9

     Dependence on Principal Customers. Micron Technology, Inc. ("Micron"), a provider of DRAMs, SRAMs and other semiconductor components, was the largest customer of the Company in the years 2001, 2000 and 1999. Micron accounted for 18%, 21% and 18% of the net sales of the Company for the years ended December 31, 2001, 2000, and 1999, respectively. The Company does not have written agreements with any of its customers, including Micron, and therefore, no customer has any minimum purchase obligations. Accordingly, there can be no assurance that any of the Company's customers will purchase the Company's products beyond those covered by released purchase orders. The loss of, or significant decrease in, business from Micron, for any reason, could have a material adverse effect on the financial condition, results of operations and business of the Company.

     Senior Credit Facility Obligations. The agreement governing the Company's credit facility with Fleet Bank (the "Senior Credit Facility") contains a Material Adverse Effects clause and numerous financial and operating covenants. Failure to meet such covenants would result in an event of default under the Senior Credit Facility. Among the operating covenants are restrictions that the Company (i) must maintain John L. Dwight, Jr. as chief executive officer of the Company or obtain the consent of the lenders under the Senior Credit Facility to any replacement of Mr. Dwight; (ii) may not, without the prior consent of such lenders, acquire the assets of or ownership interests in, or merge with, other companies; and (iii) may not, without the prior consent of such lenders, pay cash dividends. The Senior Credit Facility also requires th e Company to maintain certain financial covenants, including minimum EBITDA (earnings before interest, taxes, depreciation and amortization), minimum fixed charge coverage ratio, minimum quick ratio, maximum ratio of total senior debt to EBITDA, maximum ratio of total indebtedness for borrowed money to EBITDA, minimum interest coverage ratio, and maximum capital expenditures, during the term of the Senior Credit Facility.

     The Company has experienced difficulty meeting all of the covenants under its Senior Credit Facility and in 2001 experienced difficulty meeting its principal repayment obligations. As more fully discussed in the "Liquidity and Capital Resources" section, the Company has re-negotiated and amended the Senior Facility on several occasions since December 1997, most recently in February 2002. In connection with the February 2002 agreement, among other things, borrowing availability under the Revolving Credit Facility was increased from $16.0 million to $20.0 million and operating and financial covenants were modified.

     The Company's ability to meet its debt covenants and to fund its working capital, capital expenditure and debt payment obligations depends on its success in achieving levels of net sales, operating income and cash flows substantially in excess of the levels achieved during the third and fourth quarters of 2001.

     At December 31, 2001, the Company was in compliance with or had obtained waivers for its debt covenants. There can be no assurance, however, that the Company will be able to maintain compliance with its debt covenants in the future, and failure to meet such covenants would result in an event of default under the Senior Credit Facility. To avoid an event of default, the Company would attempt to obtain waivers from its lenders, amend the Senior Credit Facility or secure alternative financing. If financing were not available there would be a material adverse effect on the Company and the Company would be forced to consider other alternatives. Under these scenarios, there can be no assurance that the terms and conditions would be satisfactory to the Company or not disadvantageous to the Company's stockholders.

     International Sales and Operations. Sales to customers located outside the United States, either directly or through U.S. and foreign distributors, accounted for approximately 20%, 21% and 25% of the net sales of the Company in the years ended December 31, 2001, 2000 and 1999, respectively. International revenues are subject to a number of risks, including: longer accounts receivable payment cycles; exchange rate fluctuations; difficulty in enforcing agreements and intellectual property rights and in collecting accounts receivable; tariffs and other restrictions on foreign trade; withholding and other tax consequences; economic and political instability; and the burdens of complying with a wide variety of foreign laws. Sales made to foreign customers or foreign distributors may be denominated in either U.S. dollars or in the currencies of the countries where sales are made. The Company has not to date sought to hedge the risks associated with fluctuations in foreign exchange rates and does not currently plan to do so. The Company's foreign sales and operations are also affected by general economic conditions in its international markets. A prolonged economic downturn in its foreign markets could have a material adverse effect on the Company's business. The Company has an operating subsidiary in Japan, and sales and technical support operations in England. The laws of certain countries do not protect the Company's products and intellectual property rights to the same extent as do the laws of the United States. There can be no assurance that the factors described above will not have an adverse effect on the Company's future international revenues and, consequently, on the financial condition, results of operations and business of the Company.

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     Fluctuations in Operating Results. The variability of the level and timing of orders from, and shipments to, major customers may result in significant fluctuations in the Company's quarterly results of operations. The Company generally does not obtain long-term purchase orders or commitments but instead seeks to work closely with its customers to anticipate the volume of future orders. Generally, customers may cancel, reduce or delay purchase orders and commitments without penalty. Cancellations, reductions or delays in orders by a customer or groups of customers could have a material adverse effect on the financial condition, results of operations and business of the Company. In addition to the variability resulting from the short-term nature of its customers' commitments, other factors have contributed, and may in the future contribute, to such fluctuations. These factors may include, among other things, customers' and competitors' announcement and introduction of new products or new generations of products, evolution s in the life cycles of customers' products, timing of expenditures in anticipation of future orders, effectiveness in managing manufacturing processes, changes in cost and availability of labor and components, shifts in the Company's product mix and changes or anticipated changes in economic conditions. Because the Company's operating expenses are based on anticipated revenue levels and a high percentage of the Company's operating expenses are relatively fixed, any unanticipated shortfall in revenue in a quarter may have a material adverse impact on the Company's results of operations for the quarter. Results of operations for any period should not be considered indicative of the results to be anticipated for any future period.

     Technological Evolution. The rapid technological evolution of the electronics industry requires the Company to anticipate and respond rapidly to changes in industry standards and customer needs and to develop and introduce new and enhanced products on a timely and cost-effective basis. In particular, the Company must target its development of Semiconductor burn-in sockets based on which next-generation IC package designs the Company expects to be successful. The Company must manage transitions from products using present technology to those that utilize next-generation technology in order to maintain or increase sales and profitability, minimize disruptions in customer orders and avoid excess inventory of products that are less responsive to customer demand. Any failure of the Company to respond effectively to changes in industry standards and customer needs, develop and introduce new products and manage produc t transitions would have a material adverse effect on the financial condition, results of operations and business of the Company.

     Proprietary Technology and Product Protection. The Company's success depends in part on its ability to maintain the proprietary and confidential aspects of its products as they are released. The Company seeks to use a combination of patents and other means to establish and protect its proprietary rights. There can be no assurance, however, that the precautions taken by the Company will be adequate to protect the Company's technology. In addition, many of the Company's competitors have obtained or developed, and may be expected to obtain or develop in the future, patents or other proprietary rights that cover or affect products that perform functions similar to those performed by products offered by the Company. There can be no assurance that, in the future, the Company's products will not be held to infringe patent claims of its competitors, or that the Company is aware of all patents containing claims that may pose a risk of infringement by its products. The inability of the Company for any reason to protect e xisting technology or otherwise acquire such technology could prevent distribution of the Company's products, having a material adverse effect on the financial condition, results of operations and business of the Company.

     Legal Matters. The Company and its subsidiaries are subject to legal proceedings arising in the ordinary course of business. On the basis of information presently available and advice received from legal counsel, it is the opinion of management that the disposition or ultimate determination of such legal proceedings will not have a material adverse effect on the Company's consolidated financial position, its consolidated results of operations or its consolidated cash flows.

     Competition. The electronic connector industry is highly competitive and fragmented, with more than 1,200 manufacturers worldwide. The Company believes that competition in its targeted segments is primarily based on design, responsiveness, quality, price, reputation and reliability. The Company has experienced significant price pressure with respect to certain products, including its thin, small outline package ("TSOP") and quad-flat pack ("QFP") products, and fixed mount and pluggable Industrial terminal blocks. The Company's significant competitors are much larger and have substantially broader product lines and greater financial resources than the Company. There can be no assurance that the Company will compete successfully, and any failure to compete successfully would have a material adverse effect on the financial condition, results of operations and business of the Company.

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     Concentration of Ownership. The current officers, directors and Emerson Electric Co. ("Emerson"), the Company's largest stockholder, beneficially own approximately 33% of the outstanding shares of the Common Stock of the Company based on the number of shares of Common Stock outstanding as of December 31, 2001. Accordingly, such persons, if they act together, can exert substantial control over the Company through their ability to influence the election of directors and all other matters that require action by the Company's stockholders. Such persons could prevent or delay a change in control of the Company which may be favored by a majority of the remaining stockholders. Such ability to prevent or delay such a change in control of the Company also may have an adverse effect on the market price of the Company's Common Stock.

     Dependence on Key Personnel. The Company is largely dependent upon the skills and efforts of John L. Dwight, Jr., its Chairman of the Board, President and Chief Executive Officer, Jeffrey A. Farnsworth, its Vice President and General Manager, Wells-CTI-USA, John T. Doyle, Vice President and General Manager, Industrial/Avionics Division, and other officers and key employees. The Company does not have employment agreements with any of its officers or key employees providing for their employment for any specific term or non-competition agreements prohibiting them from competing with the Company after termination of their employment. The loss of key personnel or the inability to hire or retain qualified personnel could have a material adverse effect on the financial condition, results of operations and business of the Company.

     Dependence Upon Independent Distributors. Sales through independent distributors accounted for 29%, 29%, and 19% of the net sales of the Company for the years ended December 31, 2001, 2000, and 1999, respectively. The Company's agreements with its independent distributors are nonexclusive and may be terminated by either party upon 30 days written notice, provided that if the Company terminates the agreement with an independent distributor, the Company will be obligated to purchase certain of such distributor's pre-designated unsold inventory shipped by the Company within an agreed-upon period prior to the effective date of such termination. The Company's distributors are not within the control of the Company, are not obligated to purchase products from the Company, and may also sell other lines of products. There can be no assurance that these distributors will continue their current relationships with the Company or that they will not give higher priority to the sale of other products, which could incl ude products of competitors. A reduction in sales efforts or discontinuance of sales of the Company's products by its distributors could lead to reduced sales and could materially adversely affect the Company's financial condition, results of operations and business. The Company grants to certain of its distributors limited inventory return and stock rotation rights. If the Company's distributors were to increase their general levels of inventory of the Company's products, the Company could face an increased risk of product returns from its distributors. There can be no assurance that the Company's historical return rate will remain at a low level in the future or that such product returns will not have a material adverse effect on the Company's financial condition, results of operations and business.

     Product Liability. The Company's products provide electrical connections between various electrical and electronic components. Any failure by the Company's products could result in claims against the Company. Except with respect to avionics products, the Company does not maintain insurance to protect against possible claims associated with the use of its products. There can be no assurance that the Company will not be subject to product liability claims. A successful claim brought against the Company could have a material adverse effect on the financial condition, results of operations and business of the Company. Even unsuccessful claims could result in the Company's expenditure of funds in litigation and management time and resources.

     Environmental Compliance. The Company is subject to a wide range of environmental laws and regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. A failure by the Company at any time to comply with environmental laws and regulations could subject it to liabilities or the suspension of production. Such laws and regulations could also restrict the Company's ability to expand its facilities or could require the Company to acquire costly equipment or incur other significant expense.

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     Possible Volatility of Stock Price. The stock market historically has experienced volatility which has affected the market price of securities of many companies and which has sometimes been unrelated to the operating performance of such companies. The trading price of the Common Stock could also be subject to significant fluctuations in response to variations in quarterly results of operations, announcements of new products by the Company or its competitors, other developments or disputes with respect to proprietary rights, general trends in the industry, overall market conditions and other factors. In addition, there can be no assurance that an active trading market for the Common Stock will be sustained.

     Potential Effect of Anti-Takeover Provisions. The Company's Board of Directors has the authority without action by the Company's stockholders to fix the rights and preferences of and to issue shares of the Company's Preferred Stock, which may have the effect of delaying, deterring or preventing a change in control of the Company. At present the Company has no plans to issue any shares of Preferred Stock. The Company's Board of Directors also has the authority without action by the Company's stockholders to impose various procedural and other requirements that could make it more difficult for stockholders to effect certain corporate actions. In addition, the classification of the Company's Board of Directors and certain provisions of Massachusetts law applicable or potentially applicable to the Company, could have the effect of delaying, deterring or preventing a change in control of the Company. These statutory provisions include a requirement that directors of publicly-held Massachusetts corporations may only be removed for "c ause," as well as a provision not currently applicable to the Company that any stockholder who acquires beneficial ownership of 20% or more of the outstanding voting stock of a corporation may not vote such stock unless the stockholders of the corporation so authorize.

     Failure to Meet Nasdaq National Market System Listing Requirements Could Adversely Affect the Market for the Company's Common Stock. Although the Company's common stock is listed on the Nasdaq National Market System, continued listing on the National Market System is subject to the Company's ability to maintain a $5 million public float, a minimum bid price per share of $1.00, and to satisfy other Nasdaq criteria. If the Company is unable to satisfy this criteria in the future, the Company could be required to apply for a listing on the Nasdaq Smallcap Market, which may result in less market visibility and thus adversely affect the price of the Company's common stock.

     PCD, headquartered in Peabody, Massachusetts, operates leased production facilities in Peabody, Massachusetts (60,000 square feet), Phoenix, Arizona (29,000 square feet), Yokohama, Japan (3,600 square feet) and South Bend, Indiana (50,000 square feet). The Peabody facility is responsible for molding for all Company operations, and assembly, manufacturing automation development and quality assurance functions relating to industrial terminal blocks and avionics terminal blocks. The Phoenix facility is responsible for assembly and quality assurance functions relating to burn-in sockets, as well as related product design and development. The Yokohama facilities are responsible for design, assembly, manufacturing automation development and quality assurance for burn-in sockets. Production at the Wells-CTI Division manufacturing facility in South Bend, Indiana, was halted in October, and stamping and molding operations for both Wells-CTI and t he Industrial-Avionics Divisions have been consolidated at one location. The Company also maintains distribution and technical sales support facilities in Northhampton, England. The Company believes that its facilities are adequate for its operations for the foreseeable future.

     The Company and its subsidiaries are subject to legal proceedings arising in the ordinary course of business. On the basis of information presently available and advice received from legal counsel, it is the opinion of management that the disposition or ultimate determination of such legal proceedings will not have a material adverse effect on the Company's consolidated financial position, its consolidated results of operations or its consolidated cash flows.

     No matters were submitted to a vote of security holders in the fourth quarter of 2001.

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ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     The Company's Common Stock is traded on the Nasdaq National Market of the Nasdaq Stock Market, Inc. under the symbol "PCDI." The following table sets forth the reported high and low sale prices for the Common Stock for the periods indicated:

     On March 11, 2002, the last reported sale price for the Common Stock on the Nasdaq National Market was $1.30 per share. As of January 31, 2002, there were approximately 1,200 holders of record of Common Stock.

     The Company has never declared or paid any cash dividends on the Common Stock. The Company currently intends to retain future earnings, if any, to fund the development and growth of its business and does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. It is the Company's intention to use any excess cash for debt retirement. Once this debt is extinguished, the Board of Directors of the Company intends to review this policy from time to time, after taking into account various factors such as the Company's financial condition, results of operation, current and anticipated cash needs and plans for expansion. The Senior Credit Facility contains a covenant that prohibits the Company from paying cash dividends.

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The statement of operations data for the years ended 2001, 2000, and 1999 are derived from audited consolidated financial statements included elsewhere in this annual report on Form 10-K. The statement of operations data for the years ended 1998 and 1997 are derived from audited consolidated financial statements on file with the Securities and Exchange Commission. The balance sheet data as of December 31, 2001, and 2000 is derived from audited consolidated financial statements included elsewhere in this annual report on Form 10-K and the balance sheet data as of December 31, 1999, 1998 and 1997 are derived from audited consolidated financial statements on file with the Securities and Exchange Commission.

1. Net loss for the year ended December 31, 2001 includes a non-cash deferred tax asset write-down of $14.1 million and $1.7 million in charges associated with closing the Company's South Bend, Indiana plant. The impact of these items was to reduce earnings per share by $1.73 (based on a weighted average number of common and common equivalent shares outstanding of 8,890,367).
   
   
2. Net loss for the year ended December 31, 1998 includes a non-recurring charge relating to the Wells acquisition for the valuation of the Emerson Warrant and an extraordinary charge relating to the write off of the valuation of the Emerson Warrant and the prepayment penalty associated with the Debenture (for the meaning of capitalized terms, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources"). Before deducting for the non-recurring and extraordinary charges, net income per share - basic was $0.89 (based on a weighted average number of shares outstanding of 7,486,915), and net income per share - diluted was $0.81 (based on a weighted average number of common and common equivalent shares outstanding of 8,167,525).
   
   
3. Net loss for the year ended December 31, 1997 includes a non-recurring write-off relating to the Wells acquisition for acquired in-process research and development. Before deducting the write-off, net income per share - basic was $1.04 (based on a weighted average number of shares outstanding of 5,954,657), and net income per share - diluted was $0.94 (based on a weighted average number of common and common equivalent shares outstanding of 6,634,125).
   
   
   

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     In 2001, net sales of the Company decreased to $36.6 million from $62.0 million in 2000. This decrease was due mainly to lower shipments of burn-in sockets resulting from the substantial reduction in demand from semiconductor manufacturers. The reduction in demand was caused by the severe downturn in the electronics industry. The Company realized approximately 39% of its net sales in 2001 from products introduced in the last five years. The Company distributes its products through a combination of its own dedicated direct sales force, a worldwide network of manufacturers' representatives and authorized distributors. Sales to customers located outside the United States, either directly or through U.S. and foreign distributors, accounted for approximately 18%, 21%, and 25% of the net sales of the Company in the years ended December 31, 2001, 2000 and 1999, respectively.

     The following table sets forth the relative percentages of the total net sales of the Company attributable to each of the Company's product categories for the periods indicated.

   The following table sets forth certain items from the Company's Consolidated Statements of Operations as (1) a percentage of net sales and (2) the percentage period-to-period change in dollar amounts of such items for the periods indicated. The table and the discussion below should be read in conjunction with the Consolidated Financial Statements and Notes thereto.

     Net Sales. Net sales decreased 41% to $36.6 million for 2001, from $62.0 million in 2000. Net sales of $17.5 million in the semiconductor burn-in socket product lines were down $24.9 million or 59% from 2000. The net sales decrease in this business can be attributed largely to the weakest market conditions in the history of the semiconductor industry during 2001. Incoming orders for burn-in sockets declined $32.6 million or 73% to $11.9 million in 2001. Industrial/Avionics division net sales of $19.1 million were down $400,000 or 2% from 2000 as a result of the significant reduction in net sales during the fourth quarter. Net sales of $3.8 million during the fourth quarter of 2001 were down $1.5 million or 29% from the fourth quarter of 2000 and were down $800,000 from the third quarter of 2001. The reduction in net sales can be attributed in part to the impact of the events of September 11, particularly as they relate to the Company's Avionics business.

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     Gross profit. Gross profit decreased by $17.1 million or 60% in 2001 from $28.5 million in 2000. As a percentage of net sales, gross profit was 30.9% in 2001 and 45.9% in 2000. The lower gross profit percentage in 2001 resulted in large part from the significant reduction in the Company's consolidated sales volume. The drop in sales volume occurred mainly in the (higher-margin) burn-in socket product lines, which caused an unfavorable product mix shift that also contributed to the lower gross profit percentage. Changes in the Company's product mix (most particularly in the burn-in socket business) can have a material impact on the Company's gross profit percentage and these changes cannot always be predicted with certainty. The negative factors impacting gross profit percentage in 2001 were partly offset by the positive impact of a $1.5 million reduction in manufacturing overhead expense, due primarily to cost reductions implemented at the Wells-CTI division during 2001. These reductions included layoffs, attrition, salary and hiring freezes, and the closing of the South Bend, Indiana plant during the fourth quarter.

     Operating expenses. Operating expenses include selling, general and administrative expenses and costs of product development. Operating expenses decreased by $1.3 million to $11.9 million in 2001. Of this decrease, approximately $400,000 was due to lower selling expenses directly attributed to lower sales volume. The remaining decrease was due primarily to cost reductions implemented at the Wells-CTI division in 2001.

     Restructuring Costs and Impairment of Long Lived Assets. During the third quarter of 2001 the Company's senior management approved plans to close the South Bend, Indiana manufacturing plant. The plant closure resulted in the Company's eliminating 39 positions from all levels and vacating approximately 50,000 square feet of space. Management has estimated the plant closure will result in annualized savings of $1.7 million. The Company recorded a restructuring charge of $773,000 for employee-related costs of $134,000 and vacation of leased space of $639,000. The Company also wrote off $235,000 of obsolete South Bend inventory through cost of sales. In addition, the Company wrote off $727,000 of equipment and improvements that were abandoned. The plant closure is substantially complete and as of December 31, 2001 the balance of accrued restructuring charges is $556,000. Amounts accrued in this balance are primarily re nt and other facility - - related costs and are expected to be paid during the nine month period ended September 30, 2002.

     Non-operating Expense, net. Interest expense was $3.3 million in 2001 as compared with $4.4 million in 2000. Interest expense includes interest on the Senior Credit Facility of which the average outstanding balance was down $7.3 million from 2000. The lower average debt balances and lower interest rates in 2001 accounted for the decreased interest expense.

     Provision for Income Taxes. In 2001 the Company wrote off its $14.1 million deferred tax asset in accordance with current tax accounting standards. Under these standards, the weight of available evidence emphasizing recent historical results and near - - term prospects, indicated it was more likely than not that the deferred tax asset would not be realized. Accordingly, a full valuation allowance has been provided (Note 8). The effective income tax rate for 2000 was 41%.

     Net Sales. Net sales increased 20% to $62.0 million for 2000, from $51.8 million for 1999. The increase was due primarily to higher net sales in the burn-in socket product lines which were up $9.0 million or 27% from 1999. The net sales increase in this business was due to strong market conditions during 2000 together with new products introduced by the Company. Incoming orders for burn-in sockets rose $8.9 million or 25% to $44.5 million in 2000. Industrial/Avionics division net sales were up $1.1 million or 6% from 1999.

     Gross profit. Gross profit increased by $4.6 million or 19% in 2000 from $23.9 million in 1999. As a percentage of net sales, gross profit was 45.9% in 2000 and 46.0% in 1999. The gross profit percentage was impacted by several factors in 2000. First, depreciation increased by $600,000 in 2000. Second, the burn-in socket business experienced higher than expected manufacturing inefficiencies and inventory write-offs during the second half of the year. This was due in part to the inconsistent availability of certain material during a period of rapid increase in demand from the Company's customers. Finally, the Industrial/Avionics division experienced an unfavorable product mix shift in 2000. These negative factors were partially offset by the favorable impact of higher sales volume in 2000.

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     Operating expenses. Operating expenses include selling, general and administrative expenses and costs of product development. Operating expenses decreased by $600,000 to $13.2 million or 21% of net sales in 2000 from $13.8 million or 27% of net sales in 1999. The decrease in 2000 was primarily due to specific actions taken to reduce expenses at the Wells-CTI division in 1999 and 2000.

     Restructuring Costs. In 1999, the Company recorded a charge of $259,000 in connection with its Wells-CTI cost reduction program. During 1999, the Pennsylvania stamping facility was closed and operations transferred to Peabody, MA. The Japan subsidiary was downsized and restructure of manufacturing operations was begun as certain assembly operations were transferred from South Bend, IN to Phoenix, AZ. The expenses incurred were for severance payments of $177,000, write-off of fixed assets of $42,000, remodeling of Japanese office of $32,000 and other miscellaneous expenses of $8,000. There were no amounts accrued for restructuring at December 31, 2000. The annualized cost savings from the restructuring program approximate $1.0 million.

     Non-operating Expense, net. Interest expense was $4.4 million in 2000 as compared with $4.6 million in 1999. Interest expense includes interest on the Senior Credit Facility of which the balance was reduced by $13.5 million during the year. The lower debt balances were partly offset by higher borrowing costs in 2000. The higher borrowing costs were due to higher interest rates in 2000 together with amortization of additional amendment fees.

     Provision for Income Taxes. The effective income tax rates for 2000 and 1999 were 41% and 37%, respectively. The increase in the effective rate in 2000 was due to profitability in the Company's Wells-CTI Japan operation, which carries a higher effective rate than the combined U.S. federal/state effective rate. In 1999, the Japan operation reported a loss.

     Cash used in operating activities in 2001 was $10,000, compared to cash provided by operating activities of $17.2 million in 2000. Net borrowings in 2001 were $3.7 million and were used to fund capital expenditures of approximately $3.2 million and a portion of loan financing and amendment fees. The Company currently anticipates that its capital expenditures for 2002 will be in the range of $2.4 million to $2.8 million and will consist primarily of purchased tooling and equipment required to support the Company's business. The amount of these capital expenditures will frequently change based on future changes in business plans and conditions of the Company and changes in economic conditions. At December 31, 2001 and 2000, borrowings of $39.8 million and $36.1 million were outstanding under the Senior Credit Facility at weighted average interest rates of 5.18% and 8.70%, respectively.

     In December 1997, the Company obtained a Senior Credit Facility for $90 million from Fleet National Bank and other lenders (the "Senior Credit Facility") to finance in part the Wells acquisition. The Senior Credit Facility is secured by all of the assets of the Company. In conjunction with the Senior Credit Facility, PCD and Wells-CTI (formerly Wells Electronics, Inc.) each entered into a stock pledge agreement with Fleet and the other lenders pledging all or substantially all of the stock of the subsidiaries of PCD and Wells-CTI. Each of PCD, Wells-CTI and certain of their subsidiaries also entered into a security agreement and certain other collateral or conditional assignments of assets with Fleet and other lenders. The agreement governing the Senior Credit Facility contains a Material Adverse Effects clause and numerous financial and operating covenants. Among the operating covenants are restrictions that the Company (i) must maintain John L. Dwight, Jr. as chief executive officer of the Company or obtain the consent of the lenders under the Senior Credit Facility to any replacement of Mr. Dwight; (ii) may not, without the prior consent of such lender, acquire the assets of or ownership interest in, or merge with other companies; and (iii) may not, without the prior consent of such lenders, pay cash dividends. The Senior Credit Facility also requires the Company to maintain certain financial covenants, including minimum earnings before interest, taxes, depreciation and amortization ("EBITDA"), minimum fixed charge coverage ratio, minimum quick ratio, maximum ratio of total senior debt to EBITDA, maximum ratio of total indebtedness for borrowed money to EBITDA, minimum interest coverage ratio, and maximum capital expenditures, during the terms of the Senior Credit Facility.

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     The Company has experienced difficulty meeting all of the covenants under its Senior Credit Facility and in 2001 experienced difficulty meeting its principal repayment obligations. As a result, the Company has re-negotiated and amended the Senior Facility on several occasions since December 1997. In August 2001 certain covenants were amended by agreement between the Company and its lenders through June 2002. In conjunction with the August 2001 agreement, required principal payments for the year ending December 31, 2002 were reduced from $9.6 million to $5.3 million. In addition, borrowing availability under the Revolving Credit Facility ("the Revolver") was reduced from $20 million to $15 million and the maximum interest rate on the Facility was increased from 250 basis points to 350 basis points over LIBOR. The Company incurred fees of $500,000 in connection with this amendment. In November 2001 the Senior Credit Facility was am ended such that borrowing availability under the Revolver was increased to $16 million and the Company was required to obtain a commitment by January 31, 2002 to raise $7.0 million of Junior Capital by March 31, 2002. The Company and its lenders ultimately determined that raising Junior Capital was not a viable option under the existing market conditions at that time. Accordingly, in February 2002, the Senior Credit Facility was further amended and restated. In connection with the February 2002 agreement, certain covenant violations as of December 31, 2001 were waived and the lenders received warrants, exercisable immediately and for a period of ten years, to purchase 1,450,000 shares of common stock of the Company at $0.01 per share. In addition, lenders' existing warrants to purchase 203,949 shares of the Company's common stock at $4.90 per share were re-priced to $0.01 per share. The new and re-priced warrants were valued at $2.0 million utilizing the Black Scholes pricing method. The assumptions ut ilized under the Black Scholes method were 96% volatility, 1.82% riskless rate of return, no dividends and a term of six months. The key provisions of the February 2002 agreement are summarized in the table below.

     At December 31, 2001, the Company was in compliance with or had obtained waivers for its debt covenants. The February 2002 agreement contains aforementioned financial and operating covenants. There can be no assurance that the Company will be able to maintain compliance with its debt covenants in the future, and failure to meet such covenants would result in an event of default under the Senior Credit Facility. To avoid an event of default, the Company would attempt to obtain waivers from its lenders, amend the Senior Credit Facility or secure alternative financing. If financing were not available there would be a material adverse effect on the Company and the Company would be forced to consider other alternatives. Under these scenarios, there can be no assurance that the terms and conditions would be satisfactory to the Company or not disadvantageous to the Company's stockholders.

     The Company believes its existing working capital and borrowing capacity, coupled with the funds generated from the Company's operations, will be sufficient to fund its anticipated working capital, capital expenditure and debt payment requirements through 2002. Because the Company's capital requirements cannot be predicted with certainty, there can be no assurance that any additional financing will be available on terms satisfactory to the Company or not disadvantageous to the Company's stockholders.

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The Company believes the following represents its critical accounting policies:

     Revenue Recognition. The Company recognizes revenue once four basic criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Revenue is recognized upon shipment to customers. The Company grants to certain of its distributors limited return and stock rotation rights. Historically, the Company's return rate has been insignificant.

     Impairment of Long-Lived Assets. Long-lived assets include equipment and improvements, goodwill and other intangible assets and loan acquisition fees. The Company reviews goodwill and other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. When such "triggering events" occur, the Company compares the carrying amounts of the long-lived assets to the undiscounted expected future cash flows related to those assets. If this comparison indicates that impairment exists, the amount of the impairment is calculated using the discounted expected cash flows based upon the weighted average cost of capital. During the year ended December 31, 2001 the Company recorded an impairment charge of $727,000 related to certain equipment and improvements associated with the South Bend, Indiana plant closing (Note 13). The Company did not record any impairment losses related to goodwill or other intangible assets.

     Income Taxes. A valuation allowance is provided against the net deferred tax asset if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized. In the event the Company determines in the future that the deferred tax asset in excess of its carrying amount can be realized, then an adjustment to the valuation allowance would increase net income in the period such determination was made. During the year ended December 31, 2001, the Company wrote off its $14.1 million deferred tax asset by providing a full valuation allowance.

     In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 thereby eliminating the pooling-of-interests method and provides new criteria for determining whether intangible assets acquired in a business combination should be recognized separately from goodwill. SFAS No. 141 did not have an impact on the Company's consolidated financial statements.

     In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which became effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization and the requirement to test goodwill and other intangible assets for impairment at least annually. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. In accordance SFAS No. 142, the Company anticipates recording an impairment charge in the range of $10 million to $15 million during the first quarter of 2002.

     In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which will be effective for fiscal year 2003. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires among other things that obligations associated with the retirement of a tangible long lived asset be recorded as a liability when incurred. The Company doesn't expect SFAS No. 143 to have any impact on its consolidated financial statements.

20

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which became effective January 1, 2002. SFAS No. 144 supersedes SFAS No. 121 and the accounting and reporting provisions for the disposal of a segment of a business of Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations - - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 requires that long lived assets that are to be disposed of by a sale be measured at the lower of book value or fair value less the cost to sell. The Company does not expect that the adoption of SFAS No. 144 will have a significant impact on its consolidated financial statements.

     The following table presents the Company's contractual obligations and commercial commitments as of December 31, 2001 over the next five years and thereafter (in thousands):

     The cost of the Company's products is influenced by the cost of a wide variety of raw materials, including precious metals such as gold used in plating, copper and brass used for contacts, and plastic material used in molding connector components. In the past, increases in the cost of raw materials, labor and services have been offset by price increases, productivity improvements and cost saving programs. There can be no assurance, however, that the Company will be able to similarly offset such cost increases in the future.

21

     PCD is exposed to fluctuations in interest rates in connection with its variable rate term loan. In order to minimize the effect of changes in interest rates on earnings, PCD had entered into an interest rate swap that fixed the interest rate on a notional amount of its variable rate term loan. Under the swap agreement which expired in March 2001, PCD paid a variable rate under LIBOR and received a fixed rate of 5.72% on a notional amount of $35.0 million The Company may attempt to enter into another swap agreement subject to commercial availability and market conditions. The potential increase in the fair value of its term loan resulting from a hypothetical 10% decrease in interest rates was not material.

22

23

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
February 28, 2002

24

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

25

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

26

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

27

The accompanying notes are an integral part of these consolidated financial statements

28

PCD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     PCD Inc. (the "Company") is engaged principally in designing, manufacturing and marketing electronic connectors for use in semiconductor burn-in applications, industrial equipment and avionics. Electronic connectors are used in virtually all electronic systems, including data communications, telecommunications, computers and computer peripherals, industrial controls, automotive, avionics and test and measurement instrumentation.

     The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

     The Company recognizes revenue once four basic criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Revenue is recognized upon shipment to customers. The Company grants to certain of its distributors limited return and stock rotation rights. Historically, the Company's return rate has been insignificant.

     The Company considers all highly liquid debt instruments purchased with an original maturity of three months or fewer to be cash equivalents. The Company had all its cash in interest bearing accounts at December 31, 2001 and December 31, 2000.

     Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables. Collateral is not required for trade receivables, but ongoing credit evaluations of customer's financial condition are performed. Additionally, the Company maintains reserves for potential credit losses. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be inherent in the Company's accounts receivables.

     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates included in these financial statements are allowances for uncollectible accounts, allowances for inventory valuation, goodwill, intangible assets and deferred taxes.

     In the past, the Company has used derivative financial instruments for purposes other than trading and did so to reduce its exposure to fluctuations in interest rates. Gains and losses on hedges of existing assets and liabilities were included in the carrying amounts of those assets or liabilities and ultimately recognized in income. The amounts receivable and payable were recorded as a current liability with realized gains or losses recognized as adjustments to interest expense. This contract expired in March 2001 and the Company may enter into interest rate swaps again in the future.

29

     Inventory

     Inventories are stated at the lower of cost, determined on a first-in, first-out method, or market.

     Research and Development

     Research and development costs are charged to expense as incurred.

     The following table reconciles net income (loss) and weighted average shares outstanding to the amounts used to calculate basic and diluted earnings (loss) per share for each of the years ended December 31, 2001, 2000 and 1999.

     In 2001, 2000 and 1999, anti-dilutive Common Stock equivalents of 568,531, 145,357 and 125,963 shares, respectively, were not included in the calculation of diluted EPS.

     Equipment and improvements are recorded at cost and are depreciated utilizing the straight-line method over their estimated useful lives (Note 4). Maintenance and repairs which neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Upon retirement or other disposition, the cost and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is included in the results of operations.

     The Company utilizes the asset and liability approach of accounting for income taxes. Under the asset and liability approach, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax expense (benefit) represents the change in the deferred tax asset or deferred tax liability balance. Tax credits are treated as reductions of income taxes in the year in which the credits become available for tax purposes.

     Goodwill is accounted for in accordance with Accounting Principles Board ("APB") No. 17, Intangible Assets. Goodwill represents costs in excess of net assets of the business acquired and is amortized on a straight-line basis over the expected periods to be benefited, which is currently 20 years. Trademarks and trade names are amortized over their estimated remaining economic lives of 20 years, consistent with industry norms. Patented technologies are amortized over their estimated remaining economic lives of 6 years. Loan acquisition fees are amortized over the life of the applicable indebtedness.

30

     Impairment of Long-Lived Assets.

     Long-lived assets include equipment and improvements, goodwill and other intangible assets and loan acquisition fees. The Company reviews goodwill and other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. When such "triggering events" occur, the Company compares the carrying amounts of the long-lived assets to the undiscounted expected future cash flows related to those assets. If this comparison indicates that impairment exists, the amount of the impairment is calculated using the discounted expected cash flows based upon the weighted average cost of capital. During the year ended December 31, 2001 the Company recorded an impairment charge of $727,000 related to certain equipment and improvements associated with the South Bend, Indiana plant closing (Note 13). The Company did not record any impairment losses related to goodwill or ot her intangible assets.

     Foreign Currency Translation Adjustment

     The functional currency of the Company's foreign operation is the foreign subsidiary's local currency. Assets and liabilities of the foreign subsidiary are translated using the current exchange rate in effect at the balance sheet date. Revenue and expense items are translated at average exchange rates for the period. The resulting translation adjustments are recorded as a component of stockholders' equity. Gains or losses resulting from foreign currency transactions of approximately $16,000 are included in other expense in 2001.

     The Company accounts for stock based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and comply with the disclosure provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation.

     In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 thereby eliminating the pooling-of-interests method and provides new criteria for determining whether intangible assets acquired in a business combination should be recognized separately from goodwill. SFAS No. 141 did not have an impact on the Company's consolidated financial statements.

     In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which became effective January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization and the requirement to test goodwill and other intangible assets for impairment at least annually. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. In accordance SFAS No. 142, the Company anticipates recording an impairment charge in the range of $10 million to $15 million during the first quarter of 2002.

     In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which will be effective for fiscal year 2003. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires among other things that obligations associated with the retirement of a tangible long lived asset be recorded as a liability when incurred. The Company doesn't expect SFAS No. 143 to have any impact on its consolidated financial statements.

     In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which became effective January 1, 2002. SFAS No. 144 supersedes SFAS No. 121 and the accounting and reporting provisions for the disposal of a segment of a business of Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations - - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 requires that long lived assets that are to be disposed of by a sale be measured at the lower of book value or fair value less the cost to sell. The Company does not expect that the adoption of SFAS No. 144 will have a significant impact on its consolidated financial statements.

31

     Inventory consisted of the following at December 31:

     Equipment and improvements consisted of the following at December 31:

     Depreciation expense for the years ended December 31, 2001, 2000 and 1999 was $4.8 million, $4.9 million, and $4.3 million, respectively.

     Intangible assets and goodwill consisted of the following at December 31:

32

     On December 26, 1997, the Company entered into a secured $20.0 million Revolving Credit Agreement ("Revolver"), $30.0 million Secured Term Loan Agreement A and $40.0 million Secured Term Loan Agreement B (collectively referred to as the "Senior Credit Facility") with several banks. The Senior Credit Facility is collateralized by all of the assets of PCD and its subsidiaries. In conjunction with the Senior Credit Facility, PCD and Wells-CTI (formerly Wells Electronics, Inc.) each entered into a stock pledge agreement pledging all or substantially all of the stock of the subsidiaries of PCD and Wells-CTI. Each of PCD, Wells-CTI and certain of their subsidiaries also entered into a security agreement and certain other collateral or conditional assignments of assets.

     The agreement governing the Senior Credit Facility contains a Material Adverse Effects clause and numerous financial and operating covenants. Among these covenants are restrictions that the Company (i) must maintain John L. Dwight, Jr. as chief executive officer of the Company or obtain the consent of the lenders under the Senior Credit Facility to any replacement of Mr. Dwight; (ii) may not, without the prior consent of such lender, acquire the assets of or ownership interest in, or merge with, other companies; and (iii) may not, without the prior consent of such lenders, pay cash dividends. The Senior Credit Facility also requires that the Company to maintain certain financial covenants, including minimum fixed charge coverage ratio, as defined; minimum quick ratio, as defined; maximum ratio of total senior debt to EBITDA, maximum ratio of total indebtedness for borrowed money to earnings before interest, taxes, depreciation and amortization ("EBITDA"), minimum interest coverage ratio, maximum capital expenditures, as defined, during the terms of the Senior Credit Facility.

     In August 1998, the Company renegotiated the Senior Credit Facility. As a result, Term Loan A and Term Loan B were combined into a single term loan. Accordingly, the interest rate premium of 50 basis points charged on Term Loan B was eliminated. According to its terms, the re-negotiated Senior Credit Facility would have terminated on or before December 31, 2003.

     In March 2000, the Company obtained from its lenders a waiver of compliance with certain covenants for the fourth quarter of 1999. In addition, certain covenants were amended by agreement between the Company and its lenders through June 30, 2000. In conjunction with the March 2000 agreement, the Company issued warrants to its lenders covering a total of 203,949 shares of Common Stock at an exercise price of $4.90 per share. The value of these warrants, utilizing the Black Scholes option pricing method, was determined to be $289,000. The assumptions utilized under the Black Scholes method were 96% volatility, 5.3675% riskless rate of return, no dividends and a term of six months. This adjustment was made to offset the debt outstanding and the contra amount was credited to additional paid in capital. These warrants are being amortized over the remaining life of the debt.

     In August 2001 certain covenants were amended by agreement between the Company and its lenders through June 2002. In conjunction with the August 2001 agreement, required principal payments for the year ending December 31, 2002 were reduced from $9.6 million to $5.3 million. In addition, borrowing availability under the Revolver was reduced from $20 million to $15 million and the maximum interest rate on the Facility was increased from 250 basis points to 350 basis points over LIBOR. The Company incurred fees of $500,000 in connection with this amendment. In November 2001 the Senior Credit Facility was amended such that borrowing availability under the Revolver was increased to $16 million. At December 31, 2001 and 2000, borrowings of $39.8 million and $36.1 million were outstanding under the Senior Credit Facility at a weighted average interest rate of 5.18% and 8.70%, respectively. The unused portion of the Revolver at December 31, 2001 a nd 2000 was $300,000 and $12.7 million, respectively.

     In connection with the November 2001 amendment, the Company was required to obtain a commitment by January 31, 2002 to raise $7.0 million of Junior Capital by March 31, 2002. The Company and its lenders ultimately determined that raising Junior Capital was not a viable option under the existing market conditions at that time. Accordingly, in February 2002, the Senior Credit Facility was further amended and restated. In connection with the February 2002 agreement, certain covenant violations as of December 31, 2001 were waived and the lenders received warrants, exercisable immediately and for a period of ten years, to purchase 1,450,000 shares of common stock of the Company at $0.01 per share. In addition, lenders' existing warrants to purchase 203,949 shares of the Company's common stock at $4.90 per share were re-priced to $0.01 per share. The new and re-priced warrants were valued at $2.0 million utilizing the Black Scholes pricing method. The assumptions utilized under the Black Scholes method were 96% volatility, 1.82% riskless rate of return, no dividends and a term of six months.

33

     This transaction will be accounted for as an extinguishment of the existing debt and an issuance of new debt under the provisions of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, and Emerging Issues Task Force ("EITF") 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments. The transaction will result in an extraordinary loss in the first quarter of 2002. Included in this loss are the cost of these warrants along with the remaining unamortized bank fees ($1.9 million at December 31, 2001) and unamortized warrant valuation ($137,734 at December 31, 2001). The key provisions of the February 2002 agreement are summarized in the table below.

     Under SFAS No. 6, Classification of Short Term Debt Obligations Expected to be Refinanced, short term obligations refinanced prior to the issuance of the balance sheet to long term obligations are to be reclassified to long term as of the balance sheet date. Amounts under the revolving credit facility previously classified as current have been reclassified to long term at December 31, 2001.

     The following debt information is being presented gross of the above mentioned warrant valuation.

     Long-term debt consists of the following:

34

     The provision for income taxes for the years ended December 31, 2001, 2000, and 1999 was as follows:

     The components of the net deferred tax asset consisted of the following at December 31, 2001 and 2000:

     The deferred tax consequences of temporary differences in reporting items for financial statement and income tax purposes are recognized, if appropriate. Realization of the future tax benefits related to the deferred tax assets is dependent on many factors, including the Company's ability to generate sufficient future taxable income. Recognition of the deferred tax asset under SFAS No. 109 is based upon the probability that it is more likely than not that sufficient future taxable income will be generated. During the fourth quarter of 2001, the Company recorded a full valuation allowance for this asset.

     At December 31, 2001, the Company has federal and state net operating loss carryforwards of $12.5 million and $10.8 million, respectively. The federal net operating loss carryforwards expire in 2021. The state net operating loss carryforwards begin to expire in 2003. In addition, the Company has foreign tax credit carryforwards of approximately $1.3 million at December 31, 2001, which begin to expire in 2003. The entire amounts of the federal and state net operating loss carryforwards are offset by a valuation allowance at December 31, 2001.

     The analysis of the variance of income taxes as reported from income taxes compiled at the U.S. statutory federal income tax rate for continuing operations is as follows:

35

     The Company and its subsidiaries are subject to legal proceedings arising in the ordinary course of business. On the basis of information presently available and advice received from legal counsel, it is the opinion of management that the disposition or ultimate determination of such legal proceedings will not have a material adverse effect on the Company's consolidated financial position, its consolidated results of operations or its consolidated cash flows.

     The Company leases office and production facilities in Peabody, Massachusetts, Yokohama, Japan, and Phoenix, Arizona and leases distribution and a technical sales support facility in Northhampton, England. The Company also leases a building in South Bend, Indiana that is now substantially idle. The Company is currently attempting to sublease this space. These rentals are subject to escalation in real estate taxes and operating expenses. Rental expense for the years ended December 31, 2001, 2000, and 1999 was $1.2 million, $1.1 million and $1.1 million, respectively.

     Minimum future rental commitments under leases with remaining terms in excess of one year are approximately as follows:

Stock Options:

     Directors Stock Plan

     The Company's 1996 Eligible Directors Stock Plan (the "Directors Stock Plan") was approved by the Board of Directors on January 30, 1996 and thereafter by the Company's stockholders. Under the Directors Stock Plan, commencing with the 1997 annual meeting of stockholders, each director who is not an officer or employee of the Company or any subsidiary of the Company (an "outside director") who has not previously been granted an option to purchase shares of Common Stock will be granted, on the thirtieth day after such meeting, an option to purchase 3,000 shares of Common Stock at an exercise price equal to the fair market value on the date of grant. In addition, on the thirtieth day after such meeting held no earlier than six months after initial election, each outside director will be granted an option at each annual meeting of stockholders to purchase 1,500 shares of Common Stock at an exercise price equal to the fair market value on the dat e of grant. A total of 36,000 shares of Common Stock are available for awards under the Directors Stock Plan. Each option shall vest 6 months after, and expire 10 years from, the date of grant of such option. As of December 31, 2001, 15,000 shares of the Company's common stock were available for future grants and all of the 21,000 options which are outstanding under the 1996 Directors Stock Plan were exercisable. No options may be granted under the Directors Stock Plan after January 29, 2006.

     The Company's 1996 Stock Plan was approved by the Board of Directors on January 30, 1996, and thereafter by the Company's stockholders. The 1996 Stock Plan provides for the grant or award of stock options, restricted stock and other performance awards which may or may not be denominated in shares of Common Stock or other securities (collectively, the "Awards"). Stock options granted under the 1996 Stock Plan may be either incentive stock options or non-qualified options. The 1996 Stock Plan is administered by the Compensation Committee. Subject to the provisions of the 1996 Stock Plan, the Committee has the authority to designate participants, determine the types of Awards to be granted, the number of shares to be covered by each Award, the time at which each Award is exercisable or may be settled, the method of payment and any other terms and conditions of the Awards. While the Committee determines the prices at which options and other Awards may be exercised under the 1996 Stock Plan, the exercise price of an option shall be at least 100% of the fair market value (as determined under the terms of the 1996 Stock Plan) of a share of Common Stock on the date of grant. The aggregate number of shares of Common Stock available for awards under the Plan is 324,000. No option shall be exercisable with respect to any shares later than 10 years after the date of grant of such options or 5 years in the case of incentive options granted to the owner of stock possessing more than 10% of the value of all classes of stock of the Company. Vesting is determined in the sole discretion of the Compensation Committee of the Board of Directors and the typical vesting plan is in four approximately equal annual installments, the first of which vests on the date of grant. As of December 31, 2001, 93,250 shares of the Company's common stock were available for future grants and 126,250 of the 219,000 options which are outstanding under the 1996 Stock Plan were exercisable. No awards may be made under the 1996 Stock Plan after January 29, 2006.

36

     The Company's 1992 Stock Option Plan as amended on January 30, 1996 provided for the grant or award of stock options, which may be either incentive stock options or non-qualified stock options to key employees and directors. The Compensation Committee administers the 1992 Stock Option Plan. No option shall be exercisable with respect to any shares later than 10 years after the date of grant of such options or 5 years in the case of incentive options granted to the owner of stock possessing more than 10% of the value of all classes of stock of the Company. Vesting is determined in the sole discretion of the Compensation Committee of the Board of Directors and the typical vesting plan is in four approximately equal annual installments, the first of which vests on the date of grant. The aggregate number of shares of Common Stock available for awards under the Plan is 954,000. As of December 31, 2001, 36,000 shares of the Company's common st ock were available for future grants and all 171,750 options which are outstanding under the 1992 Stock Option Plan are exercisable. Awards may no longer be made under the 1992 Stock Option Plan.

     The following table summarizes the transactions from these plans:

     Summarized information about stock options outstanding at December 31, 2001 is as follows:

37

     For the years ended December 31, 2001, 2000, and 1999, options to purchase 319,000, 393,500, and 504,851 shares, at weighted average exercise prices of $4.81, $4.06, and $4.11, respectively, of Common Stock were exercisable with the remaining options becoming exercisable at various dates through October 19, 2004.

     Generally, when shares acquired pursuant to the exercise of incentive stock options are sold within one year of exercise or within two years from the date of grant, the Company derives a tax deduction measured by the amount that the fair market value exceeds the option price at the date the options are exercised. When nonqualified stock options are exercised, the Company derives a tax deduction measured by the amount that the fair market value exceeds the option price at the date the options are exercised.

     The Company has three stock-based compensation plans, which are described above. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires that companies either recognize compensation expense for grants of stock, stock options, and other equity instruments based on fair value, or provide pro forma disclosure of net income and earnings per share in the notes to the financial statements. The Company adopted the disclosure provisions of SFAS No. 123 in 1996 and has applied APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates as calculated in accordance with SFAS No. 123, the Company's net income and earnings per share for the years ended December 31 , 2001, 2000, and 1999 would have been reduced to the pro forma amounts indicated below:

     The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

     Weighted average fair value of options granted at fair value at date of grant:

     The effect of applying SFAS No. 123 in this pro forma disclosure is not indicative of future amounts. Additional awards in future years are anticipated.

     The Company has Employee Savings and Profit Sharing Plans (the "Plans") under section 401(k) of the Internal Revenue Code of 1986, as amended. All employees of the Company, after reaching the applicable service level, are eligible to participate in the Plans. A participating employee may elect to defer on a pre-tax basis up to 15% of his or her salary. This amount, plus a matching amount provided by the Company, is contributed to the Plan. Company contributions to the Plans for the years ended December 31, 2001, 2000, and 1999 amounted to $249,299, $235,509 and $210,170 respectively.

38

     During 1998, the stockholders of the Company approved the 1998 Employee Stock Purchase Plan (the "1998 Employee Stock Purchase Plan") covering 80,000 shares of the Company's Common Stock. All employees who have completed twelve months of employment, except for those employees who possess at least 5% of the voting power of the Company's Common Stock are entitled, through payroll deductions of amounts up to 10% of his or her salary, to purchase shares of the Company's Common Stock at the lesser of 85% of the market price at the offering date or the offering termination date. During the years 2001, 2000, and 1999, 11,948, 9,737 and 7,053 shares were issued, respectively, leaving 51,262 shares available for future issuance.

     During the third quarter of 2001 the Company's senior management approved plans to close the South Bend, Indiana manufacturing plant. The plant closure resulted in the Company's eliminating 39 positions from all levels and vacating approximately 50,000 square feet of space. Management has estimated the plant closure will result in annualized savings of $1.7 million. The Company recorded a restructuring charge of $773,000 for employee-related costs of $134,000 and vacation of leased space of $639,000. The Company also wrote off $235,000 of obsolete South Bend inventory through cost of sales. In addition, the Company wrote off $727,000 of equipment and improvements that were abandoned. The plant closure is substantially complete and as of December 31, 2001 the balance of accrued restructuring charges is $556,000. Amounts accrued in this balance are primarily rent and other facility - related costs and are expected to be paid during the nine month period ended September 30, 2002.

     During 1999, the Company recorded a charge of $259,000 in connection with the restructuring program at Wells-CTI. During the year, the Pennsylvania stamping facility was closed with operations transferred to Peabody, MA and the Japan subsidiary of Wells-CTI was downsized. The expenses incurred were for severance payments of $177,000, write-off of fixed assets of $42,000, remodeling of Japanese office of $32,000 and other miscellaneous expenses of $8,000. At December 31, 1999, the only accrued expenses for these restructuring costs were for severance payments in the amount of $48,000 and there was no accrued expense at December 31, 2000.

     One customer accounted for approximately 18%, 21% and 18% of the Company's net sales in 2001, 2000 and 1999, respectively. At December 31, 2001, the Company has two customers that each constitute 11% of the Company's gross accounts receivable balance and at December 31, 2000, the Company had no customers that constituted at least 10% of its gross accounts receivable.

     The Company designs, manufactures and markets electronic connectors for use in Semiconductor burn-in applications, industrial equipment and avionics. The Company has two principal businesses: Semiconductor burn-in segment and industrial and avionics segment. Each of these is a business segment with its respective financial performance detailed in this report. Net income of the two principal businesses excludes the effects of special charges and gains. The results for Semiconductor burn-in include the effects of royalty revenues from IC package-related cross-license agreements. Business assets are the owned or allocated assets used by each business. Included in corporate activities are general corporate expenses, net of elimination of inter-segment transactions, which are generally intended to approximate market prices. Assets of corporate activities include cash, corporate equipment and improvements, net.

39

     The following geographic area data include trade revenues based on product shipment destination and royalty payor per location, and property, plant and equipment based on physical location:

40

                None.

41

Set forth below are the executive officers of the Company and their ages as of December 31, 2001 and positions held with the Company, as follows:

     Mr. Dwight has served as Chairman of the Board, Chief Executive Officer, President and a director of the Company since November 1980, when he purchased a controlling interest in PCD. Mr. Dwight was previously Vice President - - International of Burndy Corporation, an electronic connector manufacturer. Mr. Dwight has 29 years of management and operating experience in the connector industry.

     Mr. Doyle rejoined PCD as Vice President and General Manager, Industrial/Avionics Division in August 1999. From January 1996 to July 1999, Mr. Doyle held various positions with Thomas & Betts including Vice President - -Worldwide Engineering, VP/GM - Communications Division and VP/GM - Automotive Division. From August 1992 to January 1996, he held positions at Amphenol Corp., RF/Microwave Division as Director of Engineering and Director of Operations. Prior to August 1992, he was VP - - Engineering & Quality Assurance at PCD. Mr. Doyle has 19 years of experience in the connector industry.

     Mr. Farnsworth has served as Vice President and General Manager, Wells-CTI - USA since July 2000. From August 1999 to July 2000, he served as Vice President - - Sales and Marketing, Wells-CTI. From December 1997 to August 1999, he was Vice President and General Manager - - CTI. From October 1993 to December 1997, he was Vice President and General Manager - - CTI. Mr. Farnsworth was a founder of Component Technologies, Inc. in 1983, and remained with the Company, in various positions in sales and marketing, following the acquisition of Component Technologies, Inc. by the Company in 1988. Mr. Farnsworth has 24 years of experience in the connector industry.

     Mr. Sheehan joined PCD as Vice President Finance and Administration, Chief Financial Officer and Treasurer in August 1999. From 1997 to 1999 he was Corporate Controller of Sappi Fine Paper North America, a manufacturer and distributor of coated paper for the printing and publishing industry. From 1991 to 1997 he was Corporate Controller of Value Health, Inc. a NYSE - - listed specialty health care services company. Mr. Sheehan is a certified public accountant with previous experience as an auditor for PricewaterhouseCoopers LLP.

     For information with respect to the Directors of the Company, see "Election of Directors" in the Proxy Statement (the "2002 Proxy Statement") for the PCD Inc. 2002 Annual Meeting of Stockholders, which portion of the Proxy Statement is incorporated herein by reference.

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     Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's executive officers, directors, and persons owning ten percent or more of a registered class of the Company's equity securities to file reports of ownership and changes in ownership of all equity and derivative securities of the Company with the Securities and Exchange Commission ("SEC"). SEC regulations also require that a copy of all such Section 16(a) forms filed must be furnished to the Company by such officers, directors and shareholders.

     Based solely on a review of the copies of such forms and amendments thereto received by the Company, or written representations from the Company's officers and directors that no Forms 5 were required to be filed, the Company believes that during 2001 all Section 16(a) filing requirements applicable to its officers, directors and shareholders were met.

     The information contained under the caption Executive Compensation in the 2002 Proxy Statement is incorporated herein by reference.

     The information contained under the caption Security Ownership Of Management and Principal Stockholders in the 2001 Proxy Statement is incorporated herein by reference.

     The information contained under the caption "Certain Relationships and Related Transactions" in the 2002 Proxy Statement is incorporated herein by reference.

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               (a) Documents Filed as a part of the Form 10-K Report

     1) Financial Statements

     2) The Report of Independent Accountants on the Financial Statement Schedule and the schedule listed
below are filed as part of this annual report on Form 10-K.