**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 July
        3, 2005 ,
 or
 
 o Transition
        Report
        Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
        1934
 
 For
        the
        transition period from  to
 
 Commission
        File Number 1-9298
 
 **RAYTECH
        CORPORATION**
 (Exact
        Name of Registrant as Specified in its Charter)
 
 **Delaware**
              **06-1182033**(State
                  or other Jurisdiction of
              (I.R.S.
                  Employer Identification No.)Incorporation
                  or Organization)
 
 
 **Suite
                  295, Four Corporate Drive****Shelton,
                  Connecticut**
              **06484**(Address
                  of Principal Executive Offices)
              (Zip
                  Code)
 
 **203-925-8021**
 (Registrant's
        Telephone Number)
 
 Indicate
        by check mark whether the Registrant (1) has filed all reports to be filed
        by
        Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
        12 months (or for such shorter period that the Registrant was required to
        file
        such reports) and (2) has been subject to such filing requirements for the
        past
        90 days.
 
 Yes
x No
o
  Indicate
        by check mark whether the Registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Act).
 
 Yes o No
x
  Indicate
        by check mark whether the Registrant has filed all documents and reports
        required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
        Act
        of 1934 subsequent to the distribution of securities under a plan confirmed
        by a
        court.
 
 Yes x No
o
  As
        of
        August 8, 2005, 41,737,306 shares of common stock were outstanding and the
        aggregate market value of these shares (based upon the closing price of Raytech
        common stock on the New York Stock Exchange) on such date held by non-affiliates
        was approximately $9.2 million.
  
 
 
 **RAYTECH
        CORPORATION** ****
 
 **INDEX**
 
 Page
                  Number**PART
                I.**
              **FINANCIAL
                  INFORMATION:**Item
                  1.
              Financial
                  StatementsCondensed
                  Consolidated BalanceSheets
                  at July 3, 2005 and January 2, 2005
              3Condensed
                  Consolidated Statements ofOperations
                  for the thirteen and twenty-six weeksended
                  July 3, 2005 and June 27, 2004
              4Condensed
                  Consolidated Statementsof
                  Cash Flows for the twenty-six weeksended
                  July 3, 2005 and June 27, 2004
              5Condensed
                  Consolidated Statements ofChanges
                  in Shareholders' Equity for the twenty-sixweeks
                  ended July 3, 2005 and June 27, 2004
              6Notes
                  to Condensed ConsolidatedFinancial
                  Statements
              7**Item
                  2.**
              Management's
                  Discussion and Analysis ofFinancial
                  Condition and Results of Operations
              31**Item
                  3.**
              Quantitative
                  and Qualitative DisclosuresAbout
                  Market Risk
              41**Item
                  4.**
              Controls
                  and Procedures
              42**PART
                  II.**
              **OTHER
                  INFORMATION****Item
                  1.**
              Legal
                  Proceedings
              43**Item
                  2.**
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              43**Item
                  6.**
              Exhibits
              43Signature
              44
 
 -
            2
            -
 
 **RAYTECH
          CORPORATION**
 **CONDENSED
          CONSOLIDATED BALANCE SHEETS**
 (in
          thousands, except share data)
 (unaudited)
 
 July
                    3,
                
                January
                    2,2005
                
                2005**ASSETS**Current
                    assetsCash
                    and cash equivalents
                
                $
                $9,548
                
                
                13,620Restricted
                    cash
                
                
                5,080
                
                
                5,548Trade
                    accounts receivable, less allowanceof
                    $1,129 and $1,462
                
                
                31,874
                
                
                27,506Inventories,
                    net
                
                
                39,919
                
                
                39,582Income
                    taxes receivable
                
                
                1,339
                
                
                1,333Deferred
                    income taxes
                
                
                3,408
                
                
                3,854Other
                    current assets
                
                
                2,340
                
                
                3,009Total
                    current assets
                
                
                93,508
                
                
                94,452Property,
                    plant and equipment
                
                
                114,700
                
                
                126,118Less
                    accumulated depreciation
                
                
                (39,782
                )
                
                (46,113
                )Net
                    property, plant and equipment
                
                
                74,918
                
                
                80,005Goodwill,
                    net
                
                
                5,287
                
                
                5,912Other
                    intangible assets, net
                
                
                21,899
                
                
                22,731Other
                    assets
                
                
                2,848
                
                
                2,586Total
                    assets
                
                $
                $198,460
                
                $
                $205,686**LIABILITIES
                    AND SHAREHOLDERS' EQUITY**Current
                    liabilitiesNotes
                    payable and current portion of long-term debt
                
                $
                $18,147
                
                $
                $15,280Current
                    portion of pension obligation
                
                
                2,242
                
                
                2,248Accounts
                    payable
                
                
                14,375
                
                
                15,068Accrued
                    liabilities
                
                
                24,302
                
                
                23,810Payable
                    to the PI Trust
                
                
                4,998
                
                
                4,393Total
                    current liabilities
                
                
                64,064
                
                
                60,799Long-term
                    debt
                
                
                16,785
                
                
                11,416Pension
                    obligation
                
                
                12,612
                
                
                14,175Postretirement
                    benefits other than pension
                
                
                17,991
                
                
                16,834Deferred
                    payable to the PI Trust
                
                
                3,630
                
                
                4,627Deferred
                    income taxes
                
                
                7,528
                
                
                7,591Other
                    long-term liabilities
                
                
                6,365
                
                
                7,044Total
                    liabilities
                
                
                128,975
                
                
                122,486Commitments
                    and ContingenciesMinority
                    interest
                
                
                523
                
                
                10,020Shareholders'
                    EquityCapital
                    stock:Cumulative
                    preferred stock, no par value,5,000,000
                    shares authorized, none issued andoutstanding
                
                
                -
                
                
                -Common
                    stock, par value $1.00, 50,000,000 sharesauthorized,
                    41,737,306 issued andoutstanding
                
                
                41,737
                
                
                41,737Additional
                    paid in capital
                
                
                117,574
                
                
                117,574Accumulated
                    deficit
                
                
                (79,331
                )
                
                (77,595
                )Accumulated
                    other comprehensive loss
                
                
                (11,018
                )
                
                (8,536
                )Total
                    shareholders' equity
                
                
                68,962
                
                
                73,180Total
                    liabilities and shareholders' equity
                
                $
                $198,460
                
                $
                $205,686
 
 *The
          accompanying notes are an integral part of these
          statements.*
 -
            3
            -
 **RAYTECH
          CORPORATION**
 **CONDENSED
          CONSOLIDATED STATEMENTS OF OPERATIONS**
 (in
          thousands, except share data)
 (unaudited)
 
  For
                      the 13 Weeks Ended
                  
                  For
                      the 26 Weeks EndedJuly
                      3,
                  
                  June
                      27,
                  
                  July
                      3,
                  
                  June
                      27,2005
                  
                  2004
                  
                  2005
                  
                  2004Net
                      sales
                  
                  $
                  60,606
                  
                  $
                  58,405
                  
                  $
                  123,958
                  
                  $
                  115,003Cost
                      of sales
                  
                  
                  53,655
                  
                  
                  45,876
                  
                  
                  105,011
                  
                  
                  91,415Gross
                      profit
                  
                  
                  6,951
                  
                  
                  12,529
                  
                  
                  18,947
                  
                  
                  23,588Selling,
                      general and administrativeexpenses
                  
                  
                  8,777
                  
                  
                  10,424
                  
                  
                  18,395
                  
                  
                  19,026Restructuring
                      expenses
                  
                  
                  1,687
                  
                  
                  -
                  
                  
                  2,074
                  
                  
                  -Operating
                      (loss) profit
                  
                  
                  (3,513
                  )
                  
                  2,105
                  
                  
                  (1,522
                  )
                  
                  4,562Interest
                      expense
                  
                  
                  (600
                  )
                  
                  (348
                  )
                  
                  (981
                  )
                  
                  (663
                  )PI
                      Trust payable (increase) decrease
                  
                  
                  (306
                  )
                  
                  -
                  
                  
                  689
                  
                  
                  -Other
                      expense, net
                  
                  
                  (460
                  )
                  
                  (375
                  )
                  
                  (73
                  )
                  
                  (82
                  )(Loss)
                      income before provision for incometaxes
                      and minority interest
                  
                  
                  (4,879
                  )
                  
                  1,382
                  
                  
                  (1,887
                  )
                  
                  3,817(Benefit)
                      provision for income taxes
                  
                  
                  (1,523
                  )
                  
                  1,038
                  
                  
                  (331
                  )
                  
                  1,866(Loss)
                      income before minority interest
                  
                  
                  (3,356
                  )
                  
                  344
                  
                  
                  (1,556
                  )
                  
                  1,951Minority
                      interest
                  
                  
                  -
                  
                  
                  287
                  
                  
                  180
                  
                  
                  543Net
                      (loss) income
                  
                  $
                  (3,356
                  )
                  $
                  57
                  
                  $
                  (1,736
                  )
                  $
                  1,408Basic
                      and diluted (loss) earningsper
                      share
                  
                  $
                  (0.08
                  )
                  $
                  -
                  
                  $
                  (0.04
                  )
                  $
                  0.03





*The
      accompanying notes are an integral part of these statements.*






-
          4
          -


**RAYTECH
        CORPORATION**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 (in
        thousands)
 (unaudited)
  For
                  the 26 Weeks endedJuly
                  3,
              
              June
                  27,2005
              
              2004Cash
                  flows from operating activities:Net
                  (loss) income
              
              $
              (1,736
              )
              $
              1,408Adjustments
                  to reconcile net (loss) income to net cashused
                  by operating activities:Depreciation
                  and amortization
              
              
              8,298
              
              
              8,344Other
                  non-cash items
              
              
              (701
              )
              
              (569
              )Changes
                  in other operating assets and liabilitiesTrade
                  accounts receivable
              
              
              (4,752
              )
              
              (7,080
              )Inventories
              
              
              (1,631
              )
              
              (1,510
              )Accounts
                  payable
              
              
              (541
              )
              
              (1,011
              )Other
                  operating assets and liabilities, net
              
              
              853
              
              
              (17
              )Net
                  cash used by operating activities
              
              
              (210
              )
              
              (435
              )Cash
                  flow from investing activities:Capital
                  expenditures
              
              
              (6,127
              )
              
              (1,754
              )Restricted
                  cash
              
              
              468
              
              
              (353
              )Other
              
              
              836
              
              
              -Net
                  cash used by investing activities
              
              
              (4,823
              )
              
              (2,107
              )Cash
                  flow from financing activities:Net
                  borrowings on short-term notes
              
              
              3,443
              
              
              3,676Principal
                  payments on long-term debt
              
              
              (1,954
              )
              
              (1,506
              )Net
                  cash provided by financing activities
              
              
              1,489
              
              
              2,170Effect
                  of exchange rate changes on cash
              
              
              (528
              )
              
              (69
              )Net
                  change in cash and cash equivalents
              
              
              (4,072
              )
              
              (441
              )Cash
                  and cash equivalents at beginning of period
              
              
              13,620
              
              
              16,413Cash
                  and cash equivalents at end of period
              
              $
              9,548
              
              $
              15,972Supplemental
                  schedule of non-cash investingand
                  financing activities:Acquisition
                  of APC minority shares owned by Raymarkthrough
                  issuance of a long-term note payable
              
              $
              7,200
              
              $
              -





*The
      accompanying notes are an integral part of these statements.*






-
          5
          -


**RAYTECH
        CORPORATION**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
        EQUITY**
 (in
        thousands)
 (unaudited)
 **Accumulated****Additional**
                
                
                
                **Other****Common**
                
                **Paid
                    in**
                
                **Accumulated**
                
                **Comprehensive****Stock**
                
                **Capital**
                
                **Deficit**
                
                **Loss**
                
                **Total**Balance,
                    December 28, 2003
                
                $
                41,737
                
                $
                117,574
                
                $
                (74,845
                )
                $
                (8,556
                )
                $
                75,910Comprehensive
                    income (loss):Net
                    income
                
                
                -
                
                
                -
                
                
                1,408
                
                
                -
                
                
                1,408Other
                    comprehensive loss
                
                
                -
                
                
                -
                
                
                -
                
                
                (279
                )
                
                (279
                )Total
                    comprehensiveincome
                    (loss)
                
                
                -
                
                
                -
                
                
                1,408
                
                
                (279
                )
                
                1,129Balance,
                    June 27, 2004
                
                $
                41,737
                
                $
                117,574
                
                $
                (73,437
                )
                $
                (8,835
                )
                $
                77,039Balance,
                    January 2, 2005
                
                $
                41,737
                
                $
                117,574
                
                $
                (77,595
                )
                $
                (8,536
                )
                $
                73,180Comprehensive
                    income (loss):Net
                    (loss) income
                
                
                -
                
                
                -
                
                
                (1,736
                )
                
                -
                
                
                (1,736
                )Other
                    comprehensive loss
                
                
                -
                
                
                -
                
                
                -
                
                
                (2,482
                )
                
                (2,482
                )Total
                    comprehensiveincome
                    (loss)
                
                
                -
                
                
                -
                
                
                (1,736
                )
                
                (2,482
                )
                
                (4,218
                )Balance,
                    July 3, 2005
                
                $
                41,737
                
                $
                117,574
                
                $
                (79,331
                )
                $
                (11,018
                )
                $
                68,962


*The
        accompanying notes are an integral part of these
        statements.*




-
          6
          -


**RAYTECH
      CORPORATION**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


(dollars
      in thousands, unless otherwise noted, except per share data)


(unaudited)




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





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 is conditioned upon receiving the
      approval of the United States Bankruptcy Court for the District of Connecticut
      after a hearing, which is scheduled for August 16, 2005. 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. Under the rules and procedures
      of
      the NYSE, the Company must respond to the NYSE within 45 days with a business
      plan that demonstrates compliance with the continued listing standards. The
      Company 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, and in the opinion
      of management, contain all adjustments necessary to fairly present the
      consolidated financial position of Raytech Corporation (the "Company") as of
      July 3, 2005 and the consolidated results of operations and cash flows for
      all
      interim periods presented. All adjustments, with the exception of the entries
      to
      record the acquisition of minority shares of Allomatic Products Company (“APC”)
      which are discussed in Note 13, are of a normal recurring nature. The year-end
      condensed consolidated balance sheet data was derived from audited financial
      statements but does not include all disclosures required by accounting
      principles generally accepted in the United States of America. The financial
      statements contained herein should be read in conjunction with the Company's
      financial statements and related notes filed on Form 10-K for the year ended
      January 2, 2005. Interim results are not necessarily indicative of the results
      for the full year.





***Stock-Based
      Compensation***




The
      Company accounts for stock-based compensation using the intrinsic value-based
      method of accounting in accordance with Accounting Principles Board Opinion
      No.
      25. As such, no compensation cost is recognized for stock options granted with
      an exercise price equal to the fair market value of the underlying stock as
      of
      the grant date. Had compensation costs of stock options been determined under
      a
      fair value alternative method as stated in Statement of Financial Accounting
      Standards No. 148, “Accounting for Stock-Based Compensation - Transition and
      Disclosure, an Amendment of FASB Statement No. 123,” the Company would have been
      required to recognize compensation cost based on the fair value of the options
      granted. Required pro forma information applying a fair value method to all
      awards, is presented in the table below.


-
          7
          -


**RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 **Note
          1, Continued**




**For
                  the thirteen weeks ended****July
                  3,**
              
              **June
                  27,****2005**
              
              **2004****Net
                  income:**As
                  reported
              
              $
              (3,356
              )
              $
              57Deduct:
                  Total stock-based employee compensationexpense
                  determined under fair value basedmethod
                  for all awards, net of related tax effects
              
              
              (170
              )
              
              (315
              )Pro
                  forma
              
              $
              (3526
              )
              $
              (258
              )Basic
                  and diluted earnings per share:As
                  reported
              
              $
              (.08
              )
              $
              .00Pro
                  forma
              
              $
              (.08
              )
              $
              (.01
              )
  **For
                    the twenty-six weeks ended****July
                    3,**
                
                **June
                    27,****2005**
                
                **2004**Net
                    income:As
                    reported
                
                $
                (1,736
                )
                $
                1,408Deduct:
                    Total stock-based employee compensationexpense
                    determined under fair value basedmethod
                    for all awards, net of related tax effects
                
                
                (386
                )
                
                (723
                )Pro
                    forma
                
                $
                (2,122
                )
                $
                685Basic
                    and diluted earnings per share:As
                    reported
                
                $
                (.04
                )
                $
                .03Pro
                    forma
                
                $
                (.05
                )
                $
                .02


During
        the first quarter of fiscal 2003, the Company granted options for 1,601,000
        shares of common stock with an exercise price of $5.70 per share. The fair
        value
        of these options was estimated at $3.22 per common share on the date of grant,
        using the Black-Scholes option pricing model and the following
        assumptions:  expected
        volatility of 56.70%, dividend yield of 0.00%, risk free interest rate of
        3.60%
        and an expected life of the options of six years. During the second quarter
        of
        fiscal 2003, the Company granted options for 1,172,000 shares of common stock
        with an exercise price of $5.70 per share. The fair value of these options
        was
        estimated at $2.05 per common share on the date of grant, using the
        Black-Scholes option pricing model and the following assumptions: expected
        volatility of 62.30%, dividend yield of 0.00%, risk free interest rate of
        2.84%
        and an expected life of the options of six years. All options granted to
        date
        vest over a four year period.
 
 There
        were no options granted during the 2004 fiscal year or during the first and
        second quarters of 2005.
 
 For
        a
        summary of all other significant accounting policies, refer to Note 1 to
        the
        consolidated financial statements included with the 2004 Form 10-K.
 
 ***Revenue
        Recognition***
  Revenue
        from the sale of the Company’s products is recognized upon shipment to the
        customer when ownership and risk of loss has been transferred. Substantially
        all
        of the Company’s revenues are derived from fixed price purchase orders. Costs
        and related expenses to manufacture the products are recorded as costs of
        sales
        when the related revenue is recognized. The Company establishes an allowance for doubtful accounts based on historical experience
        and
        believes that collections of revenues, net of the allowance for doubtful
        accounts, is reasonably assured.






-
          8
          -


**RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 
 **Note
        1, 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 benefit, 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 $1.6
        million
        in the second quarter of 2005 and the second quarter of 2004, respectively.
        The
        loss incurred on products sold under loss contracts for the twenty-six-week
        period ended July 3, 2005 was $6.4 million and $3.3 million for the same
        period
        in the prior year. The reserve for expected loss on goods in inventory and
        customer purchase orders was $2.0 million and $1.5 million at July 3, 2005
        and
        January 2, 2005, respectively.
 
 When
        the
        Company receives an incentive to enter into an agreement with a customer,
        the
        revenue attributed to the incentive is recognized over the term  of
        the
        agreement or the life of the specific  relationship
        with the customer.
 
 ***Warranties***
  The
        Company provides certain warranties relating to the quality and performance
        of
        its products. The primary product of the Company, friction plates, is used
        in
        manual and automatic transmissions, transfer cases and wet wheel brake systems
        for heavy duty equipment. The Company maintains product liability insurance
        that
        covers personal injuries and property damage alleged to have been caused
        by
        defective products. The Company also has insurance to cover the costs of
        product
        recalls arising from its 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.




-
          9
          -


**RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        1, continued**
 
 ***Fiscal
        Year***
 
 The
        Company’s fiscal year is a 52-53-week period ending on the Sunday closest to
        December 31st.
 
 ***Reclassification***
 
 Certain
        2004 amounts have been reclassified to conform to the 2005
        presentation.
 
 ***Recently
        Issued Accounting Pronouncements***
 
 In
        July
        2002, the Public Company Accounting Reform and Investor Protection Act of
        2002
        (the Sarbanes-Oxley Act) was enacted. Section 404 stipulates that public
        companies must take responsibility for maintaining an effective system of
        internal control. The act requires public companies to report on the
        effectiveness of their control over financial reporting and obtain an attest
        report from their independent registered public accountant about management’s
        report. The act requires most public companies (accelerated filers) to report
        on
        the company’s internal control over financial reporting for fiscal years ended
        on or after November 15, 2004. Other public companies (non-accelerated
        filers) must
        begin to comply with the new requirements related to internal control over
        financial reporting for their first fiscal year ending on or after July 15,
        2006
        under the latest extension granted by the Securities and Exchange Commission.
        Raytech is a non-accelerated filer and therefore does not have to comply
        with
        Section 404 of the Sarbanes- Oxley Act until 2006.
 
 In
        November 2004 the Financial Accounting Standards Board (“FASB”) issued Statement
        of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs - an
        amendment of ARB No. 43, Chapter 4”. This statement clarifies the accounting for
        abnormal amounts of idle facility expense, freight handling costs and wasted
        material (spoilage). This statement requires that these types of costs be
        recognized as current period charges. SFAS No. 151 is effective prospectively
        for inventory costs incurred during fiscal years beginning after June 15,
        2005,
        with earlier application permitted for such costs incurred during
        fiscal years beginning after November 24, 2004. Management does not expect
        the
        adoption of SFAS No. 151 to have a significant impact on the Company’s
        consolidated financial statements.
 
 In
        December 2004 the FASB issued SFAS No. 123 (revised 2004), “Share Based
        Payment”. This statement replaces SFAS 123, “Accounting for Stock-Based
        Compensation”, and supersedes APB Opinion 25, “Accounting for Stock Issued to
        Employees”. SFAS No. 123 (revised 2004) requires that the cost of share-based
        payment transactions (including those with employees and non-employees) be
        recognized as compensation costs in the financial statements. SFAS No. 123
        (revised 2004) applies to all share-based payment transactions in which an
        entity acquires goods or services by issuing (or offering to issue) its shares,
        share options, or other equity instruments (except for those held by an ESOP)
        or
        by incurring liabilities in amounts based (even in part) on the price of
        the
        entity's shares or other equity instruments, or that require (or may require)
        settlement by the issuance of an entity's shares or other equity instruments.
        This statement applies to all new awards granted during the fiscal year
        beginning after June 15, 2005 and to previous awards that are modified or
        cancelled after such date. We have not yet fully evaluated the effect of
        SFAS
        No. 123 (revised 2004) on our financial statements and have not determined
        the
        method of adoption we will use to implement SFAS No. 123 (revised 2004).
 
 In
        December 2004, the FASB issued FASB Staff Position (“FSP”) FAS 109-1,
“Application of FASB Statement No. 109, “Accounting for Income Taxes,” to the
        Tax Deduction on Qualified Production Activities Provided by
        the American Jobs Creation Act of 2004 (“AJCA”).” The AJCA introduces a special
        9% tax deduction on qualified production activities. FSP FAS 109-1 clarifies
        that this tax deduction should be accounted for as a special tax deduction
        in
        accordance with Statement 109. Based upon the Company’s preliminary evaluation
        of the effects of this guidance, we do not believe that it will have any
        impact
        on the Company’s Consolidated Financial Statements.




-
          10
          -


**RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        1, continued**
 
 In
        December 2004, the FASB issued FSP FAS 109-2, “Accounting and Disclosure
        Guidance for the Foreign Earnings Repatriation Provision within the American
        Jobs Creations Act of  2004.”
        The AJCA introduces a limited time 85% dividends received deduction on the
        repatriation of certain foreign earnings to a U.S. taxpayer (repatriation
        provision), provided certain criteria are met. FSP FAS 109-2 provides accounting
        and disclosure guidance for the repatriation provision. Based upon the Company’s
        preliminary evaluation of the effects of the repatriation provision, we do
        not
        believe that it will have any impact on the Company’s Consolidated Financial
        Statements.
 
 During
        March 2005, the Securities and Exchange Commission issued Staff Accounting
        Bulletin (“SAB”) No. 107, guidance on SFAS No. 123 (revised 2004). SAB No. 107
        was issued to assist preparers by simplifying some of the implementation
        challenges of SFAS No 123 (revised 2004) while enhancing the information
        that
        investors receive. The Company will consider the guidance provided by SAB
        No.
        107 when it implements SFAS No. 123 (revised 2004) during 2006.
 
 **Note
        2- Liquidity**
  Cash
        used
        in operating activities for the thirteen-week period ended July 3, 2005 of
        $.2
        million compared to $.4 million for the same period in the prior year. The
        principal operating use of cash for the twenty-six-week period ended July
        3,
        2005 has been to support increases in accounts receivable and inventory,
        which
        is a seasonal fluctuation and is consistent with the prior year periods.
        The
        increase in inventories is principally the result of a build-up in inventory
        to
        facilitate the closure of our Sterling Heights, Michigan, manufacturing
        facility.
 
 Capital
        expenditures through July 3, 2005 of $6.1 million compared to $1.8 million
        for
        the same period in the prior year. The capital expenditures are as planned.
        The
        Company completed the building expansion begun in 2004 at the facility in
        China
        with expenditures in 2004 of $.8 million. The new facility will increase
        production capacity to meet the demand for products produced at that location.
        In addition, the Wet Friction OEM segment has increased capital spending
        $1.9
        over the 26-week period in 2004. The increased spending has been for equipment
        installations, as production is transferred out of the facilities being closed,
        support for cost reduction programs and additional R&D
        equipment.
 
 Cash
        and
        cash available under existing lines of credit at July 3, 2005 totaled $16.8
        million compared to $19.7 million at January 2, 2005, a decrease of $2.9
        million. The decrease is due primarily to capital expenditures during the
        period.
 
 The
        total
        borrowings at July 3, 2005 of $34.9 million compares to total borrowings
        of
        $26.7 million at year-end 2004, an increase of $8.2 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 13 for a further discussion of the APC stock acquisition. Available
        lines
        of credit at July 3, 2005 of $6.8 million compared to $6.1 million at year-end
        2004, an increase of $.7 million. Full details of the Company’s debt are
        contained in Note 6 - Debt to the Condensed Consolidated Financial Statements.
        During the first quarter of 2005, the Company amended its domestic debt
        agreements. The primary purpose of the amendments was the
        modification of the debt covenant calculations to provide the Company greater
        flexibility to manage its cash resources and certain one-time costs that
        will be
        incurred during 2005 related to the plant closures announced during 2004.
        Additionally, the amendment to the Domestic OEM loan and security agreement
        provides for a remedy of future non-compliance with the quarterly debt
        covenants, by an irrevocable cash contribution by the parent. During the
        twenty-six-week period ended July 3, 2005, the parent made an irrevocable
        cash
        contribution of $2.3 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.


-
          11
          -


**RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        2, continued**
 
 Refer
        to
        Notes 8 - Debt and 15 - Commitments to the consolidated financial statements,
        included within the Company's 2004 Form 10-K, for information regarding the
        Company's obligations and commitments by year. These obligations and commitments
        consist of long-term debt, capital leases and rental agreements.
 
 The
        Company's potential obligations regarding environmental remediation are
        explained in Note 7 - Litigation to the Condensed Consolidated Financial
        Statements.
 
 Certain
        tax issues are discussed in Note 9 - Income Taxes to the Condensed Consolidated
        Financial Statements, which provides additional information concerning the
        status of the current Internal Revenue Service audit and the use of certain
        future tax benefits.
 
 The
        most
        significant factor affecting the Company’s future cash flows is its ability to
        earn and collect cash from customers. The automotive parts industry is extremely
        competitive. The Company’s customers are often able to demand price reductions
        from the suppliers including all segments of Raytech. Some of the Company’s
        sales are made under standard sales contracts that include price commitments
        for
        multiple years. Specifically in the Domestic OEM segment, the Company is
        selling
        certain products to certain customers at a loss under the terms of its current
        sales contracts. The Company is currently working with certain customers
        to
        re-negotiate the terms of these loss contracts. In addition, the Company
        is
        reviewing alternatives to improve its cost structure.  Additionally,
        the Company, specifically in the Domestic OEM segment, has very large customers,
        some representing more than ten percent of consolidated sales. From time
        to
        time, the Company loses business from existing customers, including its largest
        customers, due to pricing, technological or other competitive pressures.
        The
        Company also from time to time gains new business and renewals of existing
        business from existing or new customers through its continuing cost reduction,
        sales and development efforts. The cumulative effect of these changes, or
        the
        loss of one of its largest customers, could have a material adverse effect
        on
        the consolidated financial results of the Company.
  Items
        that will potentially require the use of cash during the remainder of fiscal
        2005 other than normal operating expenses include the following.
 
 ·
              The
                  Company has recorded an accrued liability of $5.9 million for certain
                  environmental matters more fully discussed in Note 7 - Litigation
                  to the
                  Condensed Consolidated Financial Statements. Management expects
                  that $.5
                  million will be spent during 2005 and the balance during 2006 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 underfunded and the Company,
                  through an agreement with the Internal Revenue Service, is providing
                  both
                  current contributions and catch-up contributions. The expected
                  funding for
                  the plans in 2005 will be approximately $1.3 million, $.9 million
                  of which
                  was funded during the first six months of 2005.






-
          12
          -


**RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        2, continued**
 
 ·
              The
                  Company has conducted a facilities utilization review and has determined
                  that improved performance can be obtained through the closure of
                  certain
                  facilities and moving certain production to other facilities operated
                  by
                  the Company. The Company estimates that the total cash outflows
                  related to
                  these closures will be approximately $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 12 - Restructuring Programs to the Condensed
                  Consolidated Financial Statements.
 
 ·
              During
                  2004, we reached agreements with certain major customers on revised
                  sales
                  contract provisions that will enable us to close our manufacturing
                  plant
                  in Sterling Heights, Michigan. The new sales contract provisions
                  require
                  the Company, in certain instances, to build up inventory levels
                  to
                  facilitate the transition to a new vendor or to another manufacturing
                  location within the Company. As a result, we expect our inventory
                  levels
                  to increase through September 2005 by as much as $2.6 million.
                  During the
                  fourth quarter of 2005, we expect this trend will reverse and inventory
                  levels will begin to decrease. We currently expect that the amount
                  of
                  inventory related to the build up will be less than $2.0 million
                  at year
                  end 2005.
 
 ·
              The
                  Company incurred costs associated with the retirement of its President
                  and
                  Chief Executive Officer during the second quarter and the restructuring
                  of
                  its domestic management team during the third quarter of 2004.
                  The total
                  cost associated with these items is approximately $1.4 million,
                  of which
                  $.8 million was paid during 2004, $.4 million was paid during the
                  first
                  quarter of 2005 and the balance to be paid prior to the end of
                  2005.
 
 ·
              Certain
                  tax issues are discussed in Note 9 - Income Taxes to the Condensed
                  Consolidated Financial Statements, which provides detail concerning
                  the
                  status of the current Internal Revenue Service audit and the use
                  of
                  certain future tax benefits.
 
 Management
        believes that existing cash balances, the Company’s lending facilities and cash
        flow from operations during 2005 will be sufficient to meet all of the Company’s
        obligations arising in the normal course
        of
        business, including anticipated capital investments. However, the ability
        of the
        Company to utilize its lending facilities is dependent on the Company’s ability
        to meet its financial forecasts for 2005, which is not assured, and to meet
        the
        financial covenants contained in its credit facilities. These forecasts include
        modest revenue growth in all three operating segments as well as certain
        cost-saving initiatives, partially offset by certain cost increases and
        inflation assumptions. If the Company does not comply with the financial
        covenants, an event of default would occur and could result in the acceleration
        of the Company’s indebtedness under its domestic credit facilities. If that were
        to occur, the ability of the Company to continue would be dependent upon,
        among
        other things, its ability to amend the credit facilities, enact certain actions
        to generate cash and/or to seek additional alternative financing from other
        lenders. 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 future strategic plans.






-
          13
          -


**RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 
 **Note
        3 - Restricted Cash**
 
 Restricted
        cash relates to the following:


July
                  3
              
              January
                  2,2005
              
              2005Payable
                  to the PI Trust
              
              $
              3,222
              
              $
              3,199Letters
                  of credit
              
              
              1,448
              
              
              1,939Other
              
              
              410
              
              
              410$
              5,080
              
              $
              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. Subsequent to
        July
        3, 2005, the Company paid to the PI Trust $2.7 million of the above payable.
 
 The
        letters of credit collateralize certain obligations relating primarily to
        workers' compensation and certain supplier accounts.
 
 **Note
        4 - Inventories**
 
 Inventories,
        net, consist of the following:


July
                  3,
                2005
              
              January
                  2,
                2005Raw
                  material
              
              $
              12,470
              
              $
              12,464Work
                  in process
              
              
              12,859
              
              
              11,020Finished
                  goods
              
              
              14,590
              
              
              16,098$
              39,919
              
              $
              39,582


Inventory
        reserves were $5,321 and $4,729 at July 3, 2005 and January 2, 2005,
        respectively.




-
          14
          -


**RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        5 - Goodwill and Other Intangible Assets**
 July
                    3, 2005
                
                January
                    2, 2005Gross
                
                
                
                GrossCarrying
                
                Accumulated
                
                Carrying
                
                AccumulatedAmount
                
                Amortization
                
                Amount
                
                AmortizationFinite
                    life intangibleassets:Unpatented
                    technology
                
                $
                14,382
                
                $
                7,788
                
                $
                14,360
                
                $
                6,972Distribution
                    base
                
                
                5,737
                
                
                1,218
                
                
                5,716
                
                
                1,073Total
                
                $
                20,119
                
                $
                9,006
                
                $
                20,076
                
                $
                8,045Indefinite
                    life intangibleassets:Trademarks
                
                $
                10,786
                
                
                
                
                $
                10,700Goodwill
                
                $
                5,287
                
                
                
                
                $
                5,912Intangible
                    assets, net
                
                $
                27,186
                
                
                
                
                $
                28,643


The
        weighted average amortization periods for the unpatented technology and the
        distribution base are between 6 and 20 years. Amortization expense for the
        13
        weeks ended July 3, 2005 and June 27, 2004 amounted to $480 and $482,
        respectively. Amortization expense for the 26 weeks ended July 3, 2005 and
        June
        27, 2004 amounted to $961 and $962, respectively.
 
 Estimated
        annual amortization expense is as follows:
  For
                  the year ending:2005
              
              $
              1,9222006
              
              
              1,9222007
              
              
              1,6222008
              
              
              1,5222009
              
              
              1,522




Trademarks
        and goodwill are not being amortized but are reviewed for impairment annually
        or
        more frequently when events or circumstances indicate that the carrying amount
        may be impaired. The Company's three operating segments have been defined
        as
        reporting units for purposes of testing goodwill for impairment. Goodwill
        has
        been assigned to each of the Company's segments.
 
 On
        March
        21, 2005, the Company, through its majority owned subsidiary, APC, purchased
        shares of APC owned by Raymark. This acquisition was accounted for using
        the
        purchase method of accounting in accordance with SFAS No. 141, “Business
        Combinations”. The cost of the acquisition was allocated to the assets acquired
        and liabilities assumed based on estimates of their respective fair values
        at
        the time of the acquisition. Fair values were determined by internal analysis
        and independent third party appraisals. The preliminary allocation of the
        purchase price resulted in the recognition of intangible assets of $129,
        consisting of unpatented technology $22, distribution base $21 and trademarks
        $86.
  -
            15
            -
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        6 - Debt**
 
 Debt
        at
        July 3, 2005 and January 2, 2005 consists of the following:
 July
                    3, 2005
                
                January
                    2, 2005Current
                
                Non-Current
                
                Total
                
                Current
                
                Non-Current
                
                TotalDomestic
                    bank debtLine
                    of credit
                
                $
                13,729
                
                $
                -
                
                $
                13,729
                
                $
                10,762
                
                $
                -
                
                $
                10,762Term
                    loansDomestic
                    OEM
                
                
                1,055
                
                
                2,462
                
                
                3,517
                
                
                1,055
                
                
                3,078
                
                
                4,133Aftermarket
                
                
                996
                
                
                4,337
                
                
                5,333
                
                
                996
                
                
                4,837
                
                
                5,833Total
                    domestic bank debt
                
                
                15,780
                
                
                6,799
                
                
                22,579
                
                
                12,813
                
                
                7,915
                
                
                20,728Foreign
                    bank debtLine
                    of credit
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Term
                    loansEurope
                
                
                941
                
                
                2,568
                
                
                3,509
                
                
                1,056
                
                
                3,406
                
                
                4,462Asia
                
                
                1,300
                
                
                -
                
                
                1,300
                
                
                1,300
                
                
                -
                
                
                1,300Total
                    foreign bank debt
                
                
                2,241
                
                
                2,568
                
                
                4,809
                
                
                2,356
                
                
                3,406
                
                
                5,762Total
                    bank debt
                
                
                18,012
                
                
                9,367
                
                
                27,388
                
                
                15,169
                
                
                11,321
                
                
                26,490Note
                    payable - Aftermarket
                
                
                -
                
                
                7,200
                
                
                7,200
                
                
                -
                
                
                -
                
                
                -Leases
                
                
                126
                
                
                218
                
                
                344
                
                
                111
                
                
                95
                
                
                206Total
                    debt
                
                $
                18,147
                
                $
                16,785
                
                $
                34,932
                
                $
                15,280
                
                $
                11,416
                
                $
                26,696
 
 The
        carrying value of the Company's debt approximates fair value.
  -
            16
            -
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        6, continued**
 
 The
        Company, 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 July 3, 2005, the amount available under the
        revolving line of credit was $2.9 million. Amounts outstanding under the
        revolving line of credit bear interest at a rate equal to, at the Company’s
        option, the prime rate or the adjusted Eurodollar rate, plus a margin of
        0.50%
        and 2.75%, respectively. Amounts outstanding under the term loan bear interest
        at a rate equal to, at the Company’s option, the prime rate or the adjusted
        Eurodollar rate, plus a margin of 0.75% and 3.00%, respectively. The agreement
        contains financial and other covenants, including a fixed charge coverage
        ratio
        and a material adverse change clause. At July 3, 2005 and January 2, 2005,
        the
        aggregate pledged  assets
        of
        RPC and RACC amounted to $64.4 million and $62.1 million, respectively,
        consisting of cash, accounts receivable, inventory, machinery and equipment
        and
        all other tangible and intangible assets, except real property. The agreement
        permits RPC and RACC to pay dividends to the Company for costs and expenses
        incurred by the Company in the ordinary course of business so long as no
        event
        of default has occurred and is continuing. During the second quarter of 2004,
        the Company entered into a fifth amendment to this agreement. The fifth
        amendment alters the determination of availability under the revolving line
        of
        credit to exclude certain receivables due to a potential right of setoff
        and
        grants the lender a mortgage on the real property owned by RPC, located in
        Sterling Heights, Michigan. The carrying value of the real property in Sterling
        Heights, Michigan was $4.8 million at July 3, 2005. Further, in accordance
        with
        the fifth amendment, the lender may make loans, subject to certain limits,
        under
        the revolving line of credit up to the lesser of the amount of the excluded
        receivables or $1.9 million. During the fourth quarter of 2004, the Company
        entered into a sixth amendment to this agreement. Under the sixth amendment,
        the
        lender waives certain defaults that may arise as a result of an agreement
        between the Company and a certain customer. During the first quarter of 2005,
        the Company entered into a seventh amendment to this agreement. The seventh
        amendment modifies the fixed charge coverage ratio to exclude a one-time
        forgiveness of certain intercompany receivables recorded by RPC during the
        first
        quarter of 2005, related to the closure of the RUK facility, clarifies the
        periods to be included in the calculation of the fixed charge coverage ratio
        in
        the future and provides a remedy for future non-compliance by an irrevocable
        cash contribution by the parent.
 
 The
        Company, through its subsidiaries Raytech Powertrain, Inc. (“RPI”), APC, Raytech
        Systems, Inc. (“RSI”) and Raybestos Powertrain, LLC, is party to a loan
        agreement for $7.0 million with an interest rate at 1.65 basis points over
        the
        adjusted Eurodollar rate with a five-year term. The loan is payable in 59
        monthly payments of $83, commencing on December 1, 2003, with a balloon payment
        of $2.1 million payable on November 3, 2008. The proceeds from this facility
        were used to pay environmental costs and pension costs. The loan is
        collateralized by the assets of the borrowing entities. The agreement contains
        financial and other covenants, including the maintenance of certain financial
        ratios and a material adverse change clause. At July 3, 2005 and January
        2,
        2005, the aggregate pledged assets of APC, RSI, RPI and Raybestos Powertrain,
        LLC were $39.4 million and $44.1 million, respectively.  During
        the first quarter of 2005, the Company entered into the first amendment to
        this
        agreement. The first amendment modifies the calculation of the debt service
        coverage ratio to exclude fifty percent of distributions to the borrower’s
        parent company.
  -
            17
            -
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        6, continued**
 
 The
        Company's wholly-owned German subsidiary, Raybestos Industrie-Produkte GmbH
        (“RIP”), has available lines of credit with several German banks. Interest is
        charged at rates between 3.80% and 10.75%. The lines are repayable on demand.
        At
        July 3, 2005 and January 2, 2005, there were no borrowings outstanding under
        these lines of credit.
 
 The
        Company’s wholly-owned German subsidiaries, Raytech Composites Europe GmbH
        (“RCE”) and RIP have various loan agreements with outstanding loans at July 3,
        2005 of $3.5 million with the maturities ranging from September 2005 through
        December 2012. The loans are payable in equal periodic installments (usually
        quarterly or semi-annually) over the term of the loan. The loans bear interest
        at rates ranging from 2.50% through 6.17%. At July 3, 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 July 3, 2005
        and
        January 2, 2005 was $1.3 million. The Company refinanced the outstanding
        loans
        in May 2005 into one loan agreement. 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 therefor, APC issued a ten
        year
        unsecured subordinated promissory note in the initial principal amount of
        $7.2
        million (the “Note”). The Note is subordinated to APC’s existing and future
        senior indebtedness and 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 July 3, 2005 and
        January 2, 2005 were 6.17% and 4.85%, respectively.
  -
            18
            -
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        7 - Litigation**
 
 *Environmental
        Remediation*
  Crawfordsville,
        Indiana - Shelly Ditch Contamination Removal
  In
        October 1987, RPC, a wholly-owned subsidiary of the Company, purchased a
        major
        manufacturing facility (the “RPC Facility”) in Crawfordsville, Indiana. Sometime
        thereafter, the Company learned that the previous owner of the RPC Facility
        had
        released polychlorinated biphenyls (“PCBs”) to the ground at the RPC Facility in
        the mid-1960s and that such PCBs were leaching from the RPC Facility into
        an
        adjacent ditch (“Shelly Ditch”).
  In
        1996,
        the Indiana Department of Environmental Management (the “IDEM”) advised RPC that
        the RPC Facility may have contributed to, and was potentially responsible
        for,
        the release of lead and PCBs found in Shelly Ditch. In the late 1990s, RPC
        and
        the IDEM entered into an agreed order (the “Agreed Order”) for a risk-based
        remediation of PCBs and lead in Shelly Ditch. When the IDEM later sought
        to
        unilaterally withdraw from the Agreed Order, RPC appealed and the Marion
        County
        Superior Court ordered the IDEM to reinstate the Agreed Order. Meanwhile,
        at the
        IDEM’s request, the United States Environmental Protection Agency (the “EPA”)
        became involved in Shelly Ditch.
  In
        December 2000, before the Agreed Order was reinstated, the EPA issued a
        Unilateral Administrative Order to RPC under CERCLA (the “EPA Removal Order”)
        demanding removal of contaminated soils from those Shelly Ditch areas identified
        as Reaches 1 through 3 (the “Site”). The EPA Removal Order required more work at
        greater expense than the IDEM Agreed Order. Thereafter, RPC proceeded with
        the
        work required under the EPA Removal Order.
 
 On
        January 9, 2004, the EPA confirmed that RPC had completed the action required
        under the EPA Removal Order, including the removal and proper disposal of
        Site
        soils and sediments contaminated with PCBs and lead. In its confirmation,
        the
        EPA noted that RPC would continue to be subject to certain obligations under
        that order, including record retention and the payment of oversight costs.
        Whether RPC will be required to pay oversight costs relating to the work
        under
        the EPA Removal Order will depend on the outcome of future negotiations with
        the
        EPA and the IDEM regarding potential environmental remediation downstream
        of the
        Site.
 
 By
        July
        3, 2005, RPC had spent approximately $18.7 million on removal of lead and
        PCB
        contaminated soils from the Site. RPC had accrued $.4 million for potential
        EPA
        oversight costs relating to that work, which is its best estimate of all
        remaining oversight costs. The Company believes that any cost in excess of
        the
        accrued amount related to this matter will not be material.
 
 Crawfordsville,
        IN - Environmental Remediation Downstream of the Site
  On
        May 6,
        2003, the EPA indicated that RPC is potentially liable for PCB and lead
        contamination downstream of the Site. The EPA has not issued an order to
        RPC
        regarding this downstream area. However, during the third quarter of 2003,
        the
        Company began negotiations with the EPA concerning such possible additional
        remediation. As a result, during the third quarter of 2003, the Company recorded
        a $2.4 million accrual relating to this potential liability for investigative
        and future cleanup costs. The Company has an accrual of $2.1 million at July
        3,
        2005, which is its best estimate of the costs, including oversight costs,
        that
        will be incurred related to this matter. The Company believes that any cost
        in
        excess of the accrued amount related to this matter will not be
        material.
  -
            19
            -
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        7, continued**
 
 Crawfordsville,
        IN - Environmental Remediation and Expenses relating
        to the RPC Facility
 
 On
        May
        15, 2001, the EPA issued a Pre-filing Notice and Opportunity to Confer
        to **** RPC
        (the
“Pre-filing Notice”). This notice stated that the EPA might file a civil action
        lawsuit against RPC for violations of various environmental statutes and
        would
        offer RPC the opportunity to participate in pre-filing negotiations to resolve
        this matter. The EPA stated that it had reason to believe that RPC committed
        violations of the Clean Air Act, Clean Water Act, Resource Conservation and
        Recovery Act, and Toxic Substances Control Act and that RPC could be subject
        to
        substantial penalties. On September 3, 2003, the EPA proposed that the parties
        settle the Pre-filing Notice. The EPA stated that penalties for violations
        alleged in the Pre-filing Notice could total approximately $180.0 million
        and
        suggested the following resolution: RPC should pay approximately $2.4 million
        in
        fines and undertake compliance activities, on-site investigative work that
        the
        EPA estimated would cost about $1.0 million, and corrective action to resolve
        the Pre-filing Notice. During 2004, RPC performed on-site investigative work.
        RPC is currently engaged in further investigative work and negotiations with
        the
        EPA regarding potential on-site corrective action and the amount of any penalty.
        The Company has an accrual of $3.4 million as of July 3, 2005, based on the
        EPA
        position, which is its best estimate of the costs related to this matter.
        The
        Company does not have any additional information, beyond what is discussed
        above, that would suggest a range of loss. The Company is currently working
        with
        environmental engineers and the EPA to determine the extent of corrective
        action, if any, required.
 
 Ferndale,
        MI - Potential Responsibility for Environmental Remediation
 
 In
        a
        January 8, 2002 letter, the Michigan Department of Environmental Quality
        (“MDEQ”) asserted that the Company might have responsibility for
        trichloroethylene contamination at a Ferndale, Michigan industrial site that
        Advanced Friction Materials Company (“AFM”) leased from approximately 1974 to
        1985. The Company acquired 47% of the stock of AFM in 1996 and the balance
        of
        the shares in 1998. The Company has not received any communications from
        MDEQ
        since 2002 and has insufficient knowledge to estimate a reasonably possible
        range of loss for the alleged contamination. No liability has been accrued
        as of
        July 3, 2005.
 
 *Environmental
        Litigation*
 
 Cost
        Recovery Actions against Insurers regarding Shelly Ditch
 
 In
        1996,
        RPC notified its insurers and demanded defense and indemnity regarding any
        environmental issues relating to alleged lead and PCB contamination of Shelly
        Ditch. In January 1997, one insurer filed a complaint in the U.S. District
        Court, Southern District of Indiana, captioned Reliance
        Insurance Company vs. Raybestos Products Company (the
“Insurance Case”). The complaint sought a declaratory judgment that the Reliance
        Insurance policies do not provide coverage to RPC for defense and indemnity
        relating to investigation and remediation of contamination in Shelly Ditch.
        In
        January 2000, the District Court rejected Reliance‘s claims and granted summary
        judgment to RPC. In June 2001, Reliance Insurance Company was placed in
        liquidation in Pennsylvania. The Company has filed claims in the Reliance
        liquidation for recovery of its Shelly Ditch expenses but has not received
        a
        decision. ****
  -
            20
            -
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        7, continued**
 
 In
        February 2002, RPC filed a third-party complaint in the Insurance Case against
        three insurance carriers. The third-party complaint seeks defense and indemnity
        from the insurers relating to investigation and remediation of contamination
        in
        Shelly Ditch. Later that year, two of the insurance carriers, USF&G and
        Westchester, filed motions to compel arbitration of the insurance coverage
        issues under these policies. The U.S. District Court denied these motions
        to
        compel and the two insurance companies appealed to the U.S. Court of Appeals
        for
        the Seventh Circuit ("Appeals Court"). On August 27, 2004, the Court of Appeals
        reversed the District Court's order refusing to compel such arbitration and
        remanded the case to the District Court for entry of an order compelling
        arbitration. On October 15, 2004, the District Court entered its order
        compelling arbitration and RPC promptly submitted the USF&G and Westchester
        insurance issues to arbitration. On August 9, 2005, RPC agreed to settle
        its
        claims against USF&G for, among other things, a payment by USF&G. 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
        has
        not decided whether to appeal this ruling.
 
 In
        February 2004, the third insurance carrier, National Union and its affiliates,
        commenced an adversary proceeding against the Company, RPC and others by
        filing
        a complaint in U.S. Bankruptcy Court (the “Adversary Proceeding”). In the
        Adversary Proceeding, National Union claims that RPC’s complaint against
        National Union is barred by a 2002 order of the U.S. Bankruptcy Court in
        the
        Raymark Chapter 11 cases that prohibits RPC from pursuing its third-party
        complaint against National Union and declares that the National Union insurance
        policies issued to the Company and RPC have been exhausted. Also in February
        2004, National Union filed a motion in the U.S. District Court, Southern
        District of Indiana, asking that court to stay the Insurance Case against
        National Union. On September 10, 2004, the U.S. District Court granted National
        Union's motion for stay. The outcome of this Adversary Proceeding and related
        stay and their effects, if any, on the Insurance Case against National Union
        cannot be predicted.
 
 RPC
        believes that a recovery from National Union and Reliance Insurance of a
        substantial portion of the environmental costs described above is reasonably
        possible. However, due to the uncertainty and complexity of the legal issues
        involved in the litigation against the carriers, RPC has not recorded any
        recovery and the liabilities have been recorded on a gross basis.
 
 RPC
        Claims against IDEM
 
 In
        July
        2002, RPC filed an action against the IDEM for breach of contract claiming
        damages based on the difference between the costs of cleanup under the EPA
        Removal Order and the IDEM Agreed Order. The outcome of this litigation cannot
        be predicted. Trial of this matter began in August 2005 and is expected to
        conclude in September 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 which was not material. ABD
        has
        filed an appeal of the summary judgment ruling. The Company
        does not believe that the outcome of this litigation will have a material
        adverse effect on its consolidated results of operations, financial condition
        or
        cash flows.
  -
            21
            -
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        7, continued**
 
 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
        8 - Segment Reporting**
 
 The
        Company's operations are categorized into three operating segments and a
        corporate group based on management structure, product type and distribution
        channel, as described below.
 
 Domestic
        OEM
  The
        Domestic OEM segment manufactures and distributes automatic transmission
        and wet
        wheel brake system components. The Company markets its products to automobile,
        heavy duty truck, farm machinery, mining, and bus original equipment
        manufacturers ("OEMs") in North America.
  International
  The
        International segment manufactures and distributes automatic transmission,
        manual transmission and wet wheel brake system components. The Company markets
        its products to automobile, heavy duty truck, farm machinery, mining, and
        bus
        OEMs. The International segment markets its dry friction products worldwide
        and
        its wet friction products throughout Europe and Asia.
  Aftermarket
  The
        Aftermarket segment produces specialty engineered products primarily for
        automobile and light truck automatic transmissions. In addition to these
        products, this segment markets transmission filters and other transmission
        related components. The focus of this segment is marketing to warehouse
        distributors and certain retail operations in the automotive
        aftermarket.
  Corporate
  The
        Corporate group consists principally of corporate expenses, including costs
        to
        maintain the corporate headquarters, certain environmental costs, and certain
        assets, liabilities and related income and expense stemming from the
        reorganization plan implemented when the Company emerged from bankruptcy
        in
        2001. The Company has chosen not to distribute these costs to the operating
        segments to preserve the historical comparability at the operating segment
        level.
  -
            22
            -
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        8, continued**
 
 Information
        relating to operations by industry segment follows:
  **For
                  the 13 weeks ended**
              ****
              **For
                  the 26 weeks ended**
              ********
              ****
              **July
                  3,**
              ****
              **June
                  27,**
              ****
              **July
                  3,**
              ****
              **June
                  27,**
              ********
              ****
              **2005**
              ****
              **2004**
              ****
              **2005**
              ****
              **2004**Net
                  SalesDomestic
                  OEM
              
              $
              36,617
              
              $
              32,361
              
              $
              70,810
              
              $
              63,763International
              
              
              17,461
              
              
              16,864
              
              
              37,425
              
              
              33,517Aftermarket
              
              
              12,799
              
              
              13,616
              
              
              26,833
              
              
              26,002Intersegment
                  elimination (1)
              
              
              (6,271
              )
              
              (4,436
              )
              
              (11,110
              )
              
              (8,279
              )Net
                  sales to external customers
              
              $
              60,606
              
              $
              58,405
              
              $
              123,958
              
              $
              115,003Gross
                  ProfitDomestic
                  OEM
              
              $
              1,634
              
              $
              4,521
              
              $
              4,283
              
              $
              8,417International
              
              
              4,116
              
              
              4,647
              
              
              10,333
              
              
              9,436Aftermarket
              
              
              2,782
              
              
              4,304
              
              
              6,723
              
              
              7,989Corporate
                  and intersegment elimination
              
              
              (1,581
              )
              
              (943
              )
              
              (2,392
              )
              
              (2,254
              )Consolidated
              
              $
              6,951
              
              $
              12,529
              
              $
              18,947
              
              $
              23,588Operating
                  Profit (loss)Domestic
                  OEM
              
              $
              (1,388
              )
              $
              1,583
              
              $
              (1,985
              )
              $
              2,736International
              
              
              248
              
              
              1,959
              
              
              2,818
              
              
              4,057Aftermarket
              
              
              1,162
              
              
              2,669
              
              
              3,302
              
              
              4,819Corporate
              
              
              (3,535
              )
              
              (4,106
              )
              
              (5,657
              )
              
              (7,050
              )Consolidated
              
              $
              (3,513
              )
              $
              2,105
              
              $
              (1,522
              )
              $
              4,562Income
                  before provision for incometaxes
                  and minority interestDomestic
                  OEM
              
              $
              (5,445
              )
              $
              897
              
              $
              (6,717
              )
              $
              1,567International
              
              
              (5,164
              )
              
              1,773
              
              
              8,027
              
              
              3,959Aftermarket
              
              
              998
              
              
              2,580
              
              
              3,105
              
              
              4,814Corporate
                  and intersegment elimination
              
              
              (5,596
              )
              
              (3,868
              )
              
              (6,302
              )
              
              (6,523
              )Consolidated
              
              $
              (4,879
              )
              $
              1,382
              
              $
              (1,887
              )
              $
              3,817
  (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.
  
 -
            23
            -




**RAYTECH
      CORPORATION**


**NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        9 - Income Taxes**
 
 The
        tax
        benefit recorded for the thirteen-week period ended July 3, 2005 is $1.5
        million
        compared to a provision of $1.0 million for the same period in the prior
        year.
        The tax benefit recorded for the twenty-six-week period ended July 3, 2005
        is
        $331 compared to a provision of $1.9 million for the same period in the prior
        year. The tax benefit for the current period includes the settlement 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 Company recorded a $1.6 million
        benefit based on the final outcome of the IRS exam. Also, during the current
        period, the Company recognized foreign taxes associated with operations in
        Germany and China and state taxes generated by domestic operations. The Company
        did not recognize any tax benefits associated with the losses generated by
        the
        U.S. domestic operations or its United Kingdom operations, due to doubts
        concerning their future recoverability, in the thirteen-week period ended
        July
        3, 2005.
 
 Pursuant
        to the Tax Benefits Assignment and Assumption Agreement (the "Agreement"),
        all
        tax benefits received by the Company due to the reorganization are to be
        passed
        onto the PI Trust as received. At July 3, 2005, the Company has tax loss
        carryforwards of $92.2 million and tax credit carryforwards of $2.7 million.
        The
        net operating loss carryforwards are allocated between the Company and the
        PI
        Trust in the amounts of $25.0 million and $67.2 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 $67.2 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 nine 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 July 3, 2005 and January 2,
        2005,
        respectively.
 
 During
        the twenty-six-week period ended July 3, 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
        13, and the resultant inclusion of APC in the group’s consolidated U.S. tax
        return. As part of the purchase accounting, the Company reassessed the
        realizability of APC’s deferred tax assets using the “more likely than not”
        criteria specified by SFAS No. 109, “Accounting for Income Taxes”, and
        determined that a full valuation allowance should be provided against them.
        As a
        result of this change in the deferred tax accounts, the Company has updated
        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 $400 to the Company. The benefit of the reduction in the deferred
        payable to the PI Trust has been recorded as other income in the Condensed
        Consolidated Statement of Operations. Future changes in the composition and
        reversal patterns of the Company’s deferred tax assets and liabilities may
        impact the deferred tax asset that inures to the benefit of the PI Trust
        and the
        related deferred payable. The impact on the deferred payable to the PI Trust
        could cause a corresponding impact on pre-tax income.
 
 
 -
            24
            -
 **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        9, continued**
 
 At
        July
        3, 2005, the Company has recorded a tax receivable in the amount of $1,639,
        of
        which $1,596 is due from the Federal Government due to the final settlement
        with
        the IRS discussed above and $43 is due from state governments. The
        state
        refunds inure to the benefit of the PI Trust. In July 2005, the Company received
        $1.0 million from the Federal Government, which has been paid to the PI
        Trust.
 
  -
            25
            -
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        10 - Earnings Per Share** ****


**13
                  weeks ended**
              ****
              **26
                  weeks ended**
              ********
              ****
              **July
                  3,**
              ****
              **June
                  27,**
              ****
              **July
                  3,**
              ****
              **June
                  27,**
              ********
              ****
              **2005**
              ****
              **2004**
              ****
              **2005**
              ****
              **2004**Net
                  income
              
              $
              (3,356
              )
              $
              57
              
              $
              (1,736
              )
              $
              1,408Weighted
                  average shares
              
              
              41,737,306
              
              
              41,737,306
              
              
              41,737,306
              
              
              41,737,306Basic
                  and diluted earnings per share
              
              
              (.08
              )
              
              -
              
              
              (.04
              )
              
              .03
 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 twenty-six
          weeks
          ended July 3, 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 twenty-six weeks ended June 27, 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
          11 - Pension and Post Retirement Benefit Plans**
 
 Components
          of Net Periodic Benefit Cost
  **Pension
                  Benefits**
              ****
              **Post
                  Retirement Benefits**
              ********
              ****
              **For
                  the thirteen weeks ended**
              ********
              ****
              **July
                  3,**
              ****
              **June
                  27,**
              ****
              **July
                  3,**
              ****
              **June
                  27,**
              ********
              ****
              **2005**
              ****
              **2004**
              ****
              **2005**
              ****
              **2004**Service
                  Cost
              
              $
              130
              
              $
              146
              
              $
              252
              
              $
              197Interest
                  Cost
              
              
              619
              
              
              698
              
              
              365
              
              
              290Expected
                  return on plan assets
              
              
              (698
              )
              
              (636
              )
              
              -
              
              
              -Amortization
                  of prior service cost
              
              
              15
              
              
              15
              
              
              -
              
              
              -Amortization
                  of net (gain) loss
              
              
              113
              
              
              128
              
              
              110
              
              
              41Net
                  periodic benefit cost
              
              $
              179
              
              $
              351
              
              $
              727
              
              $
              528
  **Pension
                  Benefits**
              ****
              **Post
                  Retirement Benefits**
              ********
              ****
              **For
                  the twenty-six weeks ended**
              ********
              ****
              **July
                  3,**
              ****
              **June
                  27,**
              ****
              **July
                  3,**
              ****
              **June
                  27,**
              ********
              ****
              **2005**
              ****
              **2004**
              ****
              **2005**
              ****
              **2004**Service
                  Cost
              
              $
              260
              
              $
              292
              
              $
              504
              
              $
              394Interest
                  Cost
              
              
              1,238
              
              
              1,394
              
              
              729
              
              
              580Expected
                  return on plan assets
              
              
              (1,396
              )
              
              (1,271
              )Amortization
                  of prior service cost
              
              
              30
              
              
              69Amortization
                  of net (gain) loss
              
              
              227
              
              
              215
              
              
              221
              
              
              81Net
                  periodic benefit cost
              
              $
              359
              
              $
              699
              
              $
              1,454
              
              $
              1,055
 
 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.
  -
            26
            -
  **RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
        11, continued** ****
 
 The
        Company previously disclosed in its financial statements for the year ended
        January 2, 2005, that it expected to contribute $2.2 million to its pension
        plans and $.9 million to fund its post retirement plan in 2005. As of July
        3,
        2005, $.1.5 million of contributions have been made. The Company presently
        anticipates contributing an additional $1.6 million to fund its pension and
        post
        retirement plans in 2005.
 
 In
        connection with the Company's Chapter 11 proceedings, the Pension Benefit
        Guaranty Corporation ("PBGC") filed certain motions claiming that the Company
        was responsible for the funding and sponsorship of two Raymark Corporation
        pension plans. The court ordered that the Company was liable for the maintenance
        and funding of the underfunded pension plan obligations of Raymark Corporation.
        The Company, based on the court's order, assumed the role of plan sponsor
        of the
        Raymark Plans upon emergence from bankruptcy. The Company obtained a deferral
        of
        its funding obligations for 2000. Since obtaining the deferral, the Company
        has
        made funding payments to the Raymark Plans as required. As of July 3, 2005,
        the
        outstanding balance of the deferred amounts was approximately $.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 July 3, 2005 the carrying value of the
        real
        property mortgaged was $4.6 million.
 
 
 **Note
        12 - Restructuring Programs**
 
 During
        2004, the Company conducted a facilities utilization review and made the
        decision to close its manufacturing operations in Sterling Heights, Michigan
        and
        Liverpool, England. The closure of these facilities is expected to be completed
        during 2005. Additionally, during 2004, the Company began the process of
        relocating its corporate functions from Shelton, Connecticut to its existing
        manufacturing and development facilities located in Crawfordsville, Indiana.
        The
        closure of the Shelton corporate offices is expected to be completed during
        2005.
  Restructuring
        expense of $1.2 million was recorded in the thirteen-week period ended July
        3,
        2005 as a change in estimate of the closure costs for the U.K. facility.
        Additional information has been received for estimation of final refurbishment
        costs of $.6 million and lease cost of $.6 million for exiting the facility.
        Additional severance costs were booked in the first quarter of $.1 million;
        the
        total restructuring costs for the U.K. booked in 2005 aggregate to $1.3 million
        at July 3, 2005.
  The
        table
        below sets forth the Company’s estimate of the total cost of the restructuring
        programs, the portion recognized through July 3, 2005 and the portion expected
        to be recognized in a future period:
 **July
                    3, 2005**
                ****
                **Recognized**
                ****
                **To
                    Be**
                ********
                ****
                **Expected**
                ****
                **Through**
                ****
                **Recognized**
                ********
                ****
                **Total
                    Cost**
                ****
                **July
                    3, 2005**
                ****
                **In
                    Future**Severance
                    and termination benefits
                
                $
                4,127
                
                $
                3,957
                
                $
                170Lease
                    termination costs
                
                
                530
                
                
                530
                
                
                -Asset
                    impairment
                
                
                1,610
                
                
                1,610
                
                
                -Other
                
                
                2,113
                
                
                1,390
                
                
                723$
                8,380
                
                $
                7,487
                
                $
                893
 -
              27
              -
  **RAYTECH
          CORPORATION**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
          in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 **Note
          12, continued** ****
 
 The
          employee severance and termination benefits relate to the elimination of
          approximately 300 employees, most of which are engaged in manufacturing
          activities at the Sterling Heights, Michigan and Liverpool, England facilities.
          The portion of the severance and termination benefits cost expected to
          be
          incurred, but not recognized through July 3, 2005, relates principally
          to
          one-time retention or vesting benefits that will be earned and recognized
          over
          the future service period of the employees. The Company anticipates that
          the
          remaining expense will be recognized prior to the end of fiscal 2005 and
          that
          these amounts will be paid during 2005 and 2006.
 
 The
          lease
          termination costs relate to the Liverpool, England facilities. The estimated
          cost is based on the Company’s ongoing discussions with the landlord and does
          not include the full minimum lease commitment based on the original terms
          of the
          lease. The Company expects that these costs will be recognized and paid
          in a
          future period during 2005, when the facilities are vacated. These estimates
          do
          not include any costs associated with terminating the Shelton, Connecticut
          lease, which are not anticipated to be material.
 
 The
          asset
          impairment charge relates to equipment located at the Liverpool, England
          facilities, determined to be impaired as a result of the decision to close
          those
          facilities. The equipment at the Sterling Heights, Michigan facility was
          deemed
          to be impaired and written down to liquidation value in 2003, due to the
          lack of
          profitability at that facility.
 
 The
          other
          restructuring costs relate principally to accelerated depreciation of $.6
          million associated with the shortening of the useful lives of certain equipment
          as a result of the decision to close the facilities and other costs associated
          with exiting the facilities.
 
 All
          of
          the restructuring costs except the asset impairment and accelerated depreciation
          will result in cash outflows.
 
 The
          table
          below sets forth the activity with respect to the restructuring during
          the
          twenty-six weeks ended July 3, 2005:
  **Severance**
              ****
              ****
              ****
              ****
              ****
              ****
              ********
              ****
              **and**
              ****
              ****
              ****
              ****
              ****
              ****
              ********
              ****
              **Termination**
              ****
              **Asset**
              ****
              ****
              ****
              ****
              ********
              ****
              **Benefits**
              ****
              **Impairment**
              ****
              **Other**
              ****
              **Total**Balance
                  January 2, 2005
              
              $
              3,104
              
              $
              -
              
              $
              275
              
              $
              3,379Charges
              
              
              866
              
              
              -
              
              
              1,575
              
              
              2,442Non-cash
                  charges
              
              
              -
              
              
              -
              
              
              (369
              )
              
              (368
              )Cash
                  payments
              
              
              (670
              )
              
              -
              
              
              -
              
              
              (670
              )Currency
                  translation
              
              
              (9
              )
              
              -
              
              
              (73
              )
              
              (82
              )Balance
                  July 3, 2005
              
              $
              3,291
              
              $
              -
              
              $
              1,408
              
              $
              4,701
  The
        charges recognized in the thirteen and twenty-six-week period ended July
        3, 2005
        have been reported as restructuring expenses in the Condensed Consolidated
        Statement of Operations, except $184 and $369 representing accelerated
        depreciation costs that have been reported as a component of cost of sales
        in
        the respective periods.
   -
            28
            -


**RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 
 **Note
        13 - Acquisition of APC Minority Shares owned by Raymark**
 
 On
        March
        21, 2005, the Company, through its majority owned subsidiary, APC, purchased
        shares of APC owned by Raymark. The transaction increased the Company’s indirect
        ownership of APC from approximately 57% of its outstanding common stock to
        approximately 96% of its outstanding common stock.
 
 APC
        purchased 41,904 shares of APC common stock that were owned by Raymark, and
        in
        payment therefor, APC issued a ten year unsecured subordinated promissory
        note
        in the initial principal amount of $7.2 million (the “Note”).
 
 The
        Note
        is subordinated to APC’s existing and future senior indebtedness and 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






-
          29
          -


**RAYTECH
        CORPORATION**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 (dollars
        in thousands, unless otherwise noted, except per share data)
 (unaudited)
 
 
 **Note
        14 - Contingencies**
 
 The
        Company has been notified of a claim asserted by a customer that product
        sold by
        the Company allegedly failed as a result of manufacturing defects. The customer
        has estimated that the potential costs to remedy the defect are approximately
        $1.3 million. Based on the Company’s evaluation of the claim to date, we have
        concluded that it is not probable that we have a liability. The Company intends
        to defend itself against this claim; however, the ultimate resolution of
        this
        claim cannot be predicted and it is reasonably possible that this matter
        could
        ultimately be decided, resolved or settled in favor of the customer for an
        amount up to the estimated amount provided by the customer. The Company has
        not
        recorded a provision for this claim at this time, pending further investigation
        of the claim. Further, if it is determined that this is a valid claim, the
        Company will pursue all available insurance coverage that may exist related
        to
        the manufacture and sale of this product.






-
          30
          -


**Item
        2.**  **Management's
        Discussion and Analysis of Financial** **Condition
        and Results of Operations**
 
 In
        preparing the discussion and analysis required by the federal securities
        laws,
        it is assumed that users of the interim financial information have read or
        have
        access to the discussion and analysis for the preceding fiscal year included
        in
        the Company’s Form 10-K for the year ended January 2, 2005.
 
 Caution
        Regarding Forward Looking Statements
 
 Statements
        in this "Management's Discussion and Analysis" relating to management’s views of
        trends, the effects of changing prices, plans, objectives and other matters
        for
        future operating periods are “forward-looking statements” as defined in the
        Private Securities Litigation Reform Act of 1995. These forward-looking
        statements are subject to significant risks and uncertainties that could
        cause
        actual results to differ materially from the results in the statements.
        Forward-looking statements relating to Raytech Corporation (the "Company")
        businesses are based on assumptions concerning certain factors that are not
        predictable and are subject to change. These factors include general economic
        conditions, worldwide demand for automotive and heavy duty vehicles, consumer
        confidence, actions of our competitors, vendors and customers, factors affecting
        our costs such as raw material prices, labor relations and environmental
        compliance and remediation, interest and foreign currency exchange rates,
        technological issues, accounting standards, and other risks set forth in
        the
        Company’s public filings. The forward-looking statements herein are made as of
        the date of this report. We have no obligation to update our forward-looking
        statements.
 
 Significant
        Accounting Policies
 
 Preparation
        of the Company's financial statements requires management to make estimates
        and
        assumptions that affect the reported amounts of assets, liabilities, revenues
        and expenses. Management believes the most complex and sensitive judgments,
        because of their significance to the consolidated financial statements, result
        primarily from the need to make estimates about the effects of matters that
        are
        inherently uncertain. Management's Discussion and Analysis and Note 1 to
        the
        Consolidated Financial Statements in the Company's Form 10-K for fiscal 2004
        describe the significant accounting estimates and policies used by management
        in
        the preparation of the consolidated financial statements. Actual results
        in
        these areas could differ from management's estimates. There have been no
        changes
        in the Company's critical accounting estimate processes and policies during
        the
        twenty-six-week period ended July 3, 2005.
 
 Overview
 
 The
        operating loss for the thirteen-week period ended July 3, 2005 of $3.5 million
        compares to an operating income of $2.1million in the same period in the
        prior
        year, a reduction of $5.6 million. The operating loss was due primarily to
        the
        continued poor performance of the Domestic OEM segment. The company, which
        despite improving sales 3.8% compared to the second quarter of 2004, realized
        a
        44.5% decrease in gross profit compared to the same period in 2004. In addition,
        $.7 million of the decline in gross profit is the result of purchase accounting
        with regard to the APC stock acquisition, which occurred in the first quarter
        of
        2005. A fuller discussion of this is contained in the Aftermarket segment
        discussion. The operating loss for the twenty-six-week period ended July
        3, 2005
        of $1.5 million compares to an operating profit of $4.6 million for the same
        period in the prior year, a decline of $6.1 million. The poor performance
        in the
        six-month-period is driven by the Domestic OEM segment. As a whole, the Company
        increased sales $9.0 million or 7.8% compared to the six-month period in
        2004,
        while gross profit declined $4.6 million or 19.7%. 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.
 
 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.
  -
            31
            -
 
 The
        Company recorded net sales of $60.6 million for the thirteen-week period
        ended
        July 3, 2005, an increase of $2.2 million or 3.8% 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 $124.0 for the
        twenty-six-week period ended July 3, 2005, which compares to $115.0 million
        for
        the same period in the prior year, an increase of $9.0 million or 7.8%. The
        increase in the twenty-six-week period is due to the same reasons noted above.
        The following discussion by segment provides a more detailed
        discussion.
 
 Gross
        profit for the second quarter decreased $5.6 million or 44.5% 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. Also, as noted above, the purchase accounting applied regarding
        the APC stock acquisition reduced gross profit $.7 million. See the Aftermarket
        segment discussion for more details. The gross profit for the six-month period
        ended July 3, 2005 declined $4.6 million or 19.7% compared to the same period
        in
        the prior year. In addition to the impact of the purchase accounting adjustments
        recorded regarding the APC stock acquisition, 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,
        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 declined $1.6 million and $.6 million for the thirteen- and
        twenty-six-week periods ended July 3, 2005 compared to the same periods in
        the
        prior year. The decline reflects lower professional fees and severance expense
        compared to the same periods in 2004 partially offset by increased costs
        due to
        expenses incurred related to preparation for the transfer of certain production
        from the facilities to be closed this year as part of the restructuring program
        and bad debt expense.
 
 The
        restructuring expense recorded in 2005 relates to the restructuring programs
        initiated during 2004. See Note 12 - Restructuring Programs to the Condensed
        Consolidated Financial Statements for further details regarding these
        restructuring programs.
 
 Interest
        expense is incurred on the Company's debt facilities. See Note 6 - Debt to
        the
        Condensed Consolidated Financial Statements.
 
 During
        the twenty-six-week period ended July 3, 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
        13, and the resultant inclusion of APC in the group’s consolidated U.S. tax
        return. As part of the purchase accounting, the Company reassessed the
        realizability of APC’s deferred tax assets using the “more likely than not”
        criteria specified by SFAS No. 109, “Accounting for Income Taxes”, and
        determined that a full valuation allowance should be provided against them.
        As a
        result of this change in the deferred tax accounts, the Company has updated
        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 $.4 to the Company. The benefit of the
        reduction in the deferred payable to the PI Trust has been recorded as other
        income in the Condensed Consolidated Statement of Operations. Future changes
        in
        the composition and reversal patterns of the Company’s deferred tax assets and
        liabilities may impact the deferred tax asset that inures to the benefit
        of the
        PI Trust and the related deferred payable. The impact on the deferred payable
        to
        the PI Trust could cause a corresponding impact on pre-tax income.
 
 The
        Company's income taxes are discussed in detail in Note 9 - Income Taxes to
        the
        Condensed Consolidated Financial Statements. As a condition of the
        reorganization plan, all tax benefits received by the Company as a result
        of the
        reorganization inure to the benefit of the PI Trust.
  -
            32
            -
  The
        minority interest expense relates to Allomatic Products Company (“APC”), which
        was 57% owned by the Company, 40% owned by Raymark
        Corporation (which, with its subsidiary Raymark Industries, Inc., is
        collectively referred to in this report as “Raymark”) ,
        a
        related party, and 3% owned by certain employees of the Company. APC has
        been
        consolidated in the financial results and a minority interest is recorded
        to
        reflect the minority shareholders’ interest in APC, since its acquisition in
        1989. On March 21, 2005, the Company, through its majority owned subsidiary,
        APC, purchased the APC common stock owned by Raymark in exchange for a ten-year
        unsecured subordinated promissory note in the original principal amount of
        $7.2
        million. See Note 13 - Acquisition of APC Minority Shares owned by Raymark
        to
        the Consolidated Financial Statements.
 
 The
        Company recorded net loss of $3.4 million and $1.7 million for the thirteen-
        and
        twenty-six-week periods ended July 3, 2005, respectively, which represents
        a
        decrease in earnings from the same periods in the prior year of $3.4 and
        $3.1
        million, respectively. The loss per basic and fully diluted shares for the
        second quarter 2005 of $.08 compares to $0.0 in the same period in the prior
        year. The loss per basic fully diluted share for the six-month period of
        $.04
        compares to income per basic and fully diluted share of $.03 for the same
        period
        in the prior year.
 
 **Domestic
        OEM**
 
 The
        following table sets forth selected income statement data for the Domestic
        OEM
        segment for the thirteen and twenty-six weeks ended July 3, 2005 and June
        27,
        2004.


**For
                  the thirteen weeks ended**
              ********
              ****
              **(amounts
                  in thousands)**
              ********
              ****
              **July
                  3, 2005**
              ****
              **June
                  27, 2004**Net
                  sales
              
              $
              36,617
              
              
              100.0
              %
              $
              32,361
              
              
              100.0
              %Gross
                  profit
              
              
              1,634
              
              
              4.5
              
              
              4,521
              
              
              14.0Selling,
                  general andadministrative
                  expense
              
              
              2,783
              
              
              7.6
              
              
              2,938
              
              
              9.1Restructuring
                  expenses
              
              
              239
              
              
              .7
              
              
              -
              
              
              -Operating
                  (loss) profit
              
              
              (1,388
              )
              
              (3.8
              )
              
              1,583
              
              
              4.9


**For
                    the twenty-six weeks ended**
                ********
                ****
                **(amounts
                    in thousands)**
                ********
                ****
                **July
                    3, 2005**
                ****
                **June
                    27, 2004**Net
                    sales
                
                $
                70,810
                
                
                100.0
                %
                $
                63,763
                
                
                100.0
                %Gross
                    profit
                
                
                4,283
                
                
                6.0
                
                
                8,417
                
                
                13.2Selling,
                    general andadministrative
                    expense
                
                
                5,790
                
                
                8.2
                
                
                5,681
                
                
                8.9Restructuring
                    expenses
                
                
                478
                
                
                .7
                
                
                -
                
                
                -Operating
                    (loss) profit
                
                
                (1,985
                )
                
                (2.8
                )
                
                2,736
                
                
                4.3


The
        Domestic OEM segment’s sales increased $4.2 million or 13.2% during the
        thirteen-week period ended July 3, 2005 compared to the same period in the
        prior
        year. The increased sales reflect the increased pricing, $1.5 million, reached
        with certain customers in the fourth quarter of 2004. In addition, there
        were
        increased sales to customers due to the closing of the Sterling Heights,
        Michigan, facility of $1.8 million as certain customers increased
        demand in
        order for them to inventory parts for future use and steel surcharge
        recovery from certain customers of $.9 million. Sales for the twenty-six-week
        period ended July 3, 2005 increased $7.0 million or 11.1% 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 $2.3 million and
        improved volume and mix of $2.5 million. Although the Company was able to
        negotiate improved pricing and steel surcharge recovery, 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.






-
          33
          -


Gross
        profit as a percentage of sales decreased to 4.5% for the thirteen-week period
        ended July 3, 2005 compared to 14.0% in the same period in the prior year.
        The
        cost of steel continues to be the leading factor in increased costs. The
        net
        impact of the increased price of steel (increased costs less amounts passed
        through to customers and changes in the proceeds from the sale of scrap)
        was $.6
        million for the thirteen-week-period ended July 3, 2005 compared to the same
        period in the prior year. In addition to the steel increase, medical and
        utility
        costs had significant impact on the increased cost period-over-period. In
        addition, the sale of product with negative gross margin increased $.8 million
        compared to the second quarter of 2004. In the twenty-six-week period ended
        July
        3, 2005, the net impact of increased steel cost reduced gross margin $1.2
        million. In addition, medical, utility and operating supplies increased $2.1
        million period-over-period. The increase in parts sold with negative gross
        margin increased $1.4 million compared to the twenty-six-week period ended
        June
        27, 2004. The performance of the Crawfordsville plant, this segment’s primary
        manufacturing facility, continues to be poor. The facility incurred an operating
        loss of $3.6 million and $5.8 million for the thirteen- and twenty-six-week
        periods ended July 3, 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 benefit, depreciation,
        utility and other costs. The Company has not recorded an estimate of the
        loss
        over the term of these contracts since the quantity and mix of parts is not
        known and the future production costs will be impacted by, among other things,
        changes in economic conditions and management's actions, including expected
        cost
        reductions. The loss incurred on products sold under loss contracts was $3.5
        million and $1.6 million for the second quarter of 2005 and second quarter
        of
        2004, respectively. The loss for the twenty-six-week period ended July 3,
        2005
        was $6.4 compared to $3.3 for the same period in the prior year. The reserve
        for
        expected loss on goods in inventory and customer purchase orders was $2.0
        million and $1.5 million at July 3, 2005 and January 2, 2005,
        respectively.
 
 The
        segment continues to evaluate alternative strategies for improving production,
        which could include outsourcing certain production processes and relocation
        of
        certain operations.
 
 SG&A
        expense for the thirteen-week period ended July 3, 2005 decreased $.2 million
        or
        5.3% compared to the same period in the prior year. The lower SG&A was due
        to the lower administration costs associated with the closure of the R&D
        facility in Sterling Heights, Michigan, in 2004. The cost reduction was offset
        by higher professional fees. SG&A expense for the twenty-six-week period
        increased $.1 million or 1.9% compared to the same period in the prior year.
 
 The
        restructuring expense recorded in 2005 relates to the planned closure of
        our
        manufacturing facility in Sterling Heights, Michigan. See Note 12 -
        Restructuring Programs to the Condensed Consolidated Financial Statements
        for
        further details regarding restructuring programs.
 
 As
        a
        result of the above, the segments operating income declined $3.0 million
        and
        $4.7 million for the thirteen- and twenty-six-week periods compared to the
        same
        periods in the prior year.
 
 **International**
 
 The
        following tables set forth selected income statement data for the International
        segment for the thirteen and twenty-six weeks ended July 3, 2005 and June
        27,
        2004.
  -
            34
            -
  **For
                  the 13 weeks ended****(amounts
                  in thousands)****July
                  3, 2005**
              
              **June
                  27, 2004**Net
                  sales
              
              $
              17,461
              
              
              100.0
              %
              $
              16,864
              
              
              100.0
              %Gross
                  profit
              
              
              4,116
              
              
              23.6
              
              
              4,647
              
              
              27.5Selling,
                  general andadministrative
                  expense
              
              
              2,716
              
              
              15.6
              
              
              2,688
              
              
              15.9Restructuring
                  expenses
              
              
              1,152
              
              
              6.6
              
              
              -
              
              
              -Operating
                  (loss) profit
              
              
              248
              
              
              1.4
              
              
              1,959
              
              
              11.6


**For
                  the 26 weeks
                  ended**************************
              ********
              ****
              **(amounts
                  in
                  thousands)**************************
              ********
              ****
              **July
                  3, 2005******
              ****
              **June
                  27, 2004**Net
                  sales
              
              $
              37,425
              
              
              100.0
              %
              $
              $33,517
              
              
              100.0
              %Gross
                  profit
              
              
              10,333
              
              
              27.6
              
              
              9,436
              
              
              28.2Selling,
                  general andadministrative
                  expense
              
              
              6,215
              
              
              16.6
              
              
              5,379
              
              
              16.0Restructuring
                  expenses
              
              
              1,300
              
              
              3.5
              
              
              -
              
              
              -Operating
                  (loss) profit
              
              
              2,818
              
              
              7.5
              
              
              4,057
              
              
              12.1




The
        international segment’s sales increased $.6 million or 3.5% for the
        thirteen-week period ended July 3, 2005 compared to the same period in the
        prior
        year. Sales increased in all operations except for the U.K. facility, which
        was
        in the process of closing. The segment recorded translation gains of $.4
        million
        for the thirteen-week period ended July 3, 2005. The sales for the
        twenty-six-week period increased $3.9 million or 11.7% over the same period
        in
        the prior year. The increased sales were due to volume increases in Germany
        and
        China of $2.4 million and translation gains of $1.5 million during the
        twenty-six-week period.
 
 The
        gross
        profit declined $.5 million or 11.4% for the thirteen-week period ended July
        3,
        2005 compared to the same period in the prior year. The gross profit percentage
        declined 3.9% period-over-period. The declines were partially due to $.2
        of
        unfavorable product mix. In addition, pricing pressure in Dry Friction reduced
        gross margin $.3 million during the quarter. Gross profit for the
        twenty-six-week period ended July 3, 2005 increased $.9 million or 9.5% over
        the
        same period in the prior year. The improved gross profit during the
        twenty-six-week period was due to improved profitability in Dry Friction
        of $1.1
        million offset by increased costs in the U.K. of $.5 million due to the impact
        of closing the operations. The gross profit percentage of 27.6% was 0.6%
        below
        the gross profit percentage in the same prior year period due to the increased
        U.K. costs mentioned previously.
 
 SG&A
        expense for the thirteen-week period of $2.7 million approximated the amount
        recorded in the same period in the prior year. The SG&A expense for the 2005
        period represents 15.6% of sales as compared to 15.9% of sales in the 2004
        period. The lower percentage is due to the higher sales in the 2005 period.
        SG&A for the twenty-six-week period ended July 3, 2005 shows an increase of
        $.8 million over the same period in the prior year. The increase is due to
        an
        addition to the bad debt reserve of $.3 million made in the first quarter
        of
        2005 and additional costs incurred in the U.K.
 
 Restructuring
        expense of $1.2 million was recorded in the thirteen-week-period ended July
        3,
        2005 as a change in estimate of the closure costs for the U.K. facility.
        Additional information has been received for estimation of final refurbishment
        costs of $.6 million and lease cost of $.6 million for exiting the facility.
        Additional severance costs were booked in the first quarter of $.1 million;
        the
        total restructuring costs for the U.K. booked in 2005 aggregate to $1.3 million
        at July 3, 2005.
 
 As
        a
        result of the above, operating profit declined $1.7 million and $1.2 million
        for
        the thirteen- and twenty-six-week periods compared to the same periods in
        the
        prior year.






-
          35
          -


**Aftermarket**
 
 The
        following table sets forth selected income statement data for the Aftermarket
        segment for the thirteen- and twenty-six-week periods ended July 3, 2005
        and
        June 27, 2004.


****
              **For
                  the thirteen weeks
                  ended**************************
              ********
              ****
              **(amounts
                  in
                  thousands)**************************
              ********
              ****
              **July
                  3, 2005******
              ****
              **June
                  27, 2004******Net
                  sales
              
              $
              12,799
              
              
              100.0
              %
              $
              13,616
              
              
              100.0
              %Gross
                  profit
              
              
              2,782
              
              
              21.7
              
              
              4,304
              
              
              31.6Selling,
                  general &administrative
                  expense
              
              
              1,620
              
              
              12.6
              
              
              1,635
              
              
              12.0Operating
                  profit
              
              
              1,162
              
              
              9.1
              
              
              2,669
              
              
              19.6


****
              ****
              **For
                  the twenty-six weeks ended**
              ********
              ****
              **(amounts
                  in thousands)**
              ********
              ****
              **July
                  3, 2005**
              ****
              **June
                  27, 2004**Net
                  sales
              
              $
              26,833
              
              
              100.0
              %
              $
              26,002
              
              
              100.0
              %Gross
                  profit
              
              
              6,723
              
              
              25.0
              
              
              7,989
              
              
              30.7Selling,
                  general &administrative
                  expense
              
              
              3,421
              
              
              12.7
              
              
              3,170
              
              
              12.2Operating
                  profit
              
              
              3,302
              
              
              12.3
              
              
              4,819
              
              
              18.5


Net
        sales
        for the thirteen-week period ended July 3, 2005 decreased $.8 million or
        6.0%
        compared to the same period in the prior year. The decline in sales is due
        to a
        major customer reducing orders $.5 million in the 2005 quarter ended July
        3. The
        reduced sales are considered a timing issue and sales have increased in late
        June 2005 and have continued in July. In addition, sales of transmission
        filters
        decreased $.3 million period-over-period. This is considered to be normal
        market
        fluctuation. Net sales for the twenty-six-week period ended July 3, 2005
        increased $.8 million or 3.2% compared to the same period in the prior year.
        The
        increase in sales is due to increased demand. Sales of friction plates increased
        $.5 million and steel plates increased $.3 million
        period-over-period.
  Gross
        profit decreased $1.5 million or 35.4% for the thirteen-week period ended
        July
        3, 2005 compared to the same thirteen-week period in the prior year. Due
        to the
        acquisition of certain shares of stock of Allomatic Products Company (see
        Note B
        - Acquisition of APC Minority Shares Owned by Raymark) 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 $.7 million. In addition,
        material costs increased $.5 million compared to the same period in the prior
        year. The reduced sales of friction plates in the quarter were a key factor
        in
        the reduced gross profit due to the change in mix of $.3 million. The gross
        profit decrease for the twenty-six-week period ended
 July
        3,
        2005 of $1.3 million or 15.8% compared to the same period in the prior year
        due
        substantially to the same issues detailed in the discussion of the thirteen-week
        results, higher materials costs, a negative impact from the change in sales
        mix
        and the inventory adjustment associated with the purchase accounting. The
        gross
        profit margin was reduced 35.4% and 15.8% for the thirteen-week and
        twenty-six-week periods, respectively, due to the items noted
        above.
 
 The
        selling, general and administrative costs of $1.6 million for the thirteen-week
        period ended July 3, 2005 approximated the costs for the same period in the
        prior year. The selling, general and administrative costs for the
        twenty-six-week period ended July 3, 2005 of $3.4 reflected an increase of
        $.3
        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 $1.5 million for both the
        thirteen and twenty-six-week periods ended July 3, 2005.






-
          36
          -


On
        March
        21, 2005 the Company, through its majority owned subsidiary, APC, purchased
        shares of APC owned by Raymark in exchange for a ten-year unsecured promissory
        note of $7.2 million which increased the Company’s indirect ownership of APC
        from approximately 57% of its outstanding common stock to approximately 96%
        of
        its outstanding common stock. See Note 13 - Acquisition of APC Minority Shares
        owned by Raymark to the Condensed Consolidated Financial
        Statements.
 
 Liquidity,
        Capital Resources and Future Liquidity
 
 Cash
        used
        in operating activities for the thirteen-week period ended July 3, 2005 of
        $.2
        million compared to $.4 million for the same period in the prior year. The
        principal operating use of cash for the thirteen- and twenty-six-week periods
        ended July 3, 2005 has been to support increases in accounts receivable and
        inventory, which is a seasonal fluctuation and is consistent with the prior
        year
        periods. The increase in inventories is principally the result of a build-up
        in
        inventory to facilitate the closure of our Sterling Heights, Michigan,
        manufacturing facility.
 
 Capital
        expenditures through July 3, 2005 of $6.1 million compared to $1.8 million
        for
        the same period in the prior year. The capital expenditures are as planned.
        The
        Company completed the building expansion begun in 2004 at the facility in
        China.
        The new facility will increase production capacity to meet the demand for
        products produced at that location. In addition, the Wet Friction OEM segment
        has increased capital spending $1.9 over the twenty-six-week period in 2004.
        The
        increased spending has been for equipment installations, as production is
        transferred out of the facilities being closed, support for cost reduction
        programs and additional R&D equipment.
 
 Cash
        and
        cash available under existing lines of credit at July 3, 2005 totaled $16.8
        million compared to $19.7 million at January 2, 2005, a decrease of $2.9
        million. The decrease is due primarily to capital expenditures during the
        period.
 
 The
        total
        borrowings at July 3, 2005 of $34.9 million compares to total borrowings
        of
        $26.7 million at year-end 2004, an increase of $8.2 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 13 for a further discussion of the APC stock acquisition. Available
        lines
        of credit at July 3, 2005 of $6.8 million compared to $6.1 million at year-end
        2004, an increase of $.7 million. Full details of the Company’s debt are
        contained in Note 6 - Debt to the Condensed Consolidated Financial Statements.
 
 During
        the first quarter of 2005, the Company amended its domestic debt agreements.
        The
        primary purpose of the amendments was the modification of the debt covenant
        calculations to provide the Company greater flexibility to manage its cash
        resources and certain one-time costs that will be incurred during 2005 related
        to the plant closures announced during 2004. Additionally, the amendment
        to the
        Domestic OEM loan and security agreement provides for a remedy of future
        non-compliance with the quarterly debt covenants, by an irrevocable cash
        contribution by the parent. During the twenty-six-week period ended July
        3,
        2005, the parent made an irrevocable cash contribution of $2.3 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 7 - Litigation to the Condensed Consolidated Financial
        Statements.




-
          37
          -




Certain
        tax issues are discussed in Note 9 - Income Taxes to the Condensed Consolidated
        Financial Statements, which provides additional information concerning the
        status of the current Internal Revenue Service audit and the use of certain
        future tax benefits.
 
 The
        most
        significant factor affecting the Company’s future cash flows is its ability to
        earn and collect cash from customers. The automotive parts industry is extremely
        competitive. The Company’s customers are often able to demand price reductions
        from the suppliers including all segments of Raytech. Some of the Company’s
        sales are made under standard sales contracts that include price commitments
        for
        multiple years. Specifically in the Domestic OEM segment, the Company is
        selling
        certain products to certain customers at a loss under the terms of its current
        sales contracts. The Company is currently working with certain customers
        to
        re-negotiate the terms of these loss contracts. In addition, the Company
        is
        reviewing alternatives to improve its cost structure.  Additionally,
        the Company, specifically in the Domestic OEM segment, has very large customers,
        some representing more than ten percent of consolidated sales. From time
        to
        time, the Company loses business from existing customers, including its largest
        customers, due to pricing, technological or other competitive pressures.
        The
        Company also from time to time gains new business and renewals of existing
        business from existing or new customers through its continuing cost reduction,
        sales and development efforts. The cumulative effect of these changes, or
        the
        loss of one of its largest customers, could have a material adverse effect
        on
        the consolidated financial results of the Company.
 Items
        that will potentially require the use of cash during the remainder of fiscal
        2005 other than normal operating expenses include the following.
 
 ·
              The
                  Company has recorded an accrued liability of $5.9 million for certain
                  environmental matters more fully discussed in Note 7 - Litigation
                  to the
                  Condensed Consolidated Financial Statements. Management expects
                  that $.5
                  million will be spent during 2005 and the balance during 2006 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 underfunded and the Company,
                  through an agreement with the Internal Revenue Service, is providing
                  both
                  current contributions and catch-up contributions. The expected
                  funding for
                  the plans in 2005 will be approximately $1.3 million, $.9 million
                  of which
                  was funded during the first six 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 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 12 - Restructuring Programs to the Condensed
                  Consolidated Financial Statements.
 
 ·
              During
                  2004, we reached terms with certain major customers on revised
                  sales
                  contract provisions that will enable us to close our manufacturing
                  plant
                  in Sterling Heights, Michigan. The new sales contract provisions
                  require
                  the Company, in certain instances, to build up inventory levels
                  to
                  facilitate the transition to a new vendor or to another manufacturing
                  location within the Company. As a result, we expect our inventory
                  levels
                  to increase through September 2005 by as much as $2.6 million.
                  During the
                  fourth quarter of 2005, we expect this trend will reverse and inventory
                  levels will begin to decrease. We currently expect that the amount
                  of
                  inventory related to the build up will be less than $2.0 million
                  at year
                  end 2005.
 
 ·
              The
                  Company incurred costs associated with the retirement of its President
                  and
                  Chief Executive Officer during the second quarter and the restructuring
                  of
                  its domestic management team during the third quarter of 2004.
                  The total
                  cost associated with these items is approximately $1.4 million,
                  of which
                  $.8 million was paid during 2004, $.4 million was paid during the
                  first
                  quarter of 2005 and the balance to be paid prior to the end of
                  2005.
  -
            38
            -


·
              Certain
                  tax issues are discussed in Note 9 - Income Taxes to the Condensed
                  Consolidated Financial Statements, which provides detail concerning
                  the
                  status of the current Internal Revenue Service audit and the use
                  of
                  certain future tax benefits.
 
 Management
        believes that existing cash balances, the Company’s lending facilities and cash
        flow from operations during 2005 will be sufficient to meet all of the Company’s
        obligations arising in the normal course of business, including anticipated
        capital investments. However, the ability of the Company to utilize its lending
        facilities is dependent on the Company’s ability to meet its financial forecasts
        for 2005, which is not assured, and to meet the financial covenants contained
        in
        its credit facilities. These forecasts include modest revenue growth in all
        three operating segments as well as certain cost-saving initiatives, partially
        offset by certain cost increases and inflation assumptions. If the Company
        does
        not comply with the financial covenants, an event of default would occur
        and
        could result in the acceleration of the Company’s indebtedness under its
        domestic credit facilities. If that were to occur, the ability of the Company
        to
        continue would be dependent upon, among other things, its ability to amend
        the
        credit facilities, enact certain actions to generate cash and/or to seek
        additional alternative financing from other lenders. 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,
        2006
        under the latest extension granted by the Securities and Exchange Commission.
        Raytech is a non-accelerated filer and therefore does not have to comply
        with
        Section 404 of the Sarbanes-Oxley Act until 2006.
  In
        November 2004 the Financial Accounting Standards Board (“FASB”) issued Statement
        of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs - an
        amendment of ARB No. 43, Chapter 4”. This statement clarifies the accounting for
        abnormal amounts of idle facility expense, freight handling costs and wasted
        material (spoilage). This statement requires that these types of costs be
        recognized as current period charges. SFAS No. 151 is effective prospectively
        for inventory costs incurred during fiscal years beginning after June 15,
        2005,
        with earlier application permitted for such costs incurred during fiscal
        years
        beginning after November 24, 2004. Management does not expect the adoption
        of
        SFAS No. 151 to have a significant impact on the Company’s consolidated
        financial statements.
  In
        December 2004 the FASB issued SFAS No. 123 (revised 2004), “Share Based
        Payment”. This statement replaces SFAS 123, “ Accounting
        for Stock-Based Compensation”, and supersedes APB Opinion 25, “Accounting for
        Stock Issued to Employees”. SFAS No. 123 (revised 2004) requires that the cost
        of share-based payment transactions (including those with employees and
        non-employees) be recognized as compensation costs in the financial statements.
        SFAS No. 123 (revised 2004) applies to all share-based payment transactions
        in
        which an entity acquires goods or services by issuing (or offering to issue)
        its
        shares, share options, or other equity instruments (except for those held
        by an
        ESOP) or by incurring liabilities in amounts based (even in part) on the
        price
        of the entity's shares or other equity instruments, or that require (or may
        require) settlement by the issuance of an entity's shares or other equity
        instruments. This statement applies to all new awards granted during the
        fiscal
        year beginning after June 15, 2005 and to previous awards that are modified
        or
        cancelled after such date. We have not yet fully evaluated the effect of
        SFAS
        No. 123 (revised 2004) on our financial statements and have not determined
        the
        method of adoption we will use to implement SFAS No. 123 (revised 2004).
  In
        December 2004, the FASB issued FSP FAS 109-1, “Application of FASB Statement No.
        109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production
        Activities Provided by the American Jobs Creation Act of 2004 (“AJCA”).” The
        AJCA introduces a special 9% tax deduction on qualified production activities.
        FSP FAS 109-1 clarifies that this tax deduction should be accounted for as
        a
        special tax deduction in accordance with Statement 109. Based upon the Company’s
        preliminary evaluation of the effects of this guidance, we do not believe
        that
        it will have any impact on the Company’s Consolidated Financial
        Statements.






-
          39
          -


In
        December 2004, the FASB issued FASB Staff Position (“FSP”) FAS 109-2,
“Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
        Provision within the American Jobs Creations Act of  2004.”
        The AJCA introduces a limited time 85% dividends received deduction on the
        repatriation of certain foreign earnings to a U.S. taxpayer (repatriation
        provision), provided certain criteria are met. FSP FAS 109-2 provides accounting
        and disclosure guidance for the repatriation provision. Based upon the Company’s
        preliminary evaluation of the effects of the repatriation provision, we do
        not
        believe that it will have any impact on the Company’s Consolidated Financial
        Statements.
  During
        March 2005, the Securities and Exchange Commission issued Staff Accounting
        Bulletin (“SAB”) No. 107, guidance on SFAS No. 123 (revised 2004). SAB No. 107
        was issued to assist preparers by simplifying some of the implementation
        challenges of SFAS No 123 (revised 2004) while enhancing the information
        that
        investors receive. The Company will consider the guidance provided by SAB
        No.
        107 as it implements SFAS No. 123 (revised 2004) during 2006.




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          40
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**Item
        3. Quantitative and Qualitative Disclosures About Market
        Risk**
 
 We
        maintain lines of credit with United States and foreign banks, as well as
        other
        creditors detailed in Note 6 - Debt to the Condensed Consolidated Financial
        Statements. We are naturally exposed to various interest rate risk and foreign
        currency risk in the normal course of business.
 
 Management
        does not anticipate a significant change in any of its borrowing markets
        in 2005
        given current economic conditions. 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. Further, we can reduce the
        short-term impact of interest rate fluctuations through deferral of certain
        capital investment should the need arise.
 
 The
        Company maintains borrowings in both fixed rate and variable rate debt
        instruments. The fixed rate debt at July 3, 2005 of $12.0 million had rates
        of
        interest that ranged from 2.50% to 8.00%. The variable rate debt at July
        3, 2005
        of $22.8 million had rates of interest that ranged from 4.50% to 6.25%. The
        variable rate debt reprices either at prime rate or the Eurodollar rate.
        We have
        not entered into any interest rate management programs such as interest rate
        swaps or other derivative type transactions. The amount of exposure in the
        short-term that could be created by increases in rates is not considered
        significant by management. A 100 basis point increase in annual interest
        rates,
        applied to the Company’s variable rate borrowings at July 3, 2005 would result
        in an increase in interest expense and a corresponding reduction in cash
        flow of
        approximately $50 thousand.
 
 The
        local
        currencies of our foreign subsidiaries have been designated as their functional
        currencies. Accordingly, financial statements of foreign operations are
        translated using the exchange rate at the balance sheet date for assets and
        liabilities, historical exchange rates for elements of stockholders’ equity, and
        an average exchange rate in effect during the year for revenues and expenses.
        Where possible, we attempt to mitigate foreign currency translation effects
        by
        borrowing in local currencies to fund operations. We do not believe that
        the
        fluctuations in foreign currency will have a material adverse effect on our
        overall consolidated financial statements. Additionally, we do not enter
        into
        agreements to manage any currency transaction risk.
 
 The
        principal raw materials used in the manufacture of our products include
        cold-rolled steel, metal powders, synthetic resins, plastics and synthetic
        and
        natural fibers. All of these materials are available from a number of
        competitive suppliers. However, in certain cases, the Company is required
        to
        obtain customer approval for substitute vendors, which may result in additional
        costs being incurred. Worldwide increases in steel demand led to increased
        prices, which
        negatively impacted the Company's profitability during the year ended January
        2,
        2005 and the quarter ended July 3, 2005. Management expects the increase
        in
        steel prices could continue to negatively impact the Company's profitability,
        although recent negotiations with steel vendors have resulted in certain
        reductions for the next six months. 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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            41
            -
  **Item
          4. Controls and Procedures**
 
 (a)
                The
                    Company conducted an evaluation of the effectiveness of the design
                    and
                    operation of the Company's disclosure controls and procedures
                    under the
                    supervision and with the participation of management, including
                    the
                    Company's principal executive officer and principal financial
                    officer as
                    of July 3, 2005. Based on this evaluation, the principal executive
                    officer
                    and principal financial officer have each concluded that certain
                    disclosure controls and procedures were effective in all material
                    respects
                    in ensuring that information required to be disclosed by the
                    Company in
                    reports that it files under the Exchange Act is recorded, processed,
                    summarized and reported within the time periods specified in
                    Securities
                    and Exchange Commission rules and
                    forms.
  (b)
                During
                    the second quarter ended July 3, 2005, the Company mitigated
                    the control
                    weakness noted in the first quarter of
                    2005.
 
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              42
              -
  **PART
          II. OTHER INFORMATION**
 
 **Item
          1. Legal Proceedings**
 
 See
          discussion of litigation in Note 7 - Litigation to the Condensed Consolidated
          Financial Statements.
 
 **Item
          2. Unregistered Sales of Equity Securities and Use of
          Proceeds**
 
 See
          discussion of the Company's debt agreements in Note 6 - Debt to the Condensed
          Consolidated Financial Statements.
 
 **Item
          6. Exhibits**
 
 31-1
                Certification
                    of the Chief Executive Officer pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 2002
 31-2
                Certification
                    of the Chief Financial Officer pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 2002
 32-1
                Certifications
                    of the Chief Executive Officer and the Chief Financial Officer
                    pursuant to
                    Section 906 of the Sarbanes-Oxley Act of
                    2002.
 -
            43
            -




**SIGNATURE**
  
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the Registrant
        has
        duly caused this Report to be signed on its behalf by the undersigned thereunto
        duly authorized.
  RAYTECH CORPORATIONBy:
                /s/JOHN
                  B. DEVLINJohn
                  B. DevlinVice
                    President, Treasurer and
                  Chief Financial
                    Officer
 Date:
        August 17, 2005
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            44
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