**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 **FORM
        10-Q**
 (Mark
        One)
 
 xQuarterly
        Report Pursuant to Section 13
        or 15(d)of the Securities Exchange Act of 1934
 
 For
        the
        Quarter Ended April
        3, 2005 ,
 or
 
 o   
        Transition Report
        Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
        1934
 
 For
        the
        transition period from ____ to
 
 Commission
        File Number 1-9298
 
 **RAYTECH
        CORPORATION**
 (Exact
        Name of Registrant as Specified in its Charter)
 
 **Delaware**
              **06-1182033**(State
                  or other Jurisdiction of
              (I.R.S.
                  Employer Identification No.)Incorporation
                  or Organization)**Suite
                  295, Four Corporate Drive****Shelton,
                  Connecticut**
              **06484**(Address
                  of Principal Executive Offices)
              (Zip
                  Code)
 
 **203-925-8021** ****
 (Registrant’s
        Telephone Number)
 
 Indicate
        by check mark whether the Registrant (1) has filed all reports 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
o
 
 Indicate
        by check mark whether the Registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Act).
  Yes
o   No
x
 
 Indicate
        by check mark whether the Registrant has filed all documents and reports
        required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
        Act
        of 1934 subsequent to the distribution of securities under a plan confirmed
        by a
        court.
 
 Yes x   No
o
 
 As
        of
        April 29, 2005, 41,737,306 shares of common stock were outstanding and the
        aggregate market value of these shares (based upon the closing price of Raytech
        common stock on the New York Stock Exchange) on such date held by non-affiliates
        was approximately $9.3 million.
 
 
 **RAYTECH
        CORPORATION**
 
 **INDEX**
 
 PageNumber**PART
                  I.**
              **FINANCIAL
                  INFORMATION**:**Item
                  1.**
              Financial
                  StatementsCondensed
                  Consolidated Balance Sheets at April 3, 2005and
                  January 2, 2005
              3Condensed
                  Consolidated Statements of Operations for the thirteen weeks endedApril
                  3, 2005 and March 28, 2004
              4Condensed
                    Consolidated Statementsof
                    Cash Flows for the thirteen weeksended
                    April 3, 2005 and March 28, 2004
              5Condensed
                  Consolidated Statements of Changes in Shareholders’ Equity for the
                  thirteenweeks
                  ended April 3, 2005 and March 28, 2004
              6Notes
                  to Condensed ConsolidatedFinancial
                  Statements
              7**Item
                  2.**
              Management’s
                  Discussion and Analysis ofFinancial
                  Condition and Results of Operations
              29**Item
                  3.**
              Quantitative
                  and Qualitative DisclosuresAbout
                  Market Risk
              37**Item
                  4.**
              Controls
                  and Procedures
              38**PART
                  II.**
              **OTHER
                  INFORMATION****Item
                  1.**
              Legal
                  Proceedings
              39**Item
                  2.**
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              39**Item
                  6.**
              Exhibits
              39Signature
              40
 
  -2-
  **RAYTECH
        CORPORATION**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 (in
        thousands, except share data)
 (unaudited)
 
 April
                  3,
              
              January
                  2,2005
              
              2005**ASSETS**Current
                  assetsCash
                  and cash equivalents
              
              $
              12,112
              
              $
              13,620Restricted
                  cash
              
              
              5,064
              
              
              5,548Trade
                  accounts receivable, less allowanceof
                  $1,812 and $1,462
              
              
              32,311
              
              
              27,506Inventories,
                  net
              
              
              42,020
              
              
              39,582Income
                  taxes receivable
              
              
              1,333
              
              
              1,333Deferred
                  income taxes
              
              
              3,109
              
              
              3,854Other
                  current assets
              
              
              2,653
              
              
              3,009Total
                  current assets
              
              
              98,602
              
              
              94,452Property,
                  plant and equipment
              
              
              120,904
              
              
              126,118Less
                  accumulated depreciation
              
              
              (44,427
              )
              
              (46,113
              )Net
                  property, plant and equipment
              
              
              76,477
              
              
              80,005Goodwill,
                  net
              
              
              5,912
              
              
              5,912Other
                  intangible assets, net
              
              
              22,407
              
              
              22,731Other
                  assets
              
              
              2,988
              
              
              2,586Total
                  assets
              
              $
              206,386
              
              $
              205,686**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**Current
                  liabilitiesNotes
                  payable and current portion of long-term debt
              
              $
              18,538
              
              $
              15,280Current
                  portion of pension obligation
              
              
              2,242
              
              
              2,248Accounts
                  payable
              
              
              13,595
              
              
              15,068Accrued
                  liabilities
              
              
              26,079
              
              
              23,810Payable
                  to the PI Trust
              
              
              4,393
              
              
              4,393Total
                  current liabilities
              
              
              64,847
              
              
              60,799Long-term
                  debt
              
              
              17,701
              
              
              11,416Pension
                  obligation
              
              
              13,332
              
              
              14,175Postretirement
                  benefits other than pension
              
              
              17,387
              
              
              16,834Deferred
                  payable to the PI Trust
              
              
              3,631
              
              
              4,627Deferred
                  income taxes
              
              
              7,694
              
              
              7,591Other
                  long-term liabilities
              
              
              6,565
              
              
              7,044Total
                  liabilities
              
              
              131,157
              
              
              122,486Commitments
                  and ContingenciesMinority
                  interest
              
              
              1,269
              
              
              10,020Shareholders’
                  EquityCapital
                  stock
              
              
              —
              
              
              —Cumulative
                  preferred stock, no par value,5,000,000
                  shares authorized, none issued andoutstanding
              
              
              —
              
              
              —Common
                  stock, par value $1.00, 50,000,000 sharesauthorized,
                  41,737,306 issued andoutstanding
              
              
              41,737
              
              
              41,737Additional
                  paid in capital
              
              
              117,574
              
              
              117,574Accumulated
                  deficit
              
              
              (75,975
              )
              
              (77,595
              )Accumulated
                  other comprehensive loss
              
              
              (9,376
              )
              
              (8,536
              )Total
                  shareholders’ equity
              
              
              73,960
              
              
              73,180Total
                  liabilities and shareholders’ equity
              
              $
              206,386
              
              $
              205,686
 
 *The
        accompanying notes are an integral part of these
        statements.*
  -3-
  **RAYTECH
        CORPORATION**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 (in
        thousands, except share data)
 (unaudited)
  For
                      the thirteen weeks endedApril
                      3,
                  
                  March
                      28,2005
                  
                  2004Net
                      sales
                  
                  $
                  63,352
                  
                  $
                  56,598Cost
                      of sales
                  
                  
                  51,356
                  
                  
                  45,539Gross
                      profit
                  
                  
                  11,996
                  
                  
                  11,059Selling,
                      general and administrative expenses
                  
                  
                  9,618
                  
                  
                  8,610Restructuring
                      expenses
                  
                  
                  387
                  
                  
                  —Operating
                      profit
                  
                  
                  1,991
                  
                  
                  2,449Interest
                      expense
                  
                  
                  (381
                  )
                  
                  (315
                  )Reduction
                      of payable to PI Trust
                  
                  
                  995
                  
                  
                  —Other
                      income, net
                  
                  
                  387
                  
                  
                  301Income
                      before provision for incometaxes
                      and minority interest
                  
                  
                  2,992
                  
                  
                  2,435Provision
                      for income taxes
                  
                  
                  1,192
                  
                  
                  828Income
                      before minority interest
                  
                  
                  1,800
                  
                  
                  1,607Minority
                      interest
                  
                  
                  180
                  
                  
                  256Net
                      income
                  
                  $
                  1,620
                  
                  $
                  1,351Basic
                      and diluted earnings per share
                  
                  $
                  .04
                  
                  $
                  .03
 *The
        accompanying notes are an integral part of these statements.*
 
  -4-
  **RAYTECH
        CORPORATION**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 (in
        thousands)
 (unaudited)
  For
                        the thirteen weeks endedApril
                        3,
                    
                    
                    March
                        28,2005
                    
                    
                    2004Cash
                        flows from operating activities:Net
                        income
                    
                    $
                    1,620
                    
                    $
                    1,351Adjustments
                        to reconcile net income to net cashused
                        by operating activities:Depreciation
                        and amortization
                    
                    
                    4,202
                    
                    
                    4,157Other
                        non-cash items
                    
                    
                    236
                    
                    
                    373Changes
                        in other operating assets and liabilitiesTrade
                        accounts receivable
                    
                    
                    (5,442
                    )
                    
                    (5,972
                    )Inventories
                    
                    
                    (2,866
                    )
                    
                    684Accounts
                        payable
                    
                    
                    (1,400
                    )
                    
                    (203
                    )Other
                        operating assets and liabilities, net
                    
                    
                    1,775
                    
                    
                    (1,762
                    )Net
                        cash used by operating activities
                    
                    
                    (1,875
                    )
                    
                    (1,372
                    )Cash
                        flow from investing activities:Capital
                        expenditures
                    
                    
                    (2,490
                    )
                    
                    (842
                    )Proceeds
                        on sales of property, plant and equipment
                    
                    
                    35
                    
                    
                    —Restricted
                        cash
                    
                    
                    484
                    
                    
                    (28
                    )Net
                        cash used by investing activities
                    
                    
                    (1,971
                    )
                    
                    (870
                    )Cash
                        flow from financing activities:Net
                        borrowings on short-term notes
                    
                    
                    3,387
                    
                    
                    5,513Principal
                        payments on long-term debt
                    
                    
                    (850
                    )
                    
                    (747
                    )Net
                        cash provided by financing activities
                    
                    
                    2,537
                    
                    
                    4,766Effect
                        of exchange rate changes on cash
                    
                    
                    (199
                    )
                    
                    (40
                    )Net
                        change in cash and cash equivalents
                    
                    
                    (1,508
                    )
                    
                    2,484Cash
                        and cash equivalents at beginning of period
                    
                    
                    13,620
                    
                    
                    16,413Cash
                        and cash equivalents at end of period
                    
                    $
                    12,112
                    
                    $
                    18,897Supplemental
                        schedule of non-cash investingand
                        financing activities:Acquisition
                        of APC minority shares owned by Raymarkthrough
                        issuance of a long-term note payable
                    
                    $
                    7,200
                    
                    $
                    —
 *The
        accompanying notes are an integral part of these statements.*
 
  -5-
  **RAYTECH
        CORPORATION**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
        EQUITY**
 (in
        thousands)
 (unaudited)
  **Common**Stock
                
                
                **Additional**Paid
                      inCapital
                
                
                **Accumulated**Deficit
                
                
                **Accumulated**OtherComprehensiveLoss
                
                
                **Total**Balance,
                    December 28, 2003
                
                $
                41,737
                
                $
                117,574
                
                $
                (74,845
                )
                $
                (8,556
                )
                $
                75,910Comprehensive
                    income (loss):Net
                    income
                
                
                —
                
                
                —
                
                
                1,351
                
                
                —
                
                
                1,351Other
                    comprehensive loss
                
                
                —
                
                
                —
                
                
                —
                
                
                (48
                )
                
                (48
                )Total
                    comprehensiveincome
                    (loss)
                
                
                —
                
                
                —
                
                
                1,351
                
                
                (48
                )
                
                1,303Balance,
                    March 28, 2004
                
                $
                41,737
                
                $
                117,574
                
                $
                (73,494
                )
                $
                (8,604
                )
                $
                77,213Balance,
                    January 2, 2005
                
                $
                41,737
                
                $
                117,574
                
                $
                (77,595
                )
                $
                (8,536
                )
                $
                73,180Comprehensive
                    income (loss):Net
                    income
                
                
                —
                
                
                —
                
                
                1,620
                
                
                —
                
                
                1,620Other
                    comprehensive loss
                
                
                —
                
                
                —
                
                
                —
                
                
                (840
                )
                
                (840
                )Total
                    comprehensiveincome
                    (loss)
                
                
                —
                
                
                —
                
                
                1,620
                
                
                (840
                )
                
                780Balance,
                    April 3, 2005
                
                $
                41,737
                
                $
                117,574
                
                $
                (75,975
                )
                $
                (9,376
                )
                $
                73,960
 
 *The
        accompanying notes are an integral part of these statements.*
 
  -6-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        1 - Summary of Significant Accounting Policies**
 
 ***Presentation
        of Condensed Unaudited Consolidated Financial Statements***
 
 These
        condensed unaudited consolidated financial statements have been prepared
        pursuant to the requirements of Article 10 of Regulation S-X, and in the
        opinion
        of management, contain all adjustments necessary to fairly present the
        consolidated financial position of Raytech Corporation (the “Company”) as of
        April 3, 2005 and the consolidated results of operations and cash flows for
        all
        interim periods presented. All adjustments, with the exception of the entries
        to
        record the acquisition of minority shares of Allomatic Products Company (“APC”)
        which are discussed in Note 13, are of a normal recurring nature. The year-end
        condensed consolidated balance sheet data was derived from audited financial
        statements but does not include all disclosures required by accounting
        principles generally accepted in the United States of America. The financial
        statements contained herein should be read in conjunction with the Company’s
        financial statements and related notes filed on Form 10-K for the year ended
        January 2, 2005. Interim results are not necessarily indicative of the results
        for the full year.
 
 ***Stock-Based
        Compensation***
 
 The
        Company accounts for stock-based compensation using the intrinsic value-based
        method of accounting in accordance with Accounting Principles Board Opinion
        No.
        25. As such, no compensation cost is recognized for stock options granted
        with
        an exercise price equal to the fair market value of the underlying stock
        as of
        the grant date. Had compensation costs of stock options been determined under
        a
        fair value alternative method as stated in Statement of Financial Accounting
        Standards No. 148, “Accounting for Stock-Based Compensation - Transition and
        Disclosure, an Amendment of FASB Statement No. 123,” the Company would have been
        required to recognize compensation cost based on the fair value of the options
        granted. Required pro forma information applying a fair value method to all
        awards, is presented in the table below.
 
 **For
                  the thirteen weeks ended****April
                  3,**
              
              **March
                  28,****2005**
              
              **2004**Net
                  income:As
                  reported
              
              $
              1,620
              
              $
              1,351Deduct:
                  Total stock-based employee compensationexpense
                  determined under fair value basedmethod
                  for all awards, net of related tax effects
              
              
              (216
              )
              
              (408
              )Pro
                  forma
              
              $
              1,404
              
              $
              943Basic
                  and diluted earnings per share:As
                  reported
              
              $
              .04
              
              $
              .03Pro
                  forma
              
              $
              .03
              
              $
              .02
 
 During
        the first quarter of fiscal 2003, the Company granted options for 1,601,000
        shares of common stock with an exercise price of $5.70 per share. The fair
        value
        of these options was estimated at $3.22 per common share on the date of grant,
        using the Black-Scholes option pricing model and the following assumptions:
        expected volatility of 56.70%, dividend yield of 0.00%, risk free interest
        rate
        of 3.60% and an expected life of the options of six years. During the second
        quarter of fiscal 2003, the Company granted options for 1,172,000 shares
        of
        common stock with an exercise price of $5.70 per share. The fair value of
        these
        options was estimated at $2.05 per common share on the date of grant, using
        the
        Black-Scholes option pricing model and the following assumptions: expected
        volatility of 62.30%, dividend yield of 0.00%, risk free interest rate of
        2.84%
        and an expected life of the options of six years. All options granted to
        date
        vest over a four year period.
  -7-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        1, continued**
 
 There
        were no options granted during the 2004 fiscal year or during the first quarter
        of 2005.
  For
        a
        summary of all other significant accounting policies, refer to Note 1 to
        the
        consolidated financial statements included with the 2004 Form 10-K.
 ***Revenue
          Recognition***
  Revenue
          from the sale of the Company’s products is recognized upon shipment to the
          customer when ownership and risk of loss has been transferred. Substantially
          all
          of the Company’s revenues are derived from fixed price purchase orders. Costs
          and related expenses to manufacture the products are recorded as costs
          of sales
          when the related revenue is recognized. The Company establishes an allowance
          for
          doubtful accounts based on historical experience and believes that collections
          of revenues, net of the allowance for doubtful accounts, is reasonably
          assured.
 
 The
          Company produces goods for its customers based on a purchase order system,
          and
          in certain instances using longer term contracts that stipulate a fixed
          selling
          price with no commitment as to quantity. In instances where the product’s cost
          exceeds the selling price, an accrual is provided for the expected loss
          on goods
          in inventory and customer purchase orders received by the balance sheet
          date.
          The loss is based on the difference between contracted selling price and
          the
          fully absorbed cost of inventory. The fully absorbed inventory cost includes
          normal fixed and variable, direct and indirect, manufacturing costs including
          material, labor, employee benefit, depreciation, utility and other costs.
          The
          Company has not recorded an estimate of the loss over the term of these
          contracts since the quantity and mix of parts is not known and future production
          costs will be impacted by, among other things, changes in economic conditions
          and management’s actions, including expected cost savings initiatives. The loss
          incurred on products sold under loss contracts was $2.9 million and $1.7
          million
          in the first quarter of 2005 and the first quarter of 2004, respectively.
          The
          reserve for expected loss on goods in inventory and customer purchase orders
          was
          $2.2 million and $1.5 million at April 3, 2005 and January 2, 2005,
          respectively.
 
 When
          the
          Company receives an incentive to enter into an agreement with a customer,
          the
          revenue attributed to the incentive is recognized over the term  of
          the
          agreement or the life of the specific  relationship
          with the customer.
 
 ***Warranties***
  The
          Company provides certain warranties relating to the quality and performance
          of
          its products. The primary product of the Company, friction plates, is used
          in
          manual and automatic transmissions, transfer cases and wet wheel brake
          systems
          for heavy duty equipment. The Company maintains product liability insurance
          that
          covers personal injuries and property damage alleged to have been caused
          by
          defective products. The Company also has insurance to cover the costs of
          product
          recalls arising from its German and Chinese operations. However, the Company
          currently carries only limited insurance for product recall costs in the
          United
          States, and none in the United Kingdom, as management believes such insurance
          to
          be cost prohibitive given the Company’s warranty experience. Warranty claims
          have historically been insignificant due to the quality of the Company’s
          products and the possibility that other parts in the systems or their
          interactions may contribute to any system failure. Based on the historical
          warranty claim experience the Company has not deemed it necessary to accrue
          a
          warranty obligation at the time of sale. However, if a claim is made and
          the
          Company determines that it is probable that the claim is valid and that
          it has
          an obligation, a liability is recorded. If the Company determines that
          it is not
          probable but is reasonably possible that a significant warranty obligation
          has
          been incurred, the nature of the claim and, if estimable, a range of cost
          is
          disclosed.
  -8-
  **RAYTECH
            CORPORATION**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
            in thousands, unless otherwise noted, except per share data)
 (unaudited)
 **Note
          1, continued**
 
 ***Legal
          Expenses***
 
 Legal
          expenses are accrued when incurred.
 
 ***Fiscal
          Year***
 
 The
          Company’s fiscal year is a 52-53-week period ending on the Sunday closest to
          December 31st.
 
 ***Reclassification***
 
 Certain
          2004 amounts have been reclassified to conform to the 2005
          presentation.
 *Recently
        Issued Accounting Pronouncements*
 
 In
        July
        2002, the Public Company Accounting Reform and Investor Protection Act of
        2002
        (the Sarbanes-Oxley Act) was enacted. Section 404 stipulates that public
        companies must take responsibility for maintaining an effective system of
        internal control. The act requires public companies to report on the
        effectiveness of their control over financial reporting and obtain an attest
        report from their independent registered public accountant about management’s
        report. The act requires most public companies (accelerated filers) to report
        on
        the company’s internal control over financial reporting for fiscal years ended
        on or after November 15, 2004. Other public companies (non-accelerated filers)
        must begin to comply with the new requirements related to internal control
        over
        financial reporting for their first fiscal year ending on or after July 15,
        2006
        under the latest extension granted by the Securities and Exchange Commission.
        Raytech is a non-accelerated filer and therefore does not have to comply
        with
        Section 404 of the Sarbanes- Oxley Act until 2006.
 
 In
        November 2004 the Financial Accounting Standards Board (“FASB”) issued Statement
        of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs - an
        amendment of ARB No. 43, Chapter 4”. This statement clarifies the accounting for
        abnormal amounts of idle facility expense, freight handling costs and wasted
        material (spoilage). This statement requires that these types of costs be
        recognized as current period charges. SFAS No. 151 is effective prospectively
        for inventory costs incurred during fiscal years beginning after June 15,
        2005,
        with earlier application permitted for such costs incurred during fiscal
        years
        beginning after November 24, 2004. Management does not expect the adoption
        of
        SFAS No. 151 to have a significant impact on the Company’s consolidated
        financial statements.
 
 In
        December 2004 the FASB issued SFAS No. 123 (revised 2004), “Share Based
        Payment”. This statement replaces SFAS 123, “Accounting for Stock-Based
        Compensation”, and supersedes APB Opinion 25, “Accounting for Stock Issued to
        Employees”. SFAS No. 123 (revised 2004) requires that the cost of share-based
        payment transactions (including those with employees and non-employees) be
        recognized as compensation costs in the financial statements. SFAS No. 123
        (revised 2004) applies to all share-based payment transactions in which an
        entity acquires goods or services by issuing (or offering to issue) its shares,
        share options, or other equity instruments (except for those held by an ESOP)
        or
        by incurring liabilities in amounts based (even in part) on the price of
        the
        entity’s shares or other equity instruments, or that require (or may require)
        settlement by the issuance of an entity’s shares or other equity instruments.
        This statement applies to all new awards granted during the fiscal year
        beginning after June 15, 2005 and to previous awards that are modified or
        cancelled after such date. We have not yet fully evaluated the effect of
        SFAS
        No. 123 (revised 2004) on our financial statements and have not determined
        the
        method of adoption we will use to implement SFAS No. 123 (revised
        2004).
 
  -9-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        1, continued**
 
 In
        December 2004, the FASB issued FASB Staff Position (“FSP”) FAS 109-1,
“Application of FASB Statement No. 109, “Accounting for Income Taxes,” to the
        Tax Deduction on Qualified Production Activities Provided by the American
        Jobs
        Creation Act of 2004 (“AJCA”).” The AJCA introduces a special 9% tax deduction
        on qualified production activities. FSP FAS 109-1 clarifies that this tax
        deduction should be accounted for as a special tax deduction in accordance
        with
        Statement 109. Based upon the Company’s preliminary evaluation of the effects of
        this guidance, we do not believe that it will have any impact on the Company’s
        Consolidated Financial Statements.
 
 In
        December 2004, the FASB issued FSP FAS 109-2, “Accounting and Disclosure
        Guidance for the Foreign Earnings Repatriation Provision within the American
        Jobs Creations Act of  2004.”
        The AJCA introduces a limited time 85% dividends received deduction on the
        repatriation of certain foreign earnings to a U.S. taxpayer (repatriation
        provision), provided certain criteria are met. FSP FAS 109-2 provides accounting
        and disclosure guidance for the repatriation provision. Based upon the Company’s
        preliminary evaluation of the effects of the repatriation provision, we do
        not
        believe that it will have any impact on the Company’s Consolidated Financial
        Statements.
 
 During
        March 2005, the Securities and Exchange Commission issued Staff Accounting
        Bulletin (“SAB”) No. 107, guidance on SFAS No. 123 (revised 2004). SAB No. 107
        was issued to assist preparers by simplifying some of the implementation
        challenges of SFAS No 123 (revised 2004) while enhancing the information
        that
        investors receive. The Company will consider the guidance provided by SAB
        No.
        107 when it implements SFAS No. 123 (revised 2004) during 2006.
 
 **Note
        2- Liquidity**
 
 Cash
        used
        by operating activities for the quarter ended April 3, 2005 was $1.9 million
        compared to $1.4 million during the same period last year. The principal
        operating use of cash in the first quarter of 2005 was an increase in trade
        accounts receivable and inventories. The increase in trade accounts receivable
        during the first quarter is a seasonal fluctuation and is consistent with
        the
        prior year period. The increase in inventories is principally the result
        of a
        build up in inventory to facilitate the closure of our Sterling Heights,
        Michigan manufacturing facility.
 
 Capital
        expenditures during the first quarter of 2005 were $2.5 million compared
        to $.8
        million during the first quarter of 2004. During 2004, we began a third
        expansion of our operations in China. When completed, the new facility in
        China
        will increase our capacity, positioning us to take advantage of the growing
        market in China and increase our exports from China. The expected cost of
        the
        expansion project in China is $1.9 million, with $.9 million expended during
        2004 and the remainder to be spent during 2005.
 Restricted
          cash was reduced by $.5 million due to the expiration of a letter of credit
          related to a supplier account that was no longer required by the
          supplier.
 Cash
        and
        cash available under existing lines of credit at April 3, 2005 totaled $19.0
        million compared to $19.7 million at January 2, 2005, a decrease of $.7
        million.
 -10-
  **RAYTECH
          CORPORATION**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
          in thousands, unless otherwise noted, except per share data)
 (unaudited)
  **Note
          2, continued**
 The
        total
        borrowings at April 3, 2005 of $36.2 million compares to total borrowings
        of
        $26.7 million **** at
        year-end 2004, an increase of $9.5 million. The increase in total borrowings
        was
        principally the result of the issuance of a $7.2 million note related to
        the
        purchase of the shares of APC owned by Raymark Corporation (which, with its
        subsidiary Raymark Industries, Inc., is collectively referred to in this
        report
        as “Raymark”). See Note 13 for further discussion of the APC acquisition. The
        available lines of credit at April 3, 2005 of $6.9 million compares to $6.1
        million at year-end 2004, an increase in availability of $.8 million. Full
        details of the Company’s debt are contained in Note 6 - Debt to the Condensed
        Consolidated Financial Statements.
 
 During
        the first quarter of 2005, the Company amended its domestic debt agreements.
        The
        primary purpose of the amendments was the modification of the debt covenant
        calculations to provide the Company greater flexibility to manage its cash
        resources and certain one-time costs that will be incurred during 2005 related
        to the plant closures announced during 2004. Additionally, the amendment
        to the
        Domestic OEM loan and security agreement provides for a remedy of future
        non-compliance with the quarterly debt covenants, by an irrevocable cash
        contribution by the parent. In April 2005, the parent made an irrevocable
        cash
        contribution of $1.0 million to RPC, a borrower, to remedy the debt covenant
        non-compliance occurring at the end of the first quarter of 2005. The parent
        may
        be required to make additional cash contributions in the future in the event
        of
        any further non-compliance of the borrowers.
 
 Refer
        to
        Notes 8 - Debt and 15 - Commitments to the consolidated financial statements,
        included within the Company’s 2004 Form 10-K, for information regarding the
        Company’s obligations and commitments by year. These obligations and commitments
        consist of long-term debt, capital leases and rental agreements.
 
 The
        Company’s potential obligations regarding environmental remediation are
        explained in Note 7 - Litigation to the Condensed Consolidated Financial
        Statements.
 
 Certain
        tax issues are discussed in Note 9 - Income Taxes to the Condensed Consolidated
        Financial Statements, which provides additional information concerning the
        status of the current Internal Revenue Service audit and the use of certain
        future tax benefits.
 
 The
        most
        significant factor affecting the Company’s future cash flows is its ability to
        earn and collect cash from customers. The automotive parts industry is extremely
        competitive. The Company’s customers are often able to demand price reductions
        from the suppliers including all segments of Raytech. Some of the Company’s
        sales are made under standard sales contracts that include price commitments
        for
        multiple years. Specifically in the Domestic OEM segment, the Company is
        selling
        certain products to certain customers at a loss under the terms of its current
        sales contracts. The Company is currently working with certain customers
        to
        re-negotiate the terms of these loss contracts. In addition, the Company
        is
        reviewing alternatives to improve its cost structure. Additionally, the Company,
        specifically in the Domestic OEM segment, has very large customers, some
        representing more than ten percent of consolidated sales. From time to time,
        the
        Company loses business from existing customers, including its largest customers,
        due to pricing, technological or other competitive pressures. The Company
        also
        from time to time gains new business and renewals of existing business from
        existing or new customers through its continuing cost reduction, sales and
        development efforts. The cumulative effect of these changes, or the loss
        of one
        of its largest customers, could have a material adverse effect on the
        consolidated financial results of the Company.
 
 Items
        that will potentially require the use of cash during the remainder of fiscal
        2005 other than normal operating expenses include the following.
 -11-
  **RAYTECH
          CORPORATION**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
          in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
          2, continued**
 •
              The
                  Company has recorded an accrued liability of $5.9 million for certain
                  environmental matters more fully discussed in Note 7 - Litigation
                  to the
                  Condensed Consolidated Financial Statements. Management expects
                  that $.5
                  million will be spent during 2005 and the balance during
                  2006.
  •
              The
                  Company assumed the liability for the Raymark pension plans as
                  part of the
                  Chapter 11 reorganization. The plans, which are discussed as part
                  of Note
                  9 - Employee Benefits to the consolidated financial statements,
                  included
                  within the Company’s 2004 Form 10-K, are underfunded and the Company,
                  through an agreement with the Internal Revenue Service, is providing
                  both
                  current contributions and catch-up contributions. The expected
                  funding for
                  the plans in 2005 will be approximately $1.3 million, $.6 million
                  of which
                  was funded during the first quarter of
                  2005.
 
 •
              The
                  Company has conducted a facilities utilization review and has determined
                  that improved performance can be obtained through the closure of
                  certain
                  facilities and moving certain production to other facilities operated
                  by
                  the Company. The Company estimates that the total cash outflows
                  related to
                  these closures will be approximately $5.5 million, of which we
                  expect to
                  expend $4.6 million during 2005 and the remaining balance will
                  be spent
                  during 2006 and 2007. The expenses related to these closures are
                  more
                  fully explained in Note 12 - Restructuring Programs to the Condensed
                  Consolidated Financial Statements.
 
 •
              During
                  2004, we reached terms with certain major customers on revised
                  sales
                  contract provisions that will enable us to close our manufacturing
                  plant
                  in Sterling Heights, Michigan. The new sales contract provisions
                  require
                  the Company, in certain instances, to build up inventory levels
                  to
                  facilitate the transition to a new vendor or to another manufacturing
                  location within the Company. As a result, we expect our inventory
                  levels
                  to increase through September 2005 by as much as $4.0 million.
                  During the
                  fourth quarter of 2005, we expect this trend will reverse and inventory
                  levels will begin to decrease. We currently expect that the amount
                  of
                  inventory related to the build up will be less than $2.0 million
                  at year
                  end 2005.
 
 •
              The
                  Company incurred costs associated with the retirement of its President
                  and
                  Chief Executive Officer during the second quarter and the restructuring
                  of
                  its domestic management team during the third quarter of 2004.
                  The total
                  cost associated with these items is approximately $1.4 million,
                  of which
                  $.8 million was paid during 2004, $.4 million was paid during the
                  first
                  quarter of 2005 and the balance to be paid prior to the end of
                  2005.
 
 •
              Certain
                  tax issues are discussed in Note 9 - Income Taxes to the Condensed
                  Consolidated Financial Statements, which provides detail concerning
                  the
                  status of the current Internal Revenue Service audit and the use
                  of
                  certain future tax benefits.
 
 Management
        believes that existing cash balances, the Company’s lending facilities and cash
        flow from operations during 2005 will be sufficient to meet all of the Company’s
        obligations arising in the normal course of business, including anticipated
        capital investments. However, the ability of the Company to utilize its lending
        facilities is dependent on the Company’s ability to meet its financial forecasts
        for 2005, which is not assured, and to meet the financial covenants contained
        in
        its credit facilities. These forecasts include modest revenue growth in all
        three operating segments as well as certain cost-saving initiatives, partially
        offset by certain cost increases and inflation assumptions. If the Company
        does
        not comply with the financial covenants, an event of default would occur
        and
        could result in the acceleration of the Company’s indebtedness under its
        domestic credit facilities. If that were to occur, the ability of the Company
        to
        continue would be dependent upon, among other things, its ability to amend
        the
        credit facilities, enact certain actions to generate cash and/or to seek
        additional alternative financing from other lenders.
  -12-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        3 - Restricted Cash**
 
 Restricted
        cash relates to the following:
  April
                      3,2005
                
                January
                      2,2005Payable
                    to the PI Trust
                
                $
                3,210
                
                $
                3,199Letters
                    of credit
                
                
                1,445
                
                
                1,939Other
                
                
                409
                
                
                410$
                5,064
                
                $
                5,548
 
 The
        payable to the PI Trust consists of tax refunds and other funds received
        by the
        Company that will be paid to the PI Trust at a future date.
 
 The
        letters of credit collateralize certain obligations relating primarily to
        workers’ compensation and certain supplier accounts.
 
 **Note
        4 - Inventories**
 
 Inventories,
        net, consist of the following:
  April
                    3,2005
                
                January
                    2,2005Raw
                    material
                
                $
                12,645
                
                $
                12,464Work
                    in process
                
                
                12,831
                
                
                11,020Finished
                    goods
                
                
                16,544
                
                
                16,098$
                42,020
                
                $
                39,582
 
 Inventory
        reserves were $5,718 and $4,729 at April 3, 2005 and January 2, 2005,
        respectively.
  -13-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        5 - Goodwill and Other Intangible Assets**
  April
                    3, 2005
                
                January
                    2, 2005GrossCarryingAmount
                
                AccumulatedAmortization
                
                GrossCarryingAmount
                
                AccumulatedAmortizationFinite
                    life intangibleassets:Unpatented
                    technology
                
                $
                14,388
                
                $
                7,381
                
                $
                14,360
                
                $
                6,972Distribution
                    base
                
                
                5,741
                
                
                1,145
                
                
                5,716
                
                
                1,073Total
                
                $
                20,129
                
                $
                8,526
                
                $
                20,076
                
                $
                8,045Indefinite
                    life intangibleassets:Trademarks
                
                $
                10,804
                
                
                
                
                $
                10,700Goodwill
                
                $
                5,912
                
                
                
                
                $
                5,912Intangible
                    assets, net
                
                $
                28,319
                
                
                
                
                $
                28,643
 
 The
        weighted-average amortization periods for the unpatented technology and the
        distribution base are between 6 and 20 years. Amortization expense for the
        13
        weeks ended April 3, 2005 and March 28, 2004 amounted to $481 and $480,
        respectively.
 
 Estimated
        annual amortization expense is as follows:
 
 For
                  the year ending:2005
              $
                  1,9222006
              1,9222007
              1,6222008
              1,5222009
              1,522
 
 Trademarks
        and goodwill are not being amortized but are reviewed for impairment annually
        or
        more frequently when events or circumstances indicate that the carrying amount
        may be impaired. The Company’s three operating segments have been defined as
        reporting units for purposes of testing goodwill for impairment. Goodwill
        has
        been assigned to each of the Company’s segments.
 
 On
        March
        21, 2005, the Company, through its majority owned subsidiary, APC, purchased
        shares of APC owned by Raymark. This acquisition was accounted for using
        the
        purchase method of accounting in accordance with SFAS No. 141, “Business
        Combinations”. The cost of the acquisition was allocated to the assets acquired
        and liabilities assumed based on estimates of their respective fair values
        at
        the time of the acquisition. Fair values were determined by internal analysis
        and independent third party appraisals. The preliminary allocation of the
        purchase price resulted in the recognition of intangible assets of $157,
        consisting of unpatented technology $28, distribution base $25 and trademarks
        $104.
  -14-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        6 - Debt**
 
 Debt
        at
        April 3, 2005 and January 2, 2005 consists of the following:
  April
                    3, 2005
                
                January
                    2, 2005Current
                
                Non-Current
                
                Total
                
                Current
                
                Non-Current
                
                TotalDomestic
                    bank debtLine
                    of credit
                
                $
                14,052
                
                $
                —
                
                $
                14,052
                
                $
                10,762
                
                $
                —
                
                $
                10,762Term
                    loansDomestic
                    OEM
                
                
                1,055
                
                
                2,726
                
                
                3,781
                
                
                1,055
                
                
                3,078
                
                
                4,133Aftermarket
                
                
                996
                
                
                4,587
                
                
                5,583
                
                
                996
                
                
                4,837
                
                
                5,833Total
                    domestic bank debt
                
                
                16,103
                
                
                7,313
                
                
                23,416
                
                
                12,813
                
                
                7,915
                
                
                20,728Foreign
                    bank debtLine
                    of credit
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Term
                    loansEurope
                
                
                1,009
                
                
                3,011
                
                
                4,020
                
                
                1,056
                
                
                3,406
                
                
                4,463Asia
                
                
                1,300
                
                
                —
                
                
                1,300
                
                
                1,300
                
                
                —
                
                
                1,300Total
                    foreign bank debt
                
                
                2,309
                
                
                3,011
                
                
                5,320
                
                
                2,356
                
                
                3,406
                
                
                5,763Total
                    bank debt
                
                
                18,412
                
                
                10,324
                
                
                28,736
                
                
                15,169
                
                
                11,321
                
                
                26,490Note
                    payable - Aftermarket
                
                
                —
                
                
                7,200
                
                
                7,200
                
                
                —
                
                
                —
                
                
                —Leases
                
                
                126
                
                
                177
                
                
                303
                
                
                111
                
                
                95
                
                
                206Total
                    debt
                
                $
                18,538
                
                $
                17,701
                
                $
                36,239
                
                $
                15,280
                
                $
                11,416
                
                $
                26,696
 
 The
        carrying value of the Company’s debt approximates fair value.
  -15-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        6, continued**
 
 The
        Company, through its Domestic OEM segment subsidiaries, Raybestos Products
        Company (“RPC”), and Raybestos Automotive Components Company (“RACC”), maintains
        a Loan and Security Agreement, which provides for RPC and RACC to borrow
        up to
        $25.3 million in the aggregate. The agreement, as amended in November 2003,
        consists of a $20 million revolving line of credit and a term loan of $5.3
        million. The revolving line of credit is limited through a formula which
        provides availability based on qualified accounts receivable and inventory.
        The
        revolving line of credit matures September 28, 2006. The term loan is payable
        in
        34 monthly payments of $88, commencing December 1, 2003 and maturing on
        September 28, 2006, with the final payment being the remainder of the balance.
        The revolving line of credit and the term loan are collateralized by accounts
        receivable and inventory. At April 3, 2005, the amount available under the
        revolving line of credit was $3.0 million. Amounts outstanding under the
        revolving line of credit bear interest at a rate equal to, at the Company’s
        option, the prime rate or the adjusted Eurodollar rate, plus a margin of
        0.50%
        and 2.75%, respectively. Amounts outstanding under the term loan bear interest
        at a rate equal to, at the Company’s option, the prime rate or the adjusted
        Eurodollar rate, plus a margin of 0.75% and 3.00%, respectively. The agreement
        contains financial and other covenants, including a fixed charge coverage
        ratio
        and a material adverse change clause. At April 3, 2005 and January 2, 2005,
        the
        aggregate pledged  assets
        of
        RPC and RACC amounted to $64.6 million and $62.1 million, respectively,
        consisting of cash, accounts receivable, inventory, machinery and equipment
        and
        all other tangible and intangible assets, except real property. The agreement
        permits RPC and RACC to pay dividends to the Company for costs and expenses
        incurred by the Company in the ordinary course of business so long as no
        event
        of default has occurred and is continuing. During the second quarter of 2004,
        the Company entered into a fifth amendment to this agreement. The fifth
        amendment alters the determination of availability under the revolving line
        of
        credit to exclude certain receivables due to a potential right of setoff
        and
        grants the lender a mortgage on the real property owned by RPC, located in
        Sterling Heights, Michigan. The carrying value of the real property in Sterling
        Heights, Michigan was $4.9 million at April 3, 2005. Further, in accordance
        with
        the fifth amendment, the lender may make loans, subject to certain limits,
        under
        the revolving line of credit up to the lesser of the amount of the excluded
        receivables or $1.9 million. During the fourth quarter of 2004, the Company
        entered into a sixth amendment to this agreement. Under the sixth amendment,
        the
        lender waives certain defaults that may arise as a result of an agreement
        between the Company and a certain customer. During the first quarter of 2005,
        the Company entered into a seventh amendment to this agreement. The seventh
        amendment modifies the fixed charge coverage ratio to exclude a one-time
        forgiveness of certain intercompany receivables recorded by RPC during the
        first
        quarter of 2005, related to the closure of the RUK facility, clarifies the
        periods to be included in the calculation of the fixed charge coverage ratio
        in
        the future and provides a remedy for future non-compliance by an irrevocable
        cash contribution by the parent.
 
 The
        Company, through its subsidiaries Raytech Powertrain, Inc. (“RPI”), APC, Raytech
        Systems, Inc. (“RSI”) and Raybestos Powertrain, LLC, is party to a loan
        agreement for $7.0 million with an interest rate at 1.65 basis points over
        the
        adjusted Eurodollar rate with a five-year term. The loan is payable in 59
        monthly payments of $83, commencing on December 1, 2003, with a balloon payment
        of $2.1 million payable on November 3, 2008. The proceeds from this facility
        were used to pay environmental costs and pension costs. The loan is
        collateralized by the assets of the borrowing entities. The agreement contains
        financial and other covenants, including the maintenance of certain financial
        ratios and a material adverse change clause. At April 3, 2005 and January
        2,
        2005, the aggregate pledged assets of APC, RSI, RPI and Raybestos Powertrain,
        LLC were $45.4 million and $44.1 million, respectively.  During
        the first quarter of 2005, the Company entered into the first amendment to
        this
        agreement. The first amendment modifies the calculation of the debt service
        coverage ratio to exclude fifty percent of distributions to the borrower’s
        parent company.
  -16-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        6, continued**
 
 The
        Company’s wholly-owned German subsidiary, Raybestos Industrie-Produkte GmbH
        (“RIP”), has available lines of credit with several German banks. Interest is
        charged at rates between 3.80% and 10.75%. The lines are repayable on demand.
        At
        April 3, 2005 and January 2, 2005, there were no borrowings outstanding under
        these lines of credit.
 
 The
        Company’s wholly-owned German subsidiaries, Raytech Composites Europe GmbH
        (“RCE”) and RIP have various loan agreements where the maturities range from
        September 2006 through December 2012. The loans are payable in equal periodic
        installments (usually quarterly or semi-annually) over the term of the loan.
        The
        loans bear interest at rates ranging from 2.50% through 6.17%. At April 3,
        2005
        and January 2, 2005, respectively, the aggregate pledged assets, consisting
        of
        machinery and equipment, amounted to EUR14.9 million ($19.3 million) and
        EUR14.8
        million ($20.1 million).
  During
          the periods presented, the Company’s wholly-owned Chinese subsidiary Raybestos
          Friction Products (Suzhou) Co. Ltd. (“RFP”) had several loan agreements. The
          loans are short-term and payable at maturity. The balance at April 3, 2005
          and
          January 2, 2005 was $1.3 million. The current loan agreements mature in
          May,
          2005. The Company refinanced this debt upon its maturity. The new loan
          matures
          in April 2006.
 
 On
        March
        21, 2005, the Company, through its majority owned subsidiary, APC, purchased
        shares of APC owned by Raymark and in payment therefor, APC issued a ten
        year
        unsecured subordinated promissory note in the initial principal amount of
        $7.2
        million (the “Note”). The Note is subordinated to APC’s existing and future
        senior indebtedness and will bear interest at an annual rate of 8.00% payable
        quarterly; one-half of which is payable in cash and one-half of which is
        payable, at APC’s option, in either cash or by increasing the outstanding
        principal amount of the Note. Principal payments on the Note are due on each
        annual anniversary of the issue date of the Note, beginning in 2011, at an
        annual rate of 3.00% of the then outstanding principal balance, with a final
        payment in full in 2015. APC may redeem the Note, in whole or in part, at
        any
        time without premium or penalty. In addition to certain financial reporting
        requirements, the Note contains net worth and current ratio covenants as
        well as
        merger and asset sale limitations, which if not met could cause an event
        of
        default permitting the holder of the Note to accelerate the repayment of
        the
        entire principal amount and all accrued interest then outstanding under the
        Note.
 
 The
        weighted average rates on all domestic and foreign debt at April 3, 2005
        and
        January 2, 2005 were 5.87% and 4.85%, respectively.
  -17-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        7 - Litigation**
 
 *Environmental
        Remediation*
 
 Crawfordsville,
        Indiana - Shelly Ditch Contamination Removal
 
 In
        October 1987, RPC, a wholly-owned subsidiary of the Company, purchased a
        major
        manufacturing facility (the “RPC Facility”) in Crawfordsville, Indiana. Sometime
        thereafter, the Company learned that the previous owner of the RPC Facility
        had
        released polychlorinated biphenyls (“PCBs”) to the ground at the RPC Facility in
        the mid-1960s and that such PCBs were leaching from the RPC Facility into
        an
        adjacent ditch (“Shelly Ditch”).
 
 In
        1996,
        the Indiana Department of Environmental Management (the “IDEM”) advised RPC that
        the RPC Facility may have contributed to, and was potentially responsible
        for,
        the release of lead and PCBs found in Shelly Ditch. In the late 1990s, RPC
        and
        the IDEM entered into an agreed order (the “Agreed Order”) for a risk-based
        remediation of PCBs and lead in Shelly Ditch. When the IDEM later sought
        to
        unilaterally withdraw from the Agreed Order, RPC appealed and the Marion
        County
        Superior Court ordered the IDEM to reinstate the Agreed Order. Meanwhile,
        at the
        IDEM’s request, the United States Environmental Protection Agency (the “EPA”)
        became involved in Shelly Ditch.
 
 In
        December 2000, before the Agreed Order was reinstated, the EPA issued a
        Unilateral Administrative Order to RPC under CERCLA (the “EPA Removal Order”)
        demanding removal of contaminated soils from those Shelly Ditch areas identified
        as Reaches 1 through 3 (the “Site”). The EPA Removal Order required more work at
        greater expense than the IDEM Agreed Order. Thereafter, RPC proceeded with
        the
        work required under the EPA Removal Order.
 
 On
        January 9, 2004, the EPA confirmed that RPC had completed the action required
        under the EPA Removal Order, including the removal and proper disposal of
        Site
        soils and sediments contaminated with PCBs and lead. In its confirmation,
        the
        EPA noted that RPC would continue to be subject to certain obligations under
        that order, including record retention and the payment of oversight costs.
        Whether RPC will be required to pay oversight costs relating to the work
        under
        the EPA Removal Order will depend on the outcome of future negotiations with
        the
        EPA and the IDEM regarding potential environmental remediation downstream
        of the
        Site.
  By
        April
        3, 2005, RPC had spent approximately $18.7 million on removal of lead and
        PCB
        contaminated soils from the Site. RPC had accrued $.4 million for potential
        EPA
        oversight costs relating to that work, which is its best estimate of all
        remaining oversight costs. The Company believes that any cost in excess of
        the
        accrued amount related to this matter will not be material.
 Crawfordsville,
          IN - Environmental Remediation Downstream of the Site
  On
          May 6,
          2003, the EPA indicated that RPC is potentially liable for PCB and lead
          contamination downstream of the Site. The EPA has not issued an order to
          RPC
          regarding this downstream area. However, during the third quarter of 2003,
          the
          Company began negotiations with the EPA concerning such possible additional
          remediation. As a result, during the third quarter of 2003, the Company
          recorded
          a $2.4 million accrual relating to this potential liability for investigative
          and future cleanup costs. The Company has an accrual of $2.1 million at
          April 3,
          2005, which is its best estimate of the costs, including oversight costs,
          that
          will be incurred related to this matter. The Company believes that any
          cost in
          excess of the accrued amount related to this matter will not be
          material.
 -18-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        7, continued**
 
 Crawfordsville,
        IN - Environmental Remediation and Expenses  relating
        to the RPC Facility
  On
        May
        15, 2001, the EPA issued a Pre-filing Notice and Opportunity to Confer
        to****RPC
        (the
“Pre-filing Notice”). This notice stated that the EPA might file a civil action
        lawsuit against RPC for violations of various environmental statutes and
        would
        offer RPC the opportunity to participate in pre-filing negotiations to resolve
        this matter. The EPA stated that it had reason to believe that RPC committed
        violations of the Clean Air Act, Clean Water Act, Resource Conservation and
        Recovery Act, and Toxic Substances Control Act and that RPC could be subject
        to
        substantial penalties. On September 3, 2003, the EPA proposed that the parties
        settle the Pre-filing Notice. The EPA stated that penalties for violations
        alleged in the Pre-filing Notice could total approximately $180.0 million
        and
        suggested the following resolution: RPC should pay approximately $2.4 million
        in
        fines and undertake compliance activities, on-site investigative work that
        the
        EPA estimated would cost about $1.0 million, and corrective action to resolve
        the Pre-filing Notice. During 2004, RPC performed on-site investigative work.
        RPC is currently engaged in further investigative work and negotiations with
        the
        EPA regarding potential on-site corrective action and the amount of any penalty.
        The Company has an accrual of $3.4 million as of April 3, 2005, based on
        the EPA
        position, which is its best estimate of the costs related to this matter.
        The
        Company does not have any additional information, beyond what is discussed
        above, that would suggest a range of loss. The Company is currently working
        with
        environmental engineers and the EPA to determine the extent of corrective
        action, if any, required.
 Ferndale,
            MI - Potential Responsibility for Environmental Remediation
 
 In
            a
            January 8, 2002 letter, the Michigan Department of Environmental Quality
            (“MDEQ”) asserted that the Company might have responsibility for
            trichloroethylene contamination at a Ferndale, Michigan industrial site
            that
            Advanced Friction Materials Company (“AFM”) leased from approximately 1974 to
            1985. The Company acquired 47% of the stock of AFM in 1996 and the balance
            of
            the shares in 1998. The Company has not received any communications from
            MDEQ
            since 2002 and has insufficient knowledge to estimate a reasonably possible
            range of loss for the alleged contamination. No liability has been accrued
            as of
            April 3, 2005.
  *Environmental
          Litigation*
 
 Cost
        Recovery Actions against Insurers regarding Shelly Ditch
 
 In
        1996,
        RPC notified its insurers and demanded defense and indemnity regarding any
        environmental issues relating to alleged lead and PCB contamination of Shelly
        Ditch. In January 1997, one insurer filed a complaint in the U.S. District
        Court, Southern District of Indiana, captioned Reliance
        Insurance Company vs. Raybestos
        Products Company (the
“Insurance Case”). The complaint sought a declaratory judgment that the Reliance
        Insurance policies do not provide coverage to RPC for defense and indemnity
        relating to investigation and remediation of contamination in Shelly Ditch.
        In
        January 2000, the District Court rejected Reliance’s claims and granted summary
        judgment to RPC. In June 2001, Reliance Insurance Company was placed in
        liquidation in Pennsylvania. The Company has filed claims in the Reliance
        liquidation for recovery of its Shelly Ditch expenses but has not received
        a
        decision. ****
  -19-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        7, continued**
 
 In
        February 2002, RPC filed a third-party complaint in the Insurance Case against
        three insurance carriers. The third-party complaint seeks defense and indemnity
        from the insurers relating to investigation and remediation of contamination
        in
        Shelly Ditch. Later that year, two of the insurance carriers, USF&G and
        Westchester, filed motions to compel arbitration of the insurance coverage
        issues under these policies. The U.S. District Court denied these motions
        to
        compel and the two insurance companies appealed to the U.S. Court of Appeals
        for
        the Seventh Circuit (“Appeals Court”). On August 27, 2004, the Court of Appeals
        reversed the District Court’s order refusing to compel such arbitration and
        remanded the case to the District Court for entry of an order compelling
        arbitration. On October 15, 2004, the District Court entered its order
        compelling arbitration and RPC promptly submitted the USF&G and Westchester
        insurance issues to arbitration. The arbitration is currently scheduled to
        take
        place during January 2006.
 
 In
        February 2004, the third insurance carrier, National Union and its affiliates,
        commenced an adversary proceeding against the Company, RPC and others by
        filing
        a complaint in U.S. Bankruptcy Court (the “Adversary Proceeding”). In the
        Adversary Proceeding, National Union claims that RPC’s complaint against
        National Union is barred by a 2002 order of the U.S. Bankruptcy Court in
        the
        Raymark Chapter 11 cases that prohibits RPC from pursuing its third-party
        complaint against National Union and declares that the National Union insurance
        policies issued to the Company and RPC have been exhausted. Also in February
        2004, National Union filed a motion in the U.S. District Court, Southern
        District of Indiana, asking that court to stay the Insurance Case against
        National Union. On September 10, 2004, the U.S. District Court granted National
        Union’s motion for stay. The outcome of this Adversary Proceeding and related
        stay and their effects, if any, on the Insurance Case against National Union
        cannot be predicted.
  RPC
        believes that a recovery from its insurance carriers of a substantial portion
        of
        the environmental costs described above is reasonably possible. However,
        due to
        the uncertainty and complexity of the legal issues involved in the litigation
        against the carriers, RPC has not recorded any recovery and the liabilities
        have
        been recorded on a gross basis.
  RPC
        Claims against IDEM
 
 In
        July
        2002, RPC filed an action against the IDEM for breach of contract claiming
        damages based on the difference between the costs of cleanup under the EPA
        Removal Order and the IDEM Agreed Order. The outcome of this litigation cannot
        be predicted.
 
 *Commercial
        Litigation*
 
 On
        April
        22, 2003, Automation by Design, Inc. (“ABD”) filed a civil action against RPC in
        U.S. District Court for the Southern District of Indiana. The complaint alleged
        copyright infringement and breach of contract in connection with RPC’s purchase
        of certain equipment. RPC denied liability and filed counterclaims for breach
        of
        contract and declaratory judgment. The court granted ABD’s motion to amend its
        complaint to include as defendants Raytech Corporation and Production Design
        Services, Inc., which manufactured certain equipment allegedly involved in
        this
        court action and which RPC agreed to defend and indemnify against certain
        liabilities. On December 8, 2004, the District Court granted RPC’s motion for
        summary judgment, ruling that ABD’s claims fail as a matter of law. In January
        2005, RPC filed a petition for reimbursement of its legal fees and costs
        incurred in defending the action. ABD has filed an appeal of the summary
        judgment ruling. The Company does not believe that the outcome of this
        litigation will have a material adverse effect on its consolidated results
        of
        operations, financial condition or cash flows.
  -20-
 
 **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
  Note
        7, continued
 The
        Company is subject to certain other legal matters that have arisen **** in
        the
        ordinary course of business, and management does not expect them to have
        a
        significant adverse effect on the results of the Company’s consolidated
        operations, financial condition or cash flow.
  **Note
        8 - Segment Reporting**
 
 The
        Company’s operations are categorized into three operating segments and a
        corporate group based on management structure, product type and distribution
        channel, as described below.
 
 Domestic
        OEM
 
 The
        Domestic OEM segment manufactures and distributes automatic transmission
        and wet
        wheel brake system components. The Company markets its products to automobile,
        heavy duty truck, farm machinery, mining, and bus original equipment
        manufacturers (“OEMs”) in North America.
 
 International
 
 The
        International segment manufactures and distributes automatic transmission,
        manual transmission and wet wheel brake system components. The Company markets
        its products to automobile, heavy duty truck, farm machinery, mining, and
        bus
        OEMs. The International segment markets its dry friction products worldwide
        and
        its wet friction products throughout Europe and Asia.
 
 Aftermarket
 
 The
        Aftermarket segment produces specialty engineered products primarily for
        automobile and light truck automatic transmissions. In addition to these
        products, this segment markets transmission filters and other transmission
        related components. The focus of this segment is marketing to warehouse
        distributors and certain retail operations in the automotive aftermarket.
 
 Corporate
 
 The
        Corporate group consists principally of corporate expenses, including costs
        to
        maintain the corporate headquarters, certain environmental costs, and certain
        assets, liabilities and related income and expense stemming from the
        reorganization plan implemented when the Company emerged from bankruptcy
        in
        2001. The Company has chosen not to distribute these costs to the operating
        segments to preserve the historical comparability at the operating segment
        level.
  -21-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        8, continued** ****
 
 Information
        relating to operations by industry segment follows:
  **For
                    the thirteen weeks ended****April
                    3,2005**
                
                **March
                    28,2004**Net
                    SalesDomestic
                    OEM
                
                $
                34,193
                
                $
                31,402International
                
                
                19,964
                
                
                16,653Aftermarket
                
                
                14,034
                
                
                12,386Intersegment
                    elimination (1)
                
                
                (4,839
                )
                
                (3,843
                )Net
                    sales to external customers
                
                $
                63,352
                
                $
                56,598Gross
                    ProfitDomestic
                    OEM
                
                $
                2,649
                
                $
                3,896International
                
                
                6,217
                
                
                4,789Aftermarket
                
                
                3,941
                
                
                3,685Corporate
                    and intersegment elimination
                
                
                (811
                )
                
                (1,311
                )Consolidated
                
                $
                11,996
                
                $
                11,059Operating
                    ProfitDomestic
                    OEM
                
                $
                (597
                )
                $
                1,153International
                
                
                2,570
                
                
                2,098Aftermarket
                
                
                2,140
                
                
                2,150Corporate
                
                
                (2,122
                )
                
                (2,952
                )Consolidated
                
                $
                1,991
                
                $
                2,449
 
 (1)
              The
                Company records intersegment sales at an amount negotiated between
                the
                segments. All intersegment sales are eliminated in consolidation.
                Substantially all intersegment sales are sales of wet friction products
                to
                the Aftermarket segment.
  -22-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        9 - Income Taxes**
 
 The
        tax
        provision for the thirteen-week period ended April 3, 2005 is $1.2 million
        compared to a provision of $.8 million for the same period in the prior year.
        The provision for the current period includes federal taxes resulting from
        profit generated by APC, foreign taxes associated with operations in Germany
        and
        China and state taxes generated by domestic operations. The Company did not
        recognize any tax benefits associated with the losses generated by the U.S.
        domestic operations or its United Kingdom operations, due to doubts concerning
        their future recoverability, in the thirteen week period ended April 3,
        2005.
  Pursuant
        to the Tax Benefits Assignment and Assumption Agreement (the "Agreement"),
        all
        tax benefits received by the Company due to the reorganization are to be
        passed
        onto the PI Trust as received. At April 3, 2005, the Company has tax loss
        carryforwards of $107.0 million and tax credit carryforwards of $2.5 million.
        The net operating loss carryforwards are allocated between the Company and
        the
        PI Trust in the amounts of $25.0 million and $82.0 million, respectively.
        The
        tax credit carryforwards all inure to the benefit of the PI Trust. Additionally,
        future payments to the PI Trust and others will create additional tax
        deductions, which will inure to the benefit of the PI Trust in accordance
        with
        the Agreement. These include deductions for payments to the PI Trust of tax
        benefits associated with the utilization of the operating losses allocated
        to
        the PI Trust, and contributions made to the Raymark pension plans. Losses
        generated by the Company subsequent to the emergence from bankruptcy, exclusive
        of losses attributed to the payments discussed above, will be retained by
        the
        Company. The method of allocation in utilizing current and future operating
        losses between the PI Trust and the Company has not been formally determined
        at
        this time. However, the Company has allocated the net operating losses between
        the PI Trust and the Company based on year of origin.Although
        the timing cannot be determined with certainty, it is reasonably expected
        that
        the method of allocation for using current and future operating losses will
        be
        formalized in the next twelve months. Further, it is expected that the
        formalized agreement with the PI Trust will reflect the utilization of the
        net
        operating loss based on a pro rata allocation using the year of origin in
        which
        the net operating loss was created, which is the method utilized currently
        by
        the Company in accounting for these transactions. Based on the foregoing,
        it is
        not expected that future results will vary from the current accounting.Additional
        tax recoveries, expected to be received in future periods, are recorded as
        deferred tax assets, net of valuation allowances, and a deferred payable
        to the
        PI Trust, which amounted to $3.6 million and $4.6 million at April 3, 2005
        and
        January 2, 2005, respectively.
 
 The
        $1.0
        million decrease in the deferred payable to the PI Trust is due to the
        acquisition of the shares of APC owned by Raymark on March 21, 2005 as discussed
        in Note 13, and the resultant inclusion of APC in the group’s consolidated U.S.
        tax return. As part of the purchase accounting, the Company reassessed the
        realizability of APC’s deferred tax assets using the “more likely than not”
        criteria specified by SFAS No. 109, “Accounting for Income Taxes”, and
        determined that a full valuation allowance should be provided against them.
        As a
        result of this change in the deferred tax accounts, the Company has updated
        it
        deferred tax scheduling analysis and determined that the deferred payable
        to the
        PI Trust should be reduced by $1.0 million. The benefit of the reduction
        in the
        deferred payable to the PI Trust has been recorded as other income in the
        Condensed Consolidated Statement of Operations. Future changes in the
        composition and reversal patterns of the Company’s deferred tax assets and
        liabilities may impact the deferred tax asset that inures to the benefit
        of the
        PI Trust and the related deferred payable. The impact on the deferred payable
        to
        the PI Trust could cause a corresponding impact on pre-tax income.
 
 At
        April
        3, 2005, the Company has recorded a tax receivable in the amount of $1,333,
        of
        which $1,290 is due from the Federal government and $43 is due from state
        governments. The state refunds inure to the benefit of the PI Trust.
  -23-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        9, continued**
 
 The
        Company is under an IRS audit for 1996 through 2001. Any tax assessment,
        up to
        the amount of the refunds received, arising from this audit or any other
        years
        in the carryback period, are, pursuant to the Agreement, the responsibility
        of
        the PI Trust and will therefore impact the deferred tax asset attributable
        to
        the PI Trust. Any change in the deferred tax asset attributable to the PI
        Trust
        will also impact the valuation allowance and the related deferred payable
        to the
        PI Trust. Pursuant to a settlement meeting held in April 2004, the Company
        and
        the IRS have reached a tentative settlement of the IRS audit. The settlement,
        which was signed on January 4, 2005, if approved by the IRS District Director
        and the Joint Committee on Internal Revenue Taxation, would result in no
        payment
        of Federal tax given the Company’s net operating losses. However, interest on
        the tax assessment would be payable. Should the tax settlement be approved
        in
        its current form, the Company would record a tax benefit of approximately
        $1.5
        million.
 
 **Note
        10 - Earnings Per Share**
 
 **For
                  the thirteen weeks ended****April
                  3,**
              
              **March
                  28,****2005**
              
              **2004**Net
                  income
              
              $
              1,620
              
              $
              1,351Weighted
                  average shares
              
              
              41,737,306
              
              
              41,737,306Basic
                  and diluted earnings per share
              
              $
              .04
              
              $
              .03
 
 Options
        to purchase 1,675,164 and 3,035,659 shares of common stock were not included
        in
        the computation of diluted earnings per share for the thirteen weeks ended
        April
        3, 2005 and the thirteen weeks ended March 28, 2004, respectively, due to
        their
        anti-dilutive effect due either to their exercise price compared to the market
        price or the Company incurring a loss for the period.
 
 **Note
        11 - Pension and Post Retirement Benefit Plans**
  Components
                    of Net Periodic Benefit CostPension
                    Benefits
                
                Post
                    Retirement BenefitsFor
                    the thirteen weeks endedApril
                      3,2005
                
                March
                      28,2004
                
                April
                      3,2005
                
                March
                      28,2004Service
                    Cost
                
                $
                130
                
                $
                146
                
                $
                252
                
                $
                197Interest
                    Cost
                
                
                619
                
                
                698
                
                
                365
                
                
                290Expected
                    return on plan assets
                
                
                (698
                )
                
                (636
                )
                
                —
                
                
                —Amortization
                    of prior service cost
                
                
                15
                
                
                15
                
                
                —
                
                
                —Amortization
                    of net (gain) loss
                
                
                113
                
                
                128
                
                
                110
                
                
                41Net
                    periodic benefit cost
                
                $
                179
                
                $
                351
                
                $
                727
                
                $
                528
 
 On
        December 8, 2003, President Bush signed the Medicare Prescription Drug,
        Improvement and Modernization Act of 2003. The act introduces a federal subsidy
        to sponsors of retiree health care benefit plans that provide a benefit that
        is
        at least actuarially equivalent to Medicare Part D. The current measurements
        of
        accumulated postretirement benefit obligations and net periodic benefit costs
        do
        not reflect any amount associated with the subsidy as the Company believes
        that
        the benefits provided by the plan are not actuarially equivalent to the Medicare
        Part D Standard Plan.
  -24-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        11, continued**
 
 The
        Company previously disclosed in its financial statements for the year ended
        January 2, 2005, that it expected to contribute $2.2 million to its pension
        plans and $.9 million to fund its post retirement plan in 2005. As of April
        3,
        2005, $.7 million of contributions have been made. The Company presently
        anticipates contributing an additional $2.4 million to fund its pension and
        post
        retirement plans in 2005.
 
 In
        connection with the Company’s Chapter 11 proceedings, the Pension Benefit
        Guaranty Corporation (“PBGC”) filed certain motions claiming that the Company
        was responsible for the funding and sponsorship of two Raymark Corporation
        pension plans. The court ordered that the Company was liable for the maintenance
        and funding of the underfunded pension plan obligations of Raymark Corporation.
        The Company, based on the court’s order, assumed the role of plan sponsor of the
        Raymark Plans upon emergence from bankruptcy. The Company obtained a deferral
        of
        its funding obligations for 2000. Since obtaining the deferral, the Company
        has
        made funding payments to the Raymark Plans as required. As of April 3, 2005,
        the
        outstanding balance of the deferred amounts was approximately $1.2 million.
        During 2004, the Company executed a mortgage of its real property located
        in
        Crawfordsville, Indiana to the PBGC, guaranteeing its remaining deferred
        funding
        obligations of the Raymark Plans. At April 3, 2005 the carrying value of
        the
        real property mortgaged was $4.8 million.
 
 **Note
        12 - Restructuring Programs**
 
 During
        2004, the Company conducted a facilities utilization review and made the
        decision to close its manufacturing operations in Sterling Heights, Michigan
        and
        Liverpool, England. The closure of these facilities is expected to be completed
        during 2005. Additionally, during 2004, the Company began the process of
        relocating its corporate functions from Shelton, Connecticut to its existing
        manufacturing and development facilities located in Crawfordsville, Indiana.
        The
        closure of the Shelton corporate offices is expected to be completed during
        2005.
 
 The
        table
        below sets forth the Company’s estimate of the total cost of the restructuring
        programs, the portion recognized through April 3, 2005 and the portion expected
        to be recognized in a future period:
  ******Expected**Total****
                  **Cost**
                
                ******Recognized**Through**April
                    3, 2005**
                
                ****To
                    Be**Recognized****in
                    the Future**Severance
                    and termination benefits
                
                $
                4,009
                
                $
                3,474
                
                $
                535Lease
                    termination costs
                
                
                558
                
                
                —
                
                
                558Asset
                    impairment
                
                
                1,560
                
                
                1,560
                
                
                —Other
                
                
                1,632
                
                
                633
                
                
                999$
                7,759
                
                $
                5,667
                
                $
                2,092
 
  -25-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        12, continued**
 
 The
        employee severance and termination benefits relate to the elimination of
        approximately 300 employees, most of which are engaged in manufacturing
        activities at the Sterling Heights, Michigan and Liverpool, England facilities.
        The portion of the severance and termination benefits cost expected to be
        incurred, but not recognized through April 3, 2005, relates principally to
        one-time retention or vesting benefits that will be earned and recognized
        over
        the future service period of the employees. The Company anticipates that
        the
        remaining expense will be recognized prior to the end of fiscal 2005 and
        that
        these amounts will be paid during 2005 and 2006.
 
 The
        lease
        termination costs relate to the Liverpool, England facilities. The estimated
        cost is based on the Company’s ongoing discussions with the landlord and does
        not include the full minimum lease commitment based on the original term
        of the
        lease. The Company expects that these costs will be recognized and paid in
        a
        future period during 2005, when the facilities are vacated. These estimates
        do
        not include any costs associated with terminating the Shelton, Connecticut
        lease, which are not anticipated to be material.
 
 The
        asset
        impairment charge relates to equipment located at the Liverpool, England
        facilities, determined to be impaired as a result of the decision to close
        those
        facilities. The equipment at the Sterling Heights, Michigan facility was
        deemed
        to be impaired and written down to liquidation value in 2003, due to the
        lack of
        profitability at that facility.
 
 The
        other
        restructuring costs relate principally to accelerated depreciation of $.6
        million associated with the shortening of the useful lives of certain equipment
        as a result of the decision to close the facilities and other costs associated
        with exiting the facilities.
 
 All
        of
        the restructuring costs except the asset impairment and accelerated depreciation
        will result in cash outflows.
 
 The
        table
        below sets forth the activity with respect to the restructuring during the
        thirteen weeks ended April 3, 2005:
  **Severance**and
                  **Termination**Benefits
                
                **Asset**Impairment
                
                **Other**
                
                **Total**Balance
                    January 2, 2005
                
                $
                3,104
                
                $
                —
                
                $
                275
                
                $
                3,379Charges
                
                
                387
                
                
                —
                
                
                185
                
                
                572Non-cash
                    charges
                
                
                —
                
                
                —
                
                
                (185
                )
                
                (185
                )Cash
                    payments
                
                
                (462
                )
                
                —
                
                
                —
                
                
                (462
                )Currency
                    translation
                
                
                (5
                )
                
                —
                
                
                (5
                )
                
                (10
                )Balance
                  April 3, 2005
                
                $
                3,024
                
                $
                —
                
                $
                270
                
                $
                3,294
 
 The
        charges recognized in the quarter ended April 3, 2005 have been reported
        as
        restructuring expenses in the Condensed Consolidated Statement of Operations,
        except $185 representing accelerated depreciation costs that have been reported
        as a component of cost of sales.
  -26-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        13 - Acquisition of APC Minority Shares owned by Raymark**
 
 On
        March
        21, 2005, the Company, through its majority owned subsidiary, APC, purchased
        shares of APC owned by Raymark. The transaction increased the Company’s indirect
        ownership of APC from approximately 57% of its outstanding common stock to
        approximately 96% of its outstanding common stock.
 
 APC
        purchased 41,904 shares of APC common stock that were owned by Raymark, and
        in
        payment therefor, APC issued a ten year unsecured subordinated promissory
        note
        in the initial principal amount of $7.2 million (the “Note”).
 
 The
        Note
        is subordinated to APC’s existing and future senior indebtedness and will bear
        interest at an annual rate of 8% payable quarterly; one-half of which is
        payable
        in cash and one-half of which is payable, at APC’s option, in either cash or by
        increasing the outstanding principal amount of the Note. Principal payments
        on
        the Note are due on each annual anniversary of the issue date of the Note,
        beginning in 2011, at an annual rate of 3% of the then outstanding principal
        balance, with a final payment in full in 2015. APC may redeem the Note, in
        whole
        or in part, at any time without premium or penalty. In addition to certain
        financial reporting requirements, the Note contains net worth and current
        ratio
        covenants as well as merger and asset sale limitations, which if not met
        could
        cause an event of default permitting the holder of the Note to accelerate
        the
        repayment of the entire principal amount and all accrued interest then
        outstanding under the Note .
 
 This
        acquisition was accounted for using the purchase method of accounting in
        accordance with SFAS No. 141, “Business Combinations”. The cost of the
        acquisition was allocated to the assets acquired and liabilities assumed
        based
        on estimates of their respective fair values at the time of the acquisition.
        Fair values were determined by internal analysis and independent third party
        appraisals. The table below provides information regarding the preliminary
        purchase price allocation to the assets and liabilities at the date of
        acquisition.
 Cash
                  and cash equivalents
              
              $
              1,452Trade
                  accounts receivable
              
              
              1,403Inventories
              
              
              3,743Property,
                  plant and equipment
              
              
              196Intangible
                  assets
              
              
              157Other
                  assets
              
              
              1,989Total
                  assets
              
              $
              8,940Notes
                  payable and current portion of long term debt
              
              
              (10
              )Accounts
                  payable and accrued liabilities
              
              
              (1,144
              )Long-term
                  debt
              
              
              (22
              )Other
                  liabilities
              
              
              (564
              )Total
                  liabilities
              
              $
              (1,740
              )Purchase
                  price
              
              $
              7,200
 
 The
        Company expects to finalize the allocation of the purchase price before the
        end
        of the current fiscal year after final third party appraisals are
        received.
  -27-
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        14 - Contingencies**
  The
          Company has been notified of a claim asserted by a customer that product
          sold by
          the Company allegedly failed as a result of manufacturing defects. The
          customer
          has estimated that the potential costs to remedy the defect are approximately
          $1.3 million. Based on the Company’s evaluation of the claim to date, we have concluded
          that it
          is not
          probable that we
          have a
          liability. The Company intends to defend itself against this claim; however,
          the
          ultimate resolution of this claim cannot be predicted and it is reasonably
          possible that this matter could ultimately be decided, resolved or settled
          in
          favor of the customer for an amount up to the estimated amount provided
          by the
          customer. The Company has not recorded a provision for this claim at this
          time,
          pending further investigation of the claim. Further, if it is determined
          that
          this is a valid claim, the Company will pursue all available insurance
          coverage
          that may exist related to the manufacture and sale of this
          product.
  -28-
  **Item
        2. Management’s Discussion and Analysis of Financial Condition and Results of
        Operations**
 
 In
        preparing the discussion and analysis required by the federal securities
        laws,
        it is assumed that users of the interim financial information have read or
        have
        access to the discussion and analysis for the preceding fiscal year included
        in
        the Company’s Form 10-K for the year ended January 2, 2005.
 
 Caution
        Regarding Forward Looking Statements
 
 Statements
        in this “Management’s Discussion and Analysis” relating to management’s views of
        trends, the effects of changing prices, plans, objectives and other matters
        for
        future operating periods are “forward-looking statements” as defined in the
        Private Securities Litigation Reform Act of 1995. These forward-looking
        statements are subject to significant risks and uncertainties that could
        cause
        actual results to differ materially from the results in the statements.
        Forward-looking statements relating to Raytech Corporation (the “Company”)
        businesses are based on assumptions concerning certain factors that are not
        predictable and are subject to change. These factors include general economic
        conditions, worldwide demand for automotive and heavy duty vehicles, consumer
        confidence, actions of our competitors, vendors and customers, factors affecting
        our costs such as raw material prices, labor relations and environmental
        compliance and remediation, interest and foreign currency exchange rates,
        technological issues, accounting standards, and other risks set forth in
        the
        Company’s public filings. The forward-looking statements herein are made as of
        the date of this report. We have no obligation to update our forward-looking
        statements.
 
 Significant
        Accounting Policies
 
 Preparation
        of the Company’s financial statements requires management to make estimates and
        assumptions that affect the reported amounts of assets, liabilities, revenues
        and expenses. Management believes the most complex and sensitive judgments,
        because of their significance to the consolidated financial statements, result
        primarily from the need to make estimates about the effects of matters that
        are
        inherently uncertain. Management’s Discussion and Analysis and Note 1 to the
        Consolidated Financial Statements in the Company’s Form 10-K for fiscal 2004
        describe the significant accounting estimates and policies used by management
        in
        the preparation of the consolidated financial statements. Actual results
        in
        these areas could differ from management’s estimates. There have been no changes
        in the Company’s critical accounting estimate processes and policies during the
        first quarter 2005.
 
 Overview
 
 Operating
        profit for the fiscal quarter ended April 3, 2005 was $2.0 million, a decrease
        of $0.5 million or 18.7 percent from the same period in 2004. The decline
        in
        operating profit was driven by the poor performance of the Domestic OEM segment,
        which despite achieving 8.9 percent sales growth, realized a 32.0 percent
        decrease in gross profit compared to the same period in 2004. First quarter
        2005
        operating results were also negatively impacted by costs resulting from
        preparation for the transfer of certain production from the facilities to
        be
        closed this year as part of the restructuring program. The consolidated and
        operating segment results are discussed more fully in the following sections.
 
 During
        2005, the Company will focus on evaluating and implementing strategies to
        improve the performance of the Domestic OEM segment’s primary manufacturing
        facility located in Crawfordsville, Indiana. Improving the performance of
        this
        facility is critical to the future profitability of the Domestic OEM segment
        and
        the Company as a whole. The Company may incur additional costs during 2005,
        to
        implement strategies to reposition this operation for improved performance
        in
        the future.
  -29-
  
 Results
        of Operations and Liquidity and Capital Resources
 
 The
        Company reported sales of $63.4 million in the first quarter of 2005, an
        increase of $6.8 million or 11.9% compared to the first quarter of 2004.
        The
        increase in sales was driven by increased demand for the Company’s heavy-duty
        wet friction products, its commercial dry friction products and its aftermarket
        products. Additionally, the Domestic OEM segment benefited from more favorable
        pricing terms established with certain customers during the fourth quarter
        of
        2004.
 
 Gross
        profit increased to $12.0 million in the first quarter of 2005 from $11.1
        million in the first quarter of 2004. Gross profit as a percent of sales
        decreased to 18.9% of sales in the first quarter of 2005 compared to 19.5%
        during the same period last year. The decrease in gross profit as a percent
        of
        sales was driven by the reduced gross profit realized by the Domestic OEM
        segment due primarily to the increased price of steel, a key raw material,
        partially offset by increased volume. The Company expects that the price
        of
        steel may continue to negatively impact profitability. Additionally, the
        Company
        incurred costs related to evaluating strategies to improve the performance
        at
        its Crawfordsville, Indiana facility, where operating results have been
        unacceptably low. The Company continues to experience pricing pressure from
        customers, specifically in the Domestic OEM segment and in China.
 
 SG&A
        expenses increased $1.0 million or 11.7% during the first quarter of 2005
        compared to the first quarter of 2004. The increase is principally due to
        expenses incurred related to preparation for the transfer of certain production
        from the facilities to be closed this year as part of the restructuring program,
        increased professional fees and bad debt expense.
 
 The
        restructuring expense recorded in 2005 relates to the restructuring programs
        initiated during 2004. See Note 12 - Restructuring Programs to the Condensed
        Consolidated Financial Statements for further details regarding these
        restructuring programs.
 
 Interest
        expense is incurred on the Company’s debt facilities. See Note 6 - Debt to the
        Condensed Consolidated Financial Statements.
 
 Other
        income recognized in the first quarter of 2005, is the result of the reduction
        of certain net deferred tax assets and the corresponding payable to the Raytech
        Asbestos Personal Injury Settlement Trust (“PI Trust”). This is explained more
        fully in Note 9 - Income Taxes to the Condensed Consolidated Financial
        Statements.
 
 The
        Company’s income taxes are discussed in detail in Note 9 - Income Taxes to the
        Condensed Consolidated Financial Statements. As a condition of the
        reorganization plan, all tax benefits received by the Company as a result
        of the
        reorganization inure to the benefit of the PI Trust.
 
 The
        minority interest expense relates to Allomatic Products Company (“APC”), which
        was 57% owned by the Company, 40% owned by Raymark Corporation (which, with
        its
        subsidiary Raymark Industries, Inc., is collectively referred to in this
        report
        as “Raymark”), a related party, and 3% owned by certain employees of the
        Company. APC has been consolidated in the financial results and a minority
        interest is recorded to reflect the minority shareholders’ interest in APC,
        since its acquisition in 1989. On March 21, 2005, the Company, through its
        majority owned subsidiary, APC, purchased the APC common stock owned by Raymark
        in exchange for a ten-year unsecured subordinated promissory note in the
        original principal amount of $7.2 million. See Note 13 - Acquisition of APC
        Minority Shares owned by Raymark to the Consolidated Financial Statements.
 
 The
        Company recorded net income of $1.6 million, or $.04 per basic and diluted
        share, for the thirteen week period ended April 3, 2005 compared to net income
        of $1.4 million, or $.03 per basic and diluted share for the same period
        in the
        prior year. The increase in earnings was the result of improved performance
        of
        the International segment and the income associated with the reduction of
        the
        payable to the PI Trust, partially offset by decreased performance in the
        Domestic OEM segment.
  -30-
  **Domestic
        OEM**
 
 The
        following table sets forth selected income statement data for the Domestic
        OEM
        segment for the thirteen weeks ended April 3, 2005 and March 28, 2004.
  For
                      the thirteen weeks ended(amounts in thousands)April
                    3, 2005
                
                March
                    28, 2004Net
                    sales
                
                $
                34,193
                
                
                100.0
                %
                $
                31,402
                
                
                100.0
                %Gross
                    profit
                
                
                2,649
                
                
                7.7
                
                
                3,896
                
                
                12.4Selling,
                    general andadministrative
                    expense
                
                
                3,007
                
                
                8.8
                
                
                2,743
                
                
                8.7Restructuring
                    expenses
                
                
                239
                
                
                .7
                
                
                —
                
                
                —Operating
                    (loss) profit
                
                
                (597
                )
                
                -1.7
                
                
                1,153
                
                
                3.7
 
 The
        Domestic OEM segment’s sales increased $2.8 million or 8.9% in the first quarter
        of 2005 from the same period in 2004. Sales were favorably impacted by increased
        pricing related to the pass through of $1.3 million of increased steel costs.
        The remaining increase in sales is principally due to more favorable pricing
        terms reached with certain customers during the fourth quarter of 2004 and
        increased heavy-duty volume offset partially by a decrease in automotive
        volume.
        Although the Company was able to negotiate more favorable pricing terms with
        certain customers during 2004, this segment continues to experience pressure
        to
        reduce pricing from many of its customers.
  Gross
        profit as a percentage of sales decreased to 7.7% in the first quarter of
        2005
        compared to 12.4% in the same quarter last year. The most significant cause
        of
        the decrease in gross profit in 2005 was the impact of increased price of
        steel,
        a key raw material. The net impact of the increased price of steel (increased
        costs less amounts passed through to customers and increased proceeds from
        the
        sale of scrap) was a $1.4 million increase in costs in the first quarter
        of 2005
        compared to the same period in the prior year. Additionally, the segment
        incurred costs related to production flow enhancements at its Crawfordsville,
        Indiana facility. The performance of the Crawfordsville plant, this segment’s
        primary manufacturing facility, has been unacceptably low. This facility
        incurred an operating loss in the first quarter of 2005. During 2005, the
        Company will focus on evaluating and implementing strategies to improve the
        performance of this operation.
 The
          Domestic OEM segment produces goods for its customers based on a purchase
          order
          system, and in certain instances using multiple year contracts that stipulate
          a
          fixed selling price with no commitment as to quantity. In instances where
          the
          product's cost exceeds the selling price, a reserve is established for
          the
          expected loss on products in inventory and customer purchase orders received
          by
          the balance sheet date. The loss is based on the difference between contracted
          selling price and the fully absorbed cost of inventory. The fully absorbed
          inventory cost includes normal fixed and variable, direct and indirect,
          manufacturing costs including material, labor, employee benefit, depreciation,
          utility and other costs. The Company has not recorded an estimate of the
          loss
          over the term of these contracts since the quantity and mix of parts is
          not
          known and the future production costs will be impacted by, among other
          things,
          changes in economic conditions and management's actions, including expected
          cost
          reductions. The loss incurred on products sold under loss contracts was
          $2.9
          million and $1.7 million in the first quarter of 2005 and the first quarter
          of
          2004, respectively. The reserve for expected loss on goods in inventory
          and
          customer purchase orders was $2.2 million and $1.5 million at April 3,
          2005 and
          January 2, 2005, respectively.
 
 SG&A
        expense for the first quarter of 2005 increased $.3 million or 9.6% compared
        to
        the first quarter of 2004. The increase in SG&A is principally the result of
        increased costs related to preparation for Sarbanes-Oxley compliance and
        costs
        related to the transfer of certain production from the Sterling Heights facility
        which will be closed later this year.
 -31-
  The
        restructuring expense recorded in 2005 relates to the planned closure of
        our
        manufacturing facility in Sterling Heights, Michigan. See Note 12 -
        Restructuring Programs to the Condensed Consolidated Financial Statements
        for
        further details regarding restructuring programs.
 
 As
        a
        result of the above, the segment reported an operating loss of $.6 million
        in
        the first quarter of 2005 compared to operating profit of $1.2 million in
        the
        same period in 2004.
  **International**
 
 The
        following table sets forth selected income statement data for the International
        segment for the thirteen weeks ended April 3, 2005 and March 28, 2004.
  For
                        the thirteen weeks ended(amounts in thousands)April
                      3, 2005
                  
                  March
                      28, 2004Net
                      sales
                  
                  $
                  19,964
                  
                  
                  100.0
                  %
                  $
                  16,653
                  
                  
                  100.0
                  %Gross
                      profit
                  
                  
                  6,217
                  
                  
                  31.1
                  
                  
                  4,789
                  
                  
                  28.8Selling,
                      general andadministrative
                      expense
                  
                  
                  3,499
                  
                  
                  17.5
                  
                  
                  2,691
                  
                  
                  16.2Restructuring
                      expenses
                  
                  
                  148
                  
                  
                  .7
                  
                  
                  —
                  
                  
                  —Operating
                      profit
                  
                  
                  2,570
                  
                  
                  12.9
                  
                  
                  2,098
                  
                  
                  12.6
 The
        International segment’s sales increased $3.3 million or 19.9% in the first
        quarter of 2005 compared to the same period in 2004. Sales were favorably
        impacted by favorable currency translation of $1.1 million. The currency
        translation gains reflect the increase period-over-period in the exchange
        rate
        of the Euro and the British pound to the U.S. dollar. After adjusting for
        currency translation the increase in sales is due to increased demand for
        commercial dry friction products in Germany and in China and to a lesser
        degree
        increased demand for heavy-duty wet friction products in Europe.
 
 Gross
        profit increased $1.4 million in the first quarter of 2005 compared to the
        same
        period last year. Gross profit as a percentage of sales increased to 31.1%
        in
        the first quarter of 2004 from 28.8% during the first quarter of 2004. Gross
        profit was favorably impacted by currency translation of $.2 million. After
        adjusting for currency translation, the increase in gross profit is due to
        favorable product mix and cost reductions in the dry friction business and
        favorable product mix and modest price increases in the wet friction business.
        We continue to experience competitive pricing pressure in China.
 
 SG&A
        expense for the first quarter of 2005 was $3.5 million or 17.5% of sales
        compared to $2.7 million or 16.2% of sales in the first quarter of 2004.
        The
        increase in SG&A was primarily the result of bad debt expenses and increased
        expenses at the Liverpool, England facility that will be closed later this
        year.
        SG&A was unfavorably impacted by currency translation of $.1 million.
 
 The
        restructuring expense recorded in 2005 relates to the planned closure of
        our
        manufacturing facility in Liverpool, England. See Note 12 - Restructuring
        Programs to the Condensed Consolidated Financial Statements for further details
        regarding restructuring programs.
 
 As
        a
        result of the foregoing, operating profit increased $.5 million or 22.5%
        in the
        first quarter of 2005 compared to the same period in 2004.
  -32-
  
 **Aftermarket**
 
 The
        following table sets forth selected income statement data for the Aftermarket
        segment for the thirteen weeks ended April 3, 2005 and March 28, 2004.
 For
                          the thirteen weeks ended(amounts in thousands)April
                        3, 2005
                    
                    March
                        28, 2004Net
                        sales
                    
                    $
                    14,034
                    
                    
                    100.0
                    %
                    $
                    12,386
                    
                    
                    100.0
                    %Gross
                        profit
                    
                    
                    3,941
                    
                    
                    28.1
                    
                    
                    3,685
                    
                    
                    29.8Selling,
                        general &administrative
                        expense
                    
                    
                    1,801
                    
                    
                    12.8
                    
                    
                    1,535
                    
                    
                    12.4Operating
                        profit
                    
                    
                    2,140
                    
                    
                    15.2
                    
                    
                    2,150
                    
                    
                    17.4
 The
        Aftermarket segment’s sales increased $1.6 million or 13.3% in the first quarter
        of 2005 from the same period in 2004. The increase in sales is due to increased
        demand. The most notable increases were in sales of friction plates and filters
        which increased 16.5% and 14.2%, respectively, compared to the same period
        in
        the prior year. The Aftermarket segment continued to expand its sales to
        export
        customers during the first quarter of 2005. Sales to export customers increased
        36% compared to the same period in 2004.
 
 Gross
        profit increased $.3 million as a result of the increase in sales. As a
        percentage of sales, gross profit decreased to 28.1% in the first quarter
        of
        2005 compared to 29.8% in the same quarter last year. The decrease in gross
        profit as a percent of sales is due to unfavorable product mix and increased
        rebates to certain customers.
 
 SG&A
        expense for the first quarter of 2005 was $1.8 million or 12.8% of sales
        compared to $1.5 million or 12.4% of sales in the first quarter of 2004.
        The
        increase in SG&A is principally the result of increased costs related to
        preparation for Sarbanes-Oxley compliance and costs related to the transfer
        of
        certain production from the Sterling Heights facility which will be closed
        later
        this year.
 
 As
        a
        result of the above, operating profit decreased slightly to $2.1 million
        in the
        first quarter of 2005 compared to $2.2 million in the same period in 2004.
 
 On
        March
        21, 2005 the Company, through, its majority owned subsidiary, APC, purchased
        shares of APC owned by Raymark in exchange for a ten-year unsecured promissory
        note of $7.2 million which increased the Company’s indirect ownership of APC
        from approximately 57% of its outstanding common stock to approximately 96%
        of
        its outstanding common stock. See Note 13 - Acquisition of APC Minority Shares
        owned by Raymark to the Condensed Consolidated Financial Statements.
 
 Liquidity,
        Capital Resources and Future Liquidity
 
 Cash
        used
        by operating activities for the quarter ended April 3, 2005 was $1.9 million
        compared to $1.4 million during the same period last year. The principal
        operating use of cash in the first quarter of 2005 was an increase in trade
        accounts receivable and inventories. The increase in trade accounts receivable
        during the first quarter is a seasonal fluctuation and is consistent with
        the
        prior year period. The increase in inventories is principally the result
        of a
        build up in inventory to facilitate the closure of our Sterling Heights,
        Michigan manufacturing facility.
 
 Capital
        expenditures during the first quarter of 2005 were $2.5 million compared
        to $.8
        million during the first quarter of 2004. During 2004, we began a third
        expansion of our operations in China. When completed, the new facility in
        China
        will increase our capacity, positioning us to take advantage of the growing
        market in China and increase our exports from China. The expected cost of
        the
        expansion project in China is $1.9 million, with $.9 million expended during
        2004 and the remainder to be spent during 2005.
  -33-
 Restricted
          cash was reduced by $.5 million due to the expiration of a letter of credit
          related to a supplier account that was no longer required by the
          supplier.
 Cash
        and
        cash available under existing lines of credit at April 3, 2005 totaled $19.0
        million compared to $19.7 million at January 2, 2005, a decrease of $.7
        million.
 
 The
        total
        borrowings at April 3, 2005 of $36.2 million compares to total borrowings
        of
        $26.7 million **** at
        year-end 2004, an increase of $9.5 million. The increase in total borrowings
        was
        principally the result of the issuance of a $7.2 million note related to
        the
        purchase of the shares of APC owned by Raymark. See Note 13 for further
        discussion of the APC acquisition. The available lines of credit at April
        3,
        2005 of $6.9 million compares to $6.1 million at year-end 2004, an increase
        in
        availability of $.8 million. Full details of the Company’s debt are contained in
        Note 6 - Debt to the Condensed Consolidated Financial Statements.
 
 During
        the first quarter of 2005, the Company amended its domestic debt agreements.
        The
        primary purpose of the amendments was the modification of the debt covenant
        calculations to provide the Company greater flexibility to manage its cash
        resources and certain one-time costs that will be incurred during 2005 related
        to the plant closures announced during 2004. Additionally, the amendment
        to the
        Domestic OEM loan and security agreement provides for a remedy of future
        non-compliance with the quarterly debt covenants, by an irrevocable cash
        contribution by the parent. In April 2005, the parent made an irrevocable
        cash
        contribution of $1.0 million to RPC, a borrower, to remedy the debt covenant
        non-compliance occurring at the end of the first quarter of 2005. The parent
        may
        be required to make additional cash contributions in the future in the event
        of
        any further non-compliance of the borrowers.
 
 Refer
        to
        Notes 8 - Debt and 15 - Commitments to the consolidated financial statements,
        included within the Company’s 2004 Form 10-K, for information regarding the
        Company’s obligations and commitments by year. These obligations and commitments
        consist of long-term debt, capital leases and rental agreements.
 
 The
        Company’s potential obligations regarding environmental remediation are
        explained in Note 7 - Litigation to the Condensed Consolidated Financial
        Statements.
 
 Certain
        tax issues are discussed in Note 9 - Income Taxes to the Condensed Consolidated
        Financial Statements, which provides additional information concerning the
        status of the current Internal Revenue Service audit and the use of certain
        future tax benefits.
 
 The
        most
        significant factor affecting the Company’s future cash flows is its ability to
        earn and collect cash from customers. The automotive parts industry is extremely
        competitive. The Company’s customers are often able to demand price reductions
        from the suppliers including all segments of Raytech. Some of the Company’s
        sales are made under standard sales contracts that include price commitments
        for
        multiple years. Specifically in the Domestic OEM segment, the Company is
        selling
        certain products to certain customers at a loss under the terms of its current
        sales contracts. The Company is currently working with certain customers
        to
        re-negotiate the terms of these loss contracts. In addition, the Company
        is
        reviewing alternatives to improve its cost structure. Additionally, the Company,
        specifically in the Domestic OEM segment, has very large customers, some
        representing more than ten percent of consolidated sales. From time to time,
        the
        Company loses business from existing customers, including its largest customers,
        due to pricing, technological or other competitive pressures. The Company
        also
        from time to time gains new business and renewals of existing business from
        existing or new customers through its continuing cost reduction, sales and
        development efforts. The cumulative effect of these changes, or the loss
        of one
        of its largest customers, could have a material adverse effect on the
        consolidated financial results of the Company.
 
 Items
        that will potentially require the use of cash during the remainder of fiscal
        2005 other than normal operating expenses include the following.
 
 •
              The
                  Company has recorded an accrued liability of $5.9 million for certain
                  environmental matters more fully discussed in Note 7 - Litigation
                  to the
                  Condensed Consolidated Financial Statements. Management expects
                  that $.5
                  million will be spent during 2005 and the balance during
                  2006.
 
 •
              The
                  Company assumed the liability for the Raymark pension plans as
                  part of the
                  Chapter 11 reorganization. The plans, which are discussed as part
                  of Note
                  9 - Employee Benefits to the consolidated
                  financial statements, included within the Company’s 2004 Form 10-K, are
                  underfunded and the Company, through an agreement with the Internal
                  Revenue Service, is providing both current contributions and catch-up
                  contributions. The expected funding for the plans in 2005 will
                  be
                  approximately $1.3 million, $.6 million of which was funded during
                  the
                  first quarter of 2005.
    -34-
  
 •
              The
                  Company has conducted a facilities utilization review and has determined
                  that improved performance can be obtained through the closure of
                  certain
                  facilities and moving certain production to other facilities operated
                  by
                  the Company. The Company estimates that the total cash outflows
                  related to
                  these closures will be approximately $5.5 million, of which we
                  expect to
                  expend $4.6 million during 2005 and the remaining balance will
                  be spent
                  during 2006 and 2007. The expenses related to these closures are
                  more
                  fully explained in Note 12 - Restructuring Programs to the Condensed
                  Consolidated Financial Statements.
 
 •
              During
                  2004, we reached terms with certain major customers on revised
                  sales
                  contract provisions that will enable us to close our manufacturing
                  plant
                  in Sterling Heights, Michigan. The new sales contract provisions
                  require
                  the Company, in certain instances, to build up inventory levels
                  to
                  facilitate the transition to a new vendor or to another manufacturing
                  location within the Company. As a result, we expect our inventory
                  levels
                  to increase through September 2005 by as much as $4.0 million.
                  During the
                  fourth quarter of 2005, we expect this trend will reverse and inventory
                  levels will begin to decrease. We currently expect that the amount
                  of
                  inventory related to the build up will be less than $2.0 million
                  at year
                  end 2005.
 
 •
              The
                  Company incurred costs associated with the retirement of its President
                  and
                  Chief Executive Officer during the second quarter and the restructuring
                  of
                  its domestic management team during the third quarter of 2004.
                  The total
                  cost associated with these items is approximately $1.4 million,
                  of which
                  $.8 million was paid during 2004, $.4 million was paid during the
                  first
                  quarter of 2005 and the balance to be paid prior to the end of
                  2005.
 
 •
              Certain
                  tax issues are discussed in Note 9 - Income Taxes to the Condensed
                  Consolidated Financial Statements, which provides detail concerning
                  the
                  status of the current Internal Revenue Service audit and the use
                  of
                  certain future tax benefits.
 
 Management
        believes that existing cash balances, the Company’s lending facilities and cash
        flow from operations during 2005 will be sufficient to meet all of the Company’s
        obligations arising in the normal course of business, including anticipated
        capital investments. However, the ability of the Company to utilize its lending
        facilities is dependent on the Company’s ability to meet its financial forecasts
        for 2005, which is not assured, and to meet the financial covenants contained
        in
        its credit facilities. These forecasts include modest revenue growth in all
        three operating segments as well as certain cost-saving initiatives, partially
        offset by certain cost increases and inflation assumptions. If the Company
        does
        not comply with the financial covenants, an event of default would occur
        and
        could result in the acceleration of the Company’s indebtedness under its
        domestic credit facilities. If that were to occur, the ability of the Company
        to
        continue would be dependent upon, among other things, its ability to amend
        the
        credit facilities, enact certain actions to generate cash and/or to seek
        additional alternative financing from other lenders.
  -35-
  *Recently
        Issued Accounting Pronouncements*
 
 In
        July
        2002, the Public Company Accounting Reform and Investor Protection Act of
        2002
        (the Sarbanes-Oxley Act) was enacted. Section 404 stipulates that public
        companies must take responsibility for maintaining an effective system of
        internal control. The act requires public companies to report on the
        effectiveness of their control over financial reporting and obtain an attest
        report from their independent registered public accountant about management’s
        report. The act requires most public companies (accelerated filers) to report
        on
        the company’s internal control over financial reporting for fiscal years ended
        on or after November 15, 2004. Other public companies (non-accelerated filers)
        must begin to comply with the new requirements related to internal control
        over
        financial reporting for their first fiscal year ending on or after July 15,
        2006
        under the latest extension granted by the Securities and Exchange Commission.
        Raytech is a non-accelerated filer and therefore does not have to comply
        with
        Section 404 of the Sarbanes- Oxley Act until 2006.
 
 In
        November 2004 the Financial Accounting Standards Board (“FASB”) issued Statement
        of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs - an
        amendment of ARB No. 43, Chapter 4”. This statement clarifies the accounting for
        abnormal amounts of idle facility expense, freight handling costs and wasted
        material (spoilage). This statement requires that these types of costs be
        recognized as current period charges. SFAS No. 151 is effective prospectively
        for inventory costs incurred during fiscal years beginning after June 15,
        2005,
        with earlier application permitted for such costs incurred during fiscal
        years
        beginning after November 24, 2004. Management does not expect the adoption
        of
        SFAS No. 151 to have a significant impact on the Company’s consolidated
        financial statements.
 
 In
        December 2004 the FASB issued SFAS No. 123 (revised 2004), “Share Based
        Payment”. This statement replaces SFAS 123, “Accounting for Stock-Based
        Compensation”, and supersedes APB Opinion 25, “Accounting for Stock Issued to
        Employees”. SFAS No. 123 (revised 2004) requires that the cost of share-based
        payment transactions (including those with employees and non-employees) be
        recognized as compensation costs in the financial statements. SFAS No. 123
        (revised 2004) applies to all share-based payment transactions in which an
        entity acquires goods or services by issuing (or offering to issue) its shares,
        share options, or other equity instruments (except for those held by an ESOP)
        or
        by incurring liabilities in amounts based (even in part) on the price of
        the
        entity’s shares or other equity instruments, or that require (or may require)
        settlement by the issuance of an entity’s shares or other equity instruments.
        This statement applies to all new awards granted during the fiscal year
        beginning after June 15, 2005 and to previous awards that are modified or
        cancelled after such date. We have not yet fully evaluated the effect of
        SFAS
        No. 123 (revised 2004) on our financial statements and have not determined
        the
        method of adoption we will use to implement SFAS No. 123 (revised
        2004).
 
 In
        December 2004, the FASB issued FSP FAS 109-1, “Application of FASB Statement No.
        109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production
        Activities Provided by the American Jobs Creation Act of 2004 (“AJCA”).” The
        AJCA introduces a special 9% tax deduction on qualified production activities.
        FSP FAS 109-1 clarifies that this tax deduction should be accounted for as
        a
        special tax deduction in accordance with Statement 109. Based upon the Company’s
        preliminary evaluation of the effects of this guidance, we do not believe
        that
        it will have any impact on the Company’s Consolidated Financial Statements.
 
 In
        December 2004, the FASB issued FASB Staff Position (“FSP”) FAS 109-2,
“Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
        Provision within the American Jobs Creations Act of  2004.”
        The AJCA introduces a limited time 85% dividends received deduction on the
        repatriation of certain foreign earnings to a U.S. taxpayer (repatriation
        provision), provided certain criteria are met. FSP FAS 109-2 provides accounting
        and disclosure guidance for the repatriation provision. Based upon the Company’s
        preliminary evaluation of the effects of the repatriation provision, we do
        not
        believe that it will have any impact on the Company’s Consolidated Financial
        Statements.
 
 During
        March 2005, the Securities and Exchange Commission issued Staff Accounting
        Bulletin (“SAB”) No. 107, guidance on SFAS No. 123 (revised 2004). SAB No. 107
        was issued to assist preparers by simplifying some of the implementation
        challenges of SFAS No 123 (revised 2004) while enhancing the information
        that
        investors receive. The Company will consider the guidance provided by SAB
        No.
        107 as it implements SFAS No. 123 (revised 2004) during 2006.
  -36-
  
 **Item
        3. Quantitative and Qualitative Disclosures About Market Risk**
 
 We
        maintain lines of credit with United States and foreign banks, as well as
        other
        creditors detailed in Note 6 - Debt to the Condensed Consolidated Financial
        Statements. We are naturally exposed to various interest rate risk and foreign
        currency risk in the normal course of business.
 
 Management
        does not anticipate a significant change in any of its borrowing markets
        in 2005
        given current economic conditions. We strive to manage working capital levels
        to
        support business needs while minimizing borrowings. Further, we can reduce
        the
        short-term impact of interest rate fluctuations through deferral of certain
        capital investment should the need arise.
 
 The
        Company maintains borrowings in both fixed rate and variable rate debt
        instruments. The fixed rate debt at April 3, 2005 of $12.5 million had rates
        of
        interest that ranged from 2.50% to 8.00%. The variable rate debt at April
        3,
        2005 of $23.4 million had rates of interest that ranged from 4.50% to 6.25%.
        The
        variable rate debt reprices either at prime rate or the Eurodollar rate.
        We have
        not entered into any interest rate management programs such as interest rate
        swaps or other derivative type transactions. The amount of exposure in the
        short-term that could be created by increases in rates is not considered
        significant by management. A 100 basis point increase in annual interest
        rates,
        applied to the Company’s variable rate borrowings at April 3, 2005, would result
        in an increase in interest expense and a corresponding reduction in cash
        flow of
        approximately $50 thousand.
 
 The
        local
        currencies of our foreign subsidiaries have been designated as their functional
        currencies. Accordingly, financial statements of foreign operations are
        translated using the exchange rate at the balance sheet date for assets and
        liabilities, historical exchange rates for elements of stockholders’ equity, and
        an average exchange rate in effect during the year for revenues and expenses.
        Where possible, we attempt to mitigate foreign currency translation effects
        by
        borrowing in local currencies to fund operations. We do not believe that
        the
        fluctuations in foreign currency will have a material adverse effect on our
        overall consolidated financial statements. Additionally, we do not enter
        into
        agreements to manage any currency transaction risk.
  The
        principal raw materials used in the manufacture of our products include
        cold-rolled steel, metal powders, synthetic resins, plastics and synthetic
        and
        natural fibers. All of these materials are available from a number of
        competitive suppliers. However, in certain cases, the Company is required
        to
        obtain customer approval for substitute vendors, which may result in additional
        costs being incurred. Worldwide increases in steel demand led to increased
        prices,which
        negatively impacted the Company's profitability during the year ended January
        2,
        2005 and the quarter ended April 3, 2005. Management expects the increase
        in
        steel prices will continue to negatively impact the Company's profitability.
        In
        addition to steel, we use other raw materials, specifically in our paper
        production process, where a shortage of supply could negatively impact our
        profitability and our ability to deliver to customers. Other potential future
        impacts on the Company due to reduced availability of materials could include
        reduced delivery levels of finished products to customers.
  -37-
  **Item
        4. Controls and Procedures**
 
 (a)
              The
                    Company conducted an evaluation of the effectiveness of the design
                    and
                    operation of the Company's disclosure controls and procedures
                    under the
                    supervision and with the participation of management, including
                    the
                    Company's principal executive officer and principal financial
                    officer as
                    of the end of the period covered by this report. Based on this
                    evaluation,
                    the principal executive officer and principal financial officer
                    have each
                    concluded that certain disclosure controls and procedures were
                    not
                    effective at April 3, 2005 in alerting them, on a timely basis,
                    to all of
                    the material information regarding conditions that existed at
                    the date of
                    the financial statements that should be considered when evaluating
                    the
                    estimates inherent in the process of preparing financial statements
                    and in
                    ensuring that information required to be disclosed by the Company
                    in
                    reports that it files under the Exchange Act is accumulated and
                    communicated to management to allow timely decisions regarding
                    required
                    disclosure and is recorded, processed, summarized and reported
                    within the
                    time periods specified in Securities and Exchange Commission
                    rules and
                    forms.
 (b)
                  The
                        Company has concluded that its disclosure controls and procedures
                        were not
                        effective at April 3, 2005 because important information
                        related to a
                        possible loss contingency was not communicated to management
                        in a manner
                        to allow timely decisions regarding required disclosure.
                        The Company has
                        concluded that this represented a material weakness in the
                        Company’s
                        disclosure controls.
 
 (c)
                  Subsequent
                    to the end of the period covered by this report, but prior to
                    filing this
                    report the Company has taken steps to remediate the identified
                    material
                    weakness in its disclosure control procedures by publishing and
                    reaffirming its policy and procedure relating to timely communication
                    of
                    all claims, litigation and contingencies to its general counsel.
  -38-
  
 **PART
        II. OTHER INFORMATION**
 
 **Item
        1. Legal Proceedings**
 
 See
        discussion of litigation in Note 7 - Litigation to the Condensed Consolidated
        Financial Statements.
 
 **Item
        2. Unregistered Sales of Equity Securities and Use of Proceeds**
 
 See
        discussion of the Company’s debt agreements in Note 6 - Debt to the Condensed
        Consolidated Financial Statements.
 
 **Item
        6. Exhibits**
 
 31-1
              Certification
                of the Chief Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002
 31-2
              Certification
                of the Chief Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002
 32-1
              Certifications
                of the Chief Executive Officer and the Chief Financial Officer pursuant
                to
                Section 906 of the Sarbanes-Oxley Act of 2002.
  -39-
  **SIGNATURE**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the Registrant
        has
        duly caused this Report to be signed on its behalf by the undersigned thereunto
        duly authorized.
  RAYTECH
                CORPORATIONBy:
              /s/JOHN B.
                DEVLINJohn
                B. DevlinVice President,
                Treasurerand Chief Financial Officer
  Date: June
        20, 2005
  -40-