to communications and computer markets offset partially 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 Company’s 15 largest customers represented 71% of net sales in 2003. This is a slight decrease from 73% and 75% in 2002 and 2001, respectively. This percentage is decreasing as the Company continues efforts to broaden its business base, particularly in automotive and wireless infrastructure product offerings. Sales to Hewlett-Packard Company (Hewlett-Packard) represented 33% of net sales in 2003 and 33% of net sales in 2002. Hewlett-Packard acquired Compaq Computer Corporation (Compaq) in May 2002. The Compaq sales are included in the Hewlett-Packard percentages in 2003 and 2002. In 2001, sales to Compaq were 28% of net sales, while sales to Hewlett-Packard were not significant. Sales to Motorola, Inc. were 13% of net sales in 2003, 12% and 17% in 2002 and 2001, respectively.

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 products and EMS services generally decrease over time and also fluctuate in accordance with total industry utilization of manufacturing capacity. In 2001 and 2002, CTS experienced abnormal pricing pressure for some of its components products, particularly components utilized in communications, due to excess supplier capacity within the electronics industry. In 2003, this unusual pricing pressure abated to near normal conditions.

Gross margin in 2003 increased $5.7 million, or 1.0 percentage point over 2002, to 20.9%, on improved sales of $5.2 million. Items contributing to the gross margin percentage increase included $6.2 million of lower depreciation expense, $5.0 million from favorable product mix and $1.0 million positive impact from volume–related improvements, partially offset by $3.7 million in lower pension income. The prior year gross margin also included a favorable adjustment of $3.1 million for a customer reimbursement and $1.3 million of restructuring related, one-time charges.

In 2002, gross margin decreased by $20.3 million from 2001, primarily due to unfavorable pricing and product mix impacts 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. 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.

Selling, general and administrative expenses decreased to $56.9 million, or 12.3% of net sales in 2003 versus $63.3 million, or 13.8% of net sales in 2002, reflecting Company initiatives to control costs and scale operations to existing market conditions. Cost reductions were achieved primarily in salaries and wages and lower depreciation and amortization expenses. 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.

Research and development expenses were $21.5 million in 2003 versus $24.1 million in 2002 and $32.8 million in 2001. The reductions in research and development spending from 2002 to 2003 reflect savings due to organizational consolidation, changing business mix and the streamlining of research and development activities. Significant ongoing research and development activities continue in the Components and Sensors business segment, particularly for automotive products in support of growth initiatives. CTS’ research and development investment is primarily focused at expanded applications and new product development, as well as current product and process enhancements. Research and development expenditures in the EMS business segment are typically very low.

7

Operating earnings of $13.8 million improved $28.6 million over 2002. Favorable changes to operating earnings resulted from lower depreciation and amortization expenses of $9.8 million, a reduction in operating expenses of $4.2 million, primarily in salaries and wages, favorable sales mix impacts of $5.6 million and volume-related improvements of $1.0 million. Unfavorable changes to operating earnings include lower pension income of $2.3 million. In addition, 2003 included a $4.6 million asset impairment charge, while 2002 included $19.6 million of restructuring, asset impairment and restructuring-related one-time charges, and $4.1 million of favorable items which include a $3.1 million customer reimbursement.

Interest expense decreased $2.6 million and $2.5 million in 2003 and 2002 when compared to the prior year, respectively. These decreases were primarily due to lower average outstanding debt balances.

Other income decreased by approximately $1.1 million, primarily due to $0.8 million net gain on the sale of fixed assets in 2002.

During 2003, the Company recorded a tax benefit of $7.9 million resulting from the reversal of reserves that were no longer required following the expiration of statutory deadlines.

Restructuring, Asset Impairment and Related One-Time Charges

During the third quarter of 2003, CTS recorded a $4.6 million pre-tax impairment charge to reduce the carrying value of certain assets, held by the Components and Sensors business segment, to their estimated fair value. Approximately $3.3 million of the impairment charge reflected a write down for electronic equipment following final production of previously announced end-of-life products and a re-assessment of the current market value for equipment held for sale. An additional $1.3 million of the impairment charge related to excess capacity on a production line following an assessment of future capacity needs.

In the third quarter of 2002, CTS recorded $18.3 million of pre-tax restructuring and impairment charges. The charges included $5.0 of million restructuring charges, $12.5 million of asset impairments and $0.8 million of pension curtailment losses. The charges were incurred in order to effect operational improvements and related organizational realignments primarily in the Components and Sensors business segment, involving the relocation of certain manufacturing operations. 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 related 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. Approximately 67% of the employees severed were salaried and indirect employees and 33% were hourly production employees.

The following table displays the restructuring activity and restructuring reserve balances as of December 31, 2003 for actions initiated in 2002:

	Workforce			Other
($ in millions)	Reductions			Exit Costs			Total
Third quarter of 2002 charge	$	4.6		$	0.4		$	5.0
Items paid or utilized in 2002		(3.4	)		—			(3.4	)
Items paid or utilized in 2003		(1.2	)		(0.4	)		(1.6	)
Reserve balance at December 31, 2003	$	—		$	—		$	—

8

The 2002 restructuring plan also included $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. Approximately $2.1 million of the impairment charge relates to the write off of leasehold improvements at an engineering and design facility in Taiwan and at a 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.

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 improved.  CTS completed these consolidations and transfers in 2002. 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. No unusual charges of this nature were incurred in 2003.

The 2003 pre-tax profitability improvement associated with the 2002 restructuring and asset impairment charges was approximately $17 million.

Liquidity and Capital Resources

Overview

During 2003, CTS used cash from the issuance of common stock, sale of assets, primarily the TCXO production assets, and an increase in net income to reduce debt. Total debt was $75.9 million at the end of 2003, down $19.5 million from $95.4 million at the end of 2002. Total debt as a percentage of total capitalization was 21% in 2003 versus 27% in 2002. CTS also put in place a new three-year revolving credit agreement (the new credit agreement) containing improved terms and pricing during 2003.

• In 2003, free cash flow of $20.0 million improved $7.6 million from 2002, primarily from $3.8 million of reduced capital expenditures and $2.6 million of improved net cash provided by operating activities. Free cash flow is defined as the sum of cash flow from operating activities and cash flow from investing activities.

• In the year just ended, cash flows strengthened to a positive $16 million compared to a negative $4 million in the prior year, with improvements in each major cash flow category. As a result, CTS was able to increase its 2003 year-end cash balance to $25.3 million.

Outlook

The Company will utilize positive cash flows including cash provided by operating activities and from the anticipated sale of excess land in Canada, to support internal growth and profit improvement opportunities. CTS expects its 2004 capital expenditures to be approximately $20 million, primarily for new product development and investments in cost reduction programs. In addition to reinvestment for internal growth, from time to time the company evaluates merger and acquisition candidates for strategic fit.

These forward-looking statements are based on management’s expectations, certain assumptions and currently available information. Actual results may differ materially from those reflected in the forward-looking statements due to a variety of geopolitical, economic, health, industry, transactional and other factors which may affect results of operations and liquidity.

9

Operating Activities

CTS has generated net cash provided by operating activities in amounts greater than net income (loss) in 2003, 2002 and 2001. Net cash provided by operating activities in 2003 was $25.1 million, as CTS’ net income of $12.6 million, adjusted for non-cash items, primarily depreciation and amortization, and restructuring and impairment charges provided $50.8 million. Working capital and other changes used $25.7 million.

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.

Investing Activities

The 2003 use of $5.1 million for investing activities consisted primarily of $9.0 million of capital expenditures, partially offset by $4.1 million of proceeds from the sale of assets, primarily assets held for sale. Included in capital expenditures is approximately $6.1 million primarily for new products and technologies. Spending for new products included belt tension sensor and pedal sensor programs for the automotive market.

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 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 cash used in investing activities was $66.9 million. This 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.

Financing Activities

In 2003, CTS’ net cash used by financing activities totaled $5.4 million, consisting primarily of net repayment of debt of $19.5 million and dividend payments of $4.1 million. These uses were partially offset by the net proceeds from the issuance of stock of $15.6 million and $2.5 million from proceeds of stock option exercises.

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.

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.

Our cash balances are held in locations throughout the world, including substantial amounts held outside the United States. Undistributed earnings of certain non-U.S. subsidiaries amounted to approximately $154 million at December 31, 2003. 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 $9 million of withholding tax would be imposed.

10

Capital Resources

In January 2004, CTS announced the pending sale of excess land in Canada. The sale is expected to produce a one-time pre-tax gain of approximately $2 - $3 million.

In July 2003, CTS entered into the new credit agreement containing a $55 million senior, secured revolving credit facility, replacing the former $85 million senior, secured credit agreement. The outstanding balance was $8.9 million at December 31, 2003.

The new credit agreement categorized this debt as senior to CTS’ $25 million convertible debentures. The debt is collaterized by substantially all U.S. assets and a pledge of 65% of the capital stock of certain non-U.S. subsidiaries. Interest rates on these borrowings fluctuate based upon LIBOR. CTS pays a commitment fee on the undrawn portion of the new credit agreement. The commitment fee varies based on performance under certain financial covenants and was 0.40 percent per annum at December 31, 2003. The new credit agreement requires, among other things, that CTS comply with a minimum fixed charge coverage, a maximum leverage ratio and a minimum tangible net worth. Failure of CTS to comply with these covenants could reduce the borrowing availability under the new credit agreement. Additionally, the new credit agreement limits the amounts allowed for dividends, capital expenditures and acquisitions. Effective January 14, 2004, CTS met certain conditions under the new credit agreement which allow it to expand the credit facility to $75 million, if desired in the future.

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 the former revolving credit facility.

In December 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 2003, CTS issued $10.7 million of common stock under this registration statement. CTS used the net proceeds of these equity issuances to repay the revolving loans under its credit agreement. As of December 31, 2003, CTS could offer up to $435.1 million of additional debt and/or equity securities under this registration statement.

In November 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 2003, CTS issued $4.9 million of common stock under this registration statement. CTS used the net proceeds of these equity issuances to repay the revolving loans under its credit agreement. As of December 31, 2003, CTS could issue up to approximately 49,000 additional shares of common stock under this registration statement.

11

Capital Requirements

The following table sets forth the impact that contractual obligations, as of December 31, 2003, are expected to have on the Company's liquidity and cash flow in future periods:

	Payments Due by Period
($ in millions)	Total		2004		2005-2006		2007-2008			2009-beyond
Long-term debt	$	75.9	$	—	$	8.9	$	25.0	(1)	$	42.0
Operating leases		28.5		6.0		11.3		4.9			6.3
Purchase obligations (2)		—		—		—		—			—
Retirement obligations (3)		5.4		0.9		0.6		0.6			3.3
	$	109.8	$	6.9	$	20.8	$	30.5		$	51.6

⁽¹⁾ Debentures issued in 2002. The investors may accelerate the maturity of the debentures at any time after the three-year anniversary of the issue date. These debentures convert into CTS common stock at a conversion price of $20.05 per share.

⁽²⁾ CTS purchases direct materials, generally related to customer orders, for production occurring at its manufacturing facilities around the world. These goods are secured using purchase orders, either blanket or discrete. Purchase orders commit CTS to take delivery of the quantities ordered generally over a specified delivery schedule. CTS’ standard purchase order terms and conditions state that, should CTS cancel an order, CTS will reimburse its supplier only for the costs incurred at the time of cancellation. CTS’ purchase order cancellations generally occur due to order cancellation by a customer. If a customer cancels its order, CTS’ standard terms of sale provide for reimbursement of costs, including those related to CTS’ purchase orders. Therefore, these commitments are not included in purchase obligations.

⁽³⁾ Retirement obligations include defined benefit and other postretirement benefit plans. The estimate of the required contributions of CTS’ unfunded pension plans for 2004 is $0.6 million. There are no estimates included for these plans beyond 2004. Estimates for years after 2004 may be impacted by changes in actual plan results. In addition to the unfunded pension obligation, CTS maintains an unfunded other postretirement benefits plan. The estimated cash requirement for this plan is $0.3 million per year with the balance of the liability included after 2008.

CTS’ business generally does not require long-term contractual commitments. In addition to the commitments disclosed above, CTS has a variety of other agreements related to the procurement of materials and services. The Company has no material minimum purchase commitments or non-cancelable type agreements or arrangements.

CTS plans to invest in capital projects that maintain current capacity and result in future revenue opportunities. The 2004 capital spending is expected to be approximately $20 million.

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 was obligated to pay additional amounts. No amounts are due to Motorola in 2004 for 2003, the final year of the agreement.

12

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 believes that cash flows from operations and available borrowings under its new credit facility will be adequate to fund its working capital, capital expenditures and debt service requirements through December 31, 2004. However, if customer demand decreases significantly from forecasted levels or pricing pressures 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 Company does not have any significant net trade asset or liability exposure in a currency other than that of the reporting unit’s functional currency. The market risk associated with foreign currency exchange rates comes primarily from revenue and expense transactions in currencies other than the reporting unit's functional currency. CTS monitors the effects of foreign currency fluctuations impacting its foreign subsidiaries and attempts, where possible, to mitigate the impact by matching the expenses in the same currencies in which revenues are generated.

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 62-basis-point increase in interest rates (approximately 10% of CTS’ weighted-average interest rate) on variable-rate debt instruments would have increased CTS’ 2003 and 2002 interest expense by $0.2 million and $0.5 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 expectations, certain assumptions and currently available information. Actual results may differ materially from those reflected in the forward-looking statements due to a variety of geopolitical, economic, health, industry and other 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 statement. Examples of factors which may affect future results include, but are not limited to: rapid technological change, general market conditions in the automotive, communications and computer industries; reliance on key customers; the ability to protect our intellectual property; pricing pressures and demand for our products; and risks associated with our international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks.

13

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

			Year Ended December 31,
			2003			2002			2001
Net sales			$	462,987		$	457,804		$	577,654
Costs and expenses:
	Cost of goods sold			366,275			366,775			466,363
	Selling, general and administrative expenses			56,857			63,337			86,979
	Research and development expenses			21,476			24,118			32,762
	Restructuring and impairment charges — Note B			4,563			18,343			40,039
		Operating earnings (loss)		13,816			(14,769	)		(48,489	)
Other (expense) income:
	Interest expense			(7,688	)		(10,240	)		(12,775	)
	Interest income			357			396			744
	Other			(237	)		813			29
		Total other expense		(7,568	)		(9,031	)		(12,002	)
		Earnings (loss) before income taxes		6,248			(23,800	)		(60,491	)
Income tax benefit — Note H				(6,327	)		(5,950	)		(15,116	)
		Net earnings (loss)	$	12,575		$	(17,850	)	$	(45,375	)
Earnings (loss) per share — Note N
	Basic		$	0.36		$	(0.54	)	$	(1.61	)
	Diluted		$	0.36		$	(0.54	)	$	(1.61	)

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

CTS CORPORATION

14

Consolidated Balance Sheets
(In thousands of dollars)

				December 31,
				2003			2002
ASSETS
Current Assets
	Cash and equivalents			$	25,346		$	9,225
	Accounts receivable, less allowances (2003 — $1,585; 2002 — $1,694)				72,290			63,802
	Inventories
		Finished goods			8,047			12,503
		Work-in-process			7,779			8,346
		Raw materials			16,099			15,413
			Total inventories		31,925			36,262
	Other current assets				6,697			7,212
	Deferred income taxes — Note H				28,508			35,833
			Total current assets		164,766			152,334
Property, Plant and Equipment
	Buildings and land				112,407			112,243
	Machinery and equipment				271,912			287,819
			Total property, plant and equipment		384,319			400,062
	Accumulated depreciation				(261,838	)		(251,430	)
			Net property, plant and equipment		122,481			148,632
Other Assets
	Prepaid pension asset — Note G				132,960			120,277
	Intangible assets, net — Note C				37,456			39,923
	Assets held for sale — Note D				17,583			23,135
	Other				7,004			5,731
			Total other assets		195,003			189,066
Total Assets				$	482,250		$	490,032
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
	Current maturities of long-term debt — Note E			$	—		$	28,350
	Accounts payable				52,252			44,490
	Accrued salaries, wages and vacation				11,333			10,126
	Income taxes payable				9,781			23,517
	Other accrued liabilities				22,323			28,073
			Total current liabilities		95,689			134,556
Long-term debt — Note E					75,880			67,000
Other long-term obligations — Note G					11,133			11,501
Deferred income taxes — Note H					5,357			11,955
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; 52,632,088 shares issued at December 31, 2003 and 50,718,883 shares issued at December 31, 2002 — Note J				262,748			241,393
	Additional contributed capital				21,520			23,514
	Retained earnings				263,430			255,085
	Accumulated other comprehensive earnings (loss)				151			(835	)
					547,849			519,157
			Cost of common stock held in treasury (2003 — 16,565,558 shares; 2002 —16,618,373 shares) — Note K		(253,658	)		(254,137	)
			Total shareholders’ equity		294,191			265,020
Total Liabilities and Shareholders’ Equity				$	482,250		$	490,032

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

CTS CORPORATION

15

Consolidated Statements of Cash Flows
(In thousands of dollars)

					Year Ended December 31,
					2003			2002			2001
Cash flows from operating activities:
	Net earnings (loss)				$	12,575		$	(17,850	)	$	(45,375	)
	Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
		Depreciation and amortization				33,605			43,373			51,674
		Restructuring and impairment charges				4,563			18,343			40,039
		Deferred income taxes				313			(10,802	)		(26,201	)
		Income tax benefit (charge) related to exercised stock options				(301	)		--			3,687
		Changes in assets and liabilities:
			Accounts receivable			(8,488	)		17,761			64,357
			Inventories			4,336			13,887			44,780
			Prepaid pension asset			(12,053	)		(14,803	)		(14,937	)
			Accounts payable and accrued liabilities			2,452			(24,767	)		(62,275	)
			Income taxes payable			(13,736	)		(404	)		5,547
		Other				1,832			(2,289	)		4,556
			Total adjustments			12,523			40,299			111,227
				Net cash provided by operations		25,098			22,449			65,852
Cash flows from investing activities:
	Proceeds from sale of assets					4,126			2,954			15,499
	Capital expenditures					(9,044	)		(12,833	)		(77,654	)
	Other					(136	)		(145	)		(4,758	)
				Net cash used in investing activities		(5,054	)		(10,024	)		(66,913	)
Cash flows from financing activities:
	Payments of short-term borrowings					—			—			(7,396	)
	Proceeds from issuance of long-term debt					104,159			26,050			34,000
	Payments of long-term debt					(123,629	)		(83,213	)		(69,487	)
	Issuance of common stock					15,620			42,711			29,304
	Dividends paid					(4,087	)		(3,947	)		(3,429	)
	Exercise of stock options and other					2,563			170			10,684
				Net cash used in financing activities		(5,374	)		(18,229	)		(6,324	)
Effect of exchange rate changes on cash						1,451			1,774			76
Net increase (decrease) in cash						16,121			(4,030	)		(7,309	)
Cash and equivalents at beginning of year						9,225			13,255			20,564
Cash and equivalents at end of year					$	25,346		$	9,225		$	13,255
Supplemental cash flow information
	Cash paid (received) during the year for:
		Interest			$	6,443		$	8,348		$	13,285
		Income taxes — net				7,573			5,882			(1,661	)
Noncash investing and financing activities
	Common stock issued in connection with DCA acquisition				$	1,417		$	110		$	1,090

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

CTS CORPORATION

16

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, 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
Net earnings									12,575						12,575						12,575
Cumulative translation adjustment (net of tax of $633)												1,476			1,476						1,476
Minimum pension liability adjustment (net of tax of $214)												(490	)		(490	)					(490	)
	Comprehensive earnings													$	13,561
Cash dividends of $0.12 per share									(4,230	)											(4,230	)
Issued 52,140 shares on restricted stock and cash bonus plan — net			(93	)		(375	)											468
Issued 244,114 shares on exercise of stock option — net			4,164			(1,939	)											11			2,236
Issued 546,358 shares under Direct Stock Purchase Plan			4,930																		4,930
Issued 1,000,000 shares under shelf registration			10,690																		10,690
Stock compensation			247			320															567
Issued 123,384 shares to former DCA shareholders			1,417																		1,417
Balances at December 31, 2003		$	262,748		$	21,520		$	263,430		$	151					$	(253,658	)	$	294,191

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

CTS CORPORATION

17

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.

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 earnings (loss)” component of shareholders’ equity. Statement of earnings accounts are translated at the average rates during the period.

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.

Revenue Recognition:   CTS recognizes revenue from product sales when title transfers, the risks and rewards of ownership have been transferred to the customer, the sales price is fixed and determinable and collection of the related receivable is probable, which is generally at the time of shipment.

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% for the years ended December 31, 2003 and 2002. Sales to Motorola, Inc. (Motorola) were 13% and 12% of net sales for the years ended December 31, 2003 and 2002, respectively. Amounts due from Hewlett-Packard and Motorola aggregated $28 million at December 31, 2003. 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. 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.

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.

Earnings Per Share:   Basic and diluted earnings per common share are reported in conformity with the Financial Accounting Standards Board's (FASB) Financial Accounting Standard (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.”

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Stock-Based Employee Compensation:   CTS accounts for stock-based employee 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. Refer also to Note F, “Stock Plans,” for more details about CTS´ stock-based compensation plans. CTS has adopted the disclosure requirements of the FAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.” Had employee compensation cost for CTS´ fixed, stock-based compensation plans been determined based on the fair value method, as defined by FAS No. 123, “Accounting for Stock-Based Compensation,” CTS´ net earnings (loss) and net earnings (loss) per share would have been adjusted to the pro forma amounts indicated below:

	Year ended December 31,
($ in thousands, except per share amounts)	2003		2002			2001
Net earnings (loss), as reported	$	12,575	$	(17,850	)	$	(45,375	)
Add:  Stock-based employee compensation cost, net of tax, included in net earnings (loss)		—		—			—
Deduct:  Stock-based employee compensation cost, net of tax, if fair value based method were used		1,911		3,063			2,654
Proforma net earnings (loss)	$	10,664	$	(20,913	)	$	(48,029	)
Net earnings (loss) per share — basic, as reported	$	0.36	$	(0.54	)	$	(1.61	)
Proforma net earnings (loss) per share — basic		0.31		(0.63	)		(1.70	)
Net earnings (loss) per share — diluted, as reported		0.36		(0.54	)		(1.61	)
Proforma net earnings (loss) per share — diluted	$	0.30	$	(0.63	)	$	(1.70	)

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:

	2003			2002			2001
	Grants			Grants			Grants
Dividend yield		1.23	%		1.48	%		0.52	%
Expected volatility		67.87	%		62.02	%		74.87	%
Risk-free interest rate		1.81	%		2.87	%		4.51	%
Expected life	4.4 years			4.4 years			4.6 years

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

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.

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.”

19

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.

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, “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, such as the Company´s intangibles relating to customer lists, patents and technology, are amortized over that life on a straight-line basis. Goodwill is reviewed for impairment at least annually. The Company reviews the carrying value of its intangible assets whenever events or changes in circumstances indicate an impairment may have occurred. Refer to Note C, “Intangible Assets.”

Assets Held for Sale:   As required by 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.”

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, 2003 and 2002 approximates fair value where fair value is based on market prices for the same or similar debt and maturities.

Reclassifications:   Certain reclassifications have been made for the periods presented in the consolidated financial statements to conform to the classifications adopted in 2003.

NOTE B—Restructuring and Impairment Charges

During the third quarter of 2003, CTS recorded a $4.6 million pre-tax asset impairment charge to reduce the carrying value of certain assets, held by the Components and Sensors business segment, to their estimated fair value. Approximately $3.3 million of the impairment charge reflected a write down for electronic equipment following final production of previously announced end-of-life products and a re-assessment of the current market value for equipment held for sale. An additional $1.3 million of the impairment charge related to equipment write down on a production line following an assessment of future capacity needs.

In the third quarter of 2002, CTS recorded $18.3 million of pre-tax restructuring and impairment charges. The charge included $5.0 of million restructuring charges, $12.5 million of asset impairments and $0.8 million of pension curtailment losses. The charges were incurred in order to effect operational improvements and related organizational realignments primarily in the Components and Sensors business segment, involving the relocation of certain manufacturing operations. 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 related 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. Approximately 67% of the employees severed were salaried and indirect employees and 33% were hourly production employees.

20

The following table displays the restructuring activity and restructuring reserve balances as of December 31, 2003 for actions initiated in 2002:

	Workforce			Other
($ in millions)	Reductions			Exit Costs			Total
Third quarter of 2002 charge	$	4.6		$	0.4		$	5.0
Items paid or utilized in 2002		(3.4	)		—			(3.4	)
Items paid or utilized in 2003		(1.2	)		(0.4	)		(1.6	)
Reserve balance at December 31, 2003	$	—		$	—		$	—

The 2002 restructuring plan also included $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. 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.

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 improved.  CTS completed these consolidations and transfers in 2002.

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.

Note C—Intangible Assets

CTS has the following intangible assets, all relating to the Components and Sensors business segment, as of December 31:

			2003					2002
			Gross					Gross
			Carrying		Accumulated			Carrying		Accumulated
($ in thousands)			Amount		Amortization			Amount		Amortization
Amortized intangible assets:
	Customer lists		$	36,405	$	(5,246	)	$	36,405	$	(4,003	)
	Patents			10,319		(4,535	)		10,319		(3,465	)
	Technology			12,014		(12,014	)		12,014		(11,891	)
	Other			300		(300	)		300		(269	)
		Total		59,038		(22,095	)		59,038		(19,628	)
Goodwill				513		—			513		—
		Total intangibles	$	59,551	$	(22,095	)	$	59,551	$	(19,628	)

CTS recorded amortization expense of $2.5 million, $3.9 million, and $6.8 million for the years ended December 31, 2003, 2002 and 2001, respectively. CTS estimates annual amortization expense of $2.3 million in 2004 through 2008.

21

Note D—Assets Held for Sale

Assets held for sale at December 31, 2003 are comprised of facilities, primarily the Longtan, Taiwan, building 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. 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 routinely monitors the estimated value of all assets held for sale and records adjustments to these values as necessary. During 2003, CTS sold machinery and equipment classified as assets held for sale for approximately $4 million, which approximated the carrying value of these assets.

NOTE E—Debt

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

($ in thousands)		2003		2002
Revolving credit agreement, average interest rate of 3.1% (2003), due in 2006		$	8,880	$	—
Revolving credit agreement, average interest rate of 4.0% (2002)			—		28,350
Convertible, subordinated debt at a weighted- averaged rate of 6.5%, due in 2007			25,000		25,000
Industrial revenue bonds at a weighted-averaged rate of 7.5%, due in 2013			42,000		42,000
			75,880		95,350
Less current maturities			—		28,350
	Total long-term debt	$	75,880	$	67,000

The debt matures as follows:   2006 - $8.9 million; 2007 - $25.0 million; thereafter - $42.0 million.

In July 2003, CTS entered into a new, three-year credit agreement (the new credit agreement) containing a $55 million senior, secured revolving credit facility, replacing the former $85 million senior, secured credit agreement. The outstanding balance was $8.9 million at December 31, 2003.

The new credit agreement categorized this debt as senior to CTS´ $25 million convertible debentures. The debt is collaterized by substantially all U.S. assets and a pledge of 65% of the capital stock of certain non-U.S. subsidiaries. Interest rates on these borrowings fluctuate based upon LIBOR. CTS pays a commitment fee on the undrawn portion of the new credit agreement. The commitment fee varies based on performance under certain financial covenants and was 0.40 percent per annum at December 31, 2003. The new credit agreement requires, among other things, that CTS comply with a minimum fixed charge coverage, a maximum leverage ratio and a minimum tangible net worth. Failure of CTS to comply with these covenants could reduce the borrowing availability under the new credit agreement. Additionally, the new credit agreement limits the amounts allowed for dividends, capital expenditures and acquisitions. Effective January 14, 2004, CTS met certain conditions under the new credit agreement which allow it to expand the credit facility to $75 million, if desired in the future.

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.

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.

CTS also had unsecured line of credit arrangements of $17.3 million and $16.3 million at December 31, 2003 and 2002, respectively. These arrangements are generally subject to annual renewal and renegotiations, and may be withdrawn at the banks’ option.

22

NOTE F—Stock Plans

At December 31, 2003, CTS had four stock-based compensation plans. CTS applies APB Opinion No. 25 in determining compensation costs for its stock-based employee compensation cost. Stock-based compensation expense for nonemployee directors is determined in accordance with FAS No. 123, "Accounting for Stock-Based Compensation" and was approximately $0.2 million in 2003.

CTS has two stock option 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 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, 2003:

	2001 Plan		1996 Plan
Options originally available		2,000,000		1,200,000
Options outstanding		1,127,850		494,075
Options exercisable		279,225		245,975
Options available for grant		869,275		101,300

A summary of the status of stock options as of December 31, 2003, 2002 and 2001, and changes during the years ended on those dates, is presented below:

		2003					2002					2001
					Weighted-					Weighted-					Weighted-
					Average					Average					Average
					Exercise					Exercise					Exercise
		Shares			Price		Shares			Price		Shares			Price
Outstanding at beginning of year			1,560,789		$	18.74		1,287,939		$	23.69		1,736,197		$	17.53
	Granted		482,600			9.52		448,500			8.10		724,800			22.92
	Exercised		(244,114	)		10.40		—			—		(1,017,633	)		10.59
	Expired or canceled		(177,350	)		18.17		(175,650	)		27.55		(155,425	)		36.48
Outstanding at end of year			1,621,925		$	17.33		1,560,789		$	18.74		1,287,939		$	23.69
Options exercisable at end of year			525,200					626,664					452,614
Weighted-average fair value of options:
	Granted at market price				$	4.84				$	7.22				$	12.79
	Granted above market price					3.16					—					—
Weighted-average exercise price of options:
	Granted at market price				$	9.78				$	8.10				$	22.92
	Granted above market price					7.75					—					—

23

The following table summarizes information about stock options outstanding at December 31, 2003:

		Options Outstanding						Options Exercisable
				Weighted-
				Average		Weighted-				Weighted-
Range of		Number		Remaining		Average		Number		Average
Exercise		Outstanding		Contractual		Exercise		Exercisable		Exercise
Prices		at 12/31/03		Life (Years)		Price		at 12/31/03		Price
$	7.70 -   9.78		852,000		9.05	$	8.73		101,850	$	7.70
	13.85 - 18.90		182,000		6.09		15.16		47,400		16.73
	22.60 - 33.63		448,925		6.97		25.04		273,250		26.27
	35.97 - 50.00		135,500		6.65		47.73		99,700		48.20
	55.06 - 79.25		3,500		6.15		59.05		3,000		59.72

CTS has a discretionary Restricted Stock and Cash Bonus Plan (the 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, approximately 169,000 shares were available for award or sale as of December 31, 2003. 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 expense of $0.3 million in 2003 and income of $0.9 million and $0.6 million in 2002 and 2001, 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 2003, 2002 and 2001.

NOTE G—Retirement Plans

Defined Benefit and Other Postretirement Benefit Plans

CTS has a number of noncontributory defined benefit pension plans (Pension Plans) covering approximately 27% 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 and intends to continue funding all of the premiums on a pay-as-you-go basis.

The measurement date for the majority of the Pension Plans and other postretirement plan assets and benefit obligations was December 31, 2003 and 2002. The following table provides a reconciliation of benefit obligation, plan assets, and the funded status of the Pension Plans and other postretirement benefit plan at that measurement date.

24

		Pension						Other
		Plans						Postretirement Benefit Plan
($ in thousands)		2003			2002			2003			2002
Accumulated benefit obligation		$	171,470		$	153,684		$	5,100		$	4,838
Change in projected benefit obligation:
	Projected benefit obligation at January 1	$	167,447		$	162,585		$	4,838		$	4,529
	Service cost		4,916			6,059			39			33
	Interest cost		10,910			11,467			317			318
	Plan amendment and other		1,237			—			—			—
	Curtailment gains		—			(2,275	)		—			—
	Actuarial (gain) loss		12,165			(1,448	)		198			246
	Benefits paid		(9,725	)		(8,941	)		(292	)		(288	)
Projected benefit obligation at December 31		$	186,950		$	167,447		$	5,100		$	4,838
Change in plan assets:
	Assets at fair value at January 1	$	222,435		$	264,709		$	—		$	—
	Actual return on assets		46,025			(33,558	)		—			—
	Company contributions		571			656			292			288
	Benefits paid		(9,725	)		(8,941	)		(292	)		(288	)
	Other		458			(431	)		—			—
Assets at fair value at December 31		$	259,764		$	222,435		$	—		$	—
Reconciliation of prepaid (accrued) cost:
	Funded status (plan assets less projected benefit obligations)	$	72,814		$	54,988		$	(5,100	)	$	(4,838	)
	Amounts not recognized:
	Actuarial losses		50,228			56,625			284			80
	Prior service cost		5,931			5,653			5			7
	Transition asset		(796	)		(1,244	)		—			—
Prepaid (accrued) cost, net		$	128,177		$	116,022		$	(4,811	)	$	(4,751	)

The components of the prepaid (accrued) cost, net are classified in the following lines in the Consolidated Balance Sheets:

	Pension						Other
	Plans						Postretirement Benefit Plan
($ in thousands)	2003			2002			2003			2002
Prepaid pension asset	$	132,960		$	120,277		$	—		$	—
Other accrued liabilities		(462	)		(410	)		(300	)		(322	)
Other long-term obligations		(5,701	)		(4,521	)		(4,511	)		(4,429	)
Accumulated other comprehensive loss		1,380			676			—			—
	$	128,177		$	116,022		$	(4,811	)	$	(4,751	)

25

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for those Pension Plans with accumulated benefit obligation in excess of fair value of plan assets at December 31, 2003 and 2002 is shown below:

($ in thousands)		2003		2002
Projected benefit obligation	$	13,768	$	11,373
Accumulated benefit obligation		11,004		9,772
Fair value of plan assets		4,841		4,872

Net pension (income)/postretirement expense in 2003, 2002 and 2001 includes the following components:

		Pension Plans									Other Postretirement Benefit Plan
($ in thousands)		2003			2002			2001			2003			2002			2001
Service cost		$	4,916		$	6,059		$	6,527		$	39		$	33		$	40
Interest cost			10,910			11,467			11,333			317			318			305
Expected return on plan assets (1)			(26,924	)		(29,786	)		(28,448	)		—			—			—
Amortization of unrecognized:
	Transition obligation		(564	)		(554	)		(572	)		—			—			—
	Prior service cost		883			832			960			—			—			—
Recognized gain			(936	)		(2,821	)		(3,756	)		1			1			—
Curtailment (gains) loss (2)			—			768			(2,958	)		—			—			—
Net (income) expense		$	(11,715	)	$	(14,035	)	$	(16,914	)	$	357		$	352		$	345
Weighted-average actuarial assumptions (3)
Benefit obligation assumptions:
	Discount rate		6.17	%		6.67	%		—			6.25	%		6.75	%		—
	Rate of compensation increase		4.84	%		4.84	%		—			—			—			—
Pension income/postretirement
expense assumptions:
	Discount rate		6.67	%		7.14	%		7.46	%		6.75	%		7.25	%		7.50	%
	Expected return on plan assets (1)		8.94	%		9.67	%		9.68	%		—			—			—
	Rate of compensation increase		4.84	%		5.84	%		5.86	%		—			—			—

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

⁽²⁾ 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.

⁽³⁾ 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.

26

CTS utilizes a building block approach in determining the long-term rate of return for plan assets. Historical markets are reviewed and long-term relationships between equities and fixed-income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long term. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return is established via a building block approach with proper consideration of diversification and rebalancing. Peer data and historical returns are reviewed to ensure for reasonableness and appropriateness.

CTS´ pension plan asset allocation at December 31, 2003 and 2002, and target allocation for 2004 by asset category are as follows:

		Target			Percentage of Plan
		Allocation			Assets at December 31
Asset Category		2004			2003			2002
Equity securities			65	%		65	%(1)		57	%(1)
Debt securities			34	%		34	%		41	%
Real estate			—	%		—	%		—	%
Other			1	%		1	%		2	%
	Total		100	%		100	%		100	%

⁽¹⁾ Equity securities include CTS common stock in the amounts of approximately $17 million (7% of total plan assets)
at December 31, 2003, and approximately $11 million (5% of total plan assets) at December 31, 2002.

CTS employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities and funded status. The investment portfolio primarily contains a diversified mix of equity and fixed-income investments. The equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value, and small and large capitalizations. Other assets such as private equity are used modestly to enhance long-term returns while improving portfolio diversification. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and asset/liability studies at regular intervals.

The expected contributions to be made by CTS to the Pension Plans and the other postretirement benefit plan during 2004 are $0.6 million and $0.3 million, respectively.

Defined Contribution Plans

CTS sponsors a 401(k) plan that covers substantially all of its 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 $2.5 million in 2003, $3.0 million in 2002 and $3.7 million in 2001.

27

NOTE H—Income Taxes

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

($ in thousands)		2003		2002			2001
Domestic		$	767	$	(8,670	)	$	(54,700	)
Non-U.S.			5,481		(15,130	)		(5,791	)
	Total	$	6,248	$	(23,800	)	$	(60,491	)

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

($ in thousands)		2003			2002			2001
Current:
	Federal	$	(7,889	)	$	—		$	—
	State		165			368			259
	Non-U.S.		1,084			4,484			9,162
	Total current		(6,640	)		4,852			9,421
Deferred:
	Federal		(3,480	)		(7,834	)		(16,622	)
	State		(96	)		(1,275	)		(3,077	)
	Non-U.S.		3,889			(1,693	)		(4,838	)
	Total deferred		313			(10,802	)		(24,537	)
	Total benefit for income taxes	$	(6,327	)	$	(5,950	)	$	(15,116	)

During 2003, the Company recorded a tax benefit of $7.9 million resulting from the reversal of reserves that were no longer required following the expiration of statutory deadlines.

28

Significant components of CTS’ deferred tax liabilities and assets at December 31, 2003 and 2002 are:

($ in thousands)	2003			2002
Pension	$	48,529		$	44,018
Depreciation		5,406			5,834
Basis difference-acquired assets		1,281			1,281
Other		299			313
Gross deferred tax liabilities		55,515			51,446
Postretirement benefits		1,703			1,659
Inventory items		2,440			3,512
Loss carryforwards		49,598			43,912
Credit carryforwards		3,235			2,509
Nondeductible accruals		8,689			9,588
Restructuring and asset impairment		6,609			8,437
Other		13,723			12,722
Gross deferred tax assets		85,997			82,339
Net deferred tax assets		30,482			30,893
Deferred tax asset valuation allowance		(2,074	)		(2,379	)
Total	$	28,408		$	28,514

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:

	2003			2002			2001
Taxes at the U.S. statutory rate		35.0	%		(35.0	)%		(35.0	)%
State income taxes, net of federal income tax benefit		0.7	%		(2.5	)%		(3.0	)%
Non-U.S. income taxed at rates different than the U.S. statutory rate		(2.0	)%		25.1	%		14.1	%
Tax exempt earnings		(3.4	)%		(4.1	)%		—
Benefit of scheduled tax credits and adjustment of valuation allowance		(6.1	)%		(7.4	)%		(0.8	)%
Tax benefit, reversal of reserves		(126.3	)%		—			—
Other		0.8	%		(1.1	)%		(0.3	)%
Effective income tax rate		(101.3	)%		(25.0	)%		(25.0	)%

29

In certain taxing jurisdictions, CTS business operations do qualify for income tax holidays. 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 2007.

Undistributed earnings of certain non-U.S. subsidiaries amounted to approximately $154 million at December 31, 2003. 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 $9 million of withholding tax would be imposed.

No valuation allowance was recorded in 2003 against the U.S. net deferred tax assets including the U.S. net operating loss carryforward asset of $47 million expiring in 2021-2023. The Company assessed the future realization of these deferred tax assets utilizing taxable income projections for years 2004 through 2010. 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. 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 of its U.S. net deferred tax assets.

CTS had net deferred tax assets for the non-U.S. net operating loss carryforward asset of approximately $3 million at December 31, 2003. Of this amount, approximately $1 million expires in 2006-2008. 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. 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.

30

Summarized financial information concerning CTS’ reportable segments is shown in the following table:

	Components
($ in thousands)	& Sensors			EMS		Total
2003
Net sales to external customers	$	252,911		$	210,076	$	462,987
Segment operating earnings		7,394			10,985		18,379
Total assets		398,791			83,459		482,250
Depreciation and amortization		30,412			3,193		33,605
Capital expenditures	$	8,091		$	953	$	9,044
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

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

($ in thousands)	2003			2002			2001
Total segment operating earnings	$	18,379		$	4,863		$	2,226
Restructuring, asset impairment and related one-time charges — Components & Sensors		(4,563	)		(19,498	)		(50,210	)
Restructuring, asset impairment and related one-time charges — EMS		—			(134	)		(505	)
Interest expense		(7,688	)		(10,240	)		(12,775	)
Interest income		357			396			744
Other income (expense)		(237	)		813			29
Earnings (loss) before income taxes	$	6,248		$	(23,800	)	$	(60,491	)

31

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

($ in thousands)	2003		2002		2001
Net Sales
United States	$	186,675	$	199,982	$	246,653
United Kingdom		127,522		125,252		154,466
China		96,492		80,615		87,038
Canada		27,535		20,201		15,491
Singapore		15,244		21,330		35,487
Other non-U.S.		9,519		10,424		38,519
Consolidated net sales	$	462,987	$	457,804	$	577,654

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

($ in thousands)	2003		2002		2001
Long-Lived Assets
United States	$	48,680	$	58,017	$	74,451
China		43,220		55,723		68,633
Taiwan		19,098		21,265		20,086
United Kingdom		17,667		17,967		20,993
Singapore		8,077		14,856		25,154
Other non-U.S		3,322		3,939		4,581
Consolidated long-lived assets	$	140,064	$	171,767	$	213,898

The Components and Sensors business segment revenues from Motorola represent $38.6 million, or 14%, and $84.3 million, or 23%, of the segment’s revenue for the years ended December 31, 2002 and 2001, respectively. Components and Sensors business segment revenue from Motorola for the year ended December 31, 2003 was less than 10% of the segment’s revenue. The EMS business segment revenues from Hewlett-Packard, which acquired Compaq in May 2002, represented $151.8 million, or 72%, and $150.4 million, or 80%, of the segment’s revenue for the years ended December 31, 2003 and 2002, respectively. EMS business segment revenues from Motorola were $40.2 million, or 19% of the segment’s revenue for the year ended December 31, 2003. The EMS business segment revenues from Compaq represented $160.2 million, or 76%, of the segment’s revenue for the year ended December 31, 2001.

32

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.

NOTE K—Treasury Stock

Common stock held in treasury at December 31, 2003 totaled 16,565,558 shares with a cost of $253.7 million, compared to 16,618,373 shares with a cost of $254.1 million at December 31, 2002.

CTS has 240,000 remaining shares authorized for repurchase by the Board of Directors at December 31, 2003. 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 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 was obligated to pay additional amounts.  No amounts are due to Motorola in 2004 for 2003, the final year under the agreement.

NOTE M—Leases

CTS incurred approximately $6.8 million of rent expense in 2003, $7.4 million in 2002, and $6.1 million in 2001. The future minimum lease payments under the Company’s operating leases are $6.0 million in 2004, $6.0 million in 2005, $5.3 million in 2006, $2.5 million in 2007, $2.5 million in 2008 and $6.3 million thereafter.

33

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 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, 2003.

		Net		Shares
		Earnings		(In thousands)			Per Share
(In thousands of dollars, except per share amounts)		(Numerator)		(Denominator)			Amount
2003
Basic EPS		$	12,575		34,723		$	0.36
Effect of Dilutive Securities:
	Stock Options				23
	Other				243	(1)
Diluted EPS		$	12,575		34,989		$	0.36

⁽¹⁾ Includes 120 shares of CTS common stock to be issued to the former DCA shareholders. At December 31, 2003, there were approximately 28 shares of CTS common stock yet to be issued to the former DCA shareholders who have not yet tendered their stock certificates for exchange.

The following table shows the potentially dilutive securities which have been excluded from the 2003, 2002 and 2001 diluted earnings (loss) per share calculations because they are either anti-dilutive or the exercise price exceeds the average market price.

	Year ended
	December 31,
(Number of shares in thousands)	2003		2002		2001
Securities issuable in connection with stock purchase plans		—		232		285
Stock options where the exercise price exceeds the average market price of common shares during the period		1,139		1,185		662
Stock options where the exercise price is below the average market price of common shares during the period		—		50		388
Securities related to the subordinated convertible debt		1,247		935		—

34

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)
2003
4th quarter	$	132,025	$	27,454	$	7,369		$	3,947
3rd quarter (1)		108,496		23,655		(654	)		6,074
2nd quarter		116,697		24,520		4,507			1,983
1st quarter		105,769		21,083		2,594			571
	$	462,987	$	96,712	$	13,816		$	12,575
2002
4th quarter	$	116,542	$	23,357	$	2,977		$	545
3rd quarter (2)		110,944		23,885		(16,499	)		(13,821	)
2nd quarter (3)		117,725		21,109		(1,475	)		(2,673	)
1st quarter (4)		112,593		22,678		228			(1,901	)
	$	457,804	$	91,029	$	(14,769	)	$	(17,850	)

Per Share Data
(Unaudited)

					Dividends		Net Earnings (Loss)
	High (5)		Low (5)		Declared		Basic			Diluted
2003
4th quarter	$	14.94	$	10.75	$	0.03	$	0.11		$	0.11
3rd quarter (1)		14.71		10.01		0.03		0.17			0.17
2nd quarter		11.10		5.50		0.03		0.06			0.06
1st quarter		8.85		4.90		0.03		0.02			0.02
					$	0.12	$	0.36		$	0.36
2002
4th quarter	$	9.00	$	3.65	$	0.03	$	0.02		$	0.02
3rd quarter (2)		12.50		4.30		0.03		(0.41	)		(0.41	)
2nd quarter (3)		19.56		10.80		0.03		(0.08	)		(0.08	)
1st quarter (4)		17.60		12.90		0.03		(0.06	)		(0.06	)
					$	0.12	$	(0.54	)	$	(0.54	)

⁽¹⁾ The third quarter 2003 results include an asset impairment charge of $4.6 million pre-tax, $3.4 million after-tax, or $0.10 per diluted share. The third quarter 2003 also includes $7.9 million, or $0.22 per diluted share, favorable income tax adjustment resulting from the reversal of reserves that were no longer required following the expiration of statutory deadlines.

⁽²⁾ 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.

⁽³⁾ 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.

⁽⁴⁾ 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.

⁽⁵⁾ The market prices of CTS common stock presented reflect the highest and lowest sales prices on the New York Stock Exchange for each quarter of the last two years.

CTS CORPORATION

35

Five-Year Summary
(In thousands of dollars except per share and other data)

						% of						% of						% of						% of						% of
			2003			Sales			2002			Sales			2001			Sales			2000			Sales			1999			Sales
Summary of Operations
Net sales			$	462,987			100.0		$	457,804			100.0		$	577,654			100.0		$	866,523			100.0		$	677,076			100.0
	Cost of goods sold			366,275			79.1			366,775			80.1			466,363			80.7			605,598			69.9			471,543			69.6
	Selling, general and administrative expenses			54,390			11.8			59,467			13.0			80,214			13.9			94,501			10.9			80,866			12.0
	Research and development expenses			21,476			4.6			24,118			5.3			32,762			5.7			32,583			3.8			25,348			3.8
	Acquired in-process research and development (IPR&D)			—			—			—			—			—			—			—			—			12,940			1.9
	Amortization of intangible assets			2,467			0.5			3,870			0.8			6,765			1.2			5,211			0.6			3,583			0.5
	Restructuring and impairment charges			4,563			1.0			18,343			4.0			40,039			6.9			—			—			—			—
		Operating earnings (loss)		13,816			3.0			(14,769	)		(3.2	)		(48,489	)		(8.4	)		128,630			14.8			82,796			12.2
Other expense—net				(7,568	)		(1.6	)		(9,031	)		(2.0	)		(12,002	)		(2.1	)		(11,503	)		(1.3	)		(8,741	)		(1.3	)
		Earnings (loss) before income taxes		6,248			1.4			(23,800	)		(5.2	)		(60,491	)		(10.5	)		117,127			13.5			74,055			10.9
Income tax expense (benefit)				(6,327	)		(1.3	)		(5,950	)		(1.3	)		(15,116	)		(2.6	)		32,796			3.8			22,587			3.3
		Earnings (loss) from continuing operations		12,575			2.7			(17,850	)		(3.9	)		(45,375	)		(7.9	)		84,331			9.7			51,468			7.6
Discontinued operations:
	Net loss from discontinued operations			—			—			—			—			—			—			(529	)		—			—			—
		Net earnings (loss)		12,575			2.7			(17,850	)		(3.9	)		(45,375	)		(7.9	)		83,802			9.7			51,468			7.6
Retained earnings—beginning of year				255,085						276,988						325,850						245,414						197,285
Dividends declared				(4,230	)					(4,053	)					(3,487	)					(3,366	)					(3,339	)
Retained earnings—end of year			$	263,430					$	255,085					$	276,988					$	325,850					$	245,414
Earnings (loss) per share:
	Basic:
		Continuing operations	$	0.36					$	(0.54	)				$	(1.61	)				$	3.05					$	1.87
		Discontinued operations		—						—						—						(0.02	)					—
		Net earnings (loss) per share	$	0.36					$	(0.54	)				$	(1.61	)				$	3.03					$	1.87
	Diluted:
		Continuing operations	$	0.36					$	(0.54	)				$	(1.61	)				$	2.94					$	1.80
		Discontinued operations		—						—						—						(0.02	)					—
		Net earnings (loss) per share	$	0.36					$	(0.54	)				$	(1.61	)				$	2.92					$	1.80
Average basic shares outstanding (000’s)				34,723						33,148						28,231						27,623						27,498
Average diluted shares outstanding (000’s)				34,989						33,148						28,231						28,675						28,589
Cash dividends per share			$	0.12					$	0.12					$	0.12					$	0.12					$	0.12
Capital expenditures				9,044						12,833						77,654						119,216						32,896
Depreciation and amortization				33,605						43,373						51,674						44,325						33,907
Financial Position at Year End
Current assets			$	164,766					$	152,334					$	200,674					$	305,696					$	254,297
Current liabilities				95,689						134,556						153,857						202,891						154,461
Current ratio			1.7 to 1						1.1 to 1						1.3 to 1						1.5 to 1						1.6 to 1
Working capital			$	69,077					$	17,778					$	46,817					$	102,805					$	99,836
Inventories				31,925						36,262						50,149						104,316						78,942
Property, plant and equipment—net				122,481						148,632						191,958						224,861						139,692
Total assets				482,250						490,032						567,931						672,929						522,652
Short-term notes payable				—						—						—						7,397						7,428
Long-term debt				75,880						67,000						125,013						178,000						162,000
Long-term obligations, including long-term debt				87,013						78,501						132,287						189,069						176,164
Shareholders’ equity				294,191						265,020						242,873						246,357						164,764
Common shares outstanding (000’s)				36,067						34,101						30,902						27,781						27,462
Equity (book value) per share			$	8.16					$	7.77					$	7.86					$	8.87					$	6.00
Other Data
Stock price range			$	14.94-$4.90					$	19.56-$3.65					$	47.88-$13.49					$	82.75-$31.50					$	86.25-20.44
Number of employees				5,041						5,313						5,837						9,008						7,662
Number of shareholders at year end				1,527						1,585						1,549						1,492						1,498

CTS CORPORATION

36

EX-21

CTS Corporation
Form 10-K 2003

EXHIBIT (21)

CTS CORPORATION AND SUBSIDIARIES

CTS Corporation (Registrant), an Indiana corporation

Subsidiaries:

CTS Corporation, 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 Electronics Dongguan, Ltd., a Peoples’ Republic of China corporation

CTS of Canada Holding Company, a Province of Nova Scotia (Canada) corporation

CTS of Canada G.P., Ltd., a Province of Ontario (Canada) corporation

CTS of Canada L.P., a Province of Ontario (Canada) limited partnership ²

CTS of Canada Co., a Province of Nova Scotia (Canada) corporation

CTS Corporation U.K., Ltd., a Scotland 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.

²  CTS of Canada, L.P., is a limited partnership formed by CTS of Canada Holding Co. and CTS of Canada G.P., Ltd.

EX-23

CTS Corporation
Form 10-K 2003

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 and No. 333-88448), Registration Statement on Form S-4 (No. 333-34861), and Registration Statements on Form S-8 (No. 333-62202, No. 333-5730, No. 333-91335 and No. 333-106614) of CTS Corporation of our report dated January 26, 2004 relating to the financial statements and financial statement schedule, which appears in this Form 10-K for the year ended December 31, 2003.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
February 18, 2004 EX-31 6 exhibit31-a.htm (A) CERTIFICATION - SECTION 302

CTS Corporation
Form 10-K 2003

EXHIBIT (31)(a)

CERTIFICATION

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 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  February 19, 2004	/s/ Donald K. Schwanz
	Donald K. Schwanz, Chairman, President and Chief Executive Officer

EX-31

     
     
     
     
     
     
     
     Exhibit (31)(a)

EX-31

CTS Corporation
Form 10-K 2003

EXHIBIT (31)(b)

CERTIFICATION

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 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  February 19, 2004	/s/ Vinod M. Khilnani
	Vinod M. Khilnani Senior Vice President and Chief Financial Officer

EX-32

CTS Corporation
Form 10-K 2003

EXHIBIT (32)(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, 2003, as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned officer 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 19, 2004	/s/ Donald K. Schwanz
	Donald K. Schwanz
	Chairman, President and
	Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to CTS Corporation and will be retained by CTS Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32

CTS Corporation
Form 10-K 2003

EXHIBIT (32)(b)

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, 2003, as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned officer 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 19, 2004	/s/ Vinod M. Khilnani
	Vinod M. Khilnani
	Sr. Vice President and
	Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to CTS Corporation and will be retained by CTS Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-99

CTS Corporation
Form 10-K 2003

EXHIBIT (99)(a)

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 National City Bank. 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 more difficult 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:

• the board of directors fixes the number of directors within a specified range;

• the existing directors will fill any vacancy or newly created directorship with any new director; and

• only the chairman of the board, the board of directors or the president may call a board of directors meeting.

1

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. 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:

• 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

• 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:

• $1.00 per share; and

• 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.

2

In the event, such an event is defined in the Rights Agreement as a “Flip-In Event,” that

• any person or group becomes an Acquiring Person,

• 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

             - 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,

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:

• 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

• 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,

• we consolidate with or merge with or into any person and we are not the continuing or surviving corporation,

• 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

• 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:

• 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 o Date, and

• 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.

3

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.

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:

• the time that the "continuing directors" no longer constitute the majority of the directors of the corporation; or

• there is an "interested shareholder."

Under our bylaws, a “continuing director” is defined as a director who:

• is not an "interested shareholder" or any affiliate, associate, representative or nominee of an "interested shareholder" or any affiliate of an "interested shareholder;" and

• 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:

• the beneficial owner of 10% or more of the voting power of the corporation; or

• an affiliate or associate of the corporation who at any time within the five 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.

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

CTS Corporation
Form 10-K 2003

EXHIBIT (99)(b)

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, as well as the other information included in this prospectus supplement and the accompanying prospectus. In addition to those described, other 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 condition could be materially adversely affected, and you could lose all or part of your investment.

We may be unable to keep pace 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. End markets for electronic components and assemblies are 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 vary, may change and 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, results of operations and financial condition could be materially adversely affected.

Because a substantial portion of our revenues come from customers in the automotive, computer, and communications 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, financial condition and stock price. Any adverse occurrence, including industry slowdown, recession, political instability, costly or constraining regulations, armed hostilities, terrorism, excessive inflation, prolonged disruptions in one or more of our customers’ production schedules, 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, results of operations and financial condition. 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 one or more customers. 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, consumer preferences and interest rates.

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Because a significant portion of our revenues currently come from a small number of customers, any decrease in orders 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, or substantially changes the terms of that business, 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 and Motorola, Inc., who together account for 46% of net sales in 2003.

We expect to continue to depend on sales to our major customers. As our customers are under no obligation to contract to do business with us on a long-term basis, there is always the possibility that one or more customers may choose to work with a competitor and reduce their business with CTS. Customers may also reduce or delay their business with us because of economic or other conditions or decisions which reduce their need for CTS products or services. 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 products and/or services, our operating results, financial condition and cash flows could be adversely affected.

We face risks resulting from global economic factors, including economic slowdowns.

The global economic downturn has slowed demand in the CTS-served automotive, communications and computer and other markets. These served markets for our electronic components and sensors and electronics manufacturing services products have softened and may continue to soften. As a result, our revenues and earnings have been negatively affected and this softening demand has in the past and may in the future create additional pricing pressures which could further affect our revenues and earnings.

Deterioration of revenues and earnings, beyond current levels, could have a negative effect on our business, results of operations, financial condition and cash flows. 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.

We face risks relating to our non-U.S. operations.

Because we have significant non-U.S. operations, our results of operation and financial condition could be adversely affected by economic, political, health, regulatory and other factors existing in non-U.S. countries in which we operate. These international operations are subject to adverse, inherent risks including:

• political and economic instability in countries in which we have manufacturing facilities;

• expropriation;

• changes in government regulation;

• exposure to different legal standards;

• less favorable intellectual property laws;

• health conditions and standards

• currency controls;

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• fluctuations in exchange rates;

• increases in the duties and taxes we pay;

• high levels of inflation or deflation;

• greater difficulty in collecting our accounts receivable and longer payment cycles;

• changes in labor conditions and difficulties in staffing and managing our non-U.S. operations; and

• limitation on insurance coverage against geopolitical risks, natural disasters and business interruptions.

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, 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 continue to 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 an infringement claim is successfully asserted, we may be required to pay a penalty for past infringement and 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 of a non-infringing alternative, or licenses may not be available on commercially acceptable terms, if at all, in which case we may lose sales and profits.

We may be unable to compete effectively against larger competitors.

We operate in highly competitive industries. We compete against many domestic and non-U.S. companies, some of which have substantially greater research and development, marketing, manufacturing and financial resources than we do. Although no single competitor competes with us across 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.

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Customer pressure to reduce prices may cause reductions in revenues 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 and services. In many of our markets, average sales prices of established products have declined in the past. We anticipate that prices will continue to decline over time, which could negatively impact our revenues and/or gross profit margins. Accordingly, to remain competitive, we believe that we must continue to develop new technologies and product enhancements and improve manufacturing and operating efficiencies, that will offset the impact of price declines for 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.

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 non U.S. laws. Compliance with these environmental laws is a major consideration for us because we use hazardous materials in our manufacturing processes. In addition, because we are a generator of hazardous wastes, we, along with any other party 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 results of operations, 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 1, 2003 to February 17, 2004, the last daily sale price of our common stock ranged from a low of $5.05 to a high of $15.75. 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:

• general U.S. and worldwide economic conditions;

• general conditions in equity markets;

• conditions in our industries such as competition, demand for services and technological advances;

• changes in our customer base, including any addition or loss of a major customer or a significant increase or decrease in business from a major customer, and changes in our contracts

• with customers;

• introduction and market acceptance of our customers' new products and changes in demand for our customers' existing products;

• announcements by us or our competitors of new products or technical innovations or of significant acquisitions, mergers, strategic partnerships or joint ventures;

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• changes in financial estimates by securities analysts;

• any deviations in net revenues or in earnings from levels expected by securities analysts;

• changes in market valuations of related companies;

• future sales of common stock;

• changes in our revenues and earnings;

• adverse or unfavorable publicity regarding us or our products and services;

• effectiveness in managing our manufacturing processes and related assets, including our inventory and fixed assets; and

• additions or departures of key personnel.

We may fail to meet the expectations of our shareholders or of security 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 non-financial significant covenants that, among other things, limit our ability to:

• dispose of assets;

• incur additional debt;

• guarantee third-party obligations;

• create liens on assets;

• enter into capital leases;

• make investments, loans or advances;

• make acquisitions or engage in mergers or consolidations;

• make capital expenditures; and

• 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.

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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 us, except under specified circumstances, 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. 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 22.3 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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