Okay, over revved the car a while back. Not down shifting but mis shifting up and just went to nuetral and stomped it while having fun.

Had misfires, so I replaced the Plugs and Packs with NGK and OEM. Still didnt fix it. My friend dropped that car off at the dealership cause i am at sea, they said i have low compression on a cylinder and that the PCM(powertrain control monitor) is the problem. But my understanding is that the PCM can only change timing within the engine. Not the compression. So wouldnt you think that the lack of compression would force the PCM to send faulty looking signals while trying to correct the misfires retarded timing and would read bad to the OBD2. Personally i think it is the valves or gasket.

Can anyone explain how the PCM works so that i cna have a better idea and does it seem that they are making the correct choice?

Oh, and btw this is actually a good dealership. Every qoute they have given me i have gone online to try to buy the parts for cheaper and they are exactly what they would cost online! Woot

 

In the scenario you describe the PCM/ECU should not have allowed the engine to over rev. In neutral the PCM/ECU should not allow the engine to over rev by pressing the gas pedal. In your scenario the PCM/ECU should have cut the fuel off around 9000rpm. You should have hit the rev limiter like a wall.
The PCM/ECU does not control compression.
I don't know what the dealership is saying, are they suggesting the rev-limiter on the PCM/ECU did not work and allowed your car to over-rev in neutral?
I don't think the PCM/ECU is usually replaced as the result of a mechanical over-rev. I'm pretty sure those repairs are usually mechanical in nature, valve dropped, retainer cracked, cylinder scored. I'm also pretty sure loss of compression could be an indicator of any of those.
Someone else who knows more will be of more help to you. Like I said though, what you described shouldn't have even over-revved, it should have hit the fuel cut off/rev-limiter. So, how'd it get damaged? Why do they want to replace the PCM/ECU? I know that's what you are asking, but it's a mystery to me too.
Good Luck!

EDIT:What were all the DTC's? (diagnostic trouble codes), would also be a good question.

 

Thought about it some more. I know that if you roll off the throttle and then hammer it again, even if in neutral, the PCM/ECU should cut the fuel around redline.
I don't know what happens if you are already in gear at 9000rpm and push the clutch in without at least easing up on the gas. Would taking the load off the engine suddenly at 9000rpm without letting off throttle even a little, allow the engine to over-rev if only for a split second?
I don't know.
I still don't know why they would want to replace the PCM/ECU from an over-rev if that's what happened.
If you do get a new PCM/ECU read about the differences between the OEM ECU's for the AP1 generation (00-03 in the USDM) of S2000. You may want to try an 03 ECU. Supposedly the fuel maps are tuned (leaned out) a little better. People say it makes a couple hp difference.

 

Well, i let off the gas stomped the clutch and within the movement of 2nd to 3rd missed third let off the clutch and stomped the gas. So i know it wasnt a textbook over rev.

For the codes, well, i cant remember, i am on deployment right now. But i know it was a random misfire on all four. I replaced the sparks and it drove fine for a week. Went to Busch Gardens and sat in Traffic and everything! Then it started misfiring again. Replaced the Coil Packs, dont know what happened there cause my roommate did it last week, but said it was still a rough idle. So it went to the shop. I am leaning towards valves, retainer, etc. Cause i doubt i could of made it 200 miles on messed up pistons or serious internal damage. And i def would want an '03 ECU. I know mine runs rich as it is. Thanks. If anyone else has a site or more words of knowledge it is all welcomed.