UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

OR

Commission File Number: 1-4639

CTS CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes     No X 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.     Yes     No X 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).

Large accelerated filer                        Accelerated filer  X                     Non-accelerated filer    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes     No X 

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 July 2, 2006, was approximately $430.8 million. There were 35,884,265 shares of common stock, without par value, outstanding on May 10, 2007.

Documents Incorporated by Reference

TABLE OF CONTENTS

EXPLANATORY NOTE

In February 2007, CTS announced that it was investigating incorrect accounting entries at its Moorpark, California manufacturing location and that its financial statements for the first three quarters of 2006 should not be relied upon. The investigation determined that numerous incorrect entries transferred significant costs from income statement accounts, primarily cost of goods sold, to balance sheet accounts, primarily accounts payable, beginning in 2005 and continuing through 2006. For more information on these matters, please refer to Item 1A, Risk Factors; Item 9A Controls and Procedures; Note B to the consolidated financial statements, “Restatement of the Consolidated Financial Statements”; and Management ’s Report on Internal Control over Financial Reporting. Management determined that the effect of the misstatements on CTS’ 2006 consolidated financial statements was material. Amendments to CTS’ Quarterly Reports on Form 10-Q/ A restating CTS’ condensed consolidated financial statements for each of the first three quarters of 2006 are being filed contemporaneously with this Annual Report on Form 10-K. In addition, as a result of the incorrect entries discussed above CTS has restated its consolidated financial statements for the year ended December 31, 2005 in this Annual Report on Form 10-K.

PART I

Item 1. Business

CTS Corporation (CTS) is a global manufacturer of electronic 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 and amendments thereto 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 electronic components and sensors and provides electronics manufacturing services (EMS) primarily to original equipment manufacturers (OEMs), for the automotive, computer, communications, medical, industrial, and defense and aerospace markets. CTS operates manufacturing facilities located throughout North America, Asia, and Europe and serves major markets globally. Sales and marketing is accomplished through CTS sales engineers, independent manufacturers’ representatives, and distributors.

Effective January 31, 2005, CTS acquired 100% of the outstanding capital stock of SMTEK International, Inc. (SMTEK). The results of SMTEK’s operations have been included in the consolidated financial statements since that date. SMTEK is an EMS provider serving OEMs in the medical, industrial, instrumentation, telecommunications, security, financial services, automation, aerospace and defense industries. As a result of the acquisition, CTS has expanded into new EMS markets, reduced customer concentrations, and increased its global footprint. SMTEK had four facilities located in Moorpark and Santa Clara, California; Marlborough, Massachusetts; and Bangkok, Thailand. Subsequent to the acquisition, CTS consolidated the Marlborough, Massachusetts facility into its Londonderry, New Hampshire facility. See further discussion of the acquisition in Note C, “Acquisition,” appearing in the notes to the consolidated financial statements as noted in the Index appearing under Item 15(a) (1) and (2).

SEGMENTS AND PRODUCTS BY MAJOR MARKETS

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

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. For some customers, CTS provides full turnkey manufacturing and completion, including design, bill-of-material management, logistics, and repair.

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; electronic components used in communications infrastructure and computer markets; terminators, including ClearONE^tm terminators, used in computer and other high speed applications, switches, resistor networks, and potentiometers used to serve multiple markets and fabricated piezo-electric materials and substrates used primarily in medical and industrial markets.

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

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

Net sales to external customers, segment operating earnings, total assets by segment, net sales by geographic area, and long-lived assets by geographic area, are contained in Note N, “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, computer, medical, industrial, and defense and aerospace markets and in the overall economy 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 segment and markets. Many products are sold into several OEM markets:

MARKETING AND DISTRIBUTION

Sales and marketing to OEMs, for both segments, is accomplished through CTS sales engineers, independent manufacturers’ representatives, and distributors. CTS maintains sales offices in China, Hong Kong, Japan, Scotland, Singapore, Taiwan, and the United States. Approximately 89% of 2006 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 segments. Independent manufacturers’ representatives receive commissions from CTS. During 2006, approximately 9% of net sales was attributable to coverage by independent manufacturers’ representatives. CTS also uses independent distributors in its Components and Sensors segment. Independent distributors purchase component and sensor products from CTS for resale to customers. In 2006, independent distributors accounted for approximately 2% 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 segment:

These raw materials are purchased from several vendors, and, except for certain semiconductors, rare earth materials, and conductive inks, CTS does not believe it is dependent upon one or a limited number of vendors. Although CTS purchases all of its semiconductors, rare earth materials, and conductive inks from a limited number of vendors, alternative sources are available. In 2006, 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.

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 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 reflect some seasonality and cyclicality. For example, the Components and Sensors segment experiences lower third quarter sales, due to the automotive industry’s model year changeovers and summer shutdowns. The EMS segment experiences higher fourth quarter sales in line with its industry, particularly from increased computing market demand.

PATENTS, TRADEMARKS, AND LICENSES

CTS maintains a program of obtaining and protecting U.S. and non-U.S. patents relating to products which CTS has designed and manufactured, as well as, processes and equipment used in CTS’ manufacturing technology. CTS was issued 13 new U.S. patents in 2006 and currently holds in excess of 220. CTS also holds in excess of 140 non-U.S. counterpart patents. Patents have a greater impact on the Components and Sensors segment than on the EMS segment, which does not rely significantly on any patents. CTS has 10 registered U.S. trademarks and 15 foreign counterparts. CTS does not believe that its success is materially dependent on the existence or duration of any patent, group of patents, or trademarks.

CTS has licensed the right to use several of its patents to both U.S. and non-U.S. companies. In 2006, 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 61% of net sales in both 2006 and 2005 and 69% of net sales in 2004. The decrease in this percentage from 2004 is a result of the Company’s efforts to broaden its customer base. Sales to Hewlett-Packard Company (Hewlett-Packard) amounted to 22% of net sales in 2006, 28% of net sales in 2005, and 33% of net sales in 2004. Sales to Motorola, Inc. (Motorola) accounted for less than 10% of net sales in each of 2006 and 2005, and 13% of net sales in 2004.

EMS segment revenues from Hewlett-Packard represented $143.2 million, or 37%, $173.3 million, or 48%, and $177.3 million, or 66%, of the segment’s revenue for the years ended December 31, 2006, 2005, and 2004, respectively. EMS segment revenues from Motorola were $51.4 million, or 13%, $40.3 million, or 11%, and $60.9 million, or 23%, of the segment’s revenue for the years ended December 31, 2006, 2005, and 2004, respectively.

Although the Company is making efforts to broaden its customer base, it depends on a small number of customers for a large portion of its business. Changes in the level of its customers’ orders have, in the past, had a significant impact on its operating results. If a major customer reduces the amount of business it does with CTS, or substantially changes the terms of that business, there would be an adverse impact on CTS’ operating results.

Additionally, CTS expects to continue to depend on sales to its major customers. Because CTS’ customers are under no obligation to continue to do business with the Company 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 CTS 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 CTS’ operating results would be adversely affected if one or more of its major customers were to cancel, delay, or reduce a large amount of business with CTS in the future. If one or more of its customers were to become insolvent or otherwise unable to pay for CTS’ products and/or services, CTS’ 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 28, 2007 and January 29, 2006.

Order backlog at the end of January 2007 will generally be filled during the 2007 fiscal year.

COMPETITION

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, and delivery in the markets in which it participates. 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 larger competitors.

In the Components and Sensors 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 also CTS customers for components and sensors, as well as EMS products.

In both the EMS and Components and Sensors 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 represent 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 products oriented toward high mix and low to medium volume outsourcing needs of OEMs.

NON-U.S. REVENUES

In 2006, 60% of net sales to external customers originated from non-U.S. operations compared to 55% in 2005 and 63% in 2004. The higher percentage in 2006 results primarily from the consolidation of the operations of the Berne, Indiana facility into CTS’ Mexico and Singapore facilities as discussed in Note Q, “Restructuring Charges,” appearing in the notes to the consolidated financial statements as noted in the Index appearing under Item 15(a) (1) and (2). At December 31, 2006, approximately 36% of total CTS assets were located at non-U.S. operations compared to 31% of total CTS assets at the end of 2005. 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, Czech Republic, Mexico, Scotland, Singapore, Taiwan, and Thailand.

Net sales to external customers originating from non-U.S. operations for the EMS segment were $211.0 million in 2006, compared to $203.4 million in 2005, and $187.0 million in 2004. Net sales to external customers originating from non-U.S. operations for the Components and Sensors segment were $181.5 million in 2006 compared to $135.7 million in 2005, and $146.8 million in 2004. 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 N, “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 2006, 2005, and 2004, CTS spent $15.9 million, $17.1 million, and $19.1 million, respectively, for research and development. The reductions in research and development spending from 2004 to 2006 reflect savings due to changing business mix, organizational consolidation, and streamlining of research and development activities. Significant ongoing research and development activities continue in CTS’ Components and Sensors 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 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, innovative products and technologies, improving product flow, and adding product value to meet the current and future needs of its customers. 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 4,977 people at December 31, 2006, and 77% of these people were employed outside the United States. Approximately 185 CTS employees at one location in the United States were covered by two collective bargaining agreements as of December 31, 2006. One agreement, which covers 145 employees, is scheduled to expire in 2009 and the other which covers 40 employees is scheduled to expire in 2008. CTS employed 4,902 people at December 31, 2005.

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.

Item 1A. Risk Factors

The following are certain risk factors that could affect our business, financial condition and operating results. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause CTS’ actual results and condition to differ materially from those projected in forward-looking statements. Before you invest in CTS, you should know that making such an investment involves some risks, including the risks described below. The risks that are highlighted below are not the only ones that CTS faces. If any of the following risks actually occur, CTS’ business, financial condition or operating results could be negatively affected.

Because CTS currently derives a significant portion of its revenues from a small number of customers, any decrease in orders from these customers could have an adverse effect on CTS’ business, financial condition and operating results.

CTS depends on a small number of customers for a large portion of its business, and changes in the level of its customers’ orders have, in the past, had a significant impact on its results of operations. CTS’ 15 largest customers represent a substantial portion of its sales, approximately 61% of net sales in both 2006 and 2005 and 69% of net sales in 2004. CTS’ two largest customers are Hewlett-Packard Company and Motorola, Inc., which represented approximately 22% and less than 10%, respectively, of its net sales in 2006. If a major customer significantly cancels, delays or reduces the amount of business it does with CTS, there could be an adverse effect on CTS’ business, financial condition and operating results. Such adverse effect likely would be material if one of CTS’ largest customers significantly reduced its amount of business. Significant pricing and margin pressures exerted by a key customer could also materially adversely affect CTS’ operating results. In addition, CTS generates significant accounts receivable from sales to its major customers. If one or more of CTS’ largest customers were to become insolvent or otherwise unable to pay or were to delay payment for services, CTS’ business, financial condition and operating results could be materially adversely affected.

CTS is subject to intense competition in the EMS industry.

CTS competes with many providers of electronics manufacturing services. Some of its competitors have substantially greater manufacturing and financial resources and in some cases have more geographically diversified international operations than CTS. CTS’ large, global competitors, such as Flextronics International Ltd., Solectron Corporation, Sanmina — SCI Corporation, Jabil Circuit Inc., and Celestica Inc., are companies that often have a regional, product, service, or industry specific focus. CTS also faces competition from the manufacturing operations of its current and future OEM customers, which may elect to manufacture their own products internally rather that outsource the manufacturing to EMS providers. In addition, CTS also faces competition from mid-sized and smaller EMS companies such as Benchmark Electronics Inc., Plexus Corp., Sypris Solutions Inc., Labarge Inc., and Reptron Electronics Inc. Competition may intensify further if more companies enter the markets in which CTS operates. CTS’ failure to compete effectively could materially adversely affect its business, financial condition and operating results.

CTS may be unable to compete effectively against competitors in its Components and Sensors segment.

CTS’ Components and Sensors segment operates in highly competitive industries that are characterized by price erosion and rapid technological change. CTS competes with many domestic and foreign companies, some of which have substantially greater manufacturing, financial, research and development, and marketing resources than CTS. Additionally, many of CTS’ customers are seeking to consolidate their business among one or more preferred or qualified suppliers. If any customer becomes dissatisfied with CTS’ prices, quality, or timeliness of delivery, among other things, it could award future business or even move existing business to CTS’ competitors. Moreover, some of CTS’ customers could choose to manufacture and develop particular products themselves rather than purchase them from CTS. Increased competition could result in price reductions, reduced profit margins, and loss of market share, each of which could materially adversely affect CTS’ business, financial condition,

and operating results. In addition, some of CTS’ competitors have engaged, and may in the future engage, in merger and acquisition transactions. Consolidations by competitors are likely to create entities with increased market share, customer bases, proprietary technology, marketing expertise and sales force size. These developments may materially adversely affect CTS’ ability to compete against these competitors. CTS cannot assure you that its products will continue to compete successfully with its competitors’ products, including OEMs, many of which are significantly larger than CTS and have greater financial and other resources than CTS.

CTS may be unable to keep pace with rapid technological changes that could make some of its products or processes obsolete before it realizes a return on its investment.

The technologies relating to some of CTS’ products have undergone, and are continuing to undergo, rapid and significant changes. Specifically, 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 CTS’ existing products obsolete and unmarketable before CTS can recover any or all of its research, development, and commercialization expenses on capital investments. Furthermore, the life cycles of CTS’ products and the products CTS manufactures for others vary, may change, and are difficult to estimate.

CTS’ future success will depend upon its 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 CTS’ customers. CTS has incurred, and expects to continue to incur, expenses typical of the electronics industry associated with research and development activities and the introduction and promotion of new products. There can be no assurance that the expenses incurred will not exceed research and development cost estimates or that new products will achieve market acceptance and generate sales sufficient to offset development costs. CTS also cannot provide assurance that it will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products or product enhancements or that CTS’ new products or product enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. There can be no assurance that products or technologies developed by others will not render CTS’ products non-competitive or obsolete. If CTS is unable, for technological or other reasons, to develop and market new products or product enhancements in a timely and cost-effective manner, CTS’ business, financial condition, and operating results could be materially adversely affected.

CTS’ customers have canceled, and may in the future, cancel their orders, change production quantities, or locations or delay production.

CTS generally does not obtain firm, long-term purchase commitments from its customers, and has often experienced reduced lead times in customer orders. Customers cancel their orders, change production quantities, and delay production for a number of reasons. Uncertain economic and geopolitical conditions have resulted, and may continue to result, in some of CTS’ customers delaying the delivery of some of the products CTS manufactures for them and placing purchase orders for lower volumes of products than previously anticipated. Cancellations, reductions, or delays by a significant customer or by a group of customers have harmed, and may continue to harm, CTS’ results of operations by reducing the volumes of products manufactured by CTS, as well as by causing a delay in the recovery of its expenditures for inventory in preparation for customer orders and lower asset utilization resulting in lower gross margins.

In addition, customers may require that manufacturing of their products be transitioned from one facility to another to achieve cost and other objectives. Such transfers may result in inefficiencies and costs due to resulting excess capacity and overhead at one facility and capacity constraints and the inability to fulfill all orders at another. In addition, CTS makes significant decisions, including determining the levels of orders that it will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements, based on its estimates of customer requirements. The short-term nature of CTS’ customers’ commitments and the changes in demand for their products reduce CTS’ ability to estimate accurately future customer requirements. This makes it difficult to schedule production and maximize utilization of CTS’ manufacturing capacity. Anticipated orders may not materialize and delivery schedules may be deferred as a result of changes in demand for CTS’ products or its customers’ products. CTS often increases staffing and capacity, and incurs other expenses to meet the anticipated demand of its customers, which cause reductions in its gross margins if customer orders are delayed or canceled. On occasion, customers require rapid increases in production, which may stress CTS’ resources and reduce margins. CTS may not have sufficient capacity at any given time to meet its customers’ demands. In addition, because many of CTS’ costs and operating expenses are relatively fixed over the short term, a reduction in customer demand harms its gross profit and operating income until such time as adjustments can be made to activity or operating levels and structural costs.

CTS sells products to customers in cyclical industries, which are subject to significant downturns that could materially adversely affect CTS’ business, financial condition, and operating results.

CTS sells products to customers in cyclical industries, which have experienced economic and industry downturns. These markets for CTS’ electronic components and sensors and electronics manufacturing services products have softened in the past and may again soften in the future. CTS may face reduced end-customer demand, underutilization of CTS’ manufacturing capacity, changes in CTS’ revenue mix, and other factors that could adversely affect CTS’ results of operations in the near term. CTS cannot predict whether it will achieve profitability in future periods.

A deterioration of revenues and earnings could have a negative effect on CTS’ business, financial condition and operating results. This could also have a negative effect on the price of CTS common stock and could also make it difficult for CTS to service its debt. Violation of the covenants in CTS’ credit facility could require substantial fees to CTS’ banks until the violation is corrected. In the event the violation cannot be corrected, all of the indebtedness under CTS’ credit facility, its convertible subordinated notes, as well as certain other indebtedness, may be accelerated. If CTS’ indebtedness is accelerated, CTS cannot be certain that it will have sufficient funds to pay the accelerated indebtedness or that it will have the ability to refinance the accelerated indebtedness on terms favorable to CTS or at all.

Because CTS derives a substantial portion of its revenues from customers in the automotive, computer, and communications industries, it is susceptible to trends and factors affecting those industries as well as the success of its customers’ products.

Net sales to the automotive, computer, and communications industries represent a substantial portion of CTS’ revenues. Factors negatively affecting these industries and the demand for products also negatively affect CTS’ business, financial condition, and operating results. 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 CTS’ 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 CTS’ customers in these industries, could materially adversely affect CTS’ business, financial condition, and operating results. For example, the trend toward consolidation in the computer and communications industries could result in a lower level of acceptance of CTS’ products, reduced product requirements, purchasing delays by combined entities, or the loss of one or more customers. Also, the automotive industry is generally highly unionized and some of CTS’ 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.

CTS’ customers are primarily OEMs in the automotive, computer, and communications industries. CTS’ future sales are dependent on the success of its customers. CTS’ customers may discontinue or modify their products containing products that CTS manufactures or develop products requiring new manufacturing processes. Some of CTS’ U.S. automotive customers face financial difficulties due to weak sales and high labor costs, including retirement plans. In addition, the computer and communications industries are subject to rapid technological change and changes in demand for CTS’ products. If CTS’ customers are unable to develop products that keep pace with the changing technological environment, its customers’ products could lose market acceptance, and the demand for CTS’ products could decline significantly. If CTS is unable to offer technologically advanced, easily adaptable and cost-effective products in response to changing customer requirements, demand for its products will decline.

Products CTS manufactures may contain design or manufacturing defects that could result in reduced demand for CTS’ products or services and liability claims against us.

Despite CTS quality control and quality assurance efforts, defects may occur in the products CTS manufactures due to design or manufacturing errors or component failure. Product defects may result in delayed shipments and reduced demand for CTS’ products. CTS may be subject to increased costs due to warranty claims on defective products. Product defects may result in product liability claims against CTS where defects cause, or are alleged to cause, property damage, bodily injury or death. CTS may be required to participate in a recall involving products which are, or are alleged to be, defective. CTS carries insurance for certain legal matters involving product liability, however, CTS does not have coverage for all costs related to product defects and the costs of such claims, including costs of defense and settlement, may exceed CTS’ available coverage.

CTS is exposed to fluctuations in foreign currency exchange rates that have adversely affected, and may continue to adversely affect, CTS’ business, financial condition and operating results.

CTS transacts business in various foreign countries. CTS presents its consolidated financial statements in U.S. dollars, but a portion of CTS’ revenues and expenditures are transacted in other currencies. As a result, CTS is exposed to fluctuations in foreign currencies. CTS has currency exposure arising from both sales and purchases denominated in currencies other than the U.S. dollar. Volatility in the exchange rates between

the foreign currencies and the U.S. dollar could harm CTS’ business, financial condition and operating results. Furthermore, to the extent CTS sells its products in foreign markets, currency fluctuations may result in CTS’ products becoming too expensive for foreign customers. For example, CTS’ EMS business located in the United Kingdom sells primarily in U.S. dollars while most of the operating expenses and some material purchases are made in UK pound sterling. Accordingly, when the U.S. dollar weakens against the UK pound sterling, CTS’ EMS segment operating results generally worsen. CTS also manufactures products in China, most of which CTS sells in U.S. dollars. An appreciation of the Chinese RMB against the U.S. dollar would increase CTS’ expenses when translated into U.S. dollars.

CTS’ operating results vary significantly from period to period.

CTS experiences fluctuations in its operating results. Some of the principal factors that contribute to these fluctuations are: changes in demand for CTS’ products; CTS’ effectiveness in managing manufacturing processes, costs, and timing of CTS’ component purchases so that components are available when needed for production, while mitigating the risks of purchasing inventory in excess of immediate production needs; the degree to which CTS is able to utilize its available manufacturing capacity; changes in the cost and availability of components, which often occur in the electronics manufacturing industry and which affect CTS’ margins and its ability to meet delivery schedules; general economic and served industry conditions; local conditions and events that may affect CTS’ production volumes, such as labor conditions and political instability.

In addition, due to the significant differences in the operating income margins in CTS’ two reporting segments, the mix of sales between CTS’ Components and Sensors segment and CTS’ EMS segment affects CTS’ operating results from period to period. Although CTS’ restructuring activities and relocation of some of its manufacturing operations to Asia have resulted in improved operating income margins in CTS’ Components and Sensors segment, CTS can provide no assurances that this will continue to occur.

CTS faces risks relating to its international operations.

Because CTS has significant international operations, its operating results and financial condition could be materially adversely affected by economic, political, health, regulatory and other factors existing in foreign countries in which CTS operates. CTS’ international operations are subject to inherent risks, which may materially adversely affect CTS, including: political and economic instability in countries in which CTS’ products are manufactured; expropriation or the imposition of government controls; changes in government regulations; export license requirements; trade restrictions; earnings expatriation restrictions; exposure to different legal standards; less favorable intellectual property laws; health conditions and standards; currency controls; fluctuations in exchange rates; increases in the duties and taxes CTS pays; high levels of inflation or deflation; greater difficulty in collecting CTS’ accounts receivable and longer payment cycles; changes in labor conditions and difficulties in staffing and managing CTS’ international operations; limitations on insurance coverage against geopolitical risks, natural disasters and business operations; communication among and management of international operations. In addition, these same factors may also place CTS at a competitive disadvantage to some of CTS’ foreign competitors.

To respond to competitive pressures and customer requirements, CTS may further expand internationally at low cost locations, particularly in Asia. If CTS continues to expand in these locations, CTS may incur additional capital expenditures. CTS cannot assure you that it will realize the anticipated strategic benefits of CTS’ international operations or that its international operations will contribute positively to, and not adversely affect, CTS’ business, financial condition and operating results.

Furthermore, because a significant portion of CTS’ products are manufactured in Asia, including China, Singapore, Taiwan and Thailand, any conflict or uncertainty in these countries, including public health or safety concerns, such as Severe Acute Respiratory Syndrome, or natural disasters, such as earthquakes, could have a material adverse effect on CTS’ business, financial condition and operating results. In addition, if the government of any country in which CTS’ products are manufactured or sold sets technical standards for products made in or imported into their country that are not widely shared, some of CTS’ customers may suspend imports of their products into that country, require manufacturers in that country to manufacture products with different technical standards or disrupt cross-border manufacturing partnerships, which, in each case, could materially adversely affect CTS’ business, financial condition and operating results.

CTS may further restructure its operations, which may materially adversely affect CTS’ business, financial condition and operating results.

In 2006, CTS consolidated its Berne, Indiana manufacturing operations into three of its other existing facilities. The consolidation resulted in pre-tax restructuring charge and restructuring-related costs of approximately $4.0 million. CTS may incur additional restructuring and impairment charges in the future if circumstances warrant. If CTS restructures its operations in the future and is unsuccessful in implementing restructuring plans, CTS may experience disruptions in its operations and higher ongoing costs, which may materially adversely affect CTS’ business, financial condition and operating results.

CTS may explore acquisitions that complement or expand CTS’ business as well as divestitures of various business operations. CTS may not be able to complete these transactions and these transactions, if executed, could pose significant risks and may materially adversely affect CTS’ business, financial condition and operating results.

CTS intends to explore opportunities to buy other businesses or technologies that could complement, enhance, or expand CTS’ current business or product lines or that might otherwise offer CTS growth opportunities. CTS may have difficulty finding these opportunities or, if CTS does identify these opportunities, CTS may not be able to complete the transactions for reasons including a failure to secure financing. Any transactions that CTS is able to identify and complete may involve a number of risks, including: the diversion of CTS’ management’s attention from CTS’ existing business to integrate the operations and personnel of the acquired or combined business or joint venture; possible adverse effects on CTS’ operating results during the integration process; and CTS’ possible inability to achieve the intended objectives of the transaction. In addition, CTS may not be able to successfully or profitably integrate, operate, maintain, and manage CTS’ newly acquired operations or employees. CTS may not be able to maintain uniform standards, controls, procedures and policies, and this may lead to operational inefficiencies. In addition, future acquisitions may result in dilutive issuances of equity securities or the incurrence of additional debt.

CTS has in the past, and may in the future, consider divesting certain business operations. Divestitures may involve a number of risks, including the diversion of management’s attention, significant costs and expenses, the loss of customer relationships and cash flow, and the disruption of operations in the affected business. Failure to timely complete a divestiture or to consummate a divestiture may negatively affect valuation of the affected business or result in restructuring charges.

If CTS is unable to protect its intellectual property or it infringes, or is alleged to infringe, on another person’s intellectual property, CTS’ business, financial condition and operating results could be materially adversely affected.

The success of CTS’ business depends, in part, upon CTS’ ability to protect trade secrets, copyrights and patents, obtain or license patents and operate without infringing on the intellectual property rights of others. CTS relies on a combination of trade secrets, copyrights, patents, nondisclosure agreements, and technical measures to protect CTS’ proprietary rights in its products and technology. The steps taken by CTS in this regard may not be adequate to prevent misappropriation of CTS’ technology. In addition, the laws of some foreign countries in which CTS operates do not protect CTS’ proprietary rights to the same extent as do the laws of the United States. Although CTS continues to evaluate and implement protective measures, there can be no assurance that these efforts will be successful. CTS’ inability to protect its intellectual property rights could diminish or eliminate the competitive advantages that CTS derives from its technology, cause CTS to lose sales or otherwise harm CTS’ business.

CTS believes that patents will continue to play a role in its business. However, there can be no assurance that it will be successful in securing patents for claims in any pending patent application or that any issued patent will provide CTS with any competitive advantage. CTS also cannot provide assurance that the patents will not be challenged by third parties or that the patents of others will not materially adversely affect CTS’ ability to do business.

CTS may become involved in litigation in the future to protect its intellectual property or because others may allege that CTS infringes on their intellectual property. These claims and any resulting lawsuit could subject CTS to liability for damages and invalidate CTS’ intellectual property rights. If an infringement claim is successfully asserted by a holder of intellectual property rights, CTS may be required to cease marketing or selling certain products, pay a penalty for past infringement, and spend significant time and money to develop a non-infringing product or process or to obtain licenses for the technology, process or information from the holder. CTS 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 CTS may lose sales and profits. In addition, any litigation could be lengthy and costly and could materially adversely affect CTS even if CTS is successful in the litigation.

CTS may experience shortages and increased costs of raw material and required electronic components.

In the past, from time to time, there have been shortages in certain raw materials used in the manufacture of CTS’ components and sensors and certain electronic components purchased by CTS and incorporated into assemblies and subassemblies. Unanticipated raw material or electronic component shortages may prevent CTS from making scheduled shipments to customers. CTS’ inability to make scheduled shipments could cause CTS to experience a shortfall in revenue, increase CTS’ costs, and adversely affect CTS’ relationship with affected customers and CTS’ reputation as a reliable service provider. CTS may be required to pay higher prices for raw materials or electronic components in short supply and order these raw materials or electronic components in greater quantities to compensate for variable delivery times. CTS may also be required to pay higher prices for raw materials or electronic components due to inflationary trends regardless of supply. As a result, raw material or electronic component shortages and price increases could adversely affect CTS’ operating results for a particular period due to the resulting revenue shortfall and increased costs.

Loss of CTS’ key management and other personnel, or an inability to attract key management and other personnel, could materially affect CTS’ business.

CTS depends on its senior executive officers and other key personnel to run its business. CTS does not have long-term retention contracts with many of its key personnel. The loss of any of these officers or other key personnel could adversely affect CTS’ operations. Competition for qualified employees among companies that rely heavily on engineering and technology is at times intense, and the loss of qualified employees or an inability to attract, retain and motivate additional highly skilled employees required for the operation and expansion of CTS’ business could hinder CTS’ ability to conduct research activities successfully and develop marketable products.

CTS is subject to a variety of environmental laws and regulations that expose CTS to potential financial liability.

CTS’ operations are regulated by a number of federal, state, local, and foreign environmental and safety laws and regulations that govern, among other things, the discharge of hazardous materials into the air and water as well as the handling, storage and disposal of these materials. These laws and regulations include the Clean Air Act, the Clean Water Act, the Resource, Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act, as well as analogous state and foreign laws. Compliance with these environmental laws is a major consideration for CTS because it uses hazardous materials in its manufacturing processes. If CTS violates environmental laws or regulations, CTS could be held liable for substantial fines, damages, and costs of remedial actions. CTS’ environmental permits could also be revoked or modified, which could require CTS to cease or limit production at one or more of its facilities, thereby materially adversely affecting CTS’ business, financial condition and operating results. Environmental laws and requirements, including environmental laws in the European Union and other foreign jurisdictions, have generally become more stringent over time and could continue to do so, imposing greater compliance costs and increasing risks and penalties associated with any violation, which also could materially affect CTS’ business, financial condition and operating results.

In addition, because CTS is a generator of hazardous wastes, even if CTS fully complies with applicable environmental laws and requirements, CTS may be subject to financial exposure for costs, including costs of investigation and any remediation, associated with contaminated sites at which hazardous substances from CTS’ operations have been stored, treated or disposed of. CTS may also be subject to exposure for such costs at sites that CTS currently owns or operates or formerly owned or operated. Such exposure may be joint and several, so that CTS may be held responsible for more than its share of the contamination or even for the entire contamination.

CTS has been notified by the Environmental Protection Agency, state environmental agencies and, in some cases, generator groups that CTS is or may be a potentially responsible party regarding hazardous substances at several sites not owned or operated by CTS, as well as several sites that CTS owns. Although CTS estimates its potential liability with respect to environmental violations or alleged violations and other environmental liabilities and reserves for such matters, CTS cannot assure you that its reserves will be sufficient to cover the actual costs that it incurs as a result of these matters. CTS also cannot assure you that additional contamination will not be found in the future, either at sites currently known to CTS or at other sites. Any liability CTS may have for such matters could materially adversely affect CTS’ business, financial condition and operating results.

CTS’ indebtedness may adversely affect its financial health.

As of December 31, 2006, CTS’ long-term debt balance was $60.8 million, consisting of $60.0 million of 2.125% convertible senior subordinated notes, and $0.8 million of borrowings under a foreign credit facility. The level of CTS’ indebtedness could, among other things: increase CTS’ vulnerability to general economic and industry conditions, including recessions; require CTS to use cash flows from operations to service its indebtedness, thereby reducing its ability to fund working capital, capital expenditures, research and development efforts and other expenses; limit CTS’ flexibility in planning for, or reacting to, changes in its business and the industries in which it operates; place CTS at a competitive disadvantage compared to competitors that have less indebtedness; limit CTS’ ability to borrow additional funds that may be needed to operate and expand its business.

CTS’ credit facility and the indenture governing CTS’ convertible senior subordinated notes contain provisions that could materially restrict CTS’ business.

CTS’ credit facility contains a number of significant covenants that, among other things, limit CTS’ ability to: dispose of assets; incur certain additional debt; repay other debt or amend subordinated debt instruments; create liens on assets; make investments, loans or advances; make acquisitions or engage in mergers or consolidations; and engage in certain transactions with CTS’ subsidiaries and affiliates. Under CTS’ credit facility, CTS is required to meet certain financial ratios. In addition, the indenture governing CTS’ 2.125% convertible senior subordinated notes provides for an adjustment of the conversion rate if CTS pays dividends over a certain amount or makes other distributions on capital stock and limits CTS’ ability to engage in mergers or consolidations.

The restrictions contained in CTS’ credit facility and in the indenture governing CTS’ convertible senior subordinated notes could limit CTS’ ability to plan for or react to market conditions or meet capital needs or could otherwise restrict CTS’ activities or business plans. These restrictions could adversely affect CTS’ ability to finance its operations, strategic acquisitions, investments or other capital needs or to engage in other business activities that could be in CTS’ interests.

CTS’ ability to comply with these covenants may be affected by events beyond its control. If CTS breaches any of these covenants or restrictions, it could result in an event of default under CTS’ credit facility, the indenture governing CTS’ convertible senior subordinated notes, or documents governing any other existing or future indebtedness. A default, if not cured or waived, may permit acceleration of CTS’ indebtedness. In addition, CTS’ lenders could terminate their commitments to make further extensions of credit under CTS’ credit facility. If CTS’ indebtedness is accelerated, CTS cannot be certain that it will have sufficient funds to pay the accelerated indebtedness or that it will have the ability to refinance accelerated indebtedness on terms favorable to CTS or at all.

Anti-takeover provisions could delay, deter or prevent a change in control of CTS even if the change in control would be beneficial to CTS shareholders.

CTS is an Indiana corporation subject to Indiana state law. Some provisions of Indiana law could interfere with or restrict takeover bids or other change in control events affecting CTS. One statutory provision prohibits, except under specified circumstances, CTS from engaging in any mergers, sale of assets, recapitalizations and reverse stock splits with any shareholder who owns 10% or more of CTS common stock or any affiliate of the shareholder. Also, provisions in CTS’ articles of incorporation, bylaws, and other agreements to which CTS is a party could delay, deter or prevent a change in control of CTS, even if a change in control would be beneficial to shareholders. CTS has 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. CTS could, however, by action of its board of directors, elect to have those provisions apply.

In addition, CTS has a shareholder rights agreement that under certain circumstances would significantly impair the ability of third parties to acquire control of CTS without prior approval of CTS’ board of directors. In addition, CTS’ articles of incorporation allow it to issue up to an additional 21.4 million shares of common stock and 25.0 million shares of preferred stock without shareholder approval. CTS’ 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.

The Moorpark and Santa Clara accounting investigation and restatements may harm CTS’ business in the future.

In February 2007, CTS’ management commenced an investigation of accounting entries at its Moorpark and Santa Clara, California manufacturing locations which was acquired in the SMTEK acquisition in January 2005. The investigation determined that the Moorpark controller made numerous incorrect accounting entries beginning in 2005 and continuing through 2006. These entries transferred significant costs from income statement accounts, primarily cost of goods sold, to balance sheet accounts, primarily accounts payable.

As a result of the errors, CTS restated its condensed consolidated financial statements for each of the first three quarters of 2006, reducing its net income by $1.9 million, or $0.05 per diluted share for the nine months ended October 1, 2006, and its consolidated financial statements for 2005, reducing its full year net income by $1.5 million, or $0.04 per diluted share.

CTS has incurred substantial expenses for legal and accounting services due to the investigation of these misstatements and the restatement of its financial statements. In addition, these activities have diverted CTS management’s attention from the conduct of its business. The diversion of resources to address issues arising out of the investigation and financial restatement may harm CTS’ business, operating results and financial condition in the future.

CTS’ failure to maintain effective internal control over financial reporting may be insufficient to allow it to accurately report its financial results or prevent fraud, which could cause its financial statements to become materially misleading and adversely affect the trading price of its common stock.

CTS requires effective internal control over financial reporting in order to provide reasonable assurance with respect to its financial reports and to effectively prevent fraud. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If CTS cannot provide reasonable assurance with respect to its financial statements and effectively prevent fraud, its financial statements could become materially misleading, which could adversely affect the trading price of CTS’ common stock.

CTS’ management determined that the misstatements in the Moorpark and Santa Clara accounts reflected a material weakness in its internal control over financial reporting. CTS is enhancing its internal controls in order to remediate the material weakness. Implementing new internal controls and testing the internal control framework will require the dedication of additional resources, management time and expense. If CTS fails to maintain the adequacy of its internal control over financial reporting, including any failure to implement required new or improved controls, or if CTS experiences difficulties in their implementation, its business, financial condition and operating results could be harmed.

Delays in filing periodic reports and financial restatements may adversely affect CTS’ stock price.

In 2007, CTS’ stock price varied from a high of $16.18 on January 17, 2007 prior to CTS’ announcement that it would delay the release of fiscal year 2006 earnings to a low of $13.00 on April 11, 2007, following CTS’ announcement on February 9, 2007, that its 2006 consolidated financial statements could no longer be relied upon. CTS failed to file its Annual Report on Form 10-K within the time required by Securities and Exchange Commission regulations. In addition, CTS will not be able to timely file its Quarterly Report on Form 10-Q for the quarter ended April 1, 2007. CTS’ financial restatements and related disclosures in this and other filings may harm investor confidence and negatively affect CTS’ stock price. In addition, CTS’ failure to timely file periodic reports may adversely affect its stock price.

Item 1B. Unresolved Staff Comments

None.

As of May 10, 2007, CTS has manufacturing facilities, administrative, research and development and sales offices in the following locations.

(1) The land and building are collateral for a credit facility with BANKTHAI.

(2) Ground lease through 2007; restrictions on use and transfer apply.

(3) Ground lease through 2039; restrictions on use and transfer apply.

(4) Land Use Rights Agreement through 2050 includes transfer, lease and mortgage rights.

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.

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 accrued or the ultimate anticipated costs resulting will not materially affect CTS’ consolidated financial position, results of operations, or cash flows.

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

During the fourth quarter of 2006, no matter was submitted to a vote of CTS security holders.

PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

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 2006 Annual Report to Shareholders, portions of which are filed herewith as Exhibit (13) and are incorporated herein by reference (2006 Annual Report). On May 10, 2007, there were approximately 1,607 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 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.

The following table summarizes the repurchase of CTS common stock made by the Company during the three months ended December 31, 2006:

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 2006 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.”

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 (2004-2006)” included in the 2006 Annual Report and incorporated herein by reference.

A discussion of market risk for CTS is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations (2004-2006)” included in the 2006 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).

Consolidated financial statements meeting the requirements of Regulation S-X, the “Report of Independent Registered Public Accounting Firm,” “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 2006 Annual Report and incorporated herein by reference.

None.

Under the direction of CTS’ Chief Executive Officer and Chief Financial Officer, management evaluated CTS’ controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of December 31, 2006.

In the process of answering inquiries as part of the external audit for the year ended December 31, 2006, management identified problems with accounting entries made by the controller of CTS’ Moorpark, California facility, which was acquired in January 2005. Management reported the issue to CTS’ Audit Committee, Board of Directors and independent registered public accounting firm. CTS commenced an investigation with the assistance of outside counsel and forensic accountants, under the oversight of the Audit Committee of the Board of Directors.

The investigation found that numerous incorrect entries were made in the Moorpark and Santa Clara accounts beginning in 2005 and continuing through 2006. These entries transferred significant costs from income statement accounts, primarily cost of goods sold, to balance sheet accounts, primarily accounts payable. Based on the investigation, CTS concluded that substantially all of the incorrect entries in the accounts at issue were made by or caused to be made by the former controller of its Moorpark, California manufacturing facility. CTS further concluded that the Moorpark controller made these entries without the consent or knowledge of CTS’ management at its corporate headquarters or the Moorpark facility. CTS does not believe that this individual or any other employees of CTS profited from these incorrect entries. The investigation did uncover the misappropriation of funds in the amount of approximately $125,000 by this individual. However, other than the fact that this individual was ultimately responsible for accounting for the facility’s cost of goods sold and accounts payable, the investigation did not produce any facts to lead CTS to believe that there was any connection between the incorrect entries in the accounts and the misappropriation of funds. This individual is no longer employed by CTS.

CTS’ management determined that the incorrect entries in the Moorpark and Santa Clara accounts had a material effect on CTS’ 2006 consolidated financial statements. As a result of the misstatements, CTS has restated its condensed consolidated financial statements for each of the first three quarters of 2006, reducing its net income by $1.9 million, or $0.05 per diluted share for the nine months ended October 1, 2006. Additionally, CTS overstated its 2005 net income by $1.5 million, or $.04 per diluted share. Management has restated the 2005 consolidated financial statements in this filing. CTS’ management excluded the SMTEK business from its assessment of its internal control over financial reporting for the year ended December 31, 2005 due to the acquisition of SMTEK in January 2005.

CTS’ management discussed the findings of the investigation and the effects of correcting the Moorpark and Santa Clara accounting errors on CTS’ consolidated financial statements with the Audit Committee and CTS’ independent registered public accounting firm. CTS’ management advised the Audit Committee and CTS’ independent registered public accounting firm that it has determined that, as a result of the aggregation of deficiencies in the company’s control environment, a material weakness in CTS’ internal control over financial reporting existed at December 31, 2006. The control deficiencies that on a combined basis resulted in the material weakness were as follows:

During the quarter ended December 31, 2006, there were no changes in CTS’ internal control over financial reporting that materially affected, or were reasonably likely to materially affect, such internal control over financial reporting.

In its assessment of internal control over financial reporting for the year ended December 31, 2006, management, including CTS’ Chief Executive Officer and Chief Financial Officer, determined that CTS’ internal control over financial reporting was not effective as of that date. Management’s annual report on internal control over financial reporting and the attestation report of CTS’ independent registered public accounting firm are located on pages S-2 and S-4, respectively, of this Annual Report on Form 10-K and are incorporated herein by reference.

Based on the finding that CTS’ internal control over financial reporting was not effective as of December 31, 2006, CTS’ Chief Executive Officer and Chief Financial Officer concluded that CTS’ disclosure controls and procedures were not effective as of December 31, 2006.

Item 9B. Other Information

None.

PART III

Nominees For The Board of Directors.

CTS’ Articles of Incorporation provide that the number of directors will be between three and fifteen, as fixed from time to time by the Board of Directors. The CTS Board of Directors has established the current number of authorized directors at nine. All directors are elected to one-year terms or until their successors are elected and qualified. The following are nominees for election to the CTS Board of Directors at the 2007 Annual Meeting of Shareholders.

Each of the nominees named below is currently a director of CTS. The ages shown are as of the scheduled date for the 2007 Annual Meeting of Shareholders. Each of the nominees has agreed to serve as a director if elected by the shareholders. There have been no material changes to the procedures by which shareholders may recommend nominees to CTS Board of Directors since CTS last provided disclosure pursuant to Item 407(c)(3) of Regulation S-K.

Age 62

Mr. Catlow served as President of Ameritech Cellular Services, a wireless communications service provider, from 1998 until his retirement in 2000. Mr. Catlow previously served as Executive Vice President of Ameritech and as President of Ameritech International, Inc., where he directed Ameritech’s international investments and was responsible for global acquisitions and alliances. In 2006, Mr. Catlow was a member of the Audit Committee of CTS Corporation and the Presiding Director.

Age 65

Mr. Ciancia is a partner in Corporate Development International, Inc., a corporate search firm specializing in mergers, acquisitions and divestitures. He has served in this capacity since 1998. Previously, he served as President of Uponor ETI, a supplier of PVC pipe products, specialty chemicals and PVC compounds. In 2006, Mr. Ciancia was a member of the Audit Committee and Chairman of the Nominating and Governance Committee of CTS Corporation.

Age 65

Mr. Cody has served as Vice Chairman of Federated Department Stores, Inc., a nationwide department store retailer, since February 2003. Prior to assuming this position, he served as Executive Vice President, Legal and Human Resources of Federated Department Stores, Inc. since 1992. Mr. Cody also serves as a director of LCA-Vision, Inc. In 2006, Mr. Cody was Chairman of the Compensation Committee and a member of the Nominating and Governance Committee of CTS Corporation.

Age 77

Mr. Frieling has served as President of Frieling & Associates, a business consulting firm, since 1993. Previously, Mr. Frieling served as Chairman of the Board, CEO and Vice Chairman of the Board of Tokheim Corporation, a manufacturer of electronic and mechanical petroleum marketing systems. Mr. Frieling also serves as a director of Mossberg & Company. In 2006, Mr. Frieling was a member of the Finance Committee, Audit Committee and Nominating and Governance Committee of CTS Corporation.

Age 70

Mr. Hemminghaus is the retired Chairman and Chief Executive Officer of Ultramar Diamond Shamrock Corporation, a company that refined and marketed petroleum products on a retail and wholesale basis, serving from 1996 until 2000. Mr. Hemminghaus served as Chairman and Chief Executive Officer of Ultramar Diamond Shamrock, Inc. from 1996 until 1999. Mr. Hemminghaus is a past Chairman of the Federal Reserve Bank of Dallas. Mr. Hemminghaus also serves as a Director of Tandy Brand Accessories, Inc. and Xcel Energy, Inc. In 2006, Mr. Hemminghaus was a member of the Compensation Committee and Chairman of the Finance Committee of CTS Corporation.

Age 67

Mr. Henning is the retired Deputy Chairman of Ernst & Young LLP, an independent accounting firm, serving from 1999 to 2000. Previously, he served as Chief Executive Officer of Ernst & Young International, Inc. from 1993 until 1999. Mr. Henning also serves as a Director of Omnicom Group, Inc. In 2006, Mr. Henning was a member of the Finance Committee and Chairman of the Audit Committee of CTS Corporation.

Age 57

Mr. Profusek is a partner in Jones Day, a global law firm. Mr. Profusek has been a Jones Day lawyer since 1975, except for May 2000 through August 2002 during which time he served as Executive Vice President of Omnicom Group, Inc., a global communications company. Mr. Profusek also serves as a Director of Valero Energy Corporation. In 2006, Mr. Profusek was a member of the Compensation Committee and the Finance Committee of CTS Corporation.

Age 63

Donald K. Schwanz is Chairman of the Board, President and Chief Executive Officer of CTS. Mr. Schwanz was named Chief Executive Officer effective October 1, 2001 and was appointed Chairman of the Board of Directors on January 1, 2002. In January 2001, Mr. Schwanz was elected President and Chief Operating Officer of CTS. Prior to joining CTS in January 2001, he was President of the Industrial Control Business at Honeywell, Inc., an aerospace company, since 1999, and previously was President of Honeywell’s Space and Aviation Business.

Age 48

Ms. Vincent is President and Chief Executive Officer of Public Service Company of Colorado, an Xcel Energy, Inc. subsidiary, a utility company serving electricity and natural gas customers. She has served in this capacity since October 2005. Prior to assuming this position, she had served as President of Customer and Field Operations of Xcel Energy from July 2003, as President of the Retail Services Group of Xcel Energy from March 2001, and as Vice President of Marketing and Sales of Xcel Energy Services, Inc. from August 2000. In 2006, Ms. Vincent was a member of the Compensation Committee and the Nominating and Governance Committee.

Section 16(a) Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires CTS’ directors, executive officers and certain persons who own more than 10% of CTS’ common stock to file with the Securities and Exchange Commission and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of CTS common stock. Executive officers, directors and greater than 10% shareholders are required to furnish CTS with copies of all Section 16(a) reports they file. Based solely on written representations from reporting persons and on our review of Section 16(a) reports provided by those individuals, CTS believes that all required Section 16(a) filings were completed in a timely manner with respect to 2006.

Audit Committee

The Audit Committee is a standing committee of the Board of Directors. Directors Catlow, Ciancia, Frieling and Henning are the current members of the Audit Committee. Each member of the Audit Committee is financially literate and meets the independence standards applicable to audit committee members under the New York Stock Exchange Corporate Governance Listing Standards, as well as the CTS Corporation Corporate Governance Guidelines and the Audit Committee Charter. Mr. Henning qualifies as an audit committee financial expert under the criteria set forth in Item 407(d)(5)(ii) of Regulation S-K. The Audit Committee held nine meetings in 2006. A copy of the Audit Committee Charter may be obtained free of charge from CTS’ Secretary upon request or from the CTS’ website at http://www.ctscorp.com/governance/auditcharter.htm.

The Audit Committee is responsible for appointing the independent auditor, approving engagement fees and all non-audit engagements, and reviewing the independence and quality of the independent auditor. The Audit Committee reviews audit plans, audit reports and recommendations of the independent auditor and internal audit department. The Audit Committee reviews systems of internal accounting controls and audit results. The Audit Committee reviews and discusses with management CTS’ financial statements, earnings press releases and earnings guidance. The Audit Committee also reviews CTS’ compliance with legal requirements and the CTS Code of Ethics.

Code of Ethics

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 and its non-employee directors. CTS’ Code of Ethics is posted on its website at www.ctscorp.com/governance/code of ethics.htm. In the event that the Code of Ethics is amended or in the event that a waiver of the Code of Ethics is granted for a principal executive officer, principal financial officer or principal accounting officer or controller, CTS intends to disclose this information on its website at www.ctscorp.com.

Executive Officers. The individuals in the following list were elected as executive officers of CTS at the annual meeting of the Board of Directors on May 3, 2006. They are expected to serve as executive officers until the next annual meeting of the Board of Directors, scheduled to be held on or about June 28, 2007, at which time the election of officers will be considered again by the Board of Directors.

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.

Donald R. Schroeder was named President of CTS Electronics Manufacturing Solutions effective February 7, 2005 and retained his title of Executive Vice President. From December 2000 to February 2005, Mr. Schroeder served as Executive Vice President and Chief Technology Officer. He has held positions of increasing responsibility with CTS since 1972.

Vinod M. Khilnani was elected Senior Vice President and Chief Financial Officer, effective May 7, 2001.

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 increasing 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. He has had positions of increasing responsibility with CTS since 1977.

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.

Rohit Rai was elected Vice President, Strategy and Corporate Development effective February 3, 2006. Prior to joining CTS, Mr. Rai was Director Group Strategy and Development at Pratt & Whitney a division of United Technologies Corporation from 2003 to 2006. From 2002 to 2003, he was Vice President and General Manager of Pratt & Whitney Specialty Materials and Services Division. Prior to 2002, he was Vice President and General Manager of Pratt & Whitney Power Systems, Inc.

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.

Matthew W. Long was elected Treasurer effective May 1, 2003. From December 2000 through May 2003, Mr. Long served as Assistant Treasurer.

Director Compensation. Employee directors receive no additional compensation for serving on the Board of Directors or Board Committees. Compensation for non-employee directors is determined by the Board of Directors based on recommendations by the Compensation Committee.

Non-employee directors receive the following fees for their service on the Board: annual board retainer — $30,000; annual retainer for each Audit Committee member — $5,000; annual retainer for each Compensation Committee member — $5,000; annual retainer for each Finance Committee member -$3,000, annual retainer for each Nominating and Governance Committee member — $3,000; additional annual retainer for Audit Committee Chairman — $5,000; additional annual retainer for Compensation Committee Chairman — $5,000; additional annual retainer for Finance Committee Chairman — $3,000; additional annual retainer for Nominating and Governance Committee Chairman — $3,000; meeting fee for each Board or Committee Meeting — $1,500. CTS established an ad hoc Leadership Continuity Committee in 2005. The annual retainer for each member is $4,000 and the additional annual retainer for the chairman is $4,000. All committee meetings, including special meetings called by committee chairmen, are compensated at the regular meeting fee rate. Special activity by the committee chairmen, as well as any special activity by another committee member that is requested or approved by a committee chairman, is also compensated at the regular meeting fee rate. CTS reimburses non-employee directors for reasonable travel expenses related to their performance of services and for director education programs.

CTS does not currently have a retirement plan for non-employee directors. In 1990, CTS adopted the Stock Retirement Plan for Non-Employee Directors. Under that plan, a deferred common stock unit account was established for each non-employee director. Through January 2004, 800 common stock units and additional units representing dividends on CTS common stock paid were credited annually to each non-employee director’s account. When a non-employee director retires from the Board, he or she receives one share of CTS common stock for each deferred common stock unit credited to his or her account. On December 1, 2004, the Board of Directors amended the plan to preclude crediting any additional units to the deferred common stock unit accounts. The number of deferred common stock units credited to each director’s account as of December 31, 2006 is shown in the Directors’ and Officers’ Stock Ownership table on page      .

On December 1, 2004, each non-employee director received a grant of restricted stock units under the CTS Corporation 2004 Omnibus Long-Term Incentive Plan equivalent to the number of deferred stock units which would have been credited to the director for 2004 service under the Stock Retirement Plan for Non-Employee Directors. Directors received the following restricted stock unit awards, Mr. Catlow — 839; Mr. Ciancia — 956; Mr. Cody — 845; Mr. Frieling — 983; Mr. Hemminghaus — 832; Mr. Henning — 831; Mr. Profusek — 845; Ms. Vincent — 807. Under the terms of this award, each non-employee director will receive one share of CTS common stock for each restricted stock unit upon retirement from the Board.

In 2002, the Board established a $30,000 annual stock-based compensation target for each non-employee director. Since 2005, the stock-based compensation target has been fulfilled by grants of restricted stock units. The grants provide directors with the opportunity to defer distribution of some or all of the restricted stock units until separation from service with the Board, a date certain or a series of dates according to a schedule. Non-employee directors do not receive dividends or other earnings on deferred restricted stock units. For 2006, the stock-based compensation target was achieved by awarding each non-employee director 2,500 restricted stock units under the CTS Corporation 2004 Omnibus Long-Term Incentive Plan. The awards were granted on December 7, 2005 and one share of common stock was distributed for each restricted stock unit absent a deferral election by the director. On December 6, 2006, each non-employee director received an award of 2,100 restricted stock units for 2007 service. The awards vested on January 9, 2007 and one share of common stock was distributed for each restricted stock unit, absent a deferral election by the director. The market value of these awards at fiscal year end was $32,970.

Compensation Discussion and Analysis.

Compensation Overview. The Compensation Committee of the Board of Directors sets compensation for each executive officer, with the exception of the Chief Executive Officer, based on the recommendations of the Chief Executive Officer and supporting data provided by management. The Board of Directors sets compensation for the Chief Executive Officer based on the recommendations of the Compensation Committee.

CTS’ general compensation philosophy is to center compensation for each executive officer position at approximately the fiftieth percentile of compensation for similar positions at similarly situated companies based on peer benchmark data.

The elements of CTS’ executive compensation program reflect CTS’ objectives to drive improved financial performance, offer competitive compensation and align compensation with shareholder interests. As discussed in more detail in this Compensation Discussion and Analysis, CTS’ executive compensation program includes the following elements: base salary, annual cash incentives, performance-based equity compensation, time-based equity compensation, retirement benefits, other compensation and health and welfare benefits. CTS does not have a fixed formula for allocating compensation across these elements, but each element is considered as a component of total compensation. CTS does not consider the amount of compensation that could be realized from prior compensation awards in setting compensation from year to year.

Factors such as the tax and accounting treatment of different forms of compensation may influence the form and structure of executive compensation, but do not necessarily affect the total level of compensation to be provided. CTS has adopted Stock Ownership Guidelines which apply to each executive officer and encourage retention of stock awarded under its equity compensation plans. CTS has change in control severance agreements with each executive officer, but has employment agreements with only two executive officers.

Compensation Objectives. The objectives of CTS’ executive compensation program are to:

Compensation Philosophy. CTS’ executive compensation programs provide executives with strong incentives to maximize CTS’ performance and enhance shareholder value. The executive compensation program includes annual compensation, long-term compensation, performance-based compensation and time-based compensation components. CTS’ executive compensation structure consists of base salary, annual cash incentives, performance-based equity compensation, time-based equity compensation, other compensation and retirement benefits. Base salary, other compensation, annual incentive compensation and retirement benefits serve to attract and retain executive talent. Annual incentive compensation and performance-based equity compensation directly promote specific financial and operational performance objectives, which will ultimately benefit shareholders. Performance-based equity compensation and time-based equity compensation directly align the interests of the executives with those of shareholders.

The amount of total compensation realized or potentially realizable from prior compensation awards does not directly influence the level of compensation paid or future pay opportunities. Moreover, CTS does not utilize a specific formula for allocating total compensation between current and long-term compensation or between cash and non-cash compensation. As discussed below under the caption “Compensation Process and Methodology”, the amount of compensation allocated to each element reflects allocation percentages in benchmark data for comparable positions. For 2006, base salary among the named executive officers ranges from 37% to 43% of the sum of base salary, cash incentive compensation and equity compensation which we refer to here as annual compensation. Cash incentive compensation ranges from 19% to 28% of annual compensation among named executive officers. Equity compensation ranges from 35% to 37% of annual compensation. As a percent of annual compensation, cash incentive compensation targets and equity compensation increase across the executive officer positions of increasing responsibility. This structure means a higher percentage of at-risk, variable compensation for the most senior executive officers. As a result, the most senior executive officers who have the greatest ability to drive the company’s performance have the most to gain or lose based

on that performance. Allocation between types of equity compensation also illustrates this principle. For example, in 2006 the Chief Executive Officer and Chief Financial Officer received a higher percentage of equity compensation in the form of stock options, 35% compared to 25-30% for other named executive officers. This higher allocation reflects the direct impact of those positions on factors that will affect growth in the stock price.

Annual compensation as discussed above is not directly comparable to total compensation as shown in the Summary Compensation Table because it uses base salary established in June 2006, rather than salary earned in fiscal year 2006. In addition, annual compensation reflects target cash incentive compensation, rather than actual cash awards. CTS uses a Black-Scholes calculation for purposes of determining the value of equity compensation in analyzing annual compensation. In contrast, equity compensation values in the Summary Compensation Table reflect the stock-based compensation expense calculation used by CTS for financial accounting purposes, excluding forfeiture assumptions. This calculation includes factors such as retirement eligibility, which are not appropriate considerations in setting compensation. Moreover, CTS does not consider increases in pension compensation, which are required to be included in the Summary Compensation Table, as factors in setting compensation.

In 2006, the Compensation Committee conducted a comprehensive review of CTS’ executive compensation structure with the participation of management. The Compensation Committee discussed the corporation’s compensation strategy and alternative structures used by other companies. As a result of this analysis, the Compensation Committee determined that while the compensation structure was effective at accomplishing CTS’ compensation objectives, it could be enhanced by adding a performance-based equity compensation element. The Compensation Committee adopted a performance-based equity compensation plan for executive officers and general managers in 2007. By rewarding achievement of certain annual financial performance goals with equity awards which vest over time, the plan is intended to promote strong financial performance, serve as a retention tool and align executives’ interests with those of shareholders.

Compensation Process and Methodology. The Compensation Committee has responsibility for setting and administering CTS’ executive compensation policies. At its June meeting each year, the Compensation Committee reviews the total compensation of executives. This review encompasses industry compensation practices and benchmarks as well as company and individual performance. The Compensation Committee uses market data provided by management to assess CTS competitive position in the area of executive compensation. The Chief Executive Officer provides recommendations on the compensation of each of the other executive officers. Based on this review and these recommendations, the Committee approves adjustments to the annual base salary and grants of equity compensation for each executive officer, other than the Chief Executive Officer. Additionally, at this time, the Compensation Committee reviews the Chief Executive Officer’s total compensation, again considering benchmark data, CTS’ performance and individual performance. The Compensation Committee then makes a recommendation to the full Board of Directors regarding annual compensation and equity grants for the Chief Executive Officer for the following year. The full Board of Directors then reviews and acts on this recommendation.

In the first quarter of each year, usually in February, the Compensation Committee reviews and approves annual cash incentive awards for executive officers under the plan established for the prior fiscal year. In addition, the Compensation Committee adopts performance goals and target awards for the current fiscal year, for executive officers other than the Chief Executive Officer. At this time, the Compensation Committee makes recommendations to the full Board concerning the performance goals and target award for the Chief Executive Officer. These recommendations are subject to approval by the full Board of Directors. Management provides benchmark data and the Chief Executive Officer provides recommendations with respect to the other executive officers to aid the Compensation Committee in this process.

Benchmarking and Consultants. For the annual executive compensation review, management provides the Compensation Committee with benchmark data for base salary, perquisites, annual incentives and equity awards. Management uses the web-based Equilar compensation database as a source for benchmark data primarily for the Chief Executive Officer and Chief Financial Officer positions. Equilar draws data from proxy statements and reports filed with the Securities and Exchange Commission. It is difficult for CTS to establish a “pure” peer group because relatively few companies are the same size and have the same business segments as CTS. In 2006, management used a peer group composed of 18 companies, including companies of comparable size and companies in the same or similar businesses. CTS’ peer group for 2006 included Aeroflex, Anadigics Inc., AVX, BEI Technology, Dana Corporation, Dura Auto Systems, Flextronics, Kemet Corporation, LittelFuse, Molex, Pemstar, Plexus, RF Micro Devices, Sanmina-SCI Corporation, Solectron, Stoneridge, Triquint Semiconductor and Vishay Intertechnology. Management reviews and evaluates the Equilar peer group on an annual basis.

Every two to three years, CTS obtains benchmark data reports from Towers Perrin for all executive officer positions. CTS’ executive positions other than Chief Executive Officer and Chief Financial Officer, reflect a blend of responsibilities. As a result, a more detailed analysis is necessary to establish comparable positions from which to draw compensation data than can be achieved with Equilar. Management retains third party consultants for advice on specific compensation issues on an as-needed basis. CTS ages the Towers Perrin data by applying an aging factor supplied by Towers Perrin for those years in which a new report is not obtained. For 2006, the aging factor applied was 4%.

Management retained Towers Perrin in 2006 for advice regarding long-term incentive plan design and the 2007 performance stock unit plan. The Compensation Committee also uses an independent consultant to provide advice on specific compensation issues. In 2006, the Compensation Committee retained Compensation Strategies, Inc. for advice regarding the 2007 Management Incentive Plan. The Compensation Committee also retained Mercer Human Resource Consulting for advice regarding Mr. Schwanz’s employment agreement and equity compensation in 2006.

Elements of Compensation. CTS provides executives with a mix of cash compensation (base salary and a perquisite allowance), annual cash incentive compensation, performance-based equity compensation, and time-based equity compensation. CTS considers time-based equity compensation, as well as annual cash and equity incentive compensation to be variable incentive pay, as the value of these compensation awards is dependent upon CTS’ financial performance and/or stock value performance. CTS also provides retirement-related benefits under the CTS Corporation Retirement Savings Plan, a qualified defined contribution 401(k) plan; the CTS Corporation Pension Plan, a qualified defined benefit plan; the CTS Corporation 2003 Excess Benefit Retirement Plan, a supplemental executive retirement plan and the CTS Corporation Individual Excess Benefit Retirement Plan, a supplemental executive retirement plan. In addition, CTS also provides executives with a limited set of perquisites and a standard set of health and welfare benefits. Each element of compensation is discussed below.

Base Salary: Annual base salary is intended to provide a competitive level of cash compensation to CTS executives based on their qualifications, responsibilities and performance. CTS establishes a salary range for each executive officer position centered on the fiftieth percentile for similar positions at peer companies based on benchmark data. The sources of benchmark data provided by management to the Compensation Committee are discussed under the caption “Benchmarking and Consultants.” Executive officers’ actual salaries may vary within the salary range due to their experience and achievements, responsibilities and demonstrated performance.

Annual Cash Incentives: CTS has maintained an annual management incentive plan or MIP for many years. The MIP is designed to make a portion of the cash compensation of executives, officers and other key employees variable and at risk based on the financial performance of CTS and achievement of individual goals. CTS believes that tying annual cash compensation to specific financial and non-financial performance goals motivates executives to achieve results that benefit shareholders.

Awards under the MIP are intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code. In order to qualify under Section 162(m) of the Internal Revenue Code, the material terms of the plan must be approved by the shareholders at least every five years. The last management incentive plan was approved by the shareholders in 2002. A new management incentive plan is being submitted for shareholder approval at the 2007 Annual Meeting.

The Compensation Committee annually establishes a target award and performance goals for each executive officer under the MIP. Target awards are established as a percentage of base salary. Annual target awards for each executive officer under the MIP are based upon benchmark data for similar executive positions at peer companies, as discussed above under the caption “Benchmarking and Consultants.” CTS’ philosophy is to structure its executive annual cash incentive compensation to approximate the fiftieth percentile for such compensation among its peers. An executive officer’s actual award is determined under a formula that provides for payment of zero to 200% of the target award based upon actual performance versus established quantitative financial performance goals. In addition, the Compensation Committee may adjust awards downwards based upon the executives’ actual performance versus individual qualitative and quantitative objectives.

Quantitative financial performance goals under the MIP are based on CTS’ established business plan for the fiscal year. Management prepares, and the Board of Directors reviews, a business plan for each fiscal year that includes sales, earnings, key balance sheet metrics and cash flow for each business unit. The business plan considers prior year results, strategic initiatives, approved forward investment plans, projected market demands, competition, improvement initiatives and other factors in establishing plan budgets and results. Management endeavors to establish a plan that demands challenging, but achievable, results given expected business conditions. As a general rule, the business plan is established such that targets under the primary metrics can be achieved or exceeded 80% of the time. The business plan performance metrics that are most relevant to CTS’ objectives and strategy are selected as quantitative financial performance goals under the MIP for that year. Quantitative financial performance goals for executive officers with direct operations responsibility are weighted to incorporate business unit performance metrics, as well as corporate performance metrics. Quantitative financial performance goals for executive officers with only corporate responsibilities are based on corporate performance metrics, which reflect performance of the business units in the aggregate.

Actual MIP awards may vary from zero to 200% of the target award based on achievement of quantitative financial performance goals over a range that begins below the business plan targets and extends above the business plan targets. To encourage management to focus on financial risk mitigation as well as upside opportunity, the payout “cliff” drops to zero if performance falls below a threshold level of plan achievement. On the upside, payout increases linearly as performance exceeds the business plan. One consequence of this cliff threshold and payout to performance formula is that the executive’s risk of receiving no award is greater than the executive’s opportunity to obtain an award that is substantially above target. Another consequence is that payouts above target represent a fraction of the expected return to the company from “better than plan” performance.

While actual awards will vary above and below target from year to year, CTS expects that over a period of several years, payouts under the MIP will average about 100% of target. Over the past five years, payouts under the MIP based on corporate metrics alone average 95% of target. Over the past five years, payouts under the MIP, including corporate and business unit metrics, averaged 83% of target.

In order for awards under the MIP to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code, performance goals must be established within the first 90 days of the fiscal year and cannot be adjusted due to unusual and uncontrollable events or conditions that may materially affect CTS’ financial performance. In addition, to qualify under Section 162(m) of the Internal Revenue Code, awards to named executive officers cannot be adjusted upward to mitigate the effects of such events or conditions. To allow the MIP to be effective in motivating executives to drive results by focusing on factors within their reasonable control, quantitative performance measures are defined to exclude the effects of specific events or conditions, such as changes in accounting principles, which may impact actual results, but generally cannot be predicted or controlled by executives. The method for calculating business unit operating earnings may also be defined to limit exposure to specific risks or to remove disincentives to transactions between business units. In addition, for 2006, to preserve maximum tax deductibility and allow the Compensation Committee the latitude to address unforeseeable and uncontrollable events and conditions, EPS and business unit operating earnings goals for executive officers were set at a level that would allow the Compensation Committee to take into consideration the impact of such events or conditions in adjusting awards downward.

The Compensation Committee established quantitative financial performance goals based on CTS’ net sales and CTS’ earnings per share, or EPS under the MIP for 2006 for all executive officers. For executive officers with only corporate responsibilities 5% of the target award was allocated to net sales performance and 95% of the target award was allocated to EPS performance. In addition, quantitative financial performance goals were established under the 2006 MIP for two executive officers based on the operating earnings of the business units over which they exercise direct management responsibility. For those executive officers, 5% of their target awards were allocated to net sales performance, 28.5% of their target awards were allocated to EPS performance and 66.5% of their target awards were allocated to business unit operating earnings performance. For 2006, CTS did not exceed its net sales performance goals as required to support a payout on the portion of awards allocated to that goal. CTS achieved its EPS performance goal at a level sufficient to support a payout on the portion of awards allocated to that goal. The Electronic Components and Electrocomponents business units exceeded their operating earnings goals. The Automotive Products and Electronics Manufacturing Solutions business units did not attain the threshold performance level. Executive officers satisfactorily completed individual performance goals. The Compensation Committee exercised its discretion to adjust the portion of executive officer awards based on net sales downward to 0% of the target award allocated to that goal. The Compensation Committee recognized expenses related to succession planning for the Chief Executive Officer position as a condition that was outside the control of executives and that adversely affected EPS in 2006. The Compensation Committee exercised its discretion to adjust the portion of executive officer awards based on EPS downward to 128% of the target award allocated to that goal. The Compensation Committee exercised its discretion to adjust the portion of executive officer awards based on the operating earnings of business units that did not reach the performance threshold downward to 0% of the target award allocated to that goal.

In March 2007, the Compensation Committee approved the terms of the MIP for fiscal year 2007 subject to approval of the CTS Corporation 2007 Management Incentive Plan by the shareholders. The terms of the MIP for 2007 establish quantitative financial performance goals based on CTS’ EPS and/or the operating earnings of specific business units.

Performance-Based Equity Compensation: In 2007, the Compensation Committee established terms applicable to performance-based equity compensation awards for fiscal year 2007 under the CTS Corporation 2004 Omnibus Long-term Incentive Plan. The awards serve to promote multiple objectives which include encouraging strong financial performance, retaining talented executives and aligning compensation with shareholder interests. Depending upon the level of CTS’ achievement of net sales and free cash flow in fiscal year 2007, an executive officer may receive a restricted stock unit award of up to 200% of a target award established for his position. Free cash flow is defined as the sum of cash flow from operating activities and proceeds from the sale of assets, less capital expenditures. The selection of performance goals based on net sales and free cash flow targets is intended to create a focus on strategies which can drive long-term growth. Seventy percent of the target award is allocated to net sales and 30% of the target award is allocated to free cash flow. Each executive officer other than Mr. Schwanz is eligible for an equity-based incentive award. The opportunity to receive an award will replace the portion of the executive’s annual compensation that was provided in the form of stock options in prior years. The awards are intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code. The performance goals and target awards were established by the Compensation Committee at its meeting in February 2007. Restricted stock units for achievement of the performance goals will be issued in 2008 following certification of 2007 fiscal year results by CTS’ independent auditors. Performance restricted stock units issued under the plan will cliff-vest on December 31, 2010.

Time-based Equity Compensation: CTS believes that stock ownership and equity-based compensation are valuable tools for motivating employees to improve CTS’ long-term performance. CTS also believes that equity grants are an effective way to align executive and shareholder

interests, because a significant amount of an executive’s potential income is directly tied to enhanced shareholder value. CTS, historically, used two forms of time-based long-term equity compensation, restricted stock awards and stock options. Prior to 2004 the Compensation Committee granted restricted stock along with an associated cash bonus under the terms of the 1988 Restricted Stock and Cash Bonus Plan. Under that plan, executives received grants of restricted stock vesting in installments over five years together with a cash bonus equal to the fair value of the stock on the vesting date. The Compensation Committee also historically awarded incentive stock options and non-qualified stock options to executives under the terms of various shareholder-approved option plans. Since shareholder approval of the CTS Corporation 2004 Omnibus Long-term Incentive Plan, the Committee has granted restricted stock units in place of the restricted stock and cash bonus grants. In anticipation of changes in the equity compensation expensing rules, CTS’ prior practice of granting options to a broad group of management employees was discontinued under the CTS Corporation 2004 Omnibus Long-term Incentive Plan. Since 2004, only executive officers and general managers, whose contributions are likely to have a direct impact on stock price, have received option grants. The Compensation Committee generally has granted named executive officers stock options in the form of incentive stock options to the extent permitted by Section 422 of the Internal Revenue Code. The value of restricted stock units and stock options granted has been based upon consideration of peer benchmarks for equity grants to executives in similar positions. The value of equity grants made to executive officers by CTS falls below the fiftieth percentile of benchmark companies.

The Compensation Committee considers equity grants as part of its review of annual executive compensation. In recent years, the Compensation Committee has generally met in June to conduct this review. This meeting is part of the regular board and committee meeting calendar and the date is generally set at least one year in advance. In 2006, the Compensation Committee granted options to executive officers other than the Chief Executive Officer and recommended an option grant for the Chief Executive Officer that was approved by the full Board of Directors. The number of options granted was determined by the Compensation Committee based on peer data obtained from Equilar and Towers Perrin as discussed above under the caption “Benchmarking and Consultants” and provided to the Compensation Committee by management. The Compensation Committee has not delegated authority to make option grants to any member of management. The terms of the option grants made in 2006 and in prior years provide that the exercise price will be the closing price of CTS stock on the New York Stock Exchange on the date of the Compensation Committee meeting. CTS does not have a program or policy to coordinate option grants to its executives with the release of material non-public information. The terms of the option grants typically provide for vesting in installments over a four-year period.

Restricted stock unit awards under the CTS Corporation 2004 Omnibus Long-term Incentive Plan are provided to executives as well as a broader group of management employees. The Compensation Committee generally considers restricted stock unit awards as part of its review of annual executive compensation in June. The Committee grants restricted stock unit awards to executive officers, other than the Chief Executive Officer, and general managers. The Compensation Committee recommends a restricted stock unit grant for the Chief Executive Officer that is approved by the full Board of Directors. Restricted stock unit awards distribute to the recipient one share of CTS common stock for each unit upon vesting. Most of these awards vest in equal installments over five years. For new hires or to recognize significant individual contributions, the Compensation Committee may grant individual restricted stock unit awards to executive officers at different times during the year and may use alternative vesting schedules or distribution options. In addition, the Compensation Committee delegates authority to the Chief Executive Officer and Senior Vice President Administration to grant a certain number of restricted stock unit awards to employees who are not executive officers.

In June 2006, the Compensation Committee awarded restricted stock units vesting over a five-year term to each executive officer, other than Mr. Schwanz, based on the recommendation of management. Management based its recommendations on the number of units to be awarded on peer data obtained from Equilar and Towers Perrin as discussed under the caption “Benchmarking and Consultants” above. At its June meeting, the Compensation Committee deferred consideration of Mr. Schwanz’s restricted stock unit grant for 2006 until later in the year in order to consider the grant in the context of negotiating Mr. Schwanz’s employment agreement. In September 2006, based on information provided by management and following review of Mr. Schwanz’s compensation package by its consultant, Mercer Human Resource Consulting, the Compensation Committee approved an award of 35,000 restricted stock units to Mr. Schwanz to vest one year from the grant date.

CTS believes that the general practice of deferred vesting of equity grants over several years further helps to align the interests of executives with shareholders, as the value of the deferred (unvested) portion of the grant depends directly on CTS’ stock price. CTS also believes that deferred vesting helps in the retention of executives, as the terms of option grants provide that employees lose unvested grants if they leave employment with CTS prior to qualified retirement, and the terms of restricted stock unit grants provide that unvested grants are forfeited in the event of termination, including retirement.

Retirement Benefits: CTS’ retirement plans are designed to provide a competitive level of retirement benefits necessary to attract and retain executive talent. Retirement benefits encourage executive retention to the extent that executives are rewarded with increased benefits for extending their terms of service. CTS offers both a 401(k) plan and a defined benefit plan to current executives. Participation in the 401(k) plan is voluntary and is open to substantially all U.S.-based CTS employees. Under the terms of the plan which are applicable to named executive officers and other employees hired on or before March 31, 2006, CTS matches an employee’s contributions $.50 for every dollar, up

to 6% of annual salary, subject to limitations under the Internal Revenue Code. Each Named Executive Officer participates in both a qualified defined benefit plan and a supplemental executive retirement plan. The terms of these plans are discussed under the caption “Pension Benefits”. CTS has closed the qualified defined benefit plan to new entrants and does not anticipate that new executives that join CTS in the future will earn benefits under the plan.

The purpose of the supplemental executive retirement plans is to restore retirement benefits the executive would otherwise have earned under the qualified defined benefit plan in the absence of limitations under the Internal Revenue Code and to provide a competitive level of retirement benefits. Benefits earned under a supplemental executive retirement plan are not funded by CTS and are not insured by the Pension Benefit Guaranty Corporation. The supplemental executive retirement plans provide that benefits are payable at the same time and in the same manner as benefits are paid under the qualified defined benefit plan. This provision does not comply with Section 409A of the Internal Revenue Code which applies a 20% excise tax to certain forms of non-qualified deferred compensation. This type of provision is, however, eligible for transition relief through December 31, 2007. In anticipation of final regulations under Section 409A of the Internal Revenue Code, the Compensation Committee intends to address the payment provisions of the supplemental executive retirement plans prior to December 31, 2007.

Under the terms of the CTS qualified defined benefit plan, annual incentive compensation counts toward determining the sum of average earnings used in the benefit calculation. Under the supplemental executive retirement plans, one-half of the value of an installment of restricted stock units on the vesting date is considered in the sum of average earnings used in the benefit calculation. Retirement benefits, therefore, are directly affected by earned incentive compensation and the growth in stock value. This relationship further helps align executive interests with shareholder interests.

Other Compensation: CTS provides a limited set of perquisites and other compensation in order to attract and retain executive talent. Other compensation for named executive officers includes a quarterly cash perquisite allowance for non-reimbursed travel expenses, reimbursement for financial planning services, reimbursement for tax preparation services and reimbursement for an executive physical. In addition, Donald R. Schroeder receives a temporary living allowance to compensate him for the increased cost of living associated with his relocation from Indiana to California in order to assume responsibility for a newly acquired subsidiary. Other compensation also includes CTS’ matching contribution to the 401(k) Plan, and imputed income on life insurance benefits.

Health and Welfare Benefits: Named executive officers are eligible to participate in a standard set of health and welfare benefits, including medical and dental insurance, life insurance, disability insurance, and health care and dependent care reimbursement accounts. The same terms of participation that apply to salaried employees generally govern the participation of Named Executive Officers in these benefits.

Agreements with Executive Officers. CTS has change-in-control severance agreements with each of the named executive officers as discussed under the caption “Potential Payments Upon Termination or Change-in-Control.” The purpose of these agreements is to retain executives and encourage them to focus on corporate interests during times of change and uncertainty. CTS has employment agreements with its Chief Executive Officer as discussed under the caption “Employment Agreement with Donald K. Schwanz.” CTS also has an employment agreement with its Chief Financial Officer as discussed under the caption “Employment Agreement with Vinod M. Khilnani.” These agreements provides assurances to and promote the retention of the executives in these key positions. CTS does not have written employment agreements with any other executive officers.

Policy on Recovery of Awards. The CTS Corporation 2007 Management Incentive Plan being submitted for shareholder approval includes a provision to address recoupment of incentive awards in the event of financial restatements. The plan provides that if the Board of Directors learns of any intentional misconduct by a plan participant which contributes to CTS having to restate its financial statements, the Board may require that individual to reimburse CTS for the difference between any award he or she received and the amount of the award he or she would have received based on the financial results as restated.

Stock Ownership Guidelines. The Board of Directors has adopted Stock Ownership Guidelines, which are administered by the Compensation Committee. The Stock Ownership Guidelines define expected stock ownership levels for executive officers, general managers and non-employee directors. The intent of the guidelines is to require executives and directors to maintain a significant equity stake in CTS. The Stock Ownership Guidelines provide that executives and directors are expected to retain at least 75% of their share units until threshold ownership levels have been attained and at least 25% of any equity awards received from CTS once they have achieved the threshold levels. To avoid placing an undue tax or cash flow burden on the individual, threshold levels are established based on the premise that they will be attainable through retention of equity awards over five years. Threshold levels for named executive officers range from 100,000 share units to 30,000 share units. Share units include shares of CTS common stock, shares subject to vested options, non-vested restricted stock and non-vested restricted stock units. The Stock Ownership Guidelines are administered by the Compensation Committee. The Compensation Committee may reduce future awards to executives who fail to comply with the guidelines.

Deductibility of Certain Executive Compensation. Section 162(m) of the Internal Revenue Code caps at $1,000,000 the deductible compensation per year for each of the named executive officers in the proxy statement, subject to certain exceptions. In developing and implementing executive compensation policies and programs, the Compensation Committee considers whether particular payments and awards are deductible for federal income tax purposes, along with other relevant factors. Consistent with this policy, the Compensation Committee has taken what it believes to be appropriate steps to maximize the deductibility of executive compensation. Cash incentives under the MIP and performance stock unit awards under the CTS Corporation 2004 Omnibus Long-term Incentive Plan are designed to qualify as performance-based compensation, one of the exceptions to the $1,000,000 cap. Compensation from the exercise of stock options is generally excluded from the $1,000,000 cap. Compensation from the lapse of restrictions on restricted stock and the vesting of time-based restricted stock units, however, is subject to the cap. While it is the general intention of the Compensation Committee to meet the requirements for deductibility, the Compensation Committee may approve payment of compensation in excess of the $1,000,000 cap.

Compensation Committee Report

The Compensation Committee of the CTS Corporation Board of Directors has reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on this review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in CTS’ Annual Report on Form 10-K and CTS’ proxy statement on Schedule 14A.

CTS Corporation 2006 Compensation Committee

Executive Compensation

Summary Compensation Table

2006 Grants of Plan-Based Awards

Employment Agreement with Donald K. Schwanz. On December 6, 2006, CTS entered into a new employment agreement with Mr. Schwanz. Mr. Schwanz’ prior agreement expired on October 1, 2006. The new agreement provides for Mr. Schwanz’s continued employment through December 31, 2007 (the “Term”). During the Term, Mr. Schwanz will continue to receive his annual base salary of $779,300, subject to review and increase by the Board of Directors, and shall be eligible for a target annual bonus of 75% of annual base salary. Upon termination of the agreement, Mr. Schwanz will be retained by CTS as a consultant for a term of eighteen months, with consulting fees at an annual rate of $175,000. If CTS terminates Mr. Schwanz’s employment without cause or Mr. Schwanz terminates his employment for good reason (each as defined in the agreement) prior to expiration of the Term, Mr. Schwanz will receive lump sum severance payments equal to the value of the salary, annual bonus, perquisites, restricted stock and cash bonus awards, and the increase in actuarial value of retirement benefits that would have been earned by Mr. Schwanz if his employment had continued through December 31, 2007. In addition, upon the termination of Mr. Schwanz’s employment by CTS without cause or by Mr. Schwanz for good reason during the Term, the vesting of any restricted stock units which would otherwise have vested during the Term will be accelerated. CTS’ obligations to make payments upon a termination without cause or for good reason are subject to Mr. Schwanz’s compliance with certain on-going obligations and the delivery of a release of claims to CTS. The Agreement contains non-compete, confidentiality, non-solicitation, non-disparagement and work-made-for-hire clauses. On December 6, 2006, the Board of Directors also adopted a non-qualified individual excess benefit retirement plan for the benefit of Mr. Schwanz the terms of which are described under the caption Pension Benefits.

As reported in CTS’ Current Report on Form 8-K filed on December 8, 2006. Mr. Schwanz has expressed his desire to retire as Chairman and CEO. The Board of Directors is engaged in an active succession planning process and would expect to announce a successor in the near term.

Employment Agreement with Vinod M. Khilnani. On October 4, 2005, CTS entered into an employment agreement with Mr. Khilnani. The term of the agreement is four years. The agreement provides that if CTS terminates Mr. Khilnani’s employment without cause (as defined in the agreement) within two years after the time a successor CEO to Mr. Schwanz is appointed, CTS will provide Mr. Khilnani with compensation, equal to his current base salary and his target incentive compensation for the calendar year prior to termination, for a period of two years following his termination date. Termination of his employment under any other circumstances, including death, disability, voluntary termination or termination by CTS for cause (as defined in the agreement), will terminate the employment agreement without the payment of benefits under this employment agreement. Mr. Khilnani agrees to provide at least three months notice if he elects to voluntarily terminate employment and six months notice if he elects to retire. Mr. Khilnani agrees to refrain from solicitation of CTS employees for a period of five years following termination. In the event Mr. Khilnani is eligible to receive greater benefits under another agreement or policy, he may elect to receive such benefits in lieu of benefits under his employment agreement. Benefits received under the employment agreement will be reduced by any benefits received under another agreement or policy.

Compensation Arrangements. CTS does not have employment agreements with any executive officers, other than Mr. Schwanz and Mr. Khilnani. Annual base salary for each named executive officer, other than Mr. Schwanz, is determined by the Compensation Committee of the Board of Directors. Mr. Schwanz’s annual base salary is determined by the Board of Directors based on a recommendation by the Compensation Committee. The annual salaries for named executive officers set in 2006 were as follows: Donald K. Schwanz — $779,300; Vinod M. Khilnani — $364,000; Donald R. Schroeder — $322,200; H. Tyler Buchanan — $256,400; and Richard G. Cutter — $243,100. Other compensation arrangements in which named executive officers participate are discussed below.

Bonuses. Amounts shown in the Bonus column in the Summary Compensation Table reflect cash payments under the CTS Corporation 1988 Restricted Stock and Cash Bonus Plan. Under that plan, recipients receive a cash award equal to the fair market value of each restricted share of CTS stock on the date the restrictions lapse. The plan provided for awards to vest over a five year period. No awards have been made under that plan since 2003 and the Compensation Committee has expressed its intent to make no future awards under this plan. Dividends are paid on restricted shares at the same rate applicable to non-restricted shares of CTS stock. The dividend amounts paid to named executive officers on restricted shares are reflected in the All Other Compensation column of the Summary Compensation Table.

Non-Equity Incentive Plan Compensation. In 2006, each Named Executive Officer, along with other officers and key employees, participated in the 2006 Management Incentive Plan. The Compensation Committee adopted this annual cash incentive plan under the terms of the CTS Corporation Management Incentive Plan approved by the shareholders in 2002. Corporate-wide and strategic business unit quantitative financial performance goals were established for the 2006 fiscal year under the plan. Each participant was also assigned qualitative performance goals for the 2006 fiscal year which contributed to CTS’ financial performance. A target award was established for each participant based on a percentage of his base salary. The Compensation Committee established the performance goals and target awards for each named executive officer, other than Mr. Schwanz. The Board of Directors approved the performance goals and target award for Mr. Schwanz based on a recommendation by the Compensation Committee. The percentage of achievement of performance goals determined the percentage of the target award which each participant earned. Amounts shown in the Summary Compensation Table reflect awards based on achievement of net sales, earnings per share and/or business unit contribution to earnings per share goals. Determination of the achievement of quantitative performance goals was subject to the completion of the annual audit and certification of CTS’ 2006 fiscal year results by its independent auditors. CTS paid the awards to participants in the form of lump sum cash payments.

Equity-Based Compensation. The Compensation Committee has historically awarded equity-based compensation to Named Executive Officers on an annual basis. In 2006, the Compensation Committee awarded the named executive officers, other than Mr. Schwanz, restricted stock units and stock options under the CTS Corporation 2004 Omnibus Long-term Incentive Plan. The Board of Directors approved the grant of stock options and restricted stock units to Mr. Schwanz under the CTS Corporation 2004 Omnibus Long-term Incentive Plan based on the recommendation of the Compensation Committee. Restricted stock unit awards distribute one share of CTS common stock for each unit upon vesting. The award recipient does not receive dividends or other rights related to CTS stock until vesting. Restricted stock units generally vest in 20% installments over a period of five years. Mr. Schwanz’s 2006 restricted stock unit grant is subject to a one-year vesting period. Non-vested restricted stock units are forfeited upon termination of employment, except in the case of death, disability, or change-in-control of the corporation which accelerate the vesting of restricted stock units. Stock options are granted on the date of the Compensation Committee and Board meetings approving the grants. Stock options are generally granted to Named Executive Officers as incentive stock options to the maximum extent permitted by Section 422 of the Internal Revenue Code. The exercise price under the options is the closing market price of CTS stock on the New York Stock Exchange on the date of the grant. Options generally vest in 25% installments over a period of four years. Non-vested options are forfeited upon termination of employment, except upon the occurrence of certain events. In the event of a change-in-control as

defined under the severance agreements described under the caption Potential Payments Upon Termination or Change-in-Control, the vesting of options is accelerated. In the event of death or disability, options continue to become exercisable in installments and may be exercised for a period of one-year following the event. In the event of qualified retirement, options continue to become exercisable in installments and may be exercised prior to the expiration date.

Proportion of Annual Salary and Bonus to Total Compensation. Among the Named Executive Officers, salary and non-equity incentive plan compensation as a percent of total compensation ranges from approximately 31% to 50%. Differences in the change in pension value due to different levels of credited service contribute to the breadth of the range. Salary and non-equity incentive plan compensation as a percent of total compensation, excluding change in pension value, ranges from 45% to 60%. The range is further reduced by excluding Mr. Schroeder’s temporary relocation allowance. Excluding this item and change in pension value, salary and non-equity incentive plan compensation as a percent of total compensation ranges from 50% to 60%. CTS considers peer data on the mix of salary, short-term incentive and long-term incentive compensation for comparable positions in setting compensation levels.

Outstanding Equity Awards at 2006 Fiscal Year-End