**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**







**FORM
      10-Q**





(Mark
      One)





x
            Quarterly
                Report Pursuant to Section 13 or 15(d)of the Securities Exchange
                Act of
                1934





For
      the
      Quarter Ended October 2, 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)





**711
                Tech Drive****Crawfordsville,
                IN**
            **47933**(Address
                of Principal Executive Offices)
            (Zip
                Code)





**765-359-2818**


(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
      December 2, 2005, there were 41,737,306 shares of common stock outstanding
      of
      the registrant’s common stock, par value $1.00 per share 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 $9.1 million.










**FORM
      10-Q**





**TABLE
      OF CONTENTS**






**Page****Part
                I. Financial Information****Item
                1.**
            Financial
                StatementsCondensed
                Consolidated Balance Sheets (Unaudited) as of October 2, 2005 andJanuary
                2, 2005
            3Condensed
                Consolidated Statements of Operations (Unaudited) for the 13 and39
                weeks ended October 2, 2005 and September 26, 2004
            4Condensed
                Consolidated Statements of Cash Flows (Unaudited) for the 39
                weeksended
                October 2, 2005 and September 26, 2004
            5Condensed
                Consolidated Statements of Changes in Shareholders’ Equity
                (Unaudited)for
                the 39 weeks ended October 2, 2005 and September 26, 2004
            6Notes
                to Condensed Consolidated Financial Statements (Unaudited)
            7**Item
                2.**
            Management's
                Discussion and Analysis of Financial Condition and Resultsof
                Operations
            37**Item
                3.**
            Quantitative
                and Qualitative Disclosures About Market Risk
            48**Item
                4.**
            Controls
                and Procedures
            49**Part
                II. Other Information****Item
                1.**
            Legal
                Proceedings
            50**Item
                2.**
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            50**Item
                6.**
            Exhibits
            50Signature
            51




-2-





**RAYTECH
      CORPORATION**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS (UNAUDITED)**


Amounts
                  in thousands, except share data**October
                  2, 2005**
              
              **January
                  2, 2005****ASSETS****Current
                  assets:**Cash
                  and cash equivalents
              
              **$**
              **11,512**
              
              
              13,620Restricted
                  cash
              
              
              **3,242**
              
              
              5,548Trade
                  accounts receivable, less allowance
              
              
              **30,931**
              
              
              27,506of
                  $1,400 and $1,462Inventories,
                  net
              
              
              **40,521**
              
              
              39,582Income
                  taxes receivable
              
              
              **521**
              
              
              1,333Deferred
                  income taxes
              
              
              **3,243**
              
              
              3,854Assets
                  held for sale
              
              
              **2,405**
              
              
              ─Other
                  current assets
              
              
              **3,810**
              
              
              3,009**Total
                  current assets**
              
              
              **96,185**
              
              
              94,452**Property,
                  plant and equipment**
              
              
              **109,718**
              
              
              126,118**Less
                  accumulated depreciation**
              
              
              **(40,923**
              **)**
              
              (46,113
              )**Net
                  property, plant and equipment**
              
              
              **68,795**
              
              
              80,005**Goodwill,
                  net**
              
              
              **3,687**
              
              
              5,912**Other
                  intangible assets, net**
              
              
              **21,416**
              
              
              22,731**Other
                  assets**
              
              
              **2,829**
              
              
              2,586**Total
                  assets**
              
              **$**
              **192,912**
              
              
              205,686**LIABILITIES
                  AND SHAREHOLDERS' EQUITY****Current
                  liabilities:**Notes
                  payable and current portion of long-term debt
              
              **$**
              **22,008**
              
              
              15,280Current
                  portion of pension obligation
              
              
              **2,230**
              
              
              2,248Accounts
                  payable
              
              
              **17,467**
              
              
              15,068Accrued
                  liabilities
              
              
              **25,075**
              
              
              23,810Payable
                  to the PI Trust
              
              
              **990**
              
              
              4,393**Total
                  current liabilities**
              
              
              **67,770**
              
              
              60,799**Long-term
                  debt**
              
              
              **13,924**
              
              
              11,416**Pension
                  obligation**
              
              
              **12,426**
              
              
              14,175**Postretirement
                  medical benefits other than pension**
              
              
              **18,444**
              
              
              16,834**Deferred
                  payable to the PI Trust**
              
              
              **3,681**
              
              
              4,627**Deferred
                  income taxes**
              
              
              **7,514**
              
              
              7,591**Other
                  long-term liabilities**
              
              
              **6,860**
              
              
              7,044**Total
                  liabilities**
              
              
              **130,619**
              
              
              122,486**Commitments
                  and contingent liabilities (Notes 7, 8, 10, 13, 14 and
                  15)****Minority
                  interest**
              
              
              **626**
              
              
              10,020**Shareholders'
                  Equity****Capital
                  Stock:****Cumulative
                  preferred stock, no par value.****Authorized
                  5,000,000 shares; none issued and outstanding**
              
              
              **─**
              
              
              ─**Common
                  stock, $1.00 par value. Authorized 50,000,000
                  shares;****41,737,306
                  issued and outstanding**
              
              
              **41,737**
              
              
              41,737**Additional
                  paid in capital**
              
              
              **117,574**
              
              
              117,574**Accumulated
                  deficit**
              
              
              **(86,118**
              **)**
              
              (77,595
              )**Accumulated
                  other comprehensive loss**
              
              
              **(11,526**
              **)**
              
              (8,536
              )**Total
                  shareholders’ equity**
              
              
              **61,667**
              
              
              73,180**Total
                  liabilities and shareholders’ equity**
              
              **$**
              **192,912**
              
              
              205,686




*See
      accompanying notes to these Condensed Consolidated Financial Statements
      (unaudited).*





-3-





**RAYTECH
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**




Amounts
                  in thousands, except share data**For
                  the 13 Weeks Ended**
              
              **For
                  the 39 Weeks Ended****October
                  2, 2005**
              
              **September
                  26, 2004**
              
              **October
                  2, 2005**
              
              **September
                  26, 2004**Net
                  sales
              
              **$**
              **54,949**
              
              
              53,984
              
              
              **178,907**
              
              
              168,987Cost
                  of sales
              
              
              **47,911**
              
              
              45,070
              
              
              **152,922**
              
              
              136,485Gross
                  profit
              
              
              **7,038**
              
              
              8,914
              
              
              **25,985**
              
              
              32,502Selling,
                  general and administrative expenses
              
              
              **11,091**
              
              
              9,860
              
              
              **29,486**
              
              
              28,886Impairment
                  charge
              
              
              **1,762**
              
              
              ─
              
              
              **1,762**
              
              
              ─Restructuring
                  expenses
              
              
              **624**
              
              
              ─
              
              
              **2,698**
              
              
              ─Operating
                  (loss) profit
              
              
              **(6,439**
              **)**
              
              (946
              )
              
              **(7,961**
              **)**
              
              3,616Interest
                  expense
              
              
              **574**
              
              
              269
              
              
              **1,555**
              
              
              932PI
                  Trust payable decrease
              
              
              **─**
              
              
              ─
              
              
              **(689**
              **)**
              
              ─Other
                  (income) expense, net
              
              
              **(2,420**
              **)**
              
              1,254
              
              
              **(2,347**
              **)**
              
              1,336(Loss)
                  income before provision for incometaxes
                  and minority interest
              
              
              **(4,593**
              **)**
              
              (2,469
              )
              
              **(6,480**
              **)**
              
              1,348Provision
                  for income taxes
              
              
              **550**
              
              
              709
              
              
              **1,819**
              
              
              2,575Loss
                  before minority interest
              
              
              **(5,143**
              **)**
              
              (3,178
              )
              
              **(8,299**
              **)**
              
              (1,227
              )Minority
                  interest
              
              
              **44**
              
              
              91
              
              
              **224**
              
              
              634Net
                  loss
              
              **$**
              **(5,187**
              **)**
              
              (3,269
              )
              
              **(8,523**
              **)**
              
              (1,861
              )Basic
                  and diluted loss per share
              
              **$**
              **(0.12**
              **)**
              
              (0.08
              )
              
              **(0.20**
              **)**
              
              (0.04
              )





*See
      accompanying notes to these Condensed Consolidated Financial Statements
      (unaudited).*





-4-





**RAYTECH
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**


Amounts
                  in thousands**For
                  the 39 Weeks Ended****October
                  2, 2005**
              
              **September
                  26, 2004****Cash
                  flows from operating activities:**Net
                  loss
              
              **$**
              **(8,523**
              **)**
              
              (1,861
              )Adjustments
                  to reconcile net loss to net cash provided(used)
                  by operating activities:Depreciation
                  and amortization
              
              
              **13,557**
              
              
              12,384Impairment
                  charge
              
              
              **1,762**
              
              
              ─Other
                  non-cash items
              
              
              **397**
              
              
              584Changes
                  in other operating assets and liabilities:Trade
                  accounts receivable
              
              
              **(4,424**
              **)**
              
              (7,059
              )Inventories
              
              
              **(876**
              **)**
              
              (5,771
              )Accounts
                  payable
              
              
              **3,459**
              
              
              (129
              )Other
                  operating assets and liabilities, net
              
              
              **(3,350**
              **)**
              
              228Net
                  cash provided (used) by operating activities
              
              
              **2,002**
              
              
              (1,624
              )**Cash
                  flow from investing activities:**Capital
                  expenditures
              
              
              **(8,328**
              **)**
              
              (3,265
              )Restricted
                  cash
              
              
              **2,305**
              
              
              (866
              )Other
              
              
              **102**
              
              
              ─Net
                  cash used by investing activities
              
              
              **(5,921**
              **)**
              
              (4,131
              )**Cash
                  flow from financing activities:**Net
                  borrowings on short-term notes
              
              
              **4,606**
              
              
              7,288Principal
                  payments on long-term debt
              
              
              **(2,269**
              **)**
              
              (2,252
              )Net
                  cash provided by financing activities
              
              
              **2,337**
              
              
              5,036**Effect
                  of exchange rate changes on cash**
              
              
              **(526**
              **)**
              
              (7
              )**Net
                  change in cash and cash equivalents**
              
              
              **(2,108**
              **)**
              
              (726
              )**Cash
                  and cash equivalents at beginning of period**
              
              
              **13,620**
              
              
              16,413**Cash
                  and cash equivalents at end of period**
              
              **$**
              **11,512**
              
              
              15,687**Supplemental
                  schedule of non-cash investing****and
                  financing activities:**Acquisition
                  of APC minority shares owned by Raymarkthrough
                  issuance of a long-term note payable
              
              **$**
              **7,200**
              
              
              ─





*See
      accompanying notes to these Condensed Consolidated Financial Statements
      (unaudited).*




-5-





**RAYTECH
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
      (UNAUDITED)**


Amounts
                  in thousands**Common
                  Stock**
              
              **Additional
                  Paid in Capital**
              
              **Accumulated
                  Deficit**
              
              **Accumulated
                  Other Comprehensive Loss**
              
              **Total****Balance,
                  December 28, 2003**
              
              $
              41,737
              
              
              117,574
              
              
              (74,845
              )
              
              (8,556
              )
              
              75,910Comprehensive
                  loss:Net
                  loss
              
              
              ─
              
              
              ─
              
              
              (1,861
              )
              
              ─
              
              
              (1,861
              )Other
                  comprehensive loss
              
              
              ─
              
              
              ─
              
              
              ─
              
              
              (60
              )
              
              (60
              )Total
                  comprehensive loss
              
              
              ─
              
              
              ─
              
              
              (1,861
              )
              
              (60
              )
              
              (1,921
              )**Balance,
                  September 26, 2004**
              
              $
              41,737
              
              
              117,574
              
              
              (76,706
              )
              
              (8,616
              )
              
              73,989**Balance,
                  January 2, 2005**
              
              **$**
              **41,737**
              
              
              **117,574**
              
              
              **(77,595**
              **)**
              
              **(8,536**
              **)**
              
              **73,180**Comprehensive
                  loss:Net
                  loss
              
              
              **─**
              
              
              **─**
              
              
              **(8,523**
              **)**
              
              **─**
              
              
              **(8,523**
              **)**Other
                  comprehensive loss
              
              
              **─**
              
              
              **─**
              
              
              **─**
              
              
              **(2,990**
              **)**
              
              **(2,990**
              **)**Total
                  comprehensive loss
              
              
              **─**
              
              
              **─**
              
              
              **(8,523**
              **)**
              
              **(2,990**
              **)**
              
              **(11,513**
              **)****Balance,
                  October 2, 2005**
              
              **$**
              **41,737**
              
              
              **117,574**
              
              
              **(86,118**
              **)**
              
              **(11,526**
              **)**
              
              **61,667**




*See
      accompanying notes to these Condensed Consolidated Financial Statements
      (unaudited).*





-6-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**  **(UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data




**Note
        1 -** **Restatement
        of Condensed Consolidated Financial Statements for the thirteen and twenty-six
        week period ended July 3, 2005**





During
      the third quarter of 2005, the Company determined that certain accounting for
      taxes in the previously filed second quarter Form 10Q for the period ended
      July
      3, 2005 needed to be modified.





An
      Internal Revenue Service settlement that was finalized in the second quarter
      was
      recorded as a $1.6 million benefit in the tax provision. The tax reserves,
      that
      were no longer necessary after the Internal Revenue Service settlement, were
      established as part of fresh start accounting in 2001, when the Company emerged
      from Chapter 11 bankruptcy. The reversal of the $1.6 million reserve for Federal
      income tax contingencies should have resulted in a reduction of goodwill rather
      than being recorded as a benefit in the income tax provision. The financial
      statements in this Form 10-Q reflect the proper accounting. The Balance Sheet
      as
      of July 3, 2005, the Statements of Operations for the thirteen and twenty-six
      weeks then ended and
      the
      Statements of Cash Flows for the twenty-six weeks then endedas
      previously reported and as restatedare as follows:





-7-





**Note
      1 - Continued**


**RAYTECH
      CORPORATION**


**CONDENSED
      CONSOLIDATED BALANCE SHEET DATA (UNAUDITED)**


Amounts
                  in thousands, except share data
              
              **July
                  3, 2005****As
                  Restated**
              
              **As
                  Previously Reported****ASSETS****Current
                  assets:**Cash
                  and cash equivalents
              
              **$**
              **9,548**
              
              
              9,548Restricted
                  cash
              
              
              **5,080**
              
              
              5,080Trade
                  accounts receivable, less allowance
              
              
              **31,874**
              
              
              31,874of
                  $1,219Inventories,
                  net
              
              
              **39,919**
              
              
              39,919Income
                  taxes receivable
              
              
              **1,339**
              
              
              1,339Deferred
                  income taxes
              
              
              **3,408**
              
              
              3,408Other
                  current assets
              
              
              **2,340**
              
              
              2,340**Total
                  current assets**
              
              
              **93,508**
              
              
              93,508**Property,
                  plant and equipment**
              
              
              **114,700**
              
              
              114,700**Less
                  accumulated depreciation**
              
              
              **(39,782**
              **)**
              
              (39,782
              )**Net
                  property, plant and equipment**
              
              
              **74,918**
              
              
              74,918**Goodwill,
                  net**
              
              
              **3,687**
              
              
              5,287**Other
                  intangible assets, net**
              
              
              **21,899**
              
              
              21,899**Other
                  assets**
              
              
              **2,848**
              
              
              2,848**Total
                  assets**
              
              **$**
              **196,860**
              
              
              198,460**LIABILITIES
                  AND SHAREHOLDERS' EQUITY****Current
                  liabilities:**Notes
                  payable and current portion of long-term debt
              
              **$**
              **18,147**
              
              
              18,147Current
                  portion of pension obligation
              
              
              **2,242**
              
              
              2,242Accounts
                  payable
              
              
              **14,375**
              
              
              14,375Accrued
                  liabilities
              
              
              **24,302**
              
              
              24,302Payable
                  to the PI Trust
              
              
              **4,998**
              
              
              4,998**Total
                  current liabilities**
              
              
              **64,064**
              
              
              64,064**Long-term
                  debt**
              
              
              **16,785**
              
              
              16,785**Pension
                  obligation**
              
              
              **12,612**
              
              
              12,612**Postretirement
                  benefits other than pension**
              
              
              **17,991**
              
              
              17,991**Deferred
                  payable to the PI Trust**
              
              
              **3,630**
              
              
              3,630**Deferred
                  income taxes**
              
              
              **7,528**
              
              
              7,528**Other
                  long-term liabilities**
              
              
              **6,365**
              
              
              6,365**Total
                  liabilities**
              
              
              **128,975**
              
              
              128,975**Commitments
                  and contingent liabilities****Minority
                  interest**
              
              
              **523**
              
              
              523**Shareholders'
                  Equity****Capital
                  Stock:****Cumulative
                  preferred stock, no par value.****Authorized
                  5,000,000 shares; none issued and outstanding**
              
              
              **─**
              
              
              ─**Common
                  stock, $1.00 par value. Authorized 50,000,000
                  shares;****41,737,306
                  issued and outstanding**
              
              
              **41,737**
              
              
              41,737**Additional
                  paid in capital**
              
              
              **117,574**
              
              
              117,574**Accumulated
                  deficit**
              
              
              **(80,931**
              **)**
              
              (79,331
              )**Accumulated
                  other comprehensive loss**
              
              
              **(11,018**
              **)**
              
              (11,018
              )**Total
                  shareholders’ equity**
              
              
              **67,362**
              
              
              68,962**Total
                  liabilities and shareholders’ equity**
              
              **$**
              **196,860**
              
              
              198,460





-8-





**Note
      1 - Continued**





**RAYTECH
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATION DATA (UNAUDITED)**


Amounts
                  in thousands, except share data**For
                  the 13 Weeks Ended July 3, 2005**
              
              **For
                  the 26 Weeks Ended July 3, 2005****As
                  Restated**
              
              **As
                  Previously Reported**
              
              **As
                  Restated**
              
              **As
                  Previously Reported**Net
                  sales
              
              **$**
              **60,606**
              
              
              60,606
              
              
              **123,958**
              
              
              123,958Cost
                  of sales
              
              
              **53,655**
              
              
              53,655
              
              
              **105,011**
              
              
              105,011Gross
                  profit
              
              
              **6,951**
              
              
              6,951
              
              
              **18,947**
              
              
              18,947Selling,
                  general and administrative expenses
              
              
              **8,777**
              
              
              8,777
              
              
              **18,395**
              
              
              18,395Restructuring
                  expenses
              
              
              **1,687**
              
              
              1,687
              
              
              **2,074**
              
              
              2,074Operating
                  loss
              
              
              **(3,513**
              **)**
              
              (3,513
              )
              
              **(1,522**
              **)**
              
              (1,522
              )Interest
                  expense
              
              
              **600**
              
              
              600
              
              
              **981**
              
              
              981PI
                  Trust payable (decrease) increase
              
              
              **306**
              
              
              306
              
              
              **(689**
              **)**
              
              (689
              )Other
                  expense, net
              
              
              **460**
              
              
              460
              
              
              **73**
              
              
              73Loss
                  before provision for incometaxes
                  and minority interest
              
              
              **(4,879**
              **)**
              
              (4,879
              )
              
              **(1,887**
              **)**
              
              (1,887
              )(Benefit)
                  provision for income taxes
              
              
              **77**
              
              
              (1,523
              )
              
              **1,269**
              
              
              (331
              )Loss
                  before minority interest
              
              
              **(4,956**
              **)**
              
              (3,356
              )
              
              **(3,156**
              **)**
              
              (1,556
              )Minority
                  interest
              
              
              **─**
              
              
              **─**
              
              
              **180**
              
              
              180Net
                  loss
              
              **$**
              **(4,956**
              **)**
              
              (3,356
              )
              
              **(3,336**
              **)**
              
              (1,736
              )Basic
                  and diluted loss per share
              
              **$**
              **(0.12**
              **)**
              
              (0.08
              )
              
              **(0.08**
              **)**
              
              (0.04
              )





-9-





**Note
      1 - Continued**





**RAYTECH
      CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOW DATA (UNAUDITED)**


Amounts
                  in thousands**For
                  the 26 Weeks Ended July 3, 2005****As
                  Restated**
              
              **As
                  Previously Reported****Cash
                  flows from operating activities:**Net
                  loss
              
              **$**
              **(3,336**
              **)**
              
              (1,736
              )Adjustments
                  to reconcile net loss to net cash usedby
                  operating activities:Depreciation
                  and amortization
              
              
              **8,298**
              
              
              8,298Other
                  non-cash items
              
              
              **899**
              
              
              (701
              )Changes
                  in other operating assets and liabilities:Trade
                  accounts receivable
              
              
              **(4,752**
              **)**
              
              (4,752
              )Inventories
              
              
              **(1,631**
              **)**
              
              (1,631
              )Accounts
                  payable
              
              
              **(541**
              **)**
              
              (541
              )Other
                  operating assets and liabilities, net
              
              
              **853**
              
              
              853Net
                  cash used by operating activities
              
              
              **(210**
              **)**
              
              (210
              )**Cash
                  flow from investing activities:**Capital
                  expenditures
              
              
              **(6,127**
              **)**
              
              (6,127
              )Restricted
                  cash
              
              
              **468**
              
              
              468Other
              
              
              **836**
              
              
              836Net
                  cash used by investing activities
              
              
              **(4,823**
              **)**
              
              (4,823
              )**Cash
                  flow from financing activities:**Net
                  borrowings on short-term notes
              
              
              **3,443**
              
              
              3,443Principal
                  payments on long-term debt
              
              
              **(1,954**
              **)**
              
              (1,954
              )Net
                  cash provided by financing activities
              
              
              **1,489**
              
              
              1,489**Effect
                  of exchange rate changes on cash**
              
              
              **(528**
              **)**
              
              (528
              )**Net
                  change in cash and cash equivalents**
              
              
              **(4,072**
              **)**
              
              (4,072
              )**Cash
                  and cash equivalents at beginning of period**
              
              
              **13,620**
              
              
              13,620**Cash
                  and cash equivalents at end of period**
              
              **$**
              **9,548**
              
              
              9,548**Supplemental
                  schedule of non-cash investing****and
                  financing activities:**Acquisition
                  of APC minority shares owned by Raymarkthrough
                  issuance of a long-term note payable
              
              **$**
              **7,200**
              
              
              7,200





-10-





**Note
      2 - Summary of Significant Accounting Policies**





On
      July
      7, 2005, the Company and The Raytech Corporation Asbestos Personal Injury Trust
      (the “PI Trust”), its largest shareholder, announced that the PI Trust intends
      to undertake a going private transaction of the Company. As part of that
      transaction, the PI Trust entered into a Supplemental Settlement Agreement
      with
      shareholders who were the environmental creditors of the Company in its 2001
      Chapter 11 reorganization. The settlement was conditioned upon receiving the
      approval of the United States Bankruptcy Court for the District of Connecticut
      after a hearing, which was received on August 16, 2005. The PI Trust has filed
      a
      Schedule 13E-3 relating to the going private transaction with the Securities
      and
      Exchange Commission (“SEC”), and is responding to the SEC’s comments on its
      amended filing. After approval of the SEC and upon completion of the settlement,
      the PI Trust will own approximately 90.6% of the outstanding shares of the
      Company. The PI Trust then intends to undertake a short-form merger of the
      Company into a newly created subsidiary that is wholly owned by the Trust,
      terminate the registration of the stock with the Securities and Exchange
      Commission, and seek to de-list the Company’s common stock from trading on the
      New York Stock Exchange. On August 1, 2005, the Company was notified by the
      New
      York Stock Exchange ("NYSE") that it is not in compliance with the NYSE’s
      increased continued listing standards due to the fact that its total market
      capitalization is less than $75 million over a 30-day trading period and its
      stockholders' equity is less than $75 million. The Company responded to the
      NYSE
      that it does not believe that it can take steps which will permit it to satisfy
      the financial continued listing criteria of the NYSE within the 18-month cure
      period provided. The Company is engaged in discussions with NYSE staff regarding
      the timing of the anticipated going private transaction and delisting of its
      stock.





***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. Accordingly,
      they
      do not include all of the information and footnotes required by generally
      accepted accounting principles for complete financial statements. In the opinion
      of management, all adjustments (consisting of normal recurring accruals)
      considered necessary for a fair presentation of the consolidated financial
      position of Raytech Corporation (the "Company") as of October 2, 2005 and the
      consolidated results of operations and cash flows for all interim periods
      presented have been included. 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 14, and the entries to record an impairment
      charge related to exiting the steel stamping business which are discussed in
      Note 16, are of a normal recurring nature. In addition, the Company agreed
      to
      settle its claims against USF&G for, among other things, a payment of $2.4
      million by USF&G, see Note 8 - Litigation to these Condensed Consolidated
      Financial Statements. 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.





-11-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data


**Note
      2, Continued**




**For
                    the 13 weeks ended****October
                    2, 2005**
                
                **September
                    26, 2004****Net
                    loss:**As
                    reported
                
                $
                (5,187
                )
                
                (3,269
                )Deduct:
                    Total stock-based employee compensationexpense
                    determined under fair value basedmethod
                    for all awards, net of related tax effects
                
                
                (170
                )
                
                (670
                )Pro
                    forma
                
                $
                (5,357
                )
                
                (3,939
                )Basic
                    and diluted loss per share:As
                    reported
                
                $
                (0.12
                )
                
                (0.08
                )Pro
                    forma
                
                $
                (0.13
                )
                
                (0.09
                )
  **For
                    the 39 weeks ended****October
                    2, 2005**
                
                **September
                    26, 2004****Net
                    loss:**As
                    reported
                
                $
                (8,523
                )
                
                (1,861
                )Deduct:
                    Total stock-based employee compensationexpense
                    determined under fair value basedmethod
                    for all awards, net of related tax effects
                
                
                (556
                )
                
                (2,011
                )Pro
                    forma
                
                $
                (9,079
                )
                
                (3,872
                )Basic
                    and diluted loss per share:As
                    reported
                
                $
                (0.20
                )
                
                (0.04
                )Pro
                    forma
                
                $
                (0.22
                )
                
                (0.09
                )




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.





There
      were no options granted during the thirty-nine weeks ended October 2, 2005
      or
      fiscal year 2004.





***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.





-12-


**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      2, continued**





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 benefits, depreciation, utility and other costs. The
      Company has not recorded an estimate of the loss over the term of these
      contracts other than purchases related to inventory on hand 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. This policy is followed for all
      periods presented regarding any and all losses on contracts where costs exceed
      selling price. Losses are consistently recorded based on all inventory and
      from
      purchase orders only based on the difference between contracted selling price
      and fully absorbed inventory costs, outlined above, consistent with the
      Company’s standard cost system in conformity with accounting principles
      generally accepted in the United States. The
      loss
      incurred on products sold under loss contracts was $3.5 million and $2.3 million
      in the third quarter of 2005 and the third quarter of 2004, respectively. The
      loss incurred on products sold under loss contracts for the thirty-nine week
      period ended October 2, 2005 was $9.8 million and $5.6 million for the same
      period in the prior year. The reserve for expected loss on goods in inventory
      and customer purchase orders was $1.5 million at both October 2, 2005 and
      January 2, 2005.





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 OEM production in the United States, Germany and China.
      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.





***Legal
      Expenses***





Legal
      expenses are accrued when incurred.





-13-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      2, continued**





***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,
      2007
      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 2007.





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 No. 123, “Accounting for Stock-Based
      Compensation”, and supersedes APB Opinion No. 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 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 No. 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.





-14-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**  **(UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      2, continued**





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
      (“AJCA”).” 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.





***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.





***Other***





For
      a
      summary of all other significant accounting policies, refer to Note 1 - Summary
      of Significant Accounting Policies to the consolidated financial statements,
      included within the Company’s 2004 Form 10-K.





**Note
      3- Liquidity**




Cash
      provided by operating activities was $2.0 million for the thirty-nine week
      period ended October 2, 2005. Components of cash provided by operating
      activities include depreciation and amortization of $13.6 million, an impairment
      charge of $1.8 million and other non-cash items of $0.4 million, partially
      offset by a net loss of $8.5 million. The changes in other operating assets
      and
      liabilities during the first thirty-nine weeks of 2005 included an increase
      in
      working capital of $1.9 million and a reduction in accrued liabilities of $3.4
      million. The Company recorded an impairment charge of $1.8 million to write-down
      the carrying value of assets in its steel stamping business to net realizable
      value, see Note 16 - Impairment to these Condensed Consolidated Financial
      Statements. The working capital change was primarily driven by an increase
      in
      trade accounts receivable and inventories, partially offset by an increase
      in
      accounts payable. The increase in trade accounts receivable at October 2, 2005
      compared to January 2, 2005 is primarily attributable to higher sales during
      the
      third quarter of 2005 compared to the fourth quarter of 2004. The increase
      in
      inventory levels is principally the result of a build-up in inventory to
      facilitate the closure of our Sterling Heights, Michigan facility. The increase
      in accounts payable was also driven primarily by a build-up of inventory in
      the
      Sterling Heights, Michigan facility. In addition, seasonal fluctuations and
      timing of payments have contributed to the increase. The reduction in accrued
      liabilities is primarily related to a decrease in the payable to the PI Trust
      of
      $3.7 million. This reduction was for payments made to the PI Trust related
      to
      tax refunds.





-15-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**  **(UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      3, continued**





Cash
      used
      by operating activities for the thirty-nine weeks ended September 26, 2004
      was
      $1.6 million. Components of cash used by operating activities include a net
      loss
      of $1.9 million, offset by depreciation and amortization of $12.4 million and
      other non-cash items of $0.6 million. The changes in other operating assets
      and
      liabilities during the first thirty-nine weeks of 2004 was an unfavorable change
      of $12.7 million, primarily driven by an increase in trade accounts receivable
      and inventories. The increase in trade accounts receivable at September 26,
      2004
      compared to December 28, 2003 is primarily attributed to higher sales during
      the
      third quarter of 2004 compared to the fourth quarter of 2003. The increase
      in
      inventory levels reflects the impact of increased production and higher steel
      prices.





Capital
      expenditures through October 2, 2005 of $8.3 million compared to $3.3 million
      for the same period in the prior year. The capital expenditures are as planned.
      The Company completed the building expansion which began in 2004 at the facility
      in China having additional expenditures in 2005 of $0.2 million. The new
      facility will increase production capacity and position the Company to take
      advantage of the growing market in China. In addition, the Domestic OEM and
      Aftermarket segments have increased capital spending $2.0 million and $1.5
      million, respectively, over the thirty-nine week period in 2004. The increased
      spending primarily relates to cost reduction programs and additional R&D
      equipment. Additional capital expenditures of $0.8 million in Germany are
      primarily for cost reductions. Other normal capital expenditures accounted
      for
      approximately $0.5 million during the period.





Cash
      and
      cash available, net of minimum cash and minimum availability requirements,
      under
      existing lines of credit at October 2, 2005 totaled $13.1 million compared
      to
      $15.7 million at January 2, 2005, a decrease of $2.6 million. The decrease
      is
      due primarily to capital expenditures during the period.





The
      total
      borrowings at October 2, 2005 of $35.9 million compares to total borrowings
      of
      $26.7 million at year end 2004, an increase of $9.2 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 stock owned by Raymark,


see
      Note
      14 - Acquisition of APC Minority Shares owned by Raymark to these Condensed
      Consolidated Financial Statements for a further discussion of the APC stock
      acquisition. Available lines of credit, net of minimum availability
      requirements, at October 2, 2005 of $4.1 million compared to $4.6 million at
      year end 2004, a decrease of $0.5 million. Full details of the Company’s debt
      are contained in Note 7 - Debt to these 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 Raytech Corporation (“the parent”). During the thirty-nine week
      period ended October 2, 2005, the parent made irrevocable cash contributions
      of
      $5.0 million to RPC, a borrower, to remedy the debt covenant non-compliance.
      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 8 - Litigation to these Condensed Consolidated Financial
      Statements.





-16-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**  **(UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      3, continued**





Certain
      tax issues are discussed in Note 10 - Income Taxes to these Condensed
      Consolidated Financial Statements, which provides additional information
      concerning the status of the recent Internal Revenue Service audit.





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 8 - Litigation
                to these
                Condensed Consolidated Financial Statements. Management expects that
                $0.8
                million will be spent during 2005 and the balance during 2006 or
                later.





·
            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
                under-funded


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, $1.2 million of which
      was
      funded during the first nine months 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, other than operating losses incurred during the period
                of
                closure, will be approximately $6.2 million, of which we expect to
                expend
                $4.0 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 13 - Restructuring Programs to these 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. 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 $1.5 million at year end
                2005.





-17-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**  **(UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      3, continued**





·
            The
                Company incurred costs associated with the retirement of its former
                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 $0.8 million was paid during 2004, $0.4 million
                was paid
                during the first quarter of 2005 and $0.2 million was paid during
                the
                third quarter of 2005.





·
            The
                Company recently announced two strategic profit initiatives to reduce
                costs and improve productivity as discussed in Note 16 - Impairment
                and
                Note 17 - Subsequent Events to these Condensed Consolidated Financial
                Statements.





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. The Company is reviewing
      alternatives with its current lenders and others, which would supply additional
      liquidity for expansion and relocation costs, which are considerations in the
      Company’s strategic planning process.





-18-


**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**  **(UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      4 - Restricted Cash**





Restricted
      cash relates to the following:


**October
                  2, 2005**
              
              **January
                  2, 2005**Payable
                  to the PI Trust
              
              **$**
              **635**
              
              
              3,199Letters
                  of credit
              
              
              **2,198**
              
              
              1,939Other
              
              
              **409**
              
              
              410**$**
              **3,242**
              
              
              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 Company paid
      $2.6 million of the above payable to the PI Trust during the thirteen week
      period ended October 2, 2005.





The
      letters of credit collateralize certain obligations relating primarily to
      workers' compensation and certain supplier accounts.





**Note
      5 - Inventories**





Inventories,
      net, consist of the following:


**October
                  2, 2005**
              
              **January
                  2, 2005**Raw
                  material
              
              **$**
              **13,299**
              
              
              12,464Work
                  in process
              
              
              **12,163**
              
              
              11,020Finished
                  goods
              
              
              **15,059**
              
              
              16,098**$**
              **40,521**
              
              
              39,582





Inventory
      reserves were $5,751 and $4,729 at October 2, 2005 and January 2, 2005,
      respectively.





-19-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      6 - Goodwill and Other Intangible Assets**





**October
                  2, 2005**
              
              **January
                  2, 2005****Gross**
                **Carrying
                  Amount**
              
              **Accumulated
                  Amortization**
              
              **Net
                  Carrying Amount**
              
              **Gross**
                **Carrying
                  Amount**
              
              **Accumulated
                  Amortization**
              
              **Net
                  Carrying Amount****Goodwill**
              
              **$**
              **3,687**
              
              
              **─**
              
              
              **3,687**
              
              
              5,912
              
              
              ─
              
              
              5,912Finite
                  life intangible assets:Unpatented
                  technology
              
              **$**
              **14,382**
              
              
              **8,200**
              
              
              **6,182**
              
              
              14,360
              
              
              6,972
              
              
              7,388Distribution
                  base
              
              
              **5,737**
              
              
              **1,289**
              
              
              **4,448**
              
              
              5,716
              
              
              1,073
              
              
              4,643Total
              
              **$**
              **20,119**
              
              
              **9,489**
              
              
              **10,630**
              
              
              20,076
              
              
              8,045
              
              
              12,031Indefinite
                  life intangible assets:Trademarks
              
              
              
              
              
              
              
              
              **10,786**
              
              
              
              
              
              
              
              
              10,700**Intangible
                  assets, net**
              
              
              
              
              
              
              
              **$**
              **21,416**
              
              
              
              
              
              
              
              
              22,731





The
      weighted-average amortization periods for the unpatented technology and the
      distribution base are 9 and 20 years, respectively. Amortization expense for
      the
      thirteen weeks ended October 2, 2005 and September 26, 2004 amounted to $483
      and
      $479, respectively. Amortization expense for the thirty-nine weeks ended October
      2, 2005 and September 26, 2004 amounted to $1,444 and $1,441,
      respectively.





Estimated
      annual amortization expense is as follows:





**For
                the year ending:****2005**
            
            $
            1,922**2006**
            
            
            1,922**2007**
            
            
            1,622**2008**
            
            
            1,522**2009**
            
            
            1,522





Goodwill
      and trademarks 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.





During
      the second quarter of 2005, goodwill was reduced by $1.6 million related to
      the
      favorable resolution of the Internal Revenue Service audit for periods prior
      to
      the Company’s emergence from bankruptcy.





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 allocation of the purchase price
      resulted in the recognition of intangible assets of $156, consisting of goodwill
      $27, unpatented technology $22, distribution base $21 and trademarks
      $86.





-20-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      7 - Debt**





Debt
      at
      October 2, 2005 and January 2, 2005 consists of the following:




**October
                  2, 2005**
              
              **January
                  2, 2005****Current**
              
              **Non-Current**
              
              **Total**
              
              **Curent**
              
              **Non-Current**
              
              **Total****Domestic
                  bank debt**Line
                  of credit
              
              **$**
              **15,302**
              
              
              **─**
              
              
              **15,302**
              
              
              10,762
              
              
              ─
              
              
              10,762Term
                  loansDomestic
                  OEM
              
              
              **3,344**
              
              
              **─**
              
              
              **3,344**
              
              
              1,055
              
              
              3,078
              
              
              4,133Aftermarket
              
              
              **1,000**
              
              
              **4,167**
              
              
              **5,167**
              
              
              996
              
              
              4,837
              
              
              5,833**Total
                  domestic bank debt**
              
              
              **19,646**
              
              
              **4,167**
              
              
              **23,813**
              
              
              12,813
              
              
              7,915
              
              
              20,728**Foreign
                  bank debt**Line
                  of credit
              
              
              **─**
              
              
              **─**
              
              
              **─**
              
              
              ─
              
              
              ─
              
              
              ─Term
                  loansEurope
              
              
              **949**
              
              
              **2,361**
              
              
              **3,310**
              
              
              1,056
              
              
              3,406
              
              
              4,462Asia
              
              
              **1,300**
              
              
              **─**
              
              
              **1,300**
              
              
              1,300
              
              
              ─
              
              
              1,300**Total
                  foreign bank debt**
              
              
              **2,249**
              
              
              **2,361**
              
              
              **4,610**
              
              
              2,356
              
              
              3,406
              
              
              5,762**Total
                  bank debt**
              
              
              **21,895**
              
              
              **6,528**
              
              
              **28,423**
              
              
              15,169
              
              
              11,321
              
              
              26,490**Note
                  payable - Aftermarket**
              
              
              **─**
              
              
              **7,200**
              
              
              **7,200**
              
              
              ─
              
              
              ─
              
              
              ─**Leases**
              
              
              **113**
              
              
              **196**
              
              
              **309**
              
              
              111
              
              
              95
              
              
              206**Total
                  debt**
              
              **$**
              **22,008**
              
              
              **13,924**
              
              
              **35,932**
              
              
              15,280
              
              
              11,416
              
              
              26,696




The
      carrying value of the Company's debt approximates fair value.





-21-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      7, 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 October 2, 2005, the amount available under the
      revolving line of credit was $2.0 million of which $1.5 million is required
      to
      be maintained as minimum availability. 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, material
      adverse change clause and a minimum availability requirement. At October 2,
      2005
      and January 2, 2005, the aggregate pledged  assets
      of
      RPC and RACC, excluding real property, amounted to $63.4 million and $62.5
      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 which 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 $4.1 million at October 2, 2005. Additionally,
      the fifth amendment alters the determination of availability under the revolving
      line of credit to limit the amount of availability on receivables from a certain
      customer as they have a potential right of setoff. 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 October 2, 2005 and January
      2,
      2005, the aggregate pledged assets of APC, RSI, RPI and Raybestos Powertrain,
      LLC were $40.1 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 and imposes a minimum $2.5 million cash on hand
      requirement.





-22-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      7, continued**





The
      Company's wholly-owned German subsidiary, Raybestos Industrie-Produkte GmbH
      (“RIP”), has available lines of credit of EUR3.0 million with several German
      banks. Interest is charged at rates between 3.80% and 10.75%. The lines are
      repayable on demand. At October 2, 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 with outstanding loans at October 2, 2005
      of $3.3 million with the maturities ranging 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 2.14% through 6.17%. At October 2, 2005 and January 2, 2005,
      respectively, the aggregate pledged assets, consisting of machinery and
      equipment, amounted to EUR15.5 million ($18.7 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 October 2, 2005
      and
      January 2, 2005 was $1.3 million. The Company refinanced the outstanding loans
      in May 2005 into one loan agreement. The loans bear interest at LIBOR plus
      1.5%
      and are adjusted every three months. The 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 therefore, 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 bears 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 October 2, 2005
      and
      January 2, 2005 were 6.57% and 4.85%, respectively.





-23-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      8 - 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 (“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
      IDEM
      entered into an agreed order (the “Agreed Order”) for a risk-based remediation
      of PCBs and lead in Shelly Ditch. When IDEM later sought to unilaterally
      withdraw from the Agreed Order, RPC appealed and the Marion County Superior
      Court ordered IDEM to reinstate the Agreed Order. Meanwhile, at 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 IDEM regarding potential environmental remediation downstream of the
      Site.





By
      October 2005, RPC had spent approximately $18.7 million on removal of lead
      and
      PCB contaminated soils from the Site. RPC had accrued $0.4 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 October
      2, 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.





-24-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      8, 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 October 2, 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
      October 2, 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. ****





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





-25-




RAYTECH
      CORPORATION


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      8, continued**





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. On August 9, 2005, RPC agreed to settle its claims against
      USF&G for, among other things, a payment of $2.4 million by USF&G. The
      $2.4 million payment from USF&G was received in August 2005 and was recorded
      as other income in these Condensed Consolidated Statements of Operations. On
      August 10, 2005, the arbitration panel granted the insurers’ motions for summary
      determination and denied a motion for summary determination by RPC, ruling
      that
      the USF&G and Westchester insurance policies do not provide coverage for
      defense and indemnity of the Shelly Ditch remediation expenses. The Company
      intends to appeal this ruling as to Westchester.





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. On October 14, 2005, the Company and RPC agreed to
      settle their claims against National Union for, among other things, a payment
      by
      National Union to be finalized during the fourth quarter.





RPC
      believes that a recovery from Reliance Insurance of a portion of the
      environmental costs described above is reasonably possible. However, due to
      the
      uncertainty of the amount and timing, RPC has not recorded any recovery other
      than the USF&G settlement described above, 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. Trial of this matter began in August 2005 and is expected to
      conclude in November 2005, but the court has stated it will not render a
      judgment until early 2006.





*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 July
      2005, RPC was awarded reimbursement of its costs (not including attorneys’ fees)
      incurred in defending the action, the amount of





-26-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      8, continued**





which
      was
      not material. The parties have briefed and argued an appeal by ABD 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.





Litigation
      Costs





The
      Company does not accrue probable and estimable litigation costs related to
      any
      of the above litigation. The Company accrues legal costs when they are
      incurred.





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
      9 - 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.





-27-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      9, continued**





Information
      relating to operations by industry segment follows:




**For
                  the 13 Weeks Ended**
              
              **For
                  the 39 Weeks Ended****October
                  2, 2005**
              
              **September
                  26, 2004**
              
              **October
                  2, 2005**
              
              **September
                  26, 2004**Net
                  SalesDomestic
                  OEM
              
              **$**
              **32,271**
              
              
              30,705
              
              
              **103,081**
              
              
              94,468International
              
              
              **16,190**
              
              
              16,640
              
              
              **53,615**
              
              
              50,157Aftermarket
              
              
              **12,245**
              
              
              11,570
              
              
              **39,078**
              
              
              37,572Intersegment
                  elimination (1)
              
              
              **(5,757**
              **)**
              
              (4,931
              )
              
              **(16,867**
              **)**
              
              (13,210
              )Net
                  sales to external customers
              
              **$**
              **54,949**
              
              
              53,984
              
              
              **178,907**
              
              
              168,987Gross
                  ProfitDomestic
                  OEM
              
              **$**
              **1,118**
              
              
              2,645
              
              
              **5,401**
              
              
              11,062International
              
              
              **4,075**
              
              
              4,117
              
              
              **14,408**
              
              
              13,553Aftermarket
              
              
              **3,327**
              
              
              3,419
              
              
              **10,050**
              
              
              11,408Corporate
                  and intersegment elimination
              
              
              **(1,482**
              **)**
              
              (1,267
              )
              
              **(3,874**
              **)**
              
              (3,521
              )Consolidated
              
              **$**
              **7,038**
              
              
              8,914
              
              
              **25,985**
              
              
              32,502Operating
                  Profit (loss)Domestic
                  OEM
              
              **$**
              **(4,516**
              **)**
              
              (107
              )
              
              **(6,501**
              **)**
              
              2,629International
              
              
              **1,347**
              
              
              1,368
              
              
              **4,165**
              
              
              5,425Aftermarket
              
              
              **1,502**
              
              
              1,706
              
              
              **4,804**
              
              
              6,525Corporate
              
              
              **(4,772**
              **)**
              
              (3,913
              )
              
              **(10,429**
              **)**
              
              (10,963
              )Consolidated
              
              **$**
              **(6,439**
              **)**
              
              (946
              )
              
              **(7,961**
              **)**
              
              3,616Income
                  (loss) before provision for incometaxes
                  and minority interestDomestic
                  OEM
              
              **$**
              **(2,789**
              **)**
              
              (1,057
              )
              
              **(9,506**
              **)**
              
              510International
              
              
              **1,383**
              
              
              1,255
              
              
              **9,410**
              
              
              5,214Aftermarket
              
              
              **1,337**
              
              
              1,628
              
              
              **4,442**
              
              
              6,442Corporate
                  and intersegment elimination
              
              
              **(4,524**
              **)**
              
              (4,295
              )
              
              **(10,826**
              **)**
              
              (10,818
              )Consolidated
              
              **$**
              **(4,593**
              **)**
              
              (2,469
              )
              
              **(6,480**
              **)**
              
              1,348




(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 Domestic OEM products
                to
                the Aftermarket segment.





-28-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      10 - Income Taxes**





The
      tax
      provision recorded for the thirteen week and thirty-nine week periods ended
      October 2, 2005 is an expense of $0.6 million and $1.8 million, respectively.
      This compares to a provision of $0.7 million and $2.6 million for the same
      periods in 2004, respectively. The provision for the current periods include
      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.





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 October 2, 2005, the Company has tax loss
      carryforwards of $90.0 million and tax credit carryforwards of $2.8 million.
      The
      net operating loss carryforwards are allocated between the Company and the
      PI
      Trust in the amounts of $24.7 million and $65.3 million, respectively. NOL
      carryforwards that inure to the PI Trust are set to expire between 2021 and
      2024. 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 certain 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.
      Alternatively, the method of allocation of current and future net operating
      losses between the Company and the PI Trust might be such that those generated
      by the PI Trust would be utilized before those generated by the Company or
      vice
      versa. Utilizing the net operating losses of the PI Trust first would require
      the Company to reimburse them for the tax benefit associated with their net
      operating losses of $65.3 million, resulting in additional cash flow for the
      PI
      Trust. Conversely, if the net operating losses of the Company were to be
      utilized first, it would result in additional cash flow for the Company.
      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 six months. Further, it is expected that
      the formalized agreement with the PI Trust will reflect the utilization of
      the
      net operating losses 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. 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 October 2, 2005 and January 2,
      2005, respectively.





During
      the thirty-nine week period ended October 2, 2005, the Company recorded a $1.0
      million decrease in the deferred payable to the PI Trust due to the acquisition
      of the shares of APC owned by Raymark on March 21, 2005, as discussed in Note
      14, 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
      its
      deferred tax scheduling analysis and determined that the deferred payable to
      the
      PI Trust should be reduced by $1.0 million and $1.4 million of additional
      valuation allowance is required of which $1.0 million is attributable to the
      PI
      Trust and $0.4 million to the Company. In addition, there was an increase of
      $0.3 million in the deferred payable to the PI Trust during the second quarter
      of 2005 related to an Internal Revenue Service audit. The benefit of the
      reduction in the deferred payable to the PI Trust has been recorded as other
      income in these Condensed Consolidated Statements 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.





-29-


**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      10, continued**




Also
      during the thirty-nine week period ended October 2, 2005, the Company recorded
      a
      $1.6 million reduction to goodwill based on the final outcome of an IRS audit
      for 1996 through 2001 as approved by the Congressional Joint Committee on
      Taxation on June 22, 2005. The settlement results in no payment of Federal
      tax
      given the Company’s net operating losses.




The
      State
      of Indiana has completed its audit of Raytech for the years 1992 through
      2001.  As a result of the audit, Raytech was denied refunds claimed
      for
      Indiana gross income tax paid in the years 1992 through 1997 of $1,044 and
      certain interest on amounts refunded.  Raytech filed a protest with
      respect
      to these items with the Indiana Department of Revenue (IDOR), and a hearing
      was
      held on August 20, 2003.  On September 18, 2003, Raytech received an
      order
      denying the claim for refund.  In response to the order, Raytech filed
      a
      petition with the Indiana Tax Court requesting a refund of Indiana gross income
      tax and interest on amounts refunded.  On December 1, 2005, the court
      granted summary judgment in favor of Raytech as it relates to the refund of
      gross income tax.  The court granted summary judgment in favor of the
      IDOR
      as it relates to statutory interest incurred between 1992 and the date the
      refund request was filed in 2002.  The IDOR and the Company have the
      right
      to appeal the court's December 1, 2005 decision to the Indiana Supreme
      Court.  The Company expects to receive, subject to any appeal, $1,044
      and
      interest from the date of filing the refund request in 2002 through the date
      of
      payment by the IDOR.  Pursuant to the Agreement, any refunds received
      will
      be payable, net of Federal tax to the PI Trust.


-30-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      11 - Loss Per Share** ****


**For
                  the 13 Weeks Ended**
              
              **For
                  the 39 Weeks Ended****October
                  2, 2005**
              
              **September
                  26, 2004**
              
              **October
                  2, 2005**
              
              **September
                  26, 2004**Net
                  loss
              
              **$**
              **(5,187**
              **)**
              
              (3,269
              )
              
              **(8,523**
              **)**
              
              (1,861
              )Weighted
                  average shares
              
              
              **41,737,306**
              
              
              41,737,306
              
              
              **41,737,306**
              
              
              41,737,306Basic
                  and diluted lossper share
              
              **$**
              **(0.12**
              **)**
              
              (0.08
              )
              
              **(0.20**
              **)**
              
              (0.04
              )




Options
      to purchase 1,251,615 shares of common stock were not included in the
      computation of diluted earnings per share for the thirteen and thirty-nine
      weeks
      ended October 2, 2005 and options to purchase 3,034,414 shares of common stock
      were not included in the computation of diluted earnings per share for the
      thirteen and thirty-nine weeks ended September 26, 2004 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
      12 - Pension and Postretirement Benefit Plans**





Components
      of Net Periodic Benefit Cost


**Pension
                    Benefits**
                
                **Postretirement
                    Benefits****For
                    the 13 Weeks Ended****October
                    2, 2005**
                
                **September
                    26, 2004**
                
                **October
                    2, 2005**
                
                **September
                    26, 2004**Service
                    Cost
                
                **$**
                **130**
                
                
                146
                
                
                **252**
                
                
                196Interest
                    Cost
                
                
                **619**
                
                
                696
                
                
                **365**
                
                
                290Expected
                    return on plan assets
                
                
                **(698**
                **)**
                
                (638
                )
                
                **─**
                
                
                ─Amortization
                    of prior service cost
                
                
                **15**
                
                
                35
                
                
                **─**
                
                
                ─Amortization
                    of net loss
                
                
                **113**
                
                
                110
                
                
                **110**
                
                
                41Net
                    periodic benefit cost
                
                **$**
                **179**
                
                
                349
                
                
                **727**
                
                
                527
  **Pension
                    Benefits**
                
                **Postretirement
                    Benefits****For
                    the 39 Weeks Ended****October
                    2, 2005**
                
                **September
                    26, 2004**
                
                **October
                    2, 2005**
                
                **September
                    26, 2004**Service
                    Cost
                
                **$**
                **390**
                
                
                438
                
                
                **756**
                
                
                590Interest
                    Cost
                
                
                **1,857**
                
                
                2,090
                
                
                **1,094**
                
                
                870Expected
                    return on plan assets
                
                
                **(2,094**
                **)**
                
                (1,909
                )
                
                **─**
                
                
                ─Amortization
                    of prior service cost
                
                
                **45**
                
                
                104
                
                
                **─**
                
                
                ─Amortization
                    of net loss
                
                
                **340**
                
                
                325
                
                
                **331**
                
                
                122Net
                    periodic benefit cost
                
                **$**
                **538**
                
                
                1,048
                
                
                **2,181**
                
                
                1,582




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.





-31-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      12, 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 $0.9 million to fund its postretirement plan in 2005. As of October
      2,
      2005, $2.5 million of contributions have been made. The Company presently
      anticipates contributing an additional $0.6 million to fund its pension and
      postretirement 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 October 2, 2005,
      the outstanding balance of the deferred amounts was approximately $0.8 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 October 2, 2005 the carrying value of
      the
      real property mortgaged was $8.8 million.








**Note
      13 - 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 Liverpool, England facility has been closed and the
      closure of the Sterling Heights facility is expected to be completed during
      2005
      or early 2006. 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 was completed during the third quarter
      of 2005. Restructuring expense of $0.5 million was recorded in the thirteen
      week
      period ended October 2, 2005 as a change in estimate of the closure costs for
      the Corporate office.


The
      table
      below sets forth the Company’s estimate of the total cost of the restructuring
      programs, the portion recognized through October 2, 2005 and the portion
      expected to be recognized in a future period:


**October
                  2, 2005 Expected Total Cost**
              
              **Recognized
                  through October 2, 2005**
              
              **To
                  Be Recognized in Future**Severance
                  and termination benefits
              
              $
              4,127
              
              
              4,087
              
              
              40Lease
                  termination cost
              
              
              1,006
              
              
              1,006
              
              
              ─Asset
                  impairment
              
              
              1,654
              
              
              1,654
              
              
              ─Other
              
              
              2,236
              
              
              1,561
              
              
              675Total
              
              $
              9,023
              
              
              8,308
              
              
              715





-32-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      13, 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 October 2, 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 or early
      2006 and that these amounts will be paid during 2005 and 2006.





The
      lease
      termination costs relate to the Liverpool, England facilities and the Shelton,
      Connecticut office. The estimated costs are based on the Company’s ongoing
      discussions with the landlord and, for the Liverpool England facilities, does
      not include the full minimum lease commitment based on the original terms of
      the
      lease. The Company expects that these costs will be recognized and paid in
      a
      future period during 2005 or early 2006, when the facilities are vacated.





The
      asset
      impairment charge relates to equipment located at the Liverpool, England
      facilities, determined to be impaired in 2004 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 lease termination costs of $1.7
      million and accelerated depreciation of $0.5 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
      thirty-nine weeks ended October 2, 2005:


**Severance
                  and Termination Benefits**
              
              **Asset
                  Impairment**
              
              **Other**
              
              **Total**Balance
                  January 2, 2005
              
              $
              3,104
              
              
              ─
              
              
              275
              
              
              3,379Charges
              
              
              1,000
              
              
              44
              
              
              2,169
              
              
              3,213Non-cash
                  charges
              
              
              ─
              
              
              ─
              
              
              (515
              )
              
              (515
              )Cash
                  payments
              
              
              (1,313
              )
              
              ─
              
              
              ─
              
              
              (1,313
              )Currency
                  translation
              
              
              (9
              )
              
              ─
              
              
              (73
              )
              
              (82
              )**Balance
                  October 2, 2005**
              
              **$**
              **2,782**
              
              
              **44**
              
              
              **1,856**
              
              
              **4,682**




The
      charges recognized in the thirteen and thirty-nine week period ended October
      2,
      2005 have been reported as restructuring expenses in these Condensed
      Consolidated Statements of Operations, except $146 and $515 representing
      accelerated depreciation costs that have been reported as a component of cost
      of
      sales in the respective periods.





-33-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data








**Note
      14 - 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 therefore, 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 bears
      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 purchase price
      allocation to the assets and liabilities at the date of acquisition. Certain
      minor adjustments to the previous estimates were recorded in the second quarter
      of 2005.


Cash
                  and cash equivalents
              
              $
              1,460Trade
                  accounts receivable
              
              
              1,410Inventories
              
              
              3,758Property,
                  plant and equipment
              
              
              162Intangible
                  assets
              
              
              156Other
                  assets
              
              
              1,872Total
                  assets
              
              $
              8,818Notes
                  payable and current portion of long term debt
              
              
              (10
              )Accounts
                  payable and accrued liabilities
              
              
              (1,112
              )Long-term
                  debt
              
              
              (23
              )Other
                  liabilities
              
              
              (473
              )Total
                  liabilities
              
              $
              (1,618
              )**Purchase
                  price**
              
              **$**
              **7,200**





-34-





**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


Dollars
      in thousands, unless otherwise noted, except per share data





**Note
      15 - 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
      and
      we have notified the customer that the Company is denying liability for the
      claim.  If the customer pursues the claim, the Company intends to defend
      itself; 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.    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.





**Note
      16 - Impairment**





In
      September 2005 the Company decided that as part of its strategy to improve
      production and profitability in its Domestic OEM segment, Raytech’s subsidiary,
      Raybestos Products Company (“RPC”) will exit its steel stamping business, which
      is primarily used to manufacture parts for its heavy-duty friction business.
      RPC
      will begin transitioning the steel stamping business to outside suppliers as
      well as moving the related heavy-duty paper assembly plant to a location near
      the outside supplier during the fourth quarter of 2005 and expects to complete
      such transition by the end of 2006. As a result of this decision, the Company
      recorded an impairment charge of $1.8 million during the third quarter of 2005
      to write-down the carrying value of the related assets to net realizable value
      and reclassified $2.4 million of equipment to assets held for sale.





**Note
      17 - Subsequent Events**





On
      November 1, 2005, the Company announced that as part of its continuing strategy
      to improve production and profitability in its Domestic OEM segment, RPC plans
      to relocate its conventional automotive assembly operations from Crawfordsville,
      Indiana to a more cost competitive location. RPC expects such relocation to
      occur over the next twelve to eighteen months and plans to work with its
      affected automotive customers to develop the specific timing for such a move.
      The decision to move the automotive assembly operations was made after RPC’s
      Crawfordsville, Indiana union voted not to open the existing union contract
      in
      order to negotiate a matching of cost savings that could be achieved by
      relocating to another facility. RPC has agreed with union representatives on
      a
      transition benefits package for the initial group of employees expected to
      be
      displaced by the Company’s decision to exit its steel stamping business and to
      move the related heavy-duty assembly operations. RPC expects to negotiate
      transition benefits as part of the negotiation of the union contract that
      expires on May 1, 2006 for the remaining group of employees expected to be
      displaced by its decision to exit its steel stamping business and to move the
      related heavy-duty assembly operations, as well as those employees expected
      to
      be displaced by the auto assembly operations move.





Although
      the Company anticipates that material charges will be incurred under generally
      accepted accounting principles, due to the uncertainty of labor negotiations
      and
      the details and timing of the relocation, the Company is unable at this time
      to
      make a good faith determination of the estimate of restructuring
      charges.





On
      November 10, 2005, the Company was notified that a customer of its International
      segment is insolvent and continuing business under the authority of the
      Commercial Court. As of October 2, 2005, the Company has an outstanding
      receivable of $0.2 million with this customer. As a result of this announcement,
      the Company recorded a reserve for the outstanding receivable of $0.2 million
      during the third quarter of 2005. Although the Company anticipates additional
      charges may be incurred in the fourth quarter related to items sold subsequent
      to October 2, 2005, the Company estimates that amount to be less than $0.1
      million.




-35-


On
      November 21, 2005, the Company decided that in order to meet the terms reached
      with a certain major customer on a revised sales contract provision, it would
      keep its Sterling Heights, Michigan facility open during a portion of the first
      quarter of 2006. The new sales contract provision requires 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. The
      Company estimates the additional cost of keeping the facility open into 2006
      will be in the $0.6 million to $1.0 million range.





-36-





**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 - Summary
      of Significant Accounting Policies to the consolidated financial statements,
      included within the Company’s 2004 Form 10-K, 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 thirty-nine
      week
      period ended October 2, 2005.





Overview





During
      the third quarter of 2005, the Company determined that certain accounting for
      taxes in the previously filed second quarter Form 10Q for the period ended
      July
      3, 2005 needed to be modified.





An
      Internal Revenue Service settlement that was finalized in the second quarter
      was
      recorded as a $1.6 million benefit in the tax provision. The tax reserves,
      that
      were no longer necessary after the Internal Revenue Service settlement, were
      established as part of fresh start accounting in 2001, when the Company emerged
      from Chapter 11 bankruptcy. The reversal of the $1.6 million reserve for Federal
      income tax contingencies should have resulted in a reduction of goodwill rather
      than being recorded as a benefit in the income tax provision. The financial
      statements in this Form 10-Q reflect the proper accounting.





The
      operating loss for the thirteen week period ended October 2, 2005 of $6.4
      million compares to an operating loss of $0.9 million in the same period in
      the
      prior year, an increase of $5.5 million. The Company recorded an impairment
      charge in the Domestic OEM segment of $1.8 million related to exiting the steel
      stamping business, see Note 16 - Impairment to these Condensed Consolidated
      Financial Statements. The operating loss was due primarily to the continued
      poor
      performance of the Domestic OEM segment. The operating loss for the thirty-nine
      week period ended October 2, 2005 of $8.0 million compares to an operating
      profit of $3.6 million for the same period in the prior year, a decline of
      $11.6
      million. The poor performance in the nine month period is driven by the Domestic
      OEM segment. As a whole, the Company increased sales $9.9 million or 5.9%
      compared to the nine month period in 2004, while gross profit declined $6.5
      million or 20.1% excluding the impairment charge. The decline in gross profit
      is
      substantially due to the Domestic OEM segment. The consolidated and operating
      segment results are discussed more fully in the following section.





-37-


During
      2005, the Company will continue to 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. In addition, the Company
      is
      evaluating alternative strategies for Domestic OEM production, which could
      include outsourcing certain production processes and relocation of certain
      operations, see Note 16 - Impairment and Note 17 - Subsequent Events to these
      Condensed Consolidated Financial Statements.





The
      Company recorded net sales of $54.9 million for the thirteen week period ended
      October 2, 2005, an increase of $1.0 million or 1.8% over the same period in
      the
      prior year. The increased sales were due primarily to the Domestic OEM segment
      as market demand increased in the heavy-duty product line; also, increased
      auto
      production due to the plant closure of the Sterling Heights, Michigan, facility
      provided additional sales. The Company recorded net sales of $178.9 million
      for
      the thirty-nine week period ended October 2, 2005, which compares to $169.0
      million for the same period in the prior year, an increase of $9.9 million
      or
      5.9%. The increase in the thirty-nine week period is due to the same reasons
      noted above. The discussion by segment provides a more detailed
      discussion.





Gross
      profit for the third quarter decreased $1.9 million or 21.1% compared to the
      same period in the prior year. The decline in gross profit was due primarily
      to
      the poor performance of the Domestic OEM segment, the details of which are
      discussed below. The gross profit for the nine month period ended October 2,
      2005 declined $6.5 million or 20.1% compared to the same period in the prior
      year. The reduced gross profit for Raytech 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, medical costs, utilities and operating supplies,
      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
      negative. The Company continues to experience pricing pressure from customers,
      specifically in the Domestic OEM segment and in China.





The
      SG&A expense increased $1.2 million for the thirteen week and increased $0.6
      million for the thirty-nine week periods ended October 2, 2005 compared to
      the
      same periods in the prior year. The increase in the third quarter of 2005
      primarily reflects higher transportation costs and an addition to the bad debt
      reserve, see Note 17 - Subsequent Events to these Condensed Consolidated
      Financial Statements.





The
      Company recorded an impairment charge in the Domestic OEM segment of $1.8
      million during the thirteen week period ended October 2, 2005 related to exiting
      the steel stamping business, see Note 16 - Impairment to these Condensed
      Consolidated Financial Statements.





The
      restructuring expense recorded in 2005 relates to the restructuring programs
      initiated during 2004, see Note 13 - Restructuring Programs to these Condensed
      Consolidated Financial Statements for further details regarding these
      restructuring programs.





Interest
      expense is incurred on the Company's debt facilities, see Note 7 - Debt to
      these
      Condensed Consolidated Financial Statements.





In
      February 2002, RPC filed a third-party complaint 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. On August 9, 2005, RPC agreed to settle its claims against USF&G for,
      among other things, a payment of $2.4 million by USF&G. This payment was
      received in August 2005 and has been recorded as other income in these Condensed
      Consolidated Statements of Operations, see Note 8 - Litigation to these
      Condensed Consolidated Financial Statements for further details.





-38-





During
      the thirty-nine week period ended October 2, 2005, the Company recorded a $1.0
      million decrease in the deferred payable to the PI Trust due to the acquisition
      of the shares of APC owned by Raymark on March 21, 2005, as discussed in Note
      14
      - Acquisition of APC Minority Shares owned by Raymark to these Condensed
      Consolidated Financial Statements, 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 its deferred tax scheduling analysis and determined that
      the
      deferred payable to the PI Trust should be reduced by $1.0 million and $1.4
      million of additional valuation allowance is required of which $1.0 million
      is
      attributable to the PI Trust and $0.4 to the Company. In addition, there was
      an
      increase of $0.3 million in the deferred payable to the PI Trust during the
      second quarter of 2005 related to an Internal Revenue Service audit. The benefit
      of the reduction in the deferred payable to the PI Trust has been recorded
      as
      other income in these Condensed Consolidated Statements 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.





The
      Company's income taxes are discussed in detail in Note 10 - Income Taxes to
      these 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 14 - Acquisition of APC Minority Shares owned by Raymark
      to
      these Condensed Consolidated Financial Statements.





As
      a
      result of the above, the Company’s net loss increased $1.9 million and $6.7
      million for the thirteen and thirty-nine week periods compared to the same
      periods in the prior year. The loss per basic and fully diluted shares for
      the
      third quarter 2005 of $0.12 compares to $0.08 in the same period in the prior
      year. The loss per basic fully diluted share for the nine month period of $0.20
      compares to a loss per basic and fully diluted share of $0.04 for the same
      period in the prior year.





-39-





**Domestic
      OEM**





The
      following table sets forth selected income statement data for the Domestic
      OEM
      segment for the thirteen and thirty-nine weeks ended October 2, 2005 and
      September 26, 2004.


Dollar
                    amounts in thousands**For
                    the 13 weeks ended****October
                    2, 2005**
                
                **September
                    26, 2004**Net
                    sales
                
                **$**
                **32,271**
                
                
                **100.0**
                **%**
                
                30,705
                
                
                100.0
                %Gross
                    profit
                
                
                **1,118**
                
                
                **3.5**
                **%**
                
                2,645
                
                
                8.6
                %Selling,
                    general and administrative expense
                
                
                **3,738**
                
                
                **11.6**
                **%**
                
                2,752
                
                
                9.0
                %Impairment
                    charge
                
                
                **1,762**
                
                
                **5.5**
                **%**
                
                ─
                
                
                ─Restructuring
                    expenses
                
                
                **134**
                
                
                **0.4**
                **%**
                
                ─
                
                
                ─Operating
                    loss
                
                
                **(4,516**
                **)**
                
                **(14.0**
                **%)**
                
                (107
                )
                
                (0.4
                %)Loss
                    before provision for income taxes andminority
                    interest
                
                
                **(2,789**
                **)**
                
                **(8.6**
                **%)**
                
                (1,057
                )
                
                (3.4
                %)
  **For
                    the 39 weeks ended****October
                    2, 2005**
                
                **September
                    26, 2004**Net
                    sales
                
                **$**
                **103,081**
                
                
                **100.0**
                **%**
                
                94,468
                
                
                100.0
                %Gross
                    profit
                
                
                **5,401**
                
                
                **5.2**
                **%**
                
                11,062
                
                
                11.7
                %Selling,
                    general and administrative expense
                
                
                **9,528**
                
                
                **9.2**
                **%**
                
                8,433
                
                
                8.9
                %Impairment
                    charge
                
                
                **1,762**
                
                
                **1.7**
                **%**
                
                ─
                
                
                ─Restructuring
                    expenses
                
                
                **612**
                
                
                **0.6**
                **%**
                
                ─
                
                
                ─Operating
                    (loss) profit
                
                
                **(6,501**
                **)**
                
                **(6.3**
                **%)**
                
                2,629
                
                
                2.8
                %Income
                    (loss) before provision for income taxesand
                    minority interest
                
                
                **(9,506**
                **)**
                
                **(9.2**
                **%)**
                
                510
                
                
                0.5
                %





The
      Domestic OEM segment’s sales increased $1.6 million or 5.1% during the thirteen
      week period ended October 2, 2005 compared to the same period in the prior
      year.
      The increased sales primarily reflect increased pricing of $1.5 million
      effective for certain customers in the fourth quarter of 2004 and other items
      of
      $0.1 million. Sales for the thirty-nine week period ended October 2, 2005
      increased $8.6 million or 9.1% over the same period in the prior year. The
      increased sales reflect the recovery of steel surcharges from certain customers
      of $2.2 million, price increases of $3.3 million and improved volume and mix
      of
      $3.1 million. Although the Company was able to negotiate improved pricing and
      steel surcharge recovery from certain customers, the segment continues to
      perform poorly due to cost issues noted below and continued pressure for reduced
      pricing from many of its customers. The Company has been notified by a major
      customer that approximately $5.0 million of business, on an annual basis, has
      been resourced to a competitor. The resource of this business began in May
      and
      will continue through the rest of this year with the full year impact occurring
      in 2006.





Gross
      profit as a percentage of sales decreased to 3.5% for the thirteen week period
      ended October 2, 2005 compared to 8.6% in the same period in the prior year.
      This decline was primarily due to an increase in medical, utilities and
      operating supplies of $1.0 million period-over-period. In addition, the sale
      of
      product with negative gross margin increased $1.2 million compared to the third
      quarter of 2004. In the thirty-nine week period ended October 2, 2005, the
      net
      impact of increased steel costs reduced gross margin $2.9 million. In addition,
      medical, utility and operating supplies increased $2.2 million
      period-over-period. The parts sold with negative gross margin increased $4.2
      million compared to the thirty-nine week period ended September 26, 2004. The
      performance of the Crawfordsville plant, this segment’s primary manufacturing
      facility, continues to be poor. The facility incurred an operating loss of
      $1.4
      million and $2.6 million for the thirteen and thirty-nine week periods ended
      October 2, 2005.





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 benefits, 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 $3.5
      million and $2.3 million for the third quarter of 2005 and third quarter of
      2004, respectively. The loss for the thirty-nine week period ended October
      2,
      2005 was $9.8 million compared to $5.6 million for the same period in the prior
      year. The reserve for expected loss on goods in inventory and customer purchase
      orders was $1.5 million at both October 2, 2005 and January 2,
      2005.





-40-


SG&A
      expense for the thirteen week period ended October 2, 2005 increased $1.0
      million or 35.8% compared to the same period in the prior year. The higher
      SG&A was primarily due to an increase in transportation costs of $0.7
      million and R&D costs of $0.3 million due to development activities.
      SG&A expense for the thirty-nine week period increased $1.1 million or 13.0%
      compared to the same period in the prior year. The higher costs were primarily
      due to transportation costs of $0.7 million and professional fees of $0.4
      million.





On
      October 4, 2005, the Company announced that as part of its strategy to improve
      production and profitability in its Domestic OEM segment RPC plans to exit
      its
      steel stamping business. As a result of this announcement, the Company recorded
      an impairment charge of $1.8 million to write-down the carrying value of the
      related assets to net realizable value, see Note 16 - Impairment to these
      Condensed Consolidated Financial Statements for further discussion. The segment
      continues to evaluate alternative strategies for improving production.





The
      restructuring expense recorded in 2005 relates to the planned closure of our
      manufacturing facility in Sterling Heights, Michigan, see Note 13 -
      Restructuring Programs to these Condensed Consolidated Financial Statements
      for
      further details regarding restructuring programs.





As
      a
      result of the above, the segment’s operating loss increased $4.4 million and
      $9.1 million for the thirteen and thirty-nine week periods compared to the
      same
      periods in the prior year.








In
      February 2002, RPC filed a third-party complaint 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. On August 9, 2005, RPC agreed to settle its claims against USF&G for,
      among other things, a payment of $2.4 million by USF&G. This payment was
      received in August 2005 and has been recorded as other income in the Domestic
      OEM segment, see Note 8 - Litigation to these Condensed Consolidated Financial
      Statements for further details.





During
      the second quarter of 2005, the closure of the RUK facility resulted in the
      write off of intercompany receivables. The write off amounted to $3.2 million
      and was recorded as other expense in the Domestic OEM segment.





-41-





International


The
      following tables set forth selected income statement data for the International
      segment for the thirteen and thirty-nine weeks ended October 2, 2005 and
      September 26, 2004.


Dollar
                    amounts in thousands**For
                    the 13 weeks ended****October
                    2, 2005**
                
                **September
                    26, 2004**Net
                    sales
                
                **$**
                **16,190**
                
                
                **100.0**
                **%**
                
                16,640
                
                
                100.0
                %Gross
                    profit
                
                
                **4,075**
                
                
                **25.2**
                **%**
                
                4,117
                
                
                24.7
                %Selling,
                    general and administrative expense
                
                
                **2,614**
                
                
                **16.2**
                **%**
                
                2,749
                
                
                16.5
                %Restructuring
                    expenses
                
                
                **114**
                
                
                **0.7**
                **%**
                
                ─
                
                
                ─Operating
                    profit
                
                
                **1,347**
                
                
                **8.3**
                **%**
                
                1,368
                
                
                8.2
                %Income
                    before provision for income taxesand
                    minority interest
                
                
                **1,383**
                
                
                **8.5**
                **%**
                
                1,255
                
                
                7.5
                %
  **For
                    the 39 weeks ended****October
                    2, 2005**
                
                **September
                    26, 2004**Net
                    sales
                
                **$**
                **53,615**
                
                
                **100.0**
                **%**
                
                50,157
                
                
                100.0
                %Gross
                    profit
                
                
                **14,408**
                
                
                **26.9**
                **%**
                
                13,553
                
                
                27.0
                %Selling,
                    general and administrative expense
                
                
                **8,829**
                
                
                **16.5**
                **%**
                
                8,128
                
                
                16.2
                %Restructuring
                    expenses
                
                
                **1,414**
                
                
                **2.6**
                **%**
                
                ─
                
                
                ─Operating
                    profit
                
                
                **4,165**
                
                
                **7.8**
                **%**
                
                5,425
                
                
                10.8
                %Income
                    before provision for income taxesand
                    minority interest
                
                
                **9,410**
                
                
                **17.6**
                **%**
                
                5,214
                
                
                10.4
                %





The
      international segment’s sales decreased $0.5 million or 2.7% for the thirteen
      week period ended October 2, 2005 compared to the same period in the prior
      year.
      Sales decreased $0.3 million due to product mix and the segment recorded a
      translation loss of $0.2 million for the thirteen week period ended October
      2,
      2005. The sales for the thirty-nine week period increased $3.5 million or 6.9%
      over the same period in the prior year. The increased sales were due to volume
      increases in Germany and China of $2.5 million and translation gains of $1.0
      million during the thirty-nine week period.





The
      gross
      profit was relatively flat for the thirteen week period ended October 2, 2005
      compared to the same period in the prior year. Gross profit for the thirty-nine
      week period ended October 2, 2005 increased $0.9 million or 6.3% over the same
      period in the prior year. The improved gross profit during the thirty-nine
      week
      period was due to increased volume, partially offset by increased costs in
      the
      U.K. due to the impact of closing the operations.





SG&A
      expense for the thirteen week period of $2.6 million was $0.1 million lower
      than
      the amount recorded in the same period in the prior year. The decrease is due
      to
      cost reductions related to the closing of the U.K. facility, partially offset
      by
      an addition to the bad debt reserve, see Note 17 - Subsequent Events to these
      Condensed Consolidated Financial Statements. SG&A for the thirty-nine week
      period ended October 2, 2005 shows an increase of $0.7 million over the same
      period in the prior year. The increase is due to an addition to the bad debt
      reserve of $0.3 million made in the first quarter of 2005 and $0.2 million
      made
      in the third quarter of 2005, and freight of $0.2 million.





Restructuring
      expense of $0.1 million was recorded in the thirteen week period ended October
      2, 2005 as a change in estimate of the closure costs for the U.K. facility.
      Additional information had been received in the second quarter for estimation
      of
      final refurbishment costs of $0.6 million and lease cost of $0.6 million for
      exiting the facility. Additional severance costs were booked in the first
      quarter of $0.1 million; the total restructuring costs for the U.K. booked
      in
      2005 aggregate to $1.4 million at October 2, 2005.





As
      a
      result of the above, operating profit increased $0.1 million and decreased
      $1.3
      million for the thirteen and thirty-nine week periods compared to the same
      periods in the prior year.





The
      $4.4
      million increase in income before provision for income taxes and minority
      interest is primarily related to the closure of the RUK facility and the
      associated write off of intercompany payables during the second quarter of
      2005.





-42-





**Aftermarket**





The
      following table sets forth selected income statement data for the Aftermarket
      segment for the thirteen and thirty-nine week periods ended October 2, 2005
      and
      September 26, 2004.


Dollar
                    amounts in thousands**For
                    the 13 weeks ended****October
                    2, 2005**
                
                **September
                    26, 2004**Net
                    sales
                
                **$**
                **12,245**
                
                
                **100.0**
                **%**
                
                11,570
                
                
                100.0
                %Gross
                    profit
                
                
                **3,327**
                
                
                **27.2**
                **%**
                
                3,419
                
                
                29.6
                %Selling,
                    general and administrative expense
                
                
                **1,825**
                
                
                **14.9**
                **%**
                
                1,713
                
                
                14.8
                %Operating
                    profit
                
                
                **1,502**
                
                
                **12.3**
                **%**
                
                1,706
                
                
                14.8
                %Income
                    before provision for income taxesand
                    minority interest
                
                
                **1,337**
                
                
                **10.9**
                **%**
                
                1,628
                
                
                14.1
                %
  **For
                    the 39 weeks ended****October
                    2, 2005**
                
                **September
                    26, 2004**Net
                    sales
                
                **$**
                **39,078**
                
                
                **100.0**
                **%**
                
                37,572
                
                
                100.0
                %Gross
                    profit
                
                
                **10,050**
                
                
                **25.7**
                **%**
                
                11,408
                
                
                30.4
                %Selling,
                    general and administrative expense
                
                
                **5,246**
                
                
                **13.4**
                **%**
                
                4,883
                
                
                13.0
                %Operating
                    profit
                
                
                **4,804**
                
                
                **12.3**
                **%**
                
                6,525
                
                
                17.4
                %Income
                    before provision for income taxesand
                    minority interest
                
                
                **4,442**
                
                
                **11.4**
                **%**
                
                6,442
                
                
                17.2
                %


Net
      sales
      for the thirteen week period ended October 2, 2005 increased $0.7 million or
      5.8% compared to the same period in the prior year. The increase was primarily
      due to increased pricing of friction plates, partially offset by a reduction
      in
      volume period-over-period. Net sales for the thirty-nine week period ended
      October 2, 2005 increased $1.5 million or 4.0% compared to the same period
      in
      the prior year. The increase in sales is due to increased pricing of friction
      plates partially offset by a reduction in volume.





Gross
      profit decreased $0.1 million or 2.7% for the thirteen week period ended October
      2, 2005 compared to the same thirteen week period in the prior year. The reduced
      gross profit was primarily due to an unfavorable change in mix of $0.1 million.
      Gross profit decreased $1.4 million or 11.9% for the thirty-nine week period
      ended October 2, 2005 compared to the same period in the prior year. Due to
      the
      acquisition of certain shares of stock of Allomatic Products Company, see Note
      14 - Acquisition of APC Minority Shares owned by Raymark to these Condensed
      Consolidated Financial Statements, certain adjustments were made as of March
      21,
      2005. The inventory was valued at the sales price less distribution cost at
      the
      time of the acquisition, which had the effect of reducing the profit on sales
      during the second quarter $0.7 million. In addition, material costs increased
      $0.6 million compared to the same period in the prior year and an unfavorable
      mix change reduced profits by $0.1 million.





The
      selling, general and administrative costs of $1.8 million for the thirteen
      week
      period ended October 2, 2005 approximated the costs for the same period in
      the
      prior year. The selling, general and administrative costs for the thirty-nine
      week period ended October 2, 2005 of $5.2 million reflects an increase of $0.4
      million over the same period in the prior year. The increase is due
      substantially to higher medical costs, distribution costs, travel and an
      increase in the reserve for doubtful accounts.





As
      a
      result of the above, operating profit was reduced $0.2 million for the thirteen
      week period and $1.7 million for the thirty-nine week periods ended October
      2,
      2005.





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 14 - Acquisition of APC Minority Shares
      owned by Raymark to these Condensed Consolidated Financial
      Statements.





-43-


Liquidity,
      Capital Resources and Future Liquidity





Cash
      provided by operating activities was $2.0 million for the thirty-nine week
      period ended October 2, 2005. Components of cash provided by operating
      activities include depreciation and amortization of $13.6 million, an impairment
      charge of $1.8 million and other non-cash items of $0.4 million, partially
      offset by a net loss of $8.5 million. The changes in other operating assets
      and
      liabilities during the first thirty-nine weeks of 2005 included an increase
      in
      working capital of $1.9 million and a reduction in accrued liabilities of $3.4
      million. The Company recorded an impairment charge of $1.8 million to write-down
      the carrying value of assets in its steel stamping business to net realizable
      value, see Note 16 - Impairment to these Condensed Consolidated Financial
      Statements. The working capital change was primarily driven by an increase
      in
      trade accounts receivable and inventories, partially offset by an increase
      in
      accounts payable. The increase in trade accounts receivable at October 2, 2005
      compared to January 2, 2005 is primarily attributable to higher sales during
      the
      third quarter of 2005 compared to the fourth quarter of 2004. The increase
      in
      inventory levels is principally the result of a build-up in inventory to
      facilitate the closure of our Sterling Heights, Michigan facility. The increase
      in accounts payable was also driven primarily by a build-up of inventory in
      the
      Sterling Heights, Michigan facility. In addition, seasonal fluctuations and
      timing of payments have contributed to the increase. The reduction in accrued
      liabilities is primarily related to a decrease in the payable to the PI Trust
      of
      $3.7 million. This reduction was for payments made to the PI Trust related
      to
      tax refunds.





Cash
      used
      by operating activities for the thirty-nine weeks ended September 26, 2004
      was
      $1.6 million. Components of cash used by operating activities include a net
      loss
      of $1.9 million, offset by depreciation and amortization of $12.4 million and
      other non-cash items of $0.6 million. The changes in other operating assets
      and
      liabilities during the first thirty-nine weeks of 2004 was an unfavorable change
      of $12.7 million, primarily driven by an increase in trade accounts receivable
      and inventories. The increase in trade accounts receivable at September 26,
      2004
      compared to December 28, 2003 is primarily attributed to higher sales during
      the
      third quarter of 2004 compared to the fourth quarter of 2003. The increase
      in
      inventory levels reflects the impact of increased production and higher steel
      prices.





Capital
      expenditures through October 2, 2005 of $8.3 million compared to $3.3 million
      for the same period in the prior year. The capital expenditures are as planned.
      The Company completed the building expansion which began in 2004 at the facility
      in China having additional expenditures in 2005 of $0.2 million. The new
      facility will increase production capacity and position the Company to take
      advantage of the growing market in China. In addition, the Domestic OEM and
      Aftermarket segments have increased capital spending $2.0 million and $1.5
      million, respectively, over the thirty-nine week period in 2004. The increased
      spending primarily relates to cost reduction programs and additional R&D
      equipment. Additional capital expenditures of $0.8 million in Germany are
      primarily for cost reductions. Other normal capital expenditures accounted
      for
      approximately $0.5 million during the period.





Cash
      and
      cash available, net of minimum cash and minimum availability requirements,
      under
      existing lines of credit at October 2, 2005 totaled $13.1 million compared
      to
      $15.7 million at January 2, 2005, a decrease of $2.6 million. The decrease
      is
      due primarily to capital expenditures during the period.





The
      total
      borrowings at October 2, 2005 of $35.9 million compares to total borrowings
      of
      $26.7 million at year end 2004, an increase of $9.2 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 stock owned by Raymark, see
      Note
      14 - Acquisition of APC Minority Shares owned by Raymark to these Condensed
      Consolidated Financial Statements for a further discussion of the APC stock
      acquisition. Available lines of credit, net of minimum availability
      requirements, at October 2, 2005 of $4.1 million compared to $4.6 million at
      year end 2004, a decrease of $0.5 million. Full details of the Company’s debt
      are contained in Note 7 - Debt to these 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 Raytech Corporation (“the parent”). During the thirty-nine week
      period ended October 2, 2005, the parent made irrevocable cash contributions
      of
      $5.0 million to RPC, a borrower, to remedy the debt covenant non-compliance.
      The
      parent may be required to make additional cash contributions in the future
      in
      the event of any further non-compliance of the borrowers.





-44-


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 8 - Litigation to these Condensed Consolidated Financial
      Statements.





Certain
      tax issues are discussed in Note 10 - Income Taxes to these Condensed
      Consolidated Financial Statements, which provides additional information
      concerning the status of the recent Internal Revenue Service audit.





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 8 - Litigation
                to these
                Condensed Consolidated Financial Statements. Management expects that
                $0.8
                million will be spent during 2005 and the balance during 2006 or
                later.





·
            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 under-fundedand
                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,
                $1.2 million of which was funded during the first nine months 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, other than operating losses incurred during the period
                of
                closure, will be approximately $6.2 million, of which we expect to
                expend
                $4.0 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 13 - Restructuring Programs to these 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. 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 $1.5 million at year end
                2005.





-45-


·
            The
                Company incurred costs associated with the retirement of its former
                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 $0.8 million was paid during 2004, $0.4 million
                was paid
                during the first quarter of 2005 and $0.2 million was paid during
                the
                third quarter of 2005.





·
            The
                Company recently announced two strategic profit initiatives to reduce
                costs and improve productivity as discussed in Note 16 - Impairment
                and
                Note 17 - Subsequent Events to these Condensed Consolidated Financial
                Statements.





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. The Company is reviewing
      alternatives with its current lenders and others, which would supply additional
      liquidity for expansion and relocation costs, which are considerations in the
      Company’s strategic planning process.





*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,
      2007
      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 2007.





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.





-46-


In
      December 2004 the FASB issued SFAS No. 123 (revised 2004), “Share-Based
      Payment”. This statement replaces SFAS No. 123, “Accounting for Stock-Based
      Compensation”, and supersedes APB Opinion No. 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 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 No. 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
      (“AJCA”).” 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.





-47-





**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 7 - Debt to these 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. The United States Federal Reserve has raised
      interest rates consistently over the past few quarters and increases of 25
      basis
      points per quarter are possible going forward. Given the level of domestic
      borrowing, the change in the Federal funds rates should not have a material
      impact on the Company. We strive to manage working capital levels to support
      business needs while minimizing borrowings.





The
      Company maintains borrowings in both fixed rate and variable rate debt
      instruments. The fixed rate debt at October 2, 2005 of $11.1 million had rates
      of interest that ranged from 3.19% to 8.00%. The variable rate debt at October
      2, 2005 of $24.5 million had rates of interest that ranged from 2.14% to 7.25%.
      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 October 2, 2005 would
      result in an increase in interest expense and a corresponding reduction in
      cash
      flow of approximately $50.





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 thirty-nine weeks ended October 2, 2005. Management expects the
      increase in steel prices could 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.





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**Item
      4. Controls and Procedures**





**Disclosure
      Controls and Procedures**




The
      Company, under the supervision and with the participation of the Company’s
      management, including the principal executive officer and principal financial
      officer, conducted an evaluation of the effectiveness of the design and
      operation of the Company’s disclosure controls and procedures, as defined in
      Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934,
      as
      amended (the Exchange Act), as of the end of the period covered by this report.
      Management had previously concluded that the Company’s disclosure controls and
      procedures were effective as of July 3, 2005, the end of the second quarter
      of
      2005. However, in connection with the restatement of our previously issued
      interim consolidated financial statements described below, management determined
      that a material weakness existed in the Company’s internal control over
      financial reporting as of the end of the period covered by this report. Because
      of this material weakness, management concluded that the Company’s disclosure
      controls and procedures were not effective as of the end of the period covered
      by this report and at July 3, 2005.





**Restatement
      of Previously Issued Consolidated Financial Statements**




As
      discussed in Note 1 to these Condensed Consolidated Financial Statements, we
      have restated our previously issued condensed consolidated financial statements.
      Management evaluated the materiality of the correction on its condensed
      consolidated financial statements using the guidelines of Staff Accounting
      Bulletin No. 99, “Materiality” and concluded that the effects of the corrections
      were material to its interim consolidated financial statements for the quarter
      ended July 3, 2005. Accordingly, management concluded that it would restate
      its
      previously issued interim condensed consolidated financial statements for the
      quarter ended July 3, 2005.





**Material
      Weakness in Internal Control Over Financial Reporting**




A
      material weakness is a control deficiency, or combination of control
      deficiencies, that results in more than a remote likelihood that a material
      misstatement of the annual or interim consolidated financial statements will
      not
      be prevented or detected. As of July 3, 2005, the end of the second quarter
      of 2005, the Company did not maintain effective controls over the accounting for
      income taxes and the elimination of the fresh start income tax reserve impacting
      both the income tax provision and goodwill to ensure compliance with accounting
      principles generally accepted in the United States of America. Specifically,
      the
      Company did not maintain effective review and approval controls over the
      accounting for the release of tax reserves as a result of a settlement with
      the
      Internal Revenue Service that had been recorded in error. This control
      deficiency resulted in the restatement of the Company’s interim consolidated
      financial statements for the quarter ended July 3, 2005. Additionally, this
      control deficiency could result in a misstatement of the income tax provision
      and related accounts that would result in a material misstatement to the
      Company’s interim or annual consolidated financial statements that would not be
      prevented or detected. Accordingly, management determined that this control
      deficiency constitutes a material weakness.





**Management’s
      Remediation Plan**




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 by communicating and reaffirming its policy and procedure relating
      to
      the responsibilities of the accounting and finance staff to ensure that GAAP
      is
      followed in all financial statements filed with the Securities and Exchange
      Commission.





**Changes
      in Internal Control Over Financial Reporting**




Other
      than as described above, there have been no changes in our internal control
      over
      financial reporting, as such term is defined in Exchange Act Rules 13a-15(f)
      and
      15d-15(f), during the quarter ended October 2, 2005 that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over financial reporting.





-49-





PART
      II.





**Item
      1. Legal Proceedings**





See
      discussion of litigation in Note 8 - Litigation to these 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 7 - Debt to these 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.





-50-





**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/RICHARD
                P. MCCOOKRichard
                P. McCookExecutive
                  Vice President,
                Chief
                  Financial Officer and
                  Treasurer


Date:
      December 6, 2005






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