SECURITIES AND EXCHANGE COMMISSION
                       WASHINGTON, D.C. 20549
                              FORM 10-K
          ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
                 THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended                   Commission File Number
    December 28, 1997                                 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
Incorporation or Organization)                Identification No.)   

Suite 512, One Corporate Drive
Shelton, Connecticut                                   06484   
(Address of Principal Executive Office)              (Zip Code)

                           (203) 925-8023                   
        (Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

                                          Name of Each Exchange
       Title of Each Class                 On Which Registered 
  Common Stock - $1.00 Par Value          New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in part
III of this Form 10-K or any amendment to this Form 10-K.  /  /

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 filed requirements for the past 90 days.

                    Yes   X       No      

As of March 16, 1998, 3,285,308 shares of common stock were outstanding
and the aggregate market value of these shares (based upon the closing
price of these shares on the New York Stock Exchange) on such date
held by non-affiliates was approximately $17.5 million.

                  Documents Incorporated by Reference
                                             
Portions of Registrant's definitive proxy statement pursuant to
Regulation 14A for the 1998 Annual Meeting of Shareholders are
incorporated by reference in Part III.

<PAGE>
                     INDEX TO RAYTECH CORPORATION
                            1997 FORM 10-K
                                   
                                PART I.

                                                                 Page
Item 1.  Business

         (a)  General Development of Business ..................   4

         (b)  Financial Information About Industry Segments ....   7

         (c)  Narrative Description of Business ................   7

              Introduction .....................................   7

              Sales Methods ....................................   9

              Raw Material Availability ........................   9

              Patents and Trademarks ...........................  10

              Competition, Significant Customers and Backlog ...  10

              Employees ........................................  11

              Capital Expenditures .............................  11

              Research and Development .........................  11

              Environmental Matters ............................  11

         (d)  Financial Information About Foreign Operations ...  12

Item 2.  Properties ............................................  12

Item 3.  Legal Proceedings .....................................  13

Item 4.  Submission of Matters to a Vote of Security Holders ...  21

                               PART II.

Item 5.  Market for Registrant's Common Equity and
           Related Stockholder Matters .........................  22

Item 6.  Selected Financial Data ...............................  23

Item 7.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations .................  24

Item 8.  Financial Statements and Supplementary Data ...........  34

Item 9.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosures ..................  88 


<PAGE>
                               PART III.
                                                                 Page

Item 10.  Directors and Officers of Registrant ................   88

Item 11.  Executive Compensation ..............................   88

Item 12.  Security Ownership of Certain Beneficial
            Owners and Management .............................   88

Item 13.  Certain Relationships and Related Transactions ......   88

                               PART IV. 

Item 14.  Exhibits, Financial Statement Schedules and
            Reports on Form 8-K ...............................   88

          (a)(1)  List of Financial Statements ................   88

          (a)(2)  List of Financial Statement Schedules .......   89

          (a)(3)  Exhibits ....................................   89

          (b)     Reports on Form 8-K .........................   89

          (c)     Index of Exhibits............................   89

          (d)     Index to Consolidated Financial Statements        
                  and Financial Statement Schedules 
                  (reference) .................................   92

Index to Consolidated Financial Statements and                      
  Financial Statement Schedules................................   93

Signatures ....................................................   94

<PAGE>
Item 1.  Business

         (a)  General Development of Business.

              Raytech Corporation was organized in June 1986 as a
Delaware corporation.  On October 15, 1986, Raytech became the
public holding company for its subsidiaries, Raymark Corporation
and Raymark Industries, Inc. (jointly referred to as "Raymark"). 
At the Annual Stockholders' Meeting held in October 1986, the
stockholders voted in favor of the establishment of a new holding
company, Raytech, to serve as the continuing vehicle for public
ownership of Raymark and of other businesses which may be
acquired by Raytech.  Pursuant to a plan of merger, the common
stock of Raymark was, on October 15, 1986, the effective date of
the merger, converted on a share for share basis into common
stock of Raytech.  Consequently, the stockholders of Raymark
became the stockholders of Raytech.  Additionally, each
stockholder was granted a right to purchase a warrant for each
share held.  Most of the warrants were sold and the proceeds were
used to cover Raytech's initial capitalization, organizational
and operating expenses.  The warrants expired on October 1, 1994.

              In 1986, Raytech sought the advice of counsel as to
whether or not newly acquired assets and businesses would be
subject to the asbestos-related claims against Raymark on
theories of successor liability, piercing the corporate veil or
fraudulent conveyance.  Counsel advised Raytech that such
determinations were heavily fact-dependent and were dependent
upon how the transactions were ultimately structured and
implemented.  Such counsel further advised that, if Raytech made
acquisitions of assets or businesses without the use of Raymark's
assets or credit or made purchases of assets or businesses of
Raymark that, although the case law in the area was still
developing and applicable legal standards may vary considerably
from state to state, it should be possible under existing case
law to acquire such assets or businesses without thereby
subjecting Raytech or such acquired assets or businesses to
liability for the asbestos-related claims of Raymark under the
doctrines of successor liability, piercing the corporate veil or
fraudulent conveyance, so long as Raytech complied with the
principles of (i) paying fair market value, (ii) acquiring
businesses that did not give rise to any asbestos-related or
other claims against Raymark, (iii) permitting Raymark to retain
the proceeds for its ongoing business and creditors, (iv)
entering the transactions in good faith and not to hinder, delay
or defraud creditors, and (v) conducting its affairs independent
of Raymark.
         
         Following the merger, Raytech sought to finance the
acquisition of attractive businesses in industries that utilized
management's operating expertise.  In accordance with the stated
purpose and goals of the restructuring, Raytech through its
subsidiaries, and during 1987 purchased the non-asbestos
businesses of Raymark as follows:

<PAGE>
        1.  In October 1987, Raytech Composites, Inc., a wholly- 
             owned subsidiary of Raytech, acquired certain assets 
             and assumed certain liabilities of the Wet Clutch
             and Brake Division of Raymark for $76.9 million. 
             The purchase price initially was comprised of $14.9
             million cash, $16 million of Raytech stock issuable
             in future installments and $46 million of notes. 
             This acquisition was financed partially through the
             sale of Warrants and funds borrowed from a new
             lender.  A 1991 amendment provided for cash in lieu
             of future installments of stock.

         2.  In November 1987, Raytech acquired the stock of
             Raybestos Industrie-Produkte GmbH, a German
             subsidiary, from Raymark for $8.2 million.  The
             purchase price initially was comprised of a DM7
             million note, equating to approximately $4.3
             million, and DM6.5 million, equating to approxi-
             mately $3.9 million, of Raytech stock issuable in
             future installments.  A 1991 amendment provided for
             cash in lieu of future installments of stock.

             In the anticipation of such purchases by Raytech,
Raymark retained Duff & Phelps, Inc., nationally-known
independent investment and financial analysts, to determine the
fair market value of certain Raymark assets and businesses
exclusive of all asbestos-related actual and contingent
liabilities or litigation being transferable to the buyer or
buyers.  Duff & Phelps, Inc. completed its assigned
responsibilities and provided Raymark with its opinion regarding
the current fair market value of the assets and businesses of
Raymark reflecting the assumption that no actual or contingent
liabilities arising from asbestos-related liabilities or
litigation could be transferred to prospective purchasers.  In
addition, Raymark retained Dean Witter Reynolds, Inc. as its
investment banker for purposes of exercising its efforts to
obtain bids for the purchase of certain of its assets and
businesses and to otherwise advise and assist in the sale and
divestiture thereof.  These processes were the basis for
determining the purchase prices.

             As part of the continuing restructuring of Raytech
and in order to attempt to alleviate itself of the substantial
asbestos-related liabilities and litigation surrounding Raymark,
management, believing it to be in the best interest of Raytech,
recommended to the Board of Directors the sale of Raymark stock. 
The sale was approved by the Raytech Board of Directors subject
to shareholder approval.  In May 1988 following shareholder
approval, Raytech sold all of the Raymark stock to Asbestos
Litigation Management, Inc. ("ALM"), thereby divesting itself of
Raymark.  Consideration received for the Raymark stock consisted
of $50 cash paid at the closing and a 7-l/2% $950 promissory note
to be paid in six equal annual installments beginning one year
after the closing with interest payable annually.  ALM was a

<PAGE>
wholly-owned subsidiary of Litigation Control Corporation
("LCC").  At the time of the said sale and purchase, LCC was 60%
beneficially owned by Craig R. Smith, President and Chief
Executive Officer of Raytech (15% through his son, Bradley C.
Smith).  The basis for determining the purchase price of the
stock was negotiations between the parties but was affected by
Raymark's substantial asbestos-related liabilities.

             Despite the restructuring plan implementation and
subsequent divestiture of Raymark, Raytech was named a co-
defendant with Raymark and other named defendants in
approximately 3,300 asbestos-related lawsuits as a successor in
liability to Raymark.  Until February 1989, the defense of all
such lawsuits was provided to Raytech by Raymark in accordance
with an indemnification agreement included as a condition of the
purchase of the Wet Clutch and Brake Division and the German
subsidiary from Raymark in 1987.  In February 1989, an
involuntary petition for bankruptcy was filed against Raymark,
and subsequently, a restrictive funding order was issued by an
Illinois Circuit Court which required one of Raymark's insurance
carriers to pay claims but not defense costs and another
insurance carrier had been declared insolvent.  These
circumstances caused Raymark to be unable to fund the costs of
defense to Raytech in the asbestos-related lawsuits referenced
above, as provided in the indemnity sections of the acquisition
agreements.  (For a discussion regarding Raymark's insurance,
refer to Item 3. Legal Proceedings, third paragraph herein.) 
With the loss of indemnification from Raymark, the defense of
such lawsuits shifted directly to Raytech as it had no insurance
providing coverage for asbestos-related liabilities.  As a result
of the above factors and in order to obtain a ruling binding
across all jurisdictions on whether Raytech is liable as a
successor for asbestos-related and other claims including claims
yet to be filed relating to the operations of Raymark or
Raymark's predecessors, in March 1989 Raytech filed a petition
seeking relief under Chapter 11 of Title 11, United States Code
in the United States Bankruptcy Court, District of Connecticut. 
Under Chapter 11, substantially all litigation against Raytech
has been stayed while the debtor corporation and its non-filed
operating subsidiaries continue to operate their businesses in
the ordinary course under the same management and without
disruption to employees, customers or suppliers.  The bankruptcy
proceedings have imposed little or no limitation to the
manufacturing and selling of products and other day-to-day
operations of the businesses.

             In an asbestos-related personal injury case decided
in October 1988 in a U.S. District Court in Oregon, Raytech was
ruled under Oregon equity law to be a successor to Raymark's
asbestos-related liability.  The successor ruling was appealed by
Raytech and in October 1992, the Ninth Circuit Court of Appeals
affirmed the District Court's judgment on the grounds stated in
the District Court's opinion.  The effect of this decision
extends beyond the Oregon District due to a 1995 Third Circuit

<PAGE>
Court of Appeals decision in a related case wherein Raytech was
collaterally estopped (precluded) from relitigating the issue of
its successor liability for Raymark's asbestos-related
liabilities and a petition for a writ of certiorari was denied by
the U.S. Supreme Court in October 1995.  (For a further
discussion regarding this liability and bankruptcy proceedings,
refer to Item 3. Legal Proceedings herein.)

             Barring an unforeseen downturn in business and
assuming that the reorganization plan filed by Raytech to limit
its legal responsibility for Raymark's asbestos-related and other
liabilities will be confirmed in the bankruptcy proceedings,
Raytech believes it will generate sufficient cash flow to satisfy
1998 debt maturities, working capital and capital spending needs. 
However, the outcome of these matters is uncertain and should
Raytech be held fully liable, there would be a material adverse
impact on Raytech as it does not have the resources needed to
fund Raymark's substantial uninsured asbestos-related liabilities
and environmental liabilities and related costs of litigation as
defined further in Item 3. Legal Proceedings.

             On January 12, 1998, Craig R. Smith, President and
Chief Executive Officer of the Registrant, was terminated by the
Board of Directors, and Albert A. Canosa was elected President
and Chief Executive Officer.  Mr. Canosa previously served as
Vice President of Administration, Chief Financial Officer and
Treasurer of the Registrant and will continue to hold the offices
of Chief Financial Officer and Treasurer pending replacement.  At
a meeting on January 23, 1998, Albert A. Canosa was elected as a
Class II Director (term expiring 2000) in place of Craig R. Smith
who had resigned following his termination.

         (b) Financial Information About Industry Segments

             The sales and operating income of Raytech on a
consolidated basis, and its identifiable assets for the fiscal
years ended December 28, 1997, December 29, 1996, and December 31,
1995 are set forth herein on page 73.

         (c) Narrative Description of Business

             Introduction

             Raytech, through its principal subsidiaries, is a
multinational manufacturer and marketer of specialty engineered
products for heat resistant, inertia control, energy absorption
and transmission applications.  Its products are used in the
vehicular, aerospace, nucleonics, petrochemical, energy, metal
working, construction, agriculture, utility, and electronic
industries, among others.

             Raytech operates through six subsidiaries: 
Raybestos Products Company, located in Crawfordsville, Indiana,
and Sterling Heights, Michigan; Raybestos Industrie-Produkte

<PAGE>
GmbH, located in Morbach, Germany; Raybestos Reibtechnik GmbH,
located in Leverkusen, Germany; Raybestos U.K. Ltd., located in
Liverpool, England; Allomatic Products Company, located in
Sullivan, Indiana; and Raybestos Aftermarket Products Company
located in Crawfordsville, Indiana.  The percentage of sales of
products represented by each of the subsidiaries for the last
three years was as follows:  


       Subsidiaries              1997        1996       1995

Raybestos Products Company        58%         55%        47%

Raybestos Industrie-      
Produkte GmbH                     15%         17%        23%

Raybestos Reibtechnik GmbH         3%          3%         4%

Raybestos U.K. Limited            <1%         <1%        <1%

Allomatic Products Company        13%         13%        14%

Raybestos Aftermarket
  Products Company                10%         11%        12%

                                                   

Beginning January 1998, the Sterling Heights, Michigan, location
will be operated by Automotive Composites Company ("ACC"), a
newly formed subsidiary.

             Raybestos Products Company manufactures and markets
a variety of products utilizing friction materials, consisting of
paper, elastomeric, graphitic and sintered metal, among others,
which operate in an oil-immersed environment.  The products are
used to absorb energy in automatic transmissions, clutches and
brakes in automotive and heavy duty off-highway vehicular
applications.

             Included in the Raybestos Products Company sales is
the contribution made by the acquired Sterling Heights, Michigan,
operations of Advanced Friction Materials Company ("AFM").  The
Sterling Heights sales represent 12% of total sales.  Excluding
Sterling Heights, Raybestos Products Company sales, as a
percentage of total sales, are 46% in 1997.

             Raybestos Industrie-Produkte GmbH manufactures and
markets dry friction material products consisting of clutch
facings and friction washers used in passenger cars, trucks,
tractors, off-highway vehicles, specialized vehicles and
machines.

             Raybestos U.K. Ltd. manufactures and markets 
friction material products which operate in an oil immersed
environment.  The products are used in automatic transmissions,

<PAGE>
clutches and brakes in automotive and heavy duty off-highway
vehicular applications.

             Allomatic Products Company manufactures and markets
automatic transmission products, including friction plates and
filters, for the automotive aftermarket industry.

             Raybestos Aftermarket Products Company, which
operates a distribution facility in Crawfordsville, Indiana,
markets automatic transmission products and other friction
materials in the aftermarket.
             
            Raybestos Reibtechnik GmbH markets and distributes 
friction material products for oil immersed applications
throughout Europe.

             Sales Methods

             Raytech serves the on-highway and off-highway
vehicular markets by sale of its products to Original Equipment
Manufacturers (OEM) of heavy trucks, buses, automobiles,
construction and mining equipment and agricultural machinery, and
through distributors supplying components and replacement parts
for these vehicles.

             The construction and mining equipment and
agricultural machinery industries comprise the off-highway
vehicle market.  Each has two segments:  OEM and aftermarket. 
The aftermarket is supplied primarily through the OEM's, who sell
products directly to equipment distributors.

             Sales are made both to OEM's and distributors by
company sales representatives.  Sales in both the original
equipment and replacement markets are made under standard sales
contracts for all or a portion of a customer's products over a
period of time, or on an open order basis.  Sales to certain
vehicular markets are made through AFM as a distributor.

             Raytech's products are sold around the world,
through export from the U.S. plants, through its wholly-owned
subsidiaries in Germany and the United Kingdom, and through
distributors.

             Raw Material Availability

             The principal raw materials used in the manufacture
of energy absorption and transmission products include cold-
rolled steel, metal powders, synthetic resins, plastics and
synthetic and natural fibers.  All of these materials are readily
available from a number of competitive suppliers.

<PAGE>
             Patents and Trademarks

             Raytech owns a number of patents both foreign and
domestic.  Such patents expire between 1998 and 2018.  In the
opinion of management, the business is not dependent upon the
protection of any of its patents or licenses and would not be
materially affected by the expiration of any of such patents and
licenses.

             Raytech operates under a number of registered and
common law trademarks, including the trademark "RAYBESTOS." 
Certain trademarks have been licensed on a limited basis.  Some
trademarks are registered internationally.

             Competition, Significant Customers and Backlog

             Raytech faces vigorous competition with respect to
price, service and product performance in all of its markets from
both foreign and domestic competitors.  In the original equipment
automotive automatic transmission parts sector there are
approximately four competitors, including one foreign company
utilizing price, service and product performance to attempt to
gain market share.  Though not the largest company competing in
this market, Raytech is highly competitive due to cost efficient
plants, dedicated and skilled employees and products that are
high in quality and reliability.  The original equipment heavy-duty, 
off-highway vehicle sector is highly competitive with
approximately three companies vying for the business, including
two foreign companies.  Price, service and product performance
are competitive factors.  Raytech is the leading competitor in
these markets and sets the standards for the industry, resulting
from its integrated, cost efficient operations and its high
quality products and service.  The European markets in which the
Company participates are competitive with approximately two
competitors in the passenger car clutch sector and approximately
three competitors for the oil-immersed friction plate sector. 
Raytech is not the leader but has enhanced its competitive
position in the European markets, having significantly increased
its market share through acquisition and restructuring.  In the 
domestic automotive automatic transmission aftermarket sector
there are approximately five competitors.  Here, Raytech believes
that some of its competitors have greater financial resources,
but its competitive position is increasing due to the customer
acceptance of both its high quality and low cost product lines. 
The transmission filter business is competitive with
approximately five competitors.  Raytech is not a major
competitor, having recently entered this market.  Domestic sales
to a single customer, Caterpillar, Inc., were 14%, 15%, and 14%
of consolidated sales in 1997, 1996, and 1995, respectively.  
The Company's German subsidiaries had combined sales to two
customers, Fichtel & Sachs, amounting to 6%, 7%, and 9% of
consolidated sales in 1997, 1996, and 1995, respectively, and 4%,
5%, and 8% to LUK in 1997, 1996, and 1995, respectively.  Sales
backlog at the end of 1997, 1996, and 1995 was approximately

<PAGE>
$107, million, $83 million, and $75 million, respectively.  It is
anticipated that current backlog will be filled in 1998. 
Competition in all markets served by Raytech is based on product
quality, service and price.  On such basis Raytech believes that
it is highly competitive in all markets in which it is engaged.

             Employees

             At December 28, 1997, Raytech employed approximately 
1,360 employees, compared with 1,259 employees at the end of
1996.  In addition, in 1997 Raytech leased 390 hourly employees
from AFM.  Effective in 1998, these employees will become
employees of ACC.  Raytech has agreements with labor unions
relating to wages, hours, fringe benefits and other conditions of
employment which cover most of its production employees.  The
term of the labor contract at Raybestos Products Company in
Crawfordsville, Indiana, is due to expire in May 2000.  The term
of the labor contract at Automotive Composites Company in
Sterling Heights, Michigan, is due to expire in October 1998.

             Capital Expenditures

             Capital expenditures were $20.6 million, $8.4
million, and $10.3 million for 1997, 1996 and 1995, respectively. 
Capital expenditures for 1998 are projected at $14.8 million.

             Research and Development

             Research and development costs were approximately   
$5.9 million, $6.0 million, and $5.9 million for 1997, 1996 and
1995, respectively.  Separate research and development facilities
are maintained at appropriate manufacturing plants for the
purpose of developing new products, improving existing production
techniques, supplying technical service to the business units and
customers, and discovering new applications for existing
products.  Research and development costs for 1998 are projected
at $6.2 million.

             Environmental Matters

             Various federal, state and local laws and
regulations related to the discharge of potentially hazardous
materials into the environment, and the occupational exposure of
employees to airborne particles, gases and noise have affected
and will continue to affect the Registrant's operations, both
directly and indirectly, in the future.  The Company's operations
have been designed to comply with applicable environmental
standards established in such laws and regulations.  Pollution
and hazardous waste controls are continually being upgraded at
the existing manufacturing facilities to help to ensure
environmental compliance.  Expenditures for upgrading of
pollution and hazardous waste controls for environmental
compliance, including capital expenditures, are projected to be  
$1.6 million for 1998.  Because environmental regulations are

<PAGE>
constantly being revised and are subject to differing
interpretations by regulatory agencies, Raytech is unable to
predict the long-range cost of compliance with environmental laws
and regulations.  Nevertheless, management believes that
compliance should not materially affect earnings, financial
position or its competitive position.

         (d) Financial Information about Foreign Operations

             Financial information about the foreign operations
of Raytech for the fiscal years ended December 28, 1997,
December 29, 1996, and December 31, 1995 is set forth in Note K
to Consolidated Financial Statements, included herein.


Item 2.  Properties

         Raytech, through its subsidiaries, has plants located in
Crawfordsville and Sullivan, Indiana; Sterling Heights, Michigan;
Liverpool, England, and in Morbach, Germany.  All of these plants
are used for the manufacturing and warehousing of products
produced by Raytech.  The Crawfordsville facility is owned and
consists of approximately 455,000 square feet of office,
production, research and warehousing space that is suitable and
adequate to provide the productive capacity to meet reasonably
anticipated demand of products.  The productive capacity is
underutilized, leaving space for future demand.  A separate
Crawfordsville facility is owned and consists of approximately
25,000 square feet of warehousing space for aftermarket
distribution.  The Sterling Heights facility is owned and
consists of approximately 111,000 square feet of office,
production, research and warehousing space that it suitable and
adequate to provide the productive capacity to meet reasonably
anticipated demand of products.  The Sullivan facility was
purchased in March 1994 and consists of 135,000 square feet of
office, production and warehousing space that is suitable and
adequate to provide the productive capacity to meet anticipated
demand of products.  The productive capacity is underutilized,
leaving space for future demand.  The Liverpool, England,
facility is leased and consists of 27,000 square feet of office,
production, research and warehousing space.  The Morbach,
Germany, plant is owned and consists of 108,000 square feet of
office, production, research and warehousing space that is
suitable and adequate to provide the production capacity to meet
reasonably anticipated demand of products.  The property owned in
Morbach, Germany, is pledged as collateral under various lending
agreements.  Raytech also leases office space in Leverkusen,
Germany, for Raybestos Reibtechnik GmbH and office space in
Shelton, Connecticut, for its headquarters staff.

         Raytech and its subsidiaries believe that their
properties are substantially suitable and adequate for their 

<PAGE>
purposes.  All of the production facilities are continually being
upgraded to comply with applicable environmental standards and to
improve efficiency.


Item 3.  Legal Proceedings

         The formation of Raytech and the implementation of the
restructuring plan more fully described in Item 1 above was for
the purpose of providing a means to acquire and operate
businesses in a corporate structure that would not be subject to
any asbestos-related or other liabilities of Raymark.

         Prior to the formation of Raytech, Raymark was first
sued in an asbestos-related claim in 1971 and has since been
named as a defendant in more than 88,000 lawsuits in which
substantial damages have been sought for injury or death from
exposure to airborne asbestos fibers.  More than 35,000 of such
lawsuits were disposed of by settlements, dismissals, summary
judgments and trial verdicts at a cost in excess of $333 million
principally covered by Raymark's insurance.  Subsequent to the
sale of Raymark in 1988, lawsuits continued to be filed against
Raymark at the rate of approximately 1,000 per month until an
involuntary petition in bankruptcy was filed against Raymark in
February 1989 which stayed all its litigation.  In August 1996,
the involuntary petition filed against Raymark was dismissed
following a trial and the stay was lifted.

         Despite the restructuring plan implementation and
subsequent divestiture of Raymark, Raytech was named a co-
defendant with Raymark and other named defendants in
approximately 3,300 asbestos-related lawsuits as a successor in
liability to Raymark.  The dollar value of these lawsuits cannot
be estimated.  Until February 1989, the defense of all such
lawsuits was provided to Raytech by Raymark in accordance with
the indemnification agreement included as a condition of the
purchase of the Wet Clutch and Brake Division and German
subsidiary from Raymark in 1987.  In February 1989, an
involuntary petition in bankruptcy was filed against Raymark, and
subsequently, a restrictive funding order was issued by an
Illinois Circuit Court, which required one of Raymark's insurance
carriers to pay claims but not defense costs, and another
insurance carrier had been declared insolvent.  These
circumstances caused Raymark to be unable to fund the costs of
defense to Raytech in the asbestos-related lawsuits referenced
above, as provided in the indemnity section of the acquisition
agreement.  Raytech management was informed that Raymark's cost
of defense and disposition of cases up to the automatic stay of
litigation under the involuntary bankruptcy proceedings was
approximately $333 million of Raymark's total insurance coverage
of approximately $395 million.  Raytech management has also been
informed that as a result of the dismissal of the involuntary
petition, Raymark has encountered pending and newly filed
asbestos-related lawsuits but has received $27 million from a

<PAGE>
state guarantee association to make up the insurance policies of
the insolvent carrier and $32 million in other policies to defend
against such litigation.

         In October 1988, in a case captioned Raymond A. Schmoll
v. ACandS, Inc., et al., the U.S. District Court for the District
of Oregon ruled, under Oregon equity law, Raytech to be a
successor to Raymark's asbestos-related liability.  The successor
ruling was appealed by Raytech and in October 1992 the Ninth
Circuit Court of Appeals affirmed the District Court's judgment
on the grounds stated in the District Court's opinion.  The
effect of this decision extends beyond the Oregon District due to
a Third Circuit Court of Appeals decision in a related case cited
below wherein Raytech was collaterally estopped (precluded) from
relitigating the issue of its successor liability for Raymark's
asbestos-related liabilities. 

         As the result of the inability of Raymark to fund
Raytech's cost of defense recited above, and in order to obtain a
ruling binding across all jurisdictions on whether Raytech is
liable as a successor for asbestos-related and other claims
including claims yet to be filed relating to the operations of
Raymark or Raymark's predecessors, on March 10, 1989 Raytech
filed a petition seeking relief under Chapter 11 of Title 11,
United States Code in the United States Bankruptcy Court,
District of Connecticut.  Under Chapter 11, substantially all
litigation against Raytech has been stayed while the debtor
corporation and its non-filing operating subsidiaries continue to
operate their businesses in the ordinary course under the same
management and without disruption to employees, customers or
suppliers.  In the Bankruptcy Court a creditors' committee was
appointed, comprised primarily of asbestos claimants' attorneys. 
In August 1995, an official committee of equity security holders
was appointed relating to a determination of equity security
holders' interest in the estate.

         In June 1989 Raytech filed a class action in the
Bankruptcy Court against all present and future asbestos
claimants seeking a declaratory judgment that it not be held
liable for the asbestos-related liabilities of Raymark.  It was
the desire of Raytech to have this case heard in the U.S.
District Court, and since the authority of the Bankruptcy Court
is referred from the U.S. District Court, upon its motion and
argument the U.S. District Court withdrew its reference of the
case to the Bankruptcy Court and thereby agreed to hear and
decide the case.  In September 1991, the U.S. District Court
issued a ruling dismissing one count of the class action citing
as a reason the preclusive effect of the 1988 Oregon case,
previously discussed, under the doctrine of collateral estoppel
(conclusiveness of judgment in a prior action), in which Raytech
was ruled to be a successor to Raymark's asbestos liability under
Oregon law.  The remaining counts before the U.S. District Court
involve the transfer of Raymark's asbestos-related liabilities to
Raytech on the legal theories of alter-ego and fraudulent

<PAGE>
conveyance.  Upon a motion for reconsideration, the U.S. District
Court affirmed its prior ruling in February 1992.  Also, in
February 1992, the U.S. District Court transferred the case in
its entirety to the U.S. District Court for the Eastern District
of Pennsylvania.  Such transfer was made by the U.S. District
Court without motion from any party in the interest of the
administration of justice as stated by the U.S. District Court. 
In December 1992, Raytech filed a motion to activate the case and
to obtain rulings on the remaining counts which was denied by the
U.S. District Court.  In October 1993, the creditors' committee
asked the Court to certify the previous dismissal of the
successor liability count.  In February 1994, the U.S. District
Court granted the motion to certify and the successor liability
dismissal was accordingly appealed.  In May 1995, the Third
Circuit Court of Appeals ruled that Raytech is collaterally
estopped (precluded) from relitigating the issue of its successor
liability as ruled in the 1988 Oregon case recited above,
affirming the U.S. District Court's ruling of dismissal.  A
petition for a writ of certiorari was denied by the U.S. Supreme
Court in October 1995.  The ruling leaves the Oregon case, as
affirmed by the Ninth Circuit Court of Appeals, as the prevailing
decision holding Raytech to be a successor to Raymark's asbestos-
related liabilities. 

         Since the bankruptcy filing, several entities have
asserted claims in Bankruptcy Court alleging environmental 
liabilities of Raymark based upon similar theories of successor
liability against Raytech as alleged by asbestos claimants. 
These claims are not covered by the class action referenced below
and will be resolved in the bankruptcy case.  The environmental
claims include a claim of the Pennsylvania Department of
Environmental Resources ("DER") to perform certain activities in
connection with Raymark's Pennsylvania manufacturing facility,
which includes submission of an acceptable closure plan for a
landfill containing hazardous waste products located at the
facility and removal of accumulated baghouse dust from its
operations.  In March 1991, the Company entered a Consent Order
which required Raymark to submit a revised closure plan which
provides for the management and removal of hazardous waste, for
investigating, treatment and monitoring of any contaminated
groundwater and for the protection of human health and
environment at the site, all relating to the closure of the
Pennsylvania landfill and to pay a nominal civil penalty.  The
estimated cost for Raymark to comply with the order is $1.2
million.  The DER has reserved its right to reinstitute an action
against the Company and the other parties to the DER order in the
event Raymark fails to comply with its obligations under the
Consent Order.  Another environmental claim was filed against the
Company by the U.S. Environmental Protection Agency for civil
penalties charged Raymark in the amount of $12 million arising
out of alleged Resource Conservation and Recovery Act violations
at Raymark's Stratford, Connecticut, manufacturing facility.  

<PAGE>
         In January 1997, the U.S. Environmental Protection
Agency ("EPA") and the State of Connecticut filed suit against
Raymark claiming $212 million in damages for cleanup of the
Stratford, Connecticut, site.  The EPA has also filed a
bankruptcy claim against Raytech as a successor to Raymark for
cleanup of the Stratford site and other Raymark sites. 
Determination of Raytech's liability for such claims, if any, is
subject to Bankruptcy Court deliberations and proceedings.  It is
possible that additional claims for reimbursement of
environmental cleanup costs related to Raymark facilities may be
asserted against Raytech, as successor in liability to Raymark.  

         In April 1996, the Indiana Department of Environmental
Management ("IDEM") advised Raybestos Products Company ("RPC"), a
wholly-owned subsidiary of the Company, that it may have
contributed to the release of lead and PCB's (polychlorinated
biphenyls) found in small waterways near its Indiana facility. 
In June, IDEM named RPC as a potentially responsible party
("PRP").  RPC notified its insurers of the IDEM action and one
insurer responded by filing a complaint in January 1997 in the
U.S. District Court, Southern District of Indiana, captioned
Reliance Insurance Company vs. RPC seeking a declaratory judgment
that any liability of RPC is excluded from its policy with RPC. 
RPC continues to assess the extent of the contamination and its
involvement and is currently negotiating with IDEM for an agreed
order of cleanup.  The Company intends to offset its
investigation and cleanup costs against its notes payable to
Raymark when such costs become known pursuant to the
indemnification clause in the wet clutch and brake acquisition
agreement since it appears that any contamination would have
occurred during Raymark's ownership of the Indiana facility. 
Blood tests administered to residents in the vicinity of the
small waterways revealed no exposure.  The Company incurred
$1,751 in legal and testing costs associated with this matter and
has requested reimbursement from Raymark under the
indemnification agreement.

         As a result of an inspection, the Company has been
notified that the operations purchased from AFM in January 1996
in Sterling Heights, Michigan, are in violation of a consent
order issued by the Michigan Department of Environmental Quality
("DEQ").  The consent order included a compliance program
providing for measures to be taken to bring certain operations
into compliance and recordkeeping on operations in compliance. 
Potential fines for the violations were as high as $4.6 million;
however, negotiations with the DEQ have been in progress
concerning the compliance program and fines for past violations,
resulting in a tentative agreement providing for a consent
judgment with a fine of $324 and subject to completion of certain
operational compliance programs.  Finalization of the consent
judgment is pending.  The Company has accrued the cost of
resolution of this matter.

<PAGE>
         Under bankruptcy rules, the debtor-in-possession has an
exclusive period in which to file a reorganization plan.  Such
exclusive period had been extended by the Bankruptcy Court
pending the conclusion of the successor liability litigation. 
However, in December 1992, the creditors' committee filed a
motion to terminate the exclusive period to file a plan of
reorganization.  At a hearing in May 1993, the motion was denied
by the Bankruptcy Court but was appealed by the creditors'
committee.  In November 1993, the U.S. District Court reversed
the Bankruptcy Court and terminated the exclusive period to file
a plan of reorganization effective in January 1994.  Accordingly,
any party in interest, including the debtor, the creditors'
committee or a creditor could thereafter file a plan of
reorganization.  

         In May 1994, Raytech filed a Plan of Reorganization
("Debtor's Plan") in the U.S. Bankruptcy Court for the purpose of
seeking confirmation allowing Raytech to emerge from the
bankruptcy filed March 10, 1989.  Important conditions precedent
to confirmation of the Debtor's Plan include a final judgment in
the litigation to determine to what extent Raytech is a successor
to the liabilities of Raymark and a resolution of the
environmental claims or other claims filed or to be filed by
governmental agencies.  The Debtor's Plan provides that in the
event Raytech is found to be a successor, it is to establish a
successor trust funded by an amount determined to be the
difference between what Raytech should have paid for the
businesses purchased from Raymark less the amount actually paid
and less amounts to be paid for environmental and other claims. 
This remedy would satisfy its obligations as a successor in full
and render all claimants unimpaired, thereby eliminating the need
for balloting and all equity shareholders would retain their
interests in full.  Raytech is reviewing the Debtor's Plan to
determine applicability and possible amendment in view of
developments in the bankruptcy proceedings referenced in this
Item 3.  In September 1994, the Creditors' Committee filed its
own Plan of Reorganization in competition to the Debtor's Plan
("Creditors' Plan").  The Creditors' Plan calls for the
elimination of Raytech Corporation and its stockholders to be
replaced with a new Raytech.  All of the stock of new Raytech
would then be distributed to unsecured claimants, environmental
claimants and both past and future asbestos disease claimants on
a formulated basis set forth in the Plan.  Current stockholders
of Raytech would receive nothing under the Plan.  Upon motion of
the parties and support of the Bankruptcy Court, the major
interested parties agreed in August 1995 to participate in non-
binding mediation to attempt to effectuate a consensual plan of
reorganization.  The mediation process commenced in October 1995
and was concluded in March 1996 without agreement for a
consensual plan of reorganization.  Raytech believes the
Creditors' Plan is unconfirmable and will vigorously contest
attempts to have it confirmed.  The competing plans of Raytech
and its creditors have returned to Bankruptcy Court procedures. 
The outcome of these matters is expected to take considerable

<PAGE>
time and is uncertain.  If an adverse plan is confirmed, it would
have a material adverse impact on Raytech and its stockholders.

         The process for confirmation of a reorganization plan
was begun in 1996 and continues with adversary positions being
presented to the Bankruptcy Court by the parties concerning the
claims bar date, the notice to claimants and estimation of
claims.

         In November 1996, Raytech filed an adversary proceeding
complaint against the creditors' committee, et al., seeking a
declaratory judgment of the Bankruptcy Court that Raytech's
liability to present and future creditors as a successor to
Raymark is limited pursuant to bankruptcy law.  The creditors'
committee filed a motion for a summary judgment, which was
granted by the Bankruptcy Court at a hearing in August 1997. 
Raytech considers the grant of the summary judgment dismissing
the proceeding as unfounded in fact and law and will exhaust its
legal remedies through appeal of the order.

         Several other matters have been filed in the Bankruptcy
Court in 1996 and 1997 but not acted upon as yet and remain
pending, including:  (1)  A creditors' committee motion for the
appointment of a trustee to manage the Company; (2)  Raytech's
motion to dismiss its bankruptcy petition based upon Raymark
providing indemnity for liability claims that may be filed
against it; (3) a creditors' committee adversary proceeding
complaint seeking to assert control over Raymark and its assets
on the grounds of fraudulent transfers in the reorganization of
Raytech in 1986 and the divestiture of Raymark in 1988; (4) a
creditors' committee adversary proceeding complaint to litigate
alternative theories of liability of Raytech other than successor
liability; and (5) a creditors' committee adversary proceeding
complaint to sanction Raytech for violation of a stipulation to
give notice for non-ordinary course transactions by Raytech
subsidiaries.

         In February 1997, Raytech resumed making monthly
payments of $650,000 to Raymark pursuant to the 1987 Asset
Purchase Agreement as amended, to ensure indemnification for
Raymark liabilities.  In November 1997, the creditors' committee
filed an adversary proceeding complaint and motion for a
temporary restraining order to halt the payments based upon
several theories, including a waste of assets and breach of a
prior stipulation and fiduciary duty.  In January 1998, the
Bankruptcy Court enjoined the payments pending a trial.  Raymark
notified its retirees by letter that their benefits would cease
after February 1998 due to the effect of the cessation of
payments from Raytech under the injunction.  Raymark and Raymark
retirees intervened in the action resulting in a Bankruptcy Court
order to Raytech to supplement Raymark's obligations to its
retirees pending a trial in April 1998.

<PAGE>
         Following Raytech's cessation of the $650,000 note
payments in December 1997, Raymark commenced 33 separate lawsuits
against Raytech subsidiaries in various jurisdictions ("Raymark
Litigation") demanding payment or the return of assets for breach
of contract.  Raytech filed an adversary proceeding complaint to
halt the Raymark litigation and was granted a temporary
restraining order in December 1997 by the Bankruptcy Court that
remains in effect.  The creditors' committee intervened in the
action in support of the restraining order.

         In January 1997, Raytech was named through a subsidiary
in a third party complaint captioned Martin Dembinski, et al. vs.
Farrell Lines, Inc., et al. vs. American Stevedoring, Ltd., et
al. filed in the U.S. District Court for the Southern District of
New York for damages for asbestos-related disease.  The case has
been removed to the U.S. District Court, Eastern District of
Pennsylvania.  When required, the Company will seek an injunction
in the Bankruptcy Court to halt the litigation.

         Costs incurred by the Company for asbestos related
liabilities are subject to indemnification by Raymark under the 1987
acquisition agreements.  By agreement, in the past, Raymark has
reimbursed the Company in part for such indemnified costs by payment
of the amounts due in Raytech common stock of equivalent value. 
Under such agreement, Raytech received 926,821 shares in 1989,
177,570 shares in 1990, 163,303 in 1991 and 80,000 shares in 1993. 
The Company's acceptance of its own stock was based upon an intent
to control dilution of its outstanding stock.  In 1992, the
indemnified costs were reimbursed by offsetting certain payments due
Raymark from the Company under the 1987 acquisition agreements. 
Costs incurred in 1994, 1995, 1996 and 1997 were applied as a
reduction of the note obligations pursuant to the agreements.

         The adverse ruling in the Third Circuit Court of Appeals of
which a petition for writ of certiorari was denied by the U.S.
Supreme Court, precluding Raytech from relitigating the issue of its
successor liability leaves the U.S. District Court's (Oregon) 1988
ruling as the prevailing decision holding Raytech to be a successor
to Raymark's asbestos-related liabilities.  This ruling could have a
material adverse impact on Raytech as it does not have the resources
needed to fund Raymark's potentially substantial uninsured asbestos-
related and environmental liabilities.  Determination of Raytech's
actual liabilities are subject to the Bankruptcy Court's
deliberations and rulings and the competing plans of reorganization
filed in the Bankruptcy Court referenced above.

         The ultimate liability of the Company with respect to
asbestos-related, environmental, or other claims cannot presently be
determined.  Accordingly, no provision for such liability has been
recorded in the financial statements.  The accompanying financial
statements have been prepared assuming that the Company will
continue as a going concern.  An unfavorable result on certain or
all of the matters described above would have a material adverse
effect on the Company's results of operations,  financial position
and cash flows.  These uncertainties raise substantial doubt about

<PAGE>
the Company's ability to continue as a going concern.  The financial
statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or
adjustments relating to establishment, settlement and classification
of liabilities that may be required in connection with reorganizing
under the Bankruptcy Code.
<PAGE>

  Item 4.  Submission of Matters to a Vote of Security Holders.
  
     The Annual Shareholders' Meeting of Raytech was held
  July 18, 1997. The matters submitted to stockholder vote and
  the vote count on each matter were as follows:
  
     1.  Proposal to elect three Class II Directors for full
         three-year terms and until their respective successors
           are elected:
  
         For Robert M. Gordon                Withheld
              2,830,132                         196,920
  
           For Dennis G. Heiner                Withheld
              2,848,236                         178,816
  
           For Craig R. Smith                  Withheld
              2,846,591                         180,461
  
       2.  Proposal to amend the 1990 Non-Qualified Stock Option
           Plan to authorize 500,000 additional shares of common
           stock for grant.
  
              For                 Against             Abstain
           1,736,306              340,311             21,188
  
  
     3.  Proposal to ratify the appointment of Coopers & Lybrand 
         as auditors for 1996:
  
            For                 Against             Abstain
         2,995,498               19,999              11,555
  
       Abstentions have the same effect as votes against
  proposals presented to stockholders other than election of
  directors.  Non-votes are not included in vote totals and
  therefore have no effect.  A "non-vote" occurs when a nominee
  holding shares for a beneficial owner votes on one proposal but
  does not vote on another proposal because the nominee does not
  have discretionary voting power and has not received
  instructions from the beneficial owner.
  
     Pursuant to the vote of shareholders, proposals 1, 2 and 3
  above were adopted and effective on July 18, 1997.
  
     Directors whose terms of office as Directors continued
  after the Annual Shareholders' Meeting include:
  
                         Robert L. Bennett
                         Donald P. Miller                 
                         Robert B. Sims
                      
  
<PAGE>
  
  
                            PART II
  
  
  Item 5.  Market for Registrant's Common Equity and Related
           Stockholder Matters
  
     The Registrant's (Raytech) common stock is traded on the
  New York Stock Exchange under the trading symbol RAY.  As of
  March 2, 1998, there were 2,062 holders of record of the
  Registrant's common stock.
  
     Information regarding the quarterly high and low sales
  prices for 1997 and 1996 and information with respect to
  dividends is set forth in Note L of the Consolidated Financial
  Statements, Part II, Item 8 hereof.
  
  
<PAGE>
Item 6.  Selected Financial Data

<TABLE>
FIVE-YEAR REVIEW OF OPERATIONS
(in thousands, except share data)                                                     
<CAPTION>
                                        1997        1996      1995      1994      1993
<S>                                 <C>        <C>       <C>       <C>       <C>
                                                    
Operating Results                                                                  
  Net sales                          $234,475   $217,683  $177,498  $167,615  $139,290
  Gross profit                         51,575     54,269    48,699    44,548    37,463
  Operating income                     26,164     23,603    20,959    17,936    14,423
  Interest expense                     (3,345)    (3,132)   (2,647)   (2,601)   (3,816)
  Income before cumulative effect          
    of accounting changes              15,538(6)  15,991(3) 14,337(2)  8,643     8,556 
  Cumulative effect of changes in            
    accounting principles                            -         -         -      (3,808)(1)
Net income                           $ 15,538   $ 15,991  $ 14,337  $  8,643  $  4,748
                              
Basic earnings per common share:(5)        
  Earnings before cumulative         
    effect of accounting changes     $   4.76   $   4.95  $   4.44  $   2.70  $   2.66
  Cumulative effect of changes in
    accounting principles                 -          -         -         -       (1.18)
  Net earnings                           4.76       4.95      4.44      2.70      1.48
Weighted average shares             3,263,137  3,232,674 3,225,962 3,205,433 3,217,467

Diluted earnings per common share:(5)
  Earnings before cumulative
    effect of accounting changes     $   4.41   $   4.65  $   4.26  $   2.52  $   2.60
  Cumulative effect of changes in
    accounting principles                 -          -         -         -       (1.16)
  Net earnings                       $   4.41   $   4.65  $   4.26  $   2.52  $   1.44
Adjusted weighted average shares    3,524,391  3,441,645 3,369,003 3,426,034 3,290,912
             
Balance sheet                              
  Total assets                       $153,385   $140,155  $114,436  $ 91,809  $ 79,488
  Working capital                       7,324      7,418     5,323       240       442
  Long-term obligations                38,639     41,522    34,966    41,959    46,019
  Commitments and contingencies(4)            
  Total shareholders'
    equity (deficit)                 $ 48,462   $ 34,015  $ 18,680  $  3,716  $ (5,860)
                                                  
Property, plant and equipment              
  Capital expenditures               $ 20,603   $  8,390  $ 10,275  $ 11,354  $  7,818 
  Depreciation                       $  8,746   $  8,039  $  7,566  $  6,892  $  6,680
                                                      
Dividends declared per share         $   -      $    -    $    -    $    -    $    -  
<FN>
(1)  Reflects the adoption of Statement of Financial Accounting Standards (SFAS) No.
     106, "Accounting for Postretirement Benefits Other Than Pensions," and Statement
     of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."

(2)  Includes $4,597 of pretax income ($2,758 after-tax and $.80 per share) related
     to a favorable litigation judgment.

(3)  Includes reversal of $3,100 of prior year tax accruals no longer required.

(4)  See Notes A and N to the consolidated financial statements.

(5)  Reflects the adoption of Statement of Financial Accounting Standards (SFAS) No.
     128, "Earnings Per Share."

(6)  Includes the reversal of $1,519 of valuation allowance against deferred tax assets
     of German operations.
</TABLE>
<PAGE>
Item 7.  Management's Discussion and Analysis of Financial
          Condition and Results of Operations

Results of Operations and Liquidity and Capital Resources

1997 vs. 1996

     Net income for the 1997 fiscal year amounted to $15,538 or
$4.76 basic earnings per share as compared to $15,991 or $4.95 
basic earnings per share in fiscal 1996. In summary, the effect
of higher net sales and lower selling, general and administrative
expense in 1997 was offset by lower margins on sales and a higher
effective income tax rate.

Net Sales

     Net sales increased 7.7% for fiscal 1997 and amounted to
$234,475 as compared with net sales of $217,683 in fiscal 1996. 
The overall improvement is primarily due to additional domestic
OEM sales of approximately $4,871 related to the Sterling Heights
operations, acquired in the first quarter of 1996, and other
domestic sales increases of $14,527 due to additional volume
within the domestic automotive, agriculture and construction
product market segments. 

     European net sales decreased by $2,606 from $45,260 in 1996
to $42,654 in 1997.  Net sales of the combined German operations,
which accounted for 18.2% of the consolidated sales of the
Company in 1997, decreased to $42,625 as compared with $44,776 in
fiscal 1996.  An increase in unit sales of $4,085 was more than
offset by foreign currency fluctuation of $(6,236).  German
operations reported operating income of $2,423 in fiscal 1997 as
compared with operating income of $1,496 in fiscal 1996.

Gross Profit

     Gross profit as a percentage of sales for the period ended
December 28, 1997 is 22.0% as compared to 24.9% for the same
period one year ago.  The overall decrease is primarily due to an
increase in domestic manufacturing labor and material costs,
contractual price reductions to certain customers, lower gross
margin on product lines acquired in the Sterling Heights
acquisition, and manufacturing inefficiencies on the Company's
domestic agriculture product line.

Selling, General and Administrative

     Selling, general and administrative expenses decreased 16.8%
to $25,683 as compared to $30,863 one year earlier.  The decrease
is primarily due to the net reversal of $1,800 of accruals
established in 1996 related to environmental violations at the
Sterling Heights facility that have been resolved more favorably
than initially anticipated.  In addition, 1997 provisions for 
<PAGE>
discretionary compensation are lower than 1996 due to reduced
earnings at certain operations.

Interest Expense

     Interest expense increased primarily as a result of higher
average borrowings under the Company's revolving line of credit
resulting from higher working capital requirements in 1997.

Other Income and Expense, Net

     Other income and expense, net in 1997 primarily represents
interest income in the amount of $410 and income from equity
investment in affiliate in the amount of $647.

     Other income and expense, net in 1996 primarily represents
interest income in the amount of $218, royalty income in the
amount of $350 and accretion of $385 of interest expense on
obligations due to AFM.

Income Taxes

     The effective tax rate for the year ended December 28, 1997
was 29.0% versus 17.5% in 1996.  Included in the effective tax
rate for 1997 is the effect of reversing certain valuation
allowances in the amount of $1,519 related to net operating loss
carryforwards of the German operations.  Included in the
effective tax rate for 1996 were adjustments to prior years'
accruals in the amount of $3,100 for tax items which were
favorably resolved.


1996 vs. 1995

     Net income for the 1996 fiscal year amounted to $15,991 or
$4.65 per share as compared to $14,337 or $4.26 per share in
fiscal 1995.  The favorable operating results are principally the
result of improved performance within the domestic product market
segments; the reversal of $3,100 of prior year tax accruals that
were no longer required and the improvement in operating income
at the Company's German operation due to cost savings as a result
of a plant consolidation in prior years.  However, the favorable
performance was somewhat offset by the negative effects of a
slowdown in the European economy, which resulted in a reduction
in foreign sales; contractual price reductions to certain
customers; an increase in salary and wages and other employee
benefits and other general cost increases.  Included in the
results of operations for fiscal 1995 is a one-time pretax gain
of $4,597 (approximately $2,758 after tax) which resulted from a
favorable judgment in regard to a product defamation lawsuit.

<PAGE>
     During the first quarter of 1996, the Company acquired
certain assets from Advanced Friction Materials Company ("AFM")
and also acquired a 47% equity interest in AFM.

Net Sales

     Net sales increased 22.6% for fiscal 1996 and amounted to
$217,683 as compared with net sales of $177,498 in fiscal 1995. 
The overall improvement is primarily due to additional sales of
approximately $24,272 related to the Sterling Heights operations
and additional volume within the domestic product market
segments.  Excluding Sterling Heights, domestic sales increased
by $19,523 compared to last year.  However, European sales
decreased by $3,610 primarily due to a continued decline in the
European economy.

Results of Foreign Operations

     Net sales of the combined German operations, which accounted
for 20.6% of the consolidated sales of the Company in 1996,
decreased to $44,776 as compared with $48,239 in fiscal 1995. 
The decrease is due to a reduction in unit sales of $(1,346) and
foreign currency fluctuation of $(2,117).  On a combined basis,
the German operations reported operating income of $1,496 in
fiscal 1996 as compared with operating income of $1,062 in fiscal
1995.  The favorable performance is due to cost savings resulting
from a plant consolidation.

Gross Profit

     Gross profit as a percentage of sales for the period ended
December 29, 1996 is 24.9% as compared to 27.4% for the same
period one year ago.  The overall decrease is primarily due to an
increase in domestic manufacturing labor and material costs,
contractual price reductions to certain customers and a lower
gross margin on product lines acquired in the Sterling Heights
acquisition.

Selling, General and Administrative

     Selling, general and administrative expenses increased 17.7%
to $30,863 as compared to $26,218 one year earlier.  Expenses are
up due to the impact of the acquired Sterling Heights operation
of AFM, increased sales volume and an increase in salary and
wages and other employee benefits.

Other Operating Income and Expense, Net

     Other operating income and expense, net in 1996 primarily
represents income related to an insurance recovery on personal
property damage.

     Other operating expense, net in 1995 includes the write-down
of certain production equipment.

<PAGE>
Other Income and Expense, Net

     Other income and expense, net in 1996 primarily represents
interest income in the amount of $218, royalty income in the
amount of $350 and accretion of $385 of interest expense on
obligations due to AFM.

     Other income and expense, net in 1995 includes a one-time
pretax gain of $4,597 which resulted from a favorable judgment in
regard to a product defamation lawsuit.

Interest Expense

     Interest expense increased primarily as a result of higher
average borrowings under the Company's revolving line of credit
resulting from higher working capital requirements in 1996.

Income Taxes

     The effective tax rate of 17.5% was less than the U.S.
statutory rate due primarily to adjustments to prior year tax
accruals as a result of a favorable tax settlement and the tax
benefit of costs incurred under indemnification arrangements with
Raymark, offset in part by the effect of state income taxes and a
decrease in the benefit realizable from future deductible
amounts.  The valuation allowance against deferred tax assets
increased by $628 during 1996.  The net deferred tax asset
represents future tax deductions that can be realized upon
carryback to prior years.

Recently Issued Accounting Pronouncements

     Effective January 1, 1997, the Company adopted Statement of
Position 96-1, Environmental Remediation Liabilities.  The
adoption of the Statement had no impact on the Company's
consolidated financial condition, results of operations or cash
flows.

     Effective February 1, 1997, the Company adopted SFAS 128,
"Earnings Per Share."  SFAS 128 revises the computation,
presentation, and disclosure requirements related to earnings per
share ("EPS").  It replaces the presentation of primary EPS with
a presentation of basic EPS.  It also requires dual presentation
of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures.  This statement
requires restatement of all prior period EPS data presented.

Future Adoption of New Accounting Pronouncements

     In 1997, SFAS No. 130, "Reporting Comprehensive Income," was
issued, effective for fiscal 1999.  SFAS 130 establishes
standards for reporting and display of comprehensive income and 

<PAGE>
its components (revenues, expenses, gains and losses) in a full
set of general purpose financial statements.  The Company will
adopt SFAS 130 in fiscal 1998. 

     In 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," was issued, effective for
fiscal 1999.  SFAS 131 changes the way public companies report
information about operating segments.  The Company will adopt
SFAS 131 in its annual financial statements for fiscal 1998 and
is still assessing the impact of this statement on its
disclosures.

Impact of Year 2000 Computer-Related Issues

     Raytech's RPC subsidiary is currently implementing new 
computer systems at an approximate cost of $2 million to be
completed in 1998.  The new systems will be Year 2000 compliant. 
Other subsidiaries are currently assessing the impact of the Year
2000 compliance, and the Company does not expect the cost to be
material to its financial position or results of operations or
cash flows.

Liquidity and Capital Resources

     The Company generated cash flow from operating activities of
$25,547, $17,779, and $16,969 in 1997, 1996 and 1995,
respectively.  Included in the Company's cash flow from operating
activities in fiscal 1995 is a one-time after-tax net gain of
approximately $2,758 which resulted from a favorable judgment in
regard to a product defamation lawsuit.

     On January 31, 1996, Raytech Composites, Inc.
("Composites"), a subsidiary of Raytech, and Raybestos Products
Company ("RPC"), a subsidiary of Composites, entered into a
series of related transactions with Advanced Friction Materials
("AFM") and related entities and persons as follows:  Composites
acquired a 47% minority share of the common stock of AFM for $9.4
million cash at closing; RPC acquired 100% of the common stock of
AFM Management Company, which leases employees to AFM, for $1.0
million, which was paid for on January 31, 1997; RPC acquired the
machinery and equipment and certain other operating assets of AFM
for $3.5 million cash at closing; RPC committed to acquire land
and building utilized in AFM's manufacturing operations (land and
building located at 44650 Merrill, Sterling Heights, Michigan)
from a principal owner of AFM for $6.6 million, which was
consummated on January 31, 1997; RPC loaned AFM $1.3 million cash
at closing bearing interest at the prime rate and maturing on
January 31, 2003; RPC agreed to acquire AFM's inventory
subsequent to closing, which amounted to approximately $3.2
million.

     Capital expenditures totaled $20,603 in fiscal 1997 as
compared with $8,390 and $10,275 in fiscal 1996 and 1995,
respectively.  The Company has an ongoing program for upgrading 

<PAGE>
its machinery and equipment in order to optimize manufacturing
quality, productivity and cost effectiveness.

     In March 1995, RPC entered into a five-year loan agreement
with The CIT Group/Credit Finance, Inc., which provided for RPC
to borrow up to $15 million, consisting of a revolving line of
credit of $10 million and a term loan of $5 million at an
interest rate of 1.75% above the prime rate.  The amount of
borrowing was predicated on satisfying an asset based formula
related to levels of certain accounts receivable, inventories and
machinery and equipment.  The loans were collateralized by all
assets, excluding land and buildings at RPC.  The purpose of the
loan was for working capital, capital expenditures, acquisitions
and possible settlement of successor liability issues.  Under the
terms of the loan agreement, RPC was required to maintain certain
cash flow levels, and RPC's dividend payments to RCI were subject
to certain restrictions.  The amount outstanding under line of
credit at  December 29, 1996 was $8,718.  The additional
borrowing availability at December 29, 1996 was $6,282, based
upon the asset borrowing formula.

     In November 1997, RPC refinanced its revolving line of
credit in an effort to reduce its interest rate and to minimize
facility fees.  The new loan agreement with NationsCredit,
Commercial Funding provides for RPC to borrow up to $17 million
in the aggregate, consisting of a revolving line of credit of $10
million and a term loan of $7 million for capital equipment
purchases.  The loans bear an interest rate of .50% above the
prime rate.  The loans are collateralized by accounts receivable,
inventory and machinery and equipment.  The revolving loan allows
the Company to borrow based on a borrowing base formula as
defined in the Loan and Security Agreement (the "Agreement"). 
The Agreement includes certain covenant restrictions, including
restrictions on dividends payable to Raytech Composites, Inc.
("RCI"), a wholly-owned subsidiary of the Company.  The purpose
of the loan is to refinance existing indebtedness and for general
working capital needs.  The outstanding balance under this loan
agreement at December 28, 1997 is $11,310.  The additional
borrowing availability at December 28, 1997 was $5,690, based
upon the asset borrowing formula.

     The Company's wholly-owned German subsidiaries, Raybestos
Industrie-Produkte GmbH and Raytech Composites Europe GmbH, have
available lines of credit amounting to DM7,800 ($4,339) of which
DM2,901 ($1,615) remains unused at December 28, 1997.  The
Company used the available lines of credit to fund working
capital and capital expenditure needs.

Future Liquidity

       Since the formation of Raytech and the restructuring that
occurred in 1986, Raytech has been named a co-defendant in
approximately 3,300 asbestos-related lawsuits as a successor in
liability to Raymark.  Until February 1989, the defense of all

<PAGE>
such lawsuits was provided to Raytech by Raymark in accordance
with the indemnification agreement included as a condition of the
purchase of the Wet Clutch and Brake Division and the German
subsidiary from Raymark in 1987.  In February 1989, an
involuntary petition in bankruptcy was filed against Raymark, and
subsequently, a restrictive funding order was issued by an
Illinois Circuit Court which required one of Raymark's insurance
carriers to pay claims but not defense costs and another
insurance carrier had been declared insolvent.  These
circumstances caused Raymark to be unable to fund the costs of
defense to Raytech in the asbestos-related lawsuits referenced
above as provided in the indemnity section of the acquisition
agreement.

       In an asbestos-related personal injury case decided in
October 1988 in a U.S. District Court in Oregon, Raytech was
ruled under Oregon equity law to be a successor to Raymark's
asbestos-related liability.  The successor ruling was appealed by
Raytech and in October 1992, the Ninth Circuit Court of Appeals
affirmed the District Court's judgment on the grounds stated in
the District Court's opinion.  The effect of this decision
extends beyond the Oregon District due to a Third Circuit Court
of Appeals decision in a related case cited below wherein Raytech
was collaterally estopped (precluded) from relitigating the issue
of its successor liability for Raymark's asbestos-related
liabilities, and a petition for a writ of certiorari was denied
by the U.S. Supreme Court in October 1995.

       As the result of the inability of Raymark to fund Raytech's
costs of defense recited above and in order to obtain a ruling
binding across all jurisdictions as to whether Raytech is liable
as a successor for asbestos-related and other claims, including
claims yet to be filed relating to the operations of Raymark and
its predecessors, on March 10, 1989, Raytech filed a petition
seeking relief under Chapter 11 of Title 11, United States Code
in the United States Bankruptcy Court, District of Connecticut. 
Under Chapter 11, substantially all litigation against Raytech
has been stayed while the debtor corporation and its non-filed
operating subsidiaries continue to operate their businesses in
the ordinary course under the same management and without
disruption to employees, customers and suppliers. 

       In June 1989 Raytech filed a class action in the Bankruptcy
Court against all present and future asbestos claimants seeking a
declaratory judgment that it not be held liable for the asbestos-
related liabilities of Raymark.  It was the desire of Raytech to
have this case heard in the U.S. District Court, and since the
authority of the Bankruptcy Court is referred from the U.S.
District Court, upon its motion and argument the U.S. District
Court withdrew its reference of the case to the Bankruptcy Court
and thereby agreed to hear and decide the case.  In September
1991, the U.S. District Court issued a ruling dismissing one
count of the class action citing as a reason the preclusive
effect of the 1988 Oregon case under the doctrine of collateral

<PAGE>
estoppel (conclusiveness of judgment in a prior action), in which
Raytech was ruled to be a successor to Raymark's asbestos
liability under Oregon law.  The remaining counts before the U.S.
District Court involve the transfer of Raymark's asbestos-related
liabilities to Raytech on the legal theories of alter-ego and
fraudulent conveyance.  Upon a motion for reconsideration, the
U.S. District Court affirmed its prior ruling in February 1992. 
Also, in February 1992, the U.S. District Court transferred the
case in its entirety to the U.S. District Court for the Eastern
District of Pennsylvania.  Such transfer was made by the U.S.
District Court without motion from any party in the interest of
the administration of justice as stated by the U.S. District
Court.  In December 1992, Raytech filed a motion to activate the
case and to obtain rulings on the remaining counts which was
denied by the U.S. District Court.  In October 1993, the
creditors' committee asked the Court to certify the previous
dismissal of the successor liability count.  In February 1994,
the U.S. District Court granted the motion to certify and the
successor liability dismissal was accordingly appealed.  In May
1995, the Third Circuit Court of Appeals ruled that Raytech is
collaterally estopped (precluded) from relitigating the issue of
its successor liability as ruled in the 1988 Oregon case recited
above, affirming the U.S. District Court's ruling of dismissal. 
A petition for a writ of certiorari was denied by the U.S.
Supreme Court in October 1995.  The ruling leaves the Oregon
case, as affirmed by the Ninth Circuit Court of Appeals, as the
prevailing decision holding Raytech to be a successor to
Raymark's asbestos-related liabilities.

       The adverse ruling in the Third Circuit Court of Appeals, of
which a petition for writ of certiorari was denied by the U.S.
Supreme Court, precluding Raytech from relitigating the issue of
its successor liability leaves the U.S. District Court's (Oregon)
1988 ruling as the prevailing decision holding Raytech to be a
successor to Raymark's asbestos-related liabilities.  This ruling
could have a material adverse impact on Raytech as it does not
have the resources needed to fund Raymark's potentially
substantial uninsured asbestos-related and environmental
liabilities.  Determination of Raytech's actual liabilities are
subject to the Bankruptcy Court's deliberations and rulings and
the competing plans of reorganization filed in the Bankruptcy
Court.

       The ultimate liability of the Company with respect to
asbestos-related, environmental, or other claims cannot presently
be determined.  Accordingly, no provision for such liability has
been recorded in the financial statements.  The accompanying
financial statements have been prepared assuming that the Company
will continue as a going concern.  An unfavorable result on the
matters described above would have a material adverse effect on
the Company's results of operations, financial position and cash
flows.  These uncertainties raise substantial doubt about the
Company's ability to continue as a going concern.  The financial
statements do not include any adjustments relating to the

<PAGE>
recoverability and classification of recorded asset amounts or
adjustments relating to establishment, settlement and
classification of liabilities that may be required in connection
with reorganizing under the Bankruptcy Code.

       The Company has a long-term obligation to Raymark resulting
from the purchase of the wet clutch and brake business and the
German subsidiary in 1987.  At December 28, 1997, the amount owed
Raymark, including accrued interest, was approximately $33
million.  In December 1992 the Company reached an agreement with
Raymark to restructure its obligations resulting in the reduction
of the interest rate from 10.48% to 6%, replacing a required
balloon payment that was due in October of 1994 with an
amortization schedule requiring equal monthly installments of
$650 through July of 1999 to be paid into an escrow account and
suspension of payments due under the German stock acquisition
until the assets purchased are free of all Raymark related
encumbrances and liabilities.   Subsequently, in May 1995, the
monthly installments were suspended, and the escrow account
containing previously paid installments was retracted pending the
assets purchased being free of Raymark related encumbrances and
liabilities.  In February 1997, the principal of the debt owed on
the Raymark Wet Clutch and Brake note was adjusted to reflect
payments, accrued interest and indemnity offsets.  Monthly
installments of $650 were resumed to ensure indemnification for
Raymark liabilities.  In December 1997, the monthly installments
were suspended and subsequently enjoined by the Bankruptcy Court
restraining order pending a trial.  The order was amended in
February 1998 ordering payment of up to $150 for retiree benefits
in March 1998.  The remaining principal balance at December 28,
1997 is $26,997.  

       In September 1993 and January 1994, RCI entered into loan
agreements with Raymark for $2,500 and $3,000, respectively.  As
of December 28, 1997 and December 29, 1996, RCI has $3,000
outstanding under the loan agreements.  The loans bear interest
at 6% per annum and are included in the current portion of long-term debt. 

       The debt obligations related to the German subsidiary are
denominated in DM's and amount to $1,961 at December 28, 1997. 
As such, the Company is at risk to future currency fluctuations
with respect to this debt.

       The Company experienced improving conditions in its foreign
and domestic market segments in fiscal 1997.  Management believes
that the Company is operating in a healthy, stable environment
and will continue to do so through 1998.  Subject to the outcome
of the legal matters discussed above, management believes that
the Company will generate sufficient cash flow during 1998 to
meet all of the Company's obligations arising in the normal 
course of business.  In addition, in the event the Company falls 
short of its cash flow forecast, the Company has an available 
line of credit with NationsCredit Commercial Funding.

Impact of Inflation

       The Company's business is subject to the impact of
inflation.  During the past year, this impact has been minimal.
Management's strategy is to try to reclaim any cost increases
through more efficient manufacturing and when competitively
feasible, higher selling prices.

<PAGE>
Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          Financial Statements:

           Consolidated Balance Sheets for the
           fiscal years ended December 28, 1997
           and December 29, 1996
   
           Consolidated Statements of Operations
           for the 1997, 1996 and 1995 Fiscal Years                

           Consolidated Statements of Cash Flows 
           for the 1997, 1996 and 1995 Fiscal Years                

           Consolidated Statements of Shareholders'
           Equity for the 1997, 1996, and 1995
           Fiscal Years

           Notes to Consolidated Financial Statements              

           Report of Independent Accountants

           (Refer to Index to Consolidated Financial
           Statements at Page 93)


<PAGE>

RAYTECH CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEETS (in thousands, except share data)                       
<CAPTION>
                                                                               
Fiscal Year                                                      1997           1996   
<S>                               <C>                        <C>            <C>
                                                                      
ASSETS                                                                    
Current assets                                                            
  Cash and cash equivalents                                  $  9,913       $ 11,341 
  Trade accounts receivable, less allowance of $1,186                                  
    for 1997 and $726 for 1996                                 26,903         23,866
  Inventories                                                  28,202         28,709
  Other current assets                                          8,590          8,120
      Total current assets                                     73,608         72,036

Property, plant and equipment                                 143,131        127,811
  Less accumulated depreciation                                82,141         76,686
      Net property, plant and equipment                        60,990         51,125
Investment in and advances to affiliates                       10,249          9,972
Other assets                                                    8,538          7,022
Total assets                                                 $153,385       $140,155

                                                                                     
LIABILITIES                                                                          
Current liabilities                                                                  
  Notes payable                                              $ 13,039       $ 10,701
  Current portion of long-term debt - Raymark                   9,970         12,007
  Current portion of long-term debt                               130            152
  Accounts payable                                             20,703         18,999
  Accrued liabilities                                          22,442         22,759
      Total current liabilities                                66,284         64,618
                                                                                     
Long-term debt due to Raymark                                  21,988         27,437
Long-term debt                                                  1,178            237
Postretirement benefits other than pensions                    10,044          9,429
Other long-term liabilities                                     5,429          4,419
Total liabilities                                             104,923        106,140
COMMITMENTS & CONTINGENCIES                                                          
                                                                                   
SHAREHOLDERS' EQUITY
Capital stock                                                                       
  Cumulative preferred stock, no par value                                           
    800,000 shares authorized, none issued                        -              -  
  Common stock, par value $1.00                                                      
    7,500,000 shares authorized; 5,417,367 and 5,371,821                             
    issued in 1997 and 1996, respectively                       5,417          5,372
Additional paid in capital                                     70,275         70,208
Accumulated deficit                                           (23,384)       (38,922)
Cumulative translation adjustment                                 715          1,918
                                                               53,023         38,576
Less treasury shares at cost                                   (4,561)        (4,561)
      Total shareholders' equity                               48,462         34,015
Total liabilities and shareholders' equity                   $153,385       $140,155

<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
                                     
<PAGE>


 
                           RAYTECH CORPORATION
                  CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                
Fiscal year                             1997         1996           1995  
<S>                                   <C>          <C>           <C>
                                                                 
Net sales                             $ 234,475    $ 217,683     $ 177,498
Cost of sales                          (182,900)    (163,414)     (128,799)

  Gross profit                           51,575       54,269        48,699
                                                      
Selling, general and administrative                   
  expenses                              (25,683)     (30,863)      (26,218)
Other operating income (expense), net       272          197        (1,522)
  Operating income                       26,164       23,603        20,959 
                                                      
Currency transaction gains (losses)        (375)          63           (43)
Interest expense - Raymark               (1,984)      (2,056)       (2,006)
Interest expense                         (1,361)      (1,076)         (641)
Other income (expense), net               1,325          121         5,917
                                                                  
Income before provision for income                    
  taxes and minority interest            23,769       20,655        24,186 
                                                      
Provision for income taxes               (6,900)      (3,606)       (9,009)
Income before minority interest          16,869       17,049        15,177

Minority interest                        (1,331)      (1,058)         (840)  
                             
Net income                            $  15,538    $  15,991     $  14,337
                                                      
Basic earnings per share              $    4.76    $    4.95     $    4.44
                                                      
Diluted earnings per share            $    4.41    $    4.65     $    4.26


<FN>
The accompanying notes are an integral part of these statements.
</TABLE>

<PAGE>
RAYTECH CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)                             
<CAPTION>
                                                                     
Fiscal Year                                            1997       1996      1995 
 <S>                                                <C>        <C>        <C>

Cash flows from operating activities:
 Net income                                         $ 15,538   $ 15,991   $14,337
    Adjustments to reconcile net income                           
    to net cash provided by operations:                          
   Deferred income tax                                (1,066)      (975)     (853)
   Depreciation and amortization                       9,085      8,467     7,654 
   Income applicable to minority interest, 
    net of dividends                                   1,199        926       840 
   Income from equity investment in affiliate           (647)       -         -
   Other items not providing or                                
    requiring cash (Note C)                              633         30     1,924 
   Changes in operating assets and liabilities:                
    Trade receivables                                 (4,208)    (6,674)   (3,758)
    Inventory                                           (160)    (2,179)     (292)
    Other current assets                              (1,347)    (2,723)       42 
    Other long-term assets                              (643)      (124)     (149)
    Accounts payable                                   5,601      2,897    (2,723)
    Accrued liabilities                                  733      2,396    (1,247)
    Other long-term liabilities                          829       (253)    1,194 
                                                               
     Net cash provided by operating activities        25,547     17,779    16,969
                                 
Cash flow from investing activities:                                             
  Purchase of securities                                (200)    (2,100)      -
  Capital expenditures                               (20,264)    (8,467)   (9,684)
  Proceeds on sales of property, plant                                           
   and equipment                                         138        129     2,206 
  Equity investment in and advances to AFM               141    (10,569)      -  
  Purchase of assets from AFM                         (7,076)    (6,706)      -  
                                                                          
     Net cash used in investing activities:          (27,261)   (27,713)   (7,478)
                                                                            
Cash flow from financing activities:                                             
  Proceeds from short-term borrowings                  2,625      4,943     3,775 
  Payment on short-term borrowings                       -       (2,187)     (905)
  Proceeds from long-term borrowings                   1,040        -         -
  Principal payments on long-term debt                  (164)      (149)     (689)
  Proceeds from borrowings from Raymark                2,034        -       6,258 
  Payments on borrowings from Raymark                 (8,388)      (917)   (3,085)
  Cash overdrafts                                      3,090        -         -
  Other                                                  195         21       (73)
                                                                       
     Net cash provided by financing
       activities                                        432      1,711     5,281

Effect of exchange rate changes on cash                 (146)       (33)       47 

Net change in cash and cash equivalents               (1,428)    (8,256)   14,819 
Cash and cash equivalents at beginning of year        11,341     19,597     4,778
Cash and cash equivalents at end of year            $  9,913   $ 11,341  $ 19,597
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>



<PAGE>



                                        RAYTECH CORPORATION
                          CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (in thousands, except share data)

<TABLE>
<CAPTION>

                           Number              Paid                Cumulative                 
                          of Shares   Common    in   Accumulated   Translation     Treasury Stock   
                           Issued      Stock  Capital   Deficit    Adjustment     Cost      Shares  
  <C>      <C> <C>        <C>        <C>      <C>      <C>           <C>        <C>      <C>

Balance,
  December 29, 1996       5,371,821  $ 5,372  $70,208  $ (38,922)    $ 1,918    $(4,561) (2,132,059)     

Stock options exercised      45,546       45       67                        

Cumulative translation
  adjustment                                                          (1,203)

Purchase of treasury  
  stock

Net income for the
 fiscal year ended
 December 28, 1997                                        15,538                                    
Balance,
 December 28, 1997        5,417,367  $ 5,417  $70,275  $ (23,384)    $   715    $(4,561) (2,132,059)
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>


<PAGE>
Continued, page 2
 



                          CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                (in thousands, except share data)  


<TABLE>
<CAPTION>


                           Number               Paid                  Cumulative      
                          of Shares   Common     in     Accumulated  Translation    Treasury Stock  
                           Issued      Stock   Capital    Deficit     Adjustment   Cost      Shares 
 <C>      <C> <C>         <C>        <C>       <C>        <C>          <C>       <C>      <C>

Balance,
 December 31, 1995        5,362,139  $ 5,362   $70,192    $(54,913)    $ 2,600   $(4,561) (2,132,059)

Stock options exercised       9,682       10        16

Cumulative translation
  adjustment                                                              (682)

Net income for the
 fiscal year ended 
 December 29, 1996                                          15,991                                   
Balance,
  December 29, 1996       5,371,821  $ 5,372   $70,208    $(38,922)    $ 1,918   $(4,561) (2,132,059) 
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>


<PAGE>
Continued, page 3



 

                          CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (in thousands, except share data)

<TABLE>
<CAPTION>
                           Number              Paid                  Cumulative              
                          of Shares   Common    in    Accumulated    Translation    Treasury Stock   
                           Issued      Stock  Capital  Deficit       Adjustment    Cost      Shares  
<C>     <C>               <C>        <C>      <C>      <C>            <C>        <C>      <C>

Balance,
  January 1, 1995         5,351,024  $ 5,351  $70,148  $(69,250)      $ 2,028    $(4,561) (2,132,056)

Stock options exercised      11,115       11       44

Cumulative translation
  adjustment                                                              572

Purchase of treasury 
  stock                                                                              -            (3)

Net income for the fiscal
  year ended December 31,
  1995                                                   14,337                                          
Balance,
 December 31, 1995        5,362,139  $ 5,362  $70,192  $(54,913)      $ 2,600    $(4,561) (2,132,059)

<FN>
The accompanying notes are an integral part of these statements.
</TABLE>











<PAGE>
RAYTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except per share data)

Note A - Formation of Raytech Corporation, Sale of Raymark,
         Chapter 11 Proceeding and Other Litigation

       Raytech Corporation ("Raytech" or the "Company") was
incorporated on June 13, 1986 in Delaware and held as a
subsidiary of Raymark Corporation ("Raymark").  In October 1986,
Raytech became the publicly traded (NYSE) holding company of
Raymark stock through a triangular merger restructuring plan
approved by Raymark's shareholders at its October 1986 Annual
Meeting whereby each share of common stock of Raymark was
automatically converted into both a share of Raytech common stock
and a right to purchase a warrant for Raytech common stock.  Each
warrant entitled the holder to purchase one share of Raytech
common stock at a price of $9.00 at any time, subject to certain
limitations, prior to October 1, 1991, extended to 1994.  The
warrants expired on October 1, 1994.  Raymark, thereby, became a
wholly-owned subsidiary of Raytech.  The purpose of the formation
of Raytech and the restructuring plan was to provide a means to
gain access to new sources of capital and borrowed funds to be
used to finance the acquisition and operation of new businesses
in a corporate structure that should not subject it or such
acquired businesses to any asbestos-related or other liabilities
of Raymark.

       Prior to the formation of Raytech, Raymark was first sued in
an asbestos-related claim in 1971 and has since been named as a
defendant in more than 88,000 lawsuits in which substantial
damages have been sought for injury or death from exposure to
airborne asbestos fibers.  More than 35,000 of such lawsuits have
been disposed of by settlements, dismissals, summary judgments
and trial verdicts at a cost in excess of $333,000 principally
covered by Raymark's insurance.  Subsequent to the sale of
Raymark as described below lawsuits continued to be filed against
Raymark at the rate of approximately 1,000 per month until an
involuntary petition in bankruptcy was filed against Raymark in
February 1989, which stayed all its litigation.  In August 1996,
the involuntary petition filed against Raymark was dismissed
following a trial and the stay was lifted.

       In accordance with the restructuring plan, Raytech purchased
the Wet Clutch and Brake Division and German subsidiary in 1987
from its then wholly-owned subsidiary, Raymark.  Each such
acquisition was financed through borrowed funds from new lenders 
and Raytech stock and notes.  Pursuant to these acquisitions,
Raymark agreed to indemnify Raytech for any future legal
liabilities and costs that may result from asbestos litigation. 
Management believes that each purchase by Raytech from Raymark
complies with Raytech's restructuring plan principles of (i)
paying fair market value, (ii) acquiring businesses that did not 
<PAGE>
Note A, continued


give rise to any asbestos-related or other claims against
Raymark, (iii) permitting Raymark to retain the proceeds for its
ongoing business and creditors, (iv) entering the transactions in
good faith and not to hinder, delay or defraud creditors, and (v)
conducting its affairs independent of Raymark. 

       In May 1988, following shareholder approval, Raytech sold
all of the Raymark stock to Asbestos Litigation Management, Inc.,
thereby divesting itself of Raymark.  Consideration received for
the Raymark stock consisted of $50 cash paid at the closing and a
7-l/2% $950 promissory note to be paid in six equal annual
installments beginning one year after the closing with interest
payable annually.  This transaction resulted in a pretax loss of
approximately $59,000 which was reflected in the 1988
consolidated financial statements.  

       Despite the restructuring plan implementation and subsequent
divestiture of Raymark, Raytech was named a co-defendant with
Raymark and other named defendants in approximately 3,300     
asbestos-related lawsuits as a successor in liability to Raymark. 
The dollar value of these lawsuits cannot be estimated.  Until
February 1989, the defense of all such lawsuits was provided to
Raytech by Raymark in accordance with the indemnification
agreement included as a condition of the purchase of the Wet
Clutch and Brake Division and German subsidiary from Raymark in
1987.  In February 1989, an involuntary petition in bankruptcy
was filed against Raymark, and subsequently, a restrictive
funding order was issued by an Illinois Circuit Court, which
required one of Raymark's insurance carriers to pay claims but
not defense costs, and another insurance carrier had been
declared insolvent.  These circumstances caused Raymark to be
unable to fund the costs of defense to Raytech in the asbestos-
related lawsuits referenced above, as provided in the indemnity
section of the acquisition agreement.  Raytech management was
informed that Raymark's cost of defense and disposition of cases
up to the automatic stay of litigation under the involuntary
bankruptcy proceedings was approximately $333 million of
Raymark's total insurance coverage of approximately $395 million. 
Raytech management has also been informed that as a result of the
dismissal of the involuntary petition, Raymark has encountered
pending and newly filed asbestos-related lawsuits but has
received $27 million from a state guarantee association to make
up the insurance policies of the insolvent carrier and $32
million in other policies to defend against such litigation.

       In an asbestos-related personal injury case decided in
October 1988 in a U.S. District Court in Oregon, Raytech was
ruled under Oregon equity law to be a successor to Raymark's
asbestos-related liability.  The successor ruling was appealed by
Raytech and in October 1992 the Ninth Circuit Court of Appeals 
<PAGE>
Note A, continued


affirmed the District Court's judgment on the grounds stated in
the District Court's opinion.  The effect of this decision
extends beyond the Oregon District due to a Third Circuit Court
of Appeals decision in a related case cited below wherein Raytech
was collaterally estopped (precluded) from relitigating the issue
of its successor liability for Raymark's asbestos-related
liabilities.

       As the result of the inability of Raymark to fund Raytech's
costs of defense recited above, and in order to obtain a ruling
binding across all jurisdictions as to whether Raytech is liable
as a successor for asbestos-related and other claims, including
claims yet to be filed relating to the operations of Raymark or
its predecessors, on March 10, 1989, Raytech filed a petition
seeking relief under Chapter 11 of Title 11, United States Code
in the United States Bankruptcy Court, District of Connecticut. 
Under Chapter 11, substantially all litigation against Raytech
has been stayed while the debtor corporation and its non-filed
operating subsidiaries continue to operate their businesses in
the ordinary course under the same management and without
disruption to employees, customers or suppliers.  In the
Bankruptcy Court a creditors' committee was appointed, comprised
primarily of asbestos claimants' attorneys.  In August 1995, an
official committee of equity security holders was appointed 
relating to a determination of equity security holders' interest
in the estate.

       In June 1989 Raytech filed a class action in the Bankruptcy
Court against all present and future asbestos claimants seeking a
declaratory judgment that it not be held liable for the asbestos-
related liabilities of Raymark.  It was the desire of Raytech to
have this case heard in the U.S. District Court, and since the
authority of the Bankruptcy Court is referred from the U.S.
District Court, upon its motion and argument the U.S. District
Court withdrew its reference of the case to the Bankruptcy Court
and thereby agreed to hear and decide the case.  In September
1991, the U.S. District Court issued a ruling dismissing one
count of the class action citing as a reason the preclusive
effect of the 1988 Oregon case, previously discussed, under the
doctrine of collateral estoppel (conclusiveness of judgment in a
prior action), in which Raytech was ruled to be a successor to
Raymark's asbestos liability under Oregon law.  The remaining
counts before the U.S. District Court involve the transfer of
Raymark's asbestos-related liabilities to Raytech on the legal
theories of alter-ego and fraudulent conveyance.  Upon a motion
for reconsideration, the U.S. District Court affirmed its prior
ruling in February 1992.  Also, in February 1992, the U.S.
District Court transferred the case in its entirety to the U.S.
District Court for the Eastern District of Pennsylvania.  Such
transfer was made by the U.S. District Court without motion from
any party in the interest of the administration of justice as 
<PAGE>
Note A, continued


stated by the U.S. District Court.  In December 1992, Raytech
filed a motion to activate the case and to obtain rulings on the
remaining counts which was denied by the U.S. District Court.  In
October 1993, the creditors' committee asked the Court to certify
the previous dismissal of the successor liability count.  In
February 1994, the U.S. District Court granted the motion to
certify and the successor liability dismissal was accordingly
appealed.  In May 1995, the Third Circuit Court of Appeals ruled
that Raytech is collaterally estopped (precluded) from
relitigating the issue of its successor liability as ruled in the
1988 Oregon case recited above, affirming the U.S. District
Court's ruling of dismissal.  A petition for a writ of certiorari
was denied by the U.S. Supreme Court in October 1995.  The ruling
leaves the Oregon case, as affirmed by the Ninth Circuit Court of
Appeals, as the prevailing decision holding Raytech to be a
successor to Raymark's asbestos-related liabilities. 

       Since the bankruptcy filing several entities have asserted
claims in Bankruptcy Court alleging environmental liabilities of
Raymark based upon similar theories of successor liability
against Raytech as alleged by asbestos claimants.  These claims
are not covered by the class action referenced below and will be
resolved in the bankruptcy case.  The environmental claims
include a claim of the Pennsylvania Department of Environmental
Resources ("DER") to perform certain activities in connection
with Raymark's Pennsylvania manufacturing facility, which
includes submission of an acceptable closure plan for a landfill
containing hazardous waste products located at the facility and
removal of accumulated baghouse dust from its operations.  In
March 1991, the Company entered a Consent Order which required
Raymark to submit a revised closure plan which provides for the
management and removal of hazardous waste, for investigating
treatment and monitoring of any contaminated groundwater and for
the protection of human health and environment at the site, all
relating to the closure of the Pennsylvania landfill and to pay a
nominal civil penalty.  The estimated cost for Raymark to comply
with the order is $1.2 million.  The DER has reserved its right
to reinstitute an action against the Company and the other
parties to the DER order in the event Raymark fails to comply
with its obligations under the Consent Order.  Another
environmental claim was filed against the Company by the U.S. 
Environmental Protection Agency for civil penalties charged
Raymark in the amount of $12 million arising out of alleged Resource
Conservation and Recovery Act violations at Raymark's Stratford,
Connecticut, manufacturing facility.  

       In January 1997, the U.S. Departmental Protection Agency
("EPA") and the State of Connecticut filed suit against Raymark
claiming $212 million in damages for cleanup of the Stratford,
Connecticut, site.  The EPA has also filed a bankruptcy claim
against Raytech as a successor to Raymark for cleanup of the 
<PAGE>
Note A, continued


Stratford site and other Raymark sites.  Determination of Raytech's
liability for such claims, if any, is subject to Bankruptcy Court
deliberations and proceedings.  It is possible that additional
claims for reimbursement of environmental cleanup costs related to
Raymark facilities may be asserted against Raytech, as successor in
liability to Raymark.  

       In April 1996, the Indiana Department of Environmental
Management ("IDEM") advised Raybestos Products Company ("RPC"), a
wholly-owned subsidiary of the Company, that it may have contributed
to the release of lead and PCB's (polychlorinated biphenyls) found
in small waterways near its Indiana facility.  In June, IDEM named
RPC as a potentially responsible party ("PRP").  RPC notified its
insurers of the IDEM action and one insurer responded by filing a
complaint in January 1997 in the U.S. District Court, Southern
District of Indiana, captioned Reliance Insurance Company vs. RPC
seeking a declaratory judgment that any liability of RPC is excluded
from its policy with RPC.  RPC continues to assess the extent of the
contamination and its involvement and is currently negotiating with
IDEM for an agreed order of cleanup.  The Company intends to offset
its investigation and cleanup costs against its notes payable to
Raymark when such costs become known pursuant to the indemnification
clause in the wet clutch and brake acquisition agreement since it
appears that any contamination would have occurred during Raymark's
ownership of the Indiana facility.  Blood tests administered to
residents in the vicinity of the small waterways revealed no
exposure.  The Company incurred $1,751 in legal and testing costs
associated with this matter during fiscal years 1996 and 1997 and
has requested reimbursement from Raymark under the indemnification
agreement.  The amount is included in other current assets at
December 28, 1997.

       As a result of an inspection, the Company has been notified
that the operations purchased from AFM in January 1996 in Sterling
Heights, Michigan, are in violation of a consent order issued by the
Michigan Department of Environmental Quality ("DEQ").  The consent
order included a compliance program providing for measures to be
taken to bring certain operations into compliance and recordkeeping
on operations in compliance.  Potential fines for the violations
were as high as $4.6 million; however, negotiations with the DEQ
have been in progress concerning the compliance program and fines
for past violations, resulting in a tentative agreement providing
for a consent judgment with a fine of $324 and subject to completion
of certain operational compliance programs.  Finalization of the
consent judgment is pending.  The Company has accrued the cost of
resolution of this matter.

       Under bankruptcy rules, the debtor-in-possession has an
exclusive period in which to file a reorganization plan.  Such
exclusive period had been extended by the Bankruptcy Court
pending the conclusion of the successor liability litigation.  
<PAGE>
Note A, continued


However, in December 1992, the creditors' committee filed a
motion to terminate the exclusive period to file a plan of 
reorganization.  At a hearing in May 1993, the motion was denied 
by the Bankruptcy Court but was appealed by the creditors' 
committee.  In November 1993, the U.S. District Court reversed
the Bankruptcy Court and terminated the exclusive period to file
a plan of reorganization effective in January 1994.  Accordingly,
any party in interest, including the debtor, the creditors'
committee, or a creditor could thereafter file a plan of
reorganization.

       In May 1994, Raytech filed a Plan of Reorganization
("Debtor's Plan") in the U.S. Bankruptcy Court for the purpose of
seeking confirmation allowing Raytech to emerge from the
bankruptcy filed March 10, 1989.  Important conditions precedent
to confirmation of the Debtor's Plan include a final judgment in
the litigation to determine to what extent Raytech is a successor
to the liabilities of Raymark and a resolution of the
environmental claims or other claims filed or to be filed by
governmental agencies.  The Debtor's Plan provides that in the
event Raytech is found to be a successor, it is to establish a
successor trust funded by an amount determined to be the
difference between what Raytech should have paid for the
businesses purchased from Raymark less the amount actually paid
and less amounts to be paid for environmental and other claims. 
This remedy would satisfy its obligations as a successor in full
and render all claimants unimpaired, thereby eliminating the need
for balloting and all equity shareholders would retain their
interests in full.  Raytech is reviewing the Debtor's Plan to
determine applicability and possible amendment in view of
developments in the bankruptcy proceedings.  In September 1994,
the creditors' committee filed its own Plan of Reorganization in
competition to the Debtor's Plan ("Creditors' Plan").  The
Creditors' Plan calls for the elimination of Raytech Corporation
and its stockholders to be replaced with a new Raytech.  All of
the stock of new Raytech would then be distributed to unsecured
claimants, environmental claimants and both past and future
asbestos disease claimants on a formulated basis set forth in the
Plan.  Current stockholders of Raytech would receive nothing
under the Plan.  Raytech believes the Creditors' Plan is
unconfirmable and will vigorously contest attempts to have it
confirmed.  Upon motion of the parties and support of the
Bankruptcy Court, the major interested parties agreed in August
1995 to participate in non-binding mediation to attempt to
effectuate a consensual plan of reorganization.  The mediation
process commenced in October 1995 and was concluded in March 1996
without agreement for a consensual plan of reorganization.  The
competing plans of Raytech and its creditors have returned to
Bankruptcy Court procedures.  The outcome of these matters is
expected to take considerable time and is uncertain.  If an 
<PAGE>
Note A, continued


adverse plan is confirmed, it would have a material adverse
impact on Raytech and its stockholders.

       The process for confirmation of a reorganization plan was
begun in 1996 and continues with adversary positions being
presented to the Bankruptcy Court by the parties concerning the
claims bar date, the notice to claimants and estimation of
claims.
       
       In November 1996, Raytech filed an adversary proceeding
complaint against the creditors' committee, seeking a declaratory
judgment of the Bankruptcy Court that Raytech's 
liability to present and future creditors as a successor to
Raymark is limited pursuant to bankruptcy law.  The creditors'
committee filed a motion for a summary judgment, which was
granted by the Bankruptcy Court at a hearing in August 1997. 
Raytech considers the grant of the summary judgment dismissing
the proceeding as unfounded in fact and law and will exhaust its
legal remedies through appeal of the order.

       Several other matters have been filed in the Bankruptcy
Court in 1996 and 1997 but not acted upon as yet and remain
pending, including:  (1)  A creditors' committee motion for the
appointment of a trustee to manage the Company; (2)  Raytech's
motion to dismiss its bankruptcy petition based upon Raymark
providing indemnity for liability claims that may be filed
against it; (3) a creditors' committee adversary proceeding
complaint seeking to assert control over Raymark and its assets
on the grounds of fraudulent transfers in the reorganization of
Raytech in 1986 and the divestiture of Raymark in 1988; (4) a
creditors' committee adversary proceeding complaint to litigate
alternative theories of liability of Raytech other than successor
liability; and (5) a creditors' committee adversary proceeding
complaint to sanction Raytech for violation of a stipulation to
give notice for non-ordinary course transactions by Raytech
subsidiaries.

       In February 1997, Raytech resumed making monthly payments of
$650,000 to Raymark pursuant to the 1987 Asset Purchase Agreement
as amended, to ensure indemnification for Raymark liabilities. 
In November 1997, the creditors' committee filed an adversary
proceeding complaint and motion for a temporary restraining order
to halt the payments based upon several theories, including a
waste of assets and breach of a prior stipulation and fiduciary
duty.  In January 1998, the Bankruptcy Court enjoined the
payments pending a trial.  Raymark notified its retirees by
letter that their benefits would cease after February 1998 due to
the effect of the cessation of payments from Raytech under the
injunction.  Raymark and Raymark retirees intervened in the
action resulting in a Bankruptcy Court order to Raytech to 
<PAGE>
Note A, continued


supplement Raymark's obligations to its retirees pending a trial
in April 1998.

       Following Raytech's cessation of the $650,000 note payments
in December 1997, Raymark commenced 33 separate lawsuits against
Raytech subsidiaries in various jurisdictions from New York to
California ("Raymark Litigation") demanding payment or the return
of assets for breach of contract.  Raytech filed an adversary
proceeding complaint to halt the Raymark litigation and was
granted a temporary restraining order in December 1997 by the
Bankruptcy Court that remains in effect.  The creditors'
committee intervened in the action in support of the restraining
order.

       In January 1997, Raytech was named through a subsidiary in a
third party complaint captioned Martin Dembinski, et al. vs.
Farrell Lines, Inc., et al. vs. American Stevedoring, Ltd., et
al. filed in the U.S. District Court for the Southern District of
New York for damages for asbestos-related disease.  The case has
been removed to the U.S. District Court, Eastern District of
Pennsylvania.  When required, the Company will seek an injunction
in the Bankruptcy Court to halt the litigation.

       Costs incurred by the Company for asbestos related
liabilities are subject to indemnification by Raymark under the
1987 acquisition agreements.  By agreement, in the past, Raymark
has reimbursed the Company in part for such indemnified costs by
payment of the amounts due in Raytech common stock of equivalent
value.  Under such agreement, Raytech received 926,821 shares in
1989, 177,570 shares in 1990, 163,303 in 1991 and 80,000 shares
in 1993.  The Company's acceptance of its own stock was based
upon an intent to control dilution of its outstanding stock.  In
1992, the indemnified costs were reimbursed by offsetting certain
payments due Raymark from the Company under the 1987 acquisition
agreements.  Costs incurred in 1994, 1995, 1996 and 1997 were
applied as a reduction of the note obligations pursuant to the
agreements.

       The adverse ruling in the Third Circuit Court of Appeals, of
which a petition for writ of certiorari was denied by the U.S. 
Supreme Court, precluding Raytech from relitigating the issue of
its successor liability leaves the U.S. District Court's (Oregon)
1988 ruling as the prevailing decision holding Raytech to be a
successor to Raymark's asbestos-related liabilities.  This ruling
could have a material adverse impact on Raytech as it does not
have the resources needed to fund Raymark's potentially
substantial uninsured asbestos-related and environmental
liabilities.  Determination of Raytech's actual liabilities are
subject to the Bankruptcy Court's deliberations and rulings and
the competing plans of reorganization filed in the Bankruptcy
Court referenced above.
<PAGE>
Note A, continued


       The ultimate liability of the Company with respect to
asbestos-related, environmental, or other claims cannot presently
be determined.  Accordingly, no provision for such liability has
been recorded in the financial statements.  The accompanying
financial statements have been prepared assuming that the Company
will continue as a going concern.  An unfavorable result on
certain or all of the matters described above would have a
material adverse effect on the Company's results of operations, 
financial position and cash flows.  These uncertainties raise
substantial doubt about the Company's ability to continue as a
going concern.  The financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or adjustments relating to establishment,
settlement and classification of liabilities that may be required
in connection with reorganizing under the Bankruptcy Code.
       
<PAGE>
Note B - Summary of Significant Accounting Policies


1.  Background and Basis of Presentation      

    Raytech, through its principal subsidiaries, is a
    multinational manufacturer and marketer of specialty
    engineered products for heat resistant, inertia control,
    energy absorption and transmission applications.  Its
    products are used in the vehicular, aerospace, nucleonics,
    petrochemical, energy, metal working, construction,
    agriculture, utility and electronic industries, among
    others.

    Raytech operates through six subsidiaries:  Raybestos
    Products Company ("RPC"), located in Crawfordsville, Indiana
    and Sterling Heights, Michigan; Raybestos Industrie-Produkte
    GmbH, located in Morbach, Germany; Raybestos U.K. Ltd.,
    located in Liverpool, England; Allomatic Products Company,
    located in Sullivan, Indiana; and Raybestos Aftermarket
    Products Company located in Crawfordsville, Indiana.  In
    1997, the Company formed Automotive Composites Company, a
    subsidiary of the Company which will include the Sterling
    Heights, Michigan, operations effective in 1998.  

    Demand for the Company's product is derived primarily from
    the automotive original equipment, agriculture, construction
    and aftermarket segments which are highly competitive. 
    These markets can be highly influenced by prevailing
    economic conditions such as interest rates and employment
    issues.
     
    The consolidated financial statements include the accounts
    of Raytech Corporation and its majority-owned subsidiaries. 
    Intercompany balances and transactions have been eliminated
    in consolidation.

         The preparation of financial statements in conformity with
         generally accepted accounting principles requires management
         to make estimates and assumptions that affect the amounts
         reported and disclosures made in the financial statements
         and accompanying notes.  Actual results could differ from
         these estimates.

    Certain amounts for prior years have been reclassified to
    conform to the current year's presentation.

2.  Fiscal Year

    The Company reports on a 52-53 week fiscal year; the last
    three fiscal years ended December 28, 1997, December 29,
    1996, and December 31, 1995.

<PAGE>
Note B, continued


3.  Cash and Cash Equivalents

    Cash equivalents are recorded at cost, which approximates
    market, and consist primarily of U.S. Treasury notes with
    maturities of three months or less.

4.  Inventories

    Inventories are stated at the lower of cost or market with
    cost determined primarily by using the FIFO (first in, first
    out) method.

5.  Property, Plant and Equipment

    Property, plant and equipment is stated at cost less
    accumulated depreciation.  Depreciation is based on the
    estimated service life of the related asset and is provided
    using the straight line method for assets acquired after
    1980 and accelerated methods for previously acquired assets. 
    Maintenance and repairs that do not increase the useful life
    of an asset are expensed as incurred.  Interest is
    capitalized on major capital expenditures during the period
    of construction and to the date such asset is placed in
    service.  Upon disposal of property, plant and equipment,
    the appropriate accounts are reduced by the related costs
    and accumulated depreciation.  The resulting gains and
    losses are reflected in the Consolidated Statements of
    Operations.

6.  Income Taxes

    The Company accounts for income taxes using the liability
    method which recognizes the amount of taxes payable or
    refundable for the current year and recognizes deferred tax
    liabilities and assets for the future tax consequences of
    events that have been recognized in the financial statements
    or tax returns.

7.  Earnings Per Share

    Basic earnings per common share is computed based on the
    weighted average number of common shares outstanding during
    the year.  Diluted earnings per share is computed based on
    the weighted average number of common and dilutive potential
    common shares during the year.

8.  Translation of Foreign Currencies

    The local currencies of the Company's subsidiaries in
    Germany and the United Kingdom have been designated as the
    functional currencies.  Accordingly, financial statements of 
    foreign operations are translated using the exchange rate at 
<PAGE>
Note B, continued


    the balance sheet date for assets and liabilities, and an
    average exchange rate in effect during the year for revenue
    and expense items.  The effects of translating the Company's 
    foreign subsidiaries' financial statements are recorded as a
    separate component of shareholders' equity.

 9. Revenue Recognition

    Sales are recorded by the Company when products are shipped
    to customers.

10. Adoption of Recently Issued Accounting Pronouncements

    Effective January 1, 1997, the Company adopted Statement of
    Position 96-1, Environmental Remediation Liabilities.  The
    adoption of the Statement had no impact on the Company's
    consolidated financial condition, results of operations or
    cash flows.

    Effective February 1, 1997, the Company adopted SFAS No.
    128, "Earnings Per Share."  SFAS 128 revises the computation,
    presentation, and disclosure requirements related to
    earnings per share.  It replaces the presentation of primary
    EPS with a presentation of basic EPS.  It also requires dual
    presentation of basic and diluted EPS on the face of the
    income statement for all entities with complex capital
    structures.  This statement requires restatement of all
    prior period EPS data presented.


11. Recently Issued Accounting Pronouncements

    In 1997, SFAS No. 130, "Reporting Comprehensive Income," was
    issued, effective for fiscal 1999.  SFAS 130 establishes
    standards for reporting and display of comprehensive income 
    and its components (revenues, expenses, gains and losses) in
    a full set of general purpose financial statements.  The
    Company will adopt SFAS 130 in fiscal 1998. 

    In 1997, SFAS No. 131, "Disclosures about segments of an
    Enterprise and Related Information," was issued, effective
    for fiscal 1999.  SFAS 131 changes the way public companies
    report information about operating segments.  The Company
    will adopt SFAS 131 in its annual financial statements for
    fiscal 1998 and is still assessing the impact of this
    statement on its disclosures.
    
    <PAGE>
Note C - Statements of Cash Flows


    Other items not providing or requiring cash consist of:

                                     1997        1996       1995
    

Net loss on sale/writedown
  of fixed assets                  $   61     $   268    $ 1,994 
Other non-cash items                  572        (238)       (70)
                                         
                                   $  633     $    30    $ 1,924 

    Income taxes paid were $5,731, $8,677, and $10,202 during
1997, 1996 and 1995, respectively.

    Interest paid was $2,584, $2,731, and $2,449 during 1997,
1996 and 1995, respectively.
         
    Excluded from the 1997, 1996 and 1995 Consolidated
Statements of Cash Flows is $451, $469, and $791, respectively,
of plant and equipment acquisitions in accounts payable or under
capital leases. 

    In connection with the purchase of certain assets of the
Advanced Friction Materials Company, the Company committed to
purchase certain real property in Sterling Heights, Michigan, and
the common stock of the AFM Management Company on January 31,
1997 for $7,600 less amounts paid during 1996. 

<PAGE>
Note D - Inventories


Net Inventories                          

Inventories net of inventory reserves are as follows:

                                                                
Fiscal Year                           1997         1996

Raw materials                      $ 10,751    $  9,921
Work-in-process                       7,760       8,033
Finished goods                        9,691      10,755
                                                       
                                   $ 28,202    $ 28,709
     



Inventory Reserves

                                                                  
Fiscal Year                            1997        1996     1995 

Beginning balance                   $  3,671    $ 2,962   $ 2,660
Provisions for obsolete and
  slow moving inventory                1,213      1,305       466
Charge-offs                           (1,059)      (596)     (164)

Ending balance                      $  3,825    $ 3,671   $ 2,962 

<PAGE>
Note E - Property, Plant and Equipment


    Property, plant and equipment, at cost, is summarized as
follows:
                                                                    
                                                      Estimated
                                                          Useful
                                                          Lives
Fiscal Year                       1997          1996      (Years)  

Land                          $   1,226     $  1,218         -

Buildings and improvements       24,622       23,121       5-40

Machinery and equipment         105,664       99,790       3-20

Capital leases                      904          877    See Below

Construction in progress         10,715        2,805         -
                                                                    
                                143,131      127,811

Less accumulated depreciation    82,141       76,686
                                                                  
Net property, plant and
  equipment                   $  60,990     $ 51,125
                                                                 


    Capital leases consist primarily of automobiles and telephone
and computer equipment and are amortized over the economic life of
the assets or the term of the leases, whichever is shorter.

    Maintenance and repairs charged to expense amounted to       
approximately $11,655, $10,046, and $11,093 for 1997, 1996 and
1995, respectively.

    Depreciation expense relating to property, plant and equipment
were $8,746, $8,039, and $7,566 for 1997, 1996 and 1995,
respectively.










<PAGE>
Note F - Debt


Debt consists of the following:

Fiscal Year                              1997           1996

Notes due to Raymark (a)               $ 31,958     $ 39,444
Notes payable to banks (b)               14,034       10,701
Capitalized leases and other
  obligations                               313          389
Total borrowings                         46,305       50,534
Less short-term debt and current
  portion of long-term debt              23,139       22,860

Long-term debt                         $ 23,166     $ 27,674

       The aggregate maturities of debt are as follows:

                     1998              $ 23,139
                     1999                22,166
                     2000                   309
                     2001                   256
                     2002                   215
                     Thereafter             220

                  Total Debt           $ 46,305

       (a)  The notes due to Raymark are the result of the purchase
of the Wet Clutch and Brake Division and the German subsidiary from
Raymark in 1987.

            In December 1992, the Company and Raymark amended the
Asset Purchase Agreement of the Wet Clutch and Brake Division. 
Under the terms of the amendment, the original note in the
principal amount of $23,074 plus accrued interest of $17,543 was
canceled and replaced by an uncollateralized promissory note in the
amount of $40,617, bearing interest at the rate of 6% per annum and
payable in equal monthly installments of $650 commencing April
1993.  The principal portion of the monthly installments was to be
paid into an escrow account pending clearance of all Raymark
encumbrances and liabilities as provided by the agreement (refer to
Note A).  In May 1995, the escrow agreement was amended, and the
Company reclaimed the balance in the escrow and suspended payment
of the monthly installments as a result of the Third Circuit Court
of Appeals decision that jeopardizes the assets purchased from
Raymark in 1987 being free of all Raymark related encumbrances and
liabilities.  In February 1997, monthly installments of $650 were
resumed to ensure indemnification for Raymark liabilities.

<PAGE>
Note F, continued


In connection with a complaint filed by the creditors' committee
and a subsequent Bankruptcy Court injunction, the Company suspended
payments on the Wet Clutch and Brake note in December 1997.  The
Bankruptcy Court's order was subsequently amended to require a note
payment of up to $150 for Raymark's retiree benefits in March 1998
and to set a trial date on this matter for April 1998.  At December
28, 1997 and December 29, 1996, the principal balance of the Wet
Clutch and Brake note was $26,997 and $32,870, respectively, and
accrued interest, included in accrued liabilities, was $264 and $0,
respectively.          
          As agreed by the Company and Raymark, remaining
obligations under the German subsidiary note, payable in German
deutsche marks (DM) are suspended pending the assets purchased
being free of all Raymark related encumbrances and liabilities.  
At December 28, 1997 and December 29, 1996, the balances due on the
German note amounted to DM3,795 ($1,961) and DM3,795 ($2,411),
respectively.  As of December 28, 1997 and December 29, 1996, the
accrued interest amounted to DM1,257 ($699) and DM899 ($584),
respectively, and is included in accrued liabilities. 

          In September 1993 and January 1994, "RCI" entered into
loan agreements with Raymark for $2,500 and $3,000, respectively. 
As of December 28, 1997 and December 29, 1996, RCI has $3,000
outstanding under the loan agreements.  The loans bear interest at
6% per annum and are included in the current portion of long-term
debt.  As of December 28, 1997 and December 29, 1996, the accrued
interest amounted to $760 and $579, respectively, and is included
in accrued liabilities.

          The Company has continued to classify the notes payable
to Raymark for the acquisition of the Wet Clutch and Brake Division
in accordance with the terms of the February 1997 adjusted note
agreement pending the outcome of the aforementioned trial in April
1998.  Amounts due under the German subsidiary notes and the
current portion of the RCI loan agreements with Raymark are
classified as short-term liabilities and are included as 1997
maturities of debt, although actual repayment is subject to assets
purchased from Raymark being free of related encumbrances and
liabilities as well as the aforementioned bankruptcy proceedings. 
Costs incurred by the Company subject to the indemnification clause
of the 1987 agreements will be applied as a reduction of the note
obligations (refer to Note H). 

        (b)  The Company's wholly-owned German subsidiaries
(Raybestos Industrie-Produkte GmbH and Raytech Composites Europe
GmbH) have available lines of credit with several German banks
amounting to DM7,800 ($4,339).  Interest is charged at rates
between 4.1% and 7.5%.  The lines are repayable on demand.  The
amount outstanding under these available lines of credit at
December 28, 1997 and December 29, 1996 was DM4,899 ($2,724) and 
<PAGE>
Note F, continued


DM3,054 ($1,983), respectively.  At December 28, 1997 and December
29, 1996, the remaining available lines of credit amounted to
DM2,901 ($1,615) and DM2,856 ($1,855), respectively. 

         In March 1995, RPC entered into a five-year loan agreement
with The CIT Group/Credit Finance, Inc. ("CIT"), which provided for
RPC to borrow up to $15,000, consisting of a revolving line of
credit of $10,000 and a term loan of $5,000 at an interest rate of
1.75% above the prime rate.  The amount of borrowing was predicated
on satisfying an asset based formula related to levels of certain
accounts receivable, inventories and machinery and equipment.  The
loans were collateralized by all assets, excluding land and
buildings, at RPC.  The purpose of the loan was for working
capital, capital expenditures, acquisitions and possible settlement
of successor liability issues.  Under the terms of the loan
agreement, RPC was required to maintain certain cash flow levels,
and RPC's dividend payments to RCI were subject to certain
restrictions.  The amount outstanding under the line of credit at
December 29, 1996 was $8,718.  The additional borrowing
availability at December 29, 1996 was $6,282, based upon the asset
borrowing formula.  The Company has classified amounts outstanding
under the line of credit as current since its intention is to repay
such amounts as cash becomes available.

     In November 1997, RPC refinanced its revolving line of credit
in an effort to reduce its interest rate and to minimize facility
fees.  The new loan agreement with NationsCredit, Commercial
Funding provides for RPC to borrow up to $17 million in the
aggregate, consisting of a revolving line of credit of $10 million
and a term loan of $7 million for capital equipment purchases.  The
loans bear an interest rate of .50% above the prime rate.  The
loans are collateralized by accounts receivable, inventory and
machinery and equipment.  The revolving loan allows the Company to
borrow based on a borrowing base formula as defined in the Loan and
Security Agreement (the "Agreement").  The Agreement includes
certain covenant restrictions, including restrictions on dividends
payable to Raytech Composites, Inc. ("RCI"), a wholly-owned
subsidiary of the Company.  At December 28, 1997, the net 
restricted assets of RPC amounted to $25, consisting of cash, 
inventory, machinery and equipment and all other tangible and 
intangible assets, excluding land and buildings. The purpose of 
the loan is to refinance existing indebtedness and for general 
working capital needs.  The outstanding balance under the 
revolving line of credit is $4,506 and under the term loan 
is $6,804 at December 28, 1997, respectively.  The additional 
borrowing availability on the revolving line of credit at 
December 28, 1997 is $0, based upon the asset borrowing formula.

<PAGE>
Note F, continued


     It is not practical for the Company to estimate the fair value
of the debt it has with Raymark due to the uncertainties associated
with the current bankruptcy proceedings.  The remaining bank debt
of the Company is at variable interest rates, and the carrying
amount approximates fair value.

     The weighted average rates on all bank notes payable at
December 28, 1997 and December 29, 1996 were 8.77% and 9.49%,
respectively.
<PAGE>
Note G - Research and Development


     Cost of research and new product development amounted to     
$5,903 in 1997, $5,958 in 1996, and $5,864 in 1995 and is included
in selling, general and administrative expenses in the Consolidated
Statements of Operations.



<PAGE>
Note H - Related Parties


       During 1997 and other relevant periods of time, Raymark was
owned by a corporation owned by Bradley C. Smith, son of Craig R.
Smith, Director and Chief Executive Officer of the Company.  On
January 12, 1998, Craig R. Smith was terminated and resigned from
the Board of Directors.

       As discussed in Note A, in 1987, Raytech acquired certain
assets and assumed certain liabilities of the Wet Clutch and Brake
Division and acquired the stock of a German subsidiary from its
then wholly-owned subsidiary, Raymark.  The purchases from Raymark
and subsequent transactions with Raymark took place as follows:

       Wet Clutch and Brake Acquisition

       The purchase price of $76,900 for the Wet Clutch and Brake
Division was initially comprised of $14,900 cash, $16,000 of
Raytech stock issuable in installments and $46,000 of notes (refer
to Note F).  The Raytech stock issuable to Raymark was due in six
annual installments beginning October 30, 1987.  The first
installment was $10,000 and the remaining installments were $1,200
each.  The number of shares to be issued was determined by taking
the average closing price of Raytech stock for the five days prior
to the payment date.  Accordingly, Raytech issued 1,365,188 and
311,688 shares of stock to Raymark as of November 1987 and 1988,
respectively.  Pursuant to the 1987 Asset Purchase Agreement of the
Wet Clutch and Brake Division, Raymark could require Raytech to
repurchase or redeem any of the shares of its stock held by Raymark
at the then current market price.  In June 1988, the Company
reached an agreement with Raymark for cash prepayments on a portion
of promissory notes due Raymark for the purchase of the Wet Clutch
and Brake Division in return for the elimination of the redemption
rights on 1,365,188 shares of Raytech stock then held by Raymark. 
This cash prepayment of $4,500 was paid to Raymark over an
eighteen-month period, $2,100 during 1988, and the remaining $2,400
in 1989.  In November 1988, pursuant to the said Asset Purchase
Agreement, Raytech issued 311,688 shares of Raytech stock to
Raymark.  Raymark exercised its option to require the Company to
repurchase these shares.  Accordingly, Raytech paid $1,200 to
Raymark in return for 311,688 shares of Company stock.  The 1989
and 1990 installments of $1,200 were paid in cash in lieu of stock
at the request of Raymark.  In August 1991, the Company and Raymark
amended the Asset Purchase Agreement to require all future annual
stock payments in cash in lieu of the issuance of shares of Common
Stock in annual installments through November 1992.  In December
1992, the Asset Purchase Agreement was again amended providing for
payment of the 1991 and 1992 payments to be completed in March
1993.  Such amendment also provided for a restructure of the
remaining note (see Note F).
<PAGE>
Note H, continued


       The German Acquisition

       The purchase price of approximately $8,200 of the German
subsidiary (Raybestos Industrie-Produkte GmbH) was initially
comprised of a DM7.0 million note (approximately $4,300 at the
acquisition date) and of DM6.5 million (approximately $3,900 at the
acquisition date) of Raytech stock issuable in installments.  The
Raytech stock issuable to Raymark was due in eight installments
commencing March 1987.  The first installment was DM1.25 million
($694 at the issuance date) and the remaining installments were
DM750 which are translated into dollars using the exchange rate in
effect when each payment becomes due.  The number of shares
issuable was determined by the weighted average closing price of
Raytech stock for the five days prior to the payment date. 
Accordingly, Raytech issued 72,038 and 63,565 shares of stock to
Raymark as of March 1987 and 1988, respectively.  The 1989
installment of DM750 was paid in April 1989 in cash in lieu of
stock at Raymark's request in the amount of $396.  Raytech issued
163,303 shares of stock to Raymark in March 1990 in payment of the
1990 installment.  In August 1991, the Company and Raymark amended
the Stock Purchase Agreement to require the three remaining annual
stock payments in cash in lieu of the issuance of shares of Common
Stock in annual installments through April 1994.  In December 1992,
the Stock Purchase Agreement was again amended providing for
payment of the 1992 payments to be completed in March 1993. 
Payments due in 1993 and 1994 are suspended pending the purchased
assets being free of all Raymark-related liabilities as required
(see Note F).

       The Raymark Divestiture - Raytech management has been informed
of the following with respect to ownership of Raymark:


       In May 1988, the common stock of Raymark Corporation was   
       divested and sold to Asbestos Litigation Management, Inc.
       ("ALM"), a wholly-owned subsidiary of Litigation Control
       Corporation ("LCC").  At the time of the said sale, LCC was
       60% beneficially owned by Craig R. Smith, President and CEO of
       Raytech (15% through his son, Bradley C. Smith).
  
       In September 1988, LCC entered a tripartite agreement with
       Celotex Corporation and Raymark for the purpose of sharing
       asbestos litigation costs.  Consideration paid by Raymark to
       LCC was to assign $1,000 of its $33,530 note receivable due in
       1994 from Raytech pursuant to the aforementioned Wet Clutch
       and Brake Division acquisition.

       In October 1988, LCC repurchased 75% of its outstanding 
       stock consisting of all of the shares beneficially owned by 
       Craig R. Smith and Bradley C. Smith and another unrelated 
       shareholder for $750.  Consideration paid to Craig R. Smith 
       <PAGE>
Note H, continued


       and Bradley C. Smith was $450 and $150, respectively.  Messrs.
       Smith and Smith were thereby completely divested of any stock
       ownership in LCC.

       In January 1989, LCC sold all of the outstanding stock of its
       subsidiary, ALM, to Bradley C. Smith, the son of Craig R.
       Smith, and another unrelated party for $17.  Subsequently,
       Bradley C. Smith purchased the balance of the stock of ALM
       and is now the sole owner.  In March 1996, 49% of the common
       stock of Raymark Corporation was purchased by Craig R. Smith
       from his son Bradley C. Smith for $7 in an agreement
       containing an option to purchase the balance of the common
       stock at a later date.

       Other Matters

       During 1989, Raytech incurred costs, including bankruptcy
related attorneys' fees and lender refinance charges, in the
amount of $1,558 subject to the indemnification clause of the
1987 agreement covering the purchase of assets of the Wet Clutch
and Brake Division.  Pursuant to Raymark's request, Raytech
accepted 926,821 shares of Raytech stock in payment therefor. 
During 1990, Raytech incurred similar costs in the amount of
$1,033 and was indemnified by a return of $364 or 177,570 shares
of Raytech stock held by Raymark, an offset against the April
1990 note payment due under the German acquisition of $521, and
then a subsequent return in February 1991 of an additional $148
or 74,826 shares of Raytech stock.  Additionally, in January
1991, the Company incurred $750 of additional refinance charges,
which were also subject to the indemnification clause.  Raytech
accepted Raymark's request to a reimbursement in the form of all
remaining shares of Raytech stock held by Raymark, which amounted
to $175 or 88,477 shares and then a reduction of $575 of future
stock obligations pursuant to the Wet Clutch and Brake and German
subsidiary acquisitions.  Accordingly, in April 1991, $446 of
such credit was used to defray the April 1991 stock obligation
pursuant to the German subsidiary acquisition leaving a balance
of $132 to be applied toward the stock obligation due in November
1991 pursuant to the Wet Clutch and Brake acquisition.  In July
1991, the Company and Raymark agreed that any future
reimbursement of indemnified costs by Raymark will be taken in
the form of a reduction of future stock obligations under the
Stock Purchase Agreement for the German subsidiary and any excess
to be taken as a reduction of the note due Raymark.  In December
1992, the Company and Raymark amended the Asset Purchase
Agreement of the Wet Clutch and Brake Division.  Under the terms
of the amendment, the note in the principal amount of $23,074
plus accrued interest in the amount of $17,543 was canceled and
replaced by an uncollateralized promissory note in the amount of
$40,617, bearing interest at the rate of 6% per annum and payable
in equal monthly installments of $650 commencing April 1993.  The
<PAGE>
Note H, continued


principal portion of the monthly installments was to be paid into
an escrow pending clearance of all Raymark encumbrances and
liabilities as provided by the Agreements.  Payments due in 1991
and 1992 under the acquisition agreements as amended and deferred
by agreement, amounting to $1,875, including accrued interest,
were paid in monthly installments of $650 until paid in full in
March 1993 bearing interest at 6%.  As agreed by the Company and
Raymark, 1993 and 1994 obligations under the German subsidiary
note were suspended pending the assets purchased from Raymark in
1987 being free of all Raymark related encumbrances and 
liabilities.  Also, costs incurred by the Company subject to the
indemnification clause of the 1987 agreements were to be applied
as a reduction of the note obligations.  As agreed in April 1993,
the Company received 80,000 shares of its stock from Raymark
valued at $262 as a credit for reimbursement of costs incurred by
the Company under the indemnification clause.  As of December
1994, the Company had incurred $253 of additional costs subject
to the indemnification clause which were applied as a reduction
of the note obligations pursuant to the agreement.  As of May
1995, the Company had incurred $460 of additional costs subject
to the indemnification clause which was applied as a reduction of
the note obligations pursuant to the agreement.  Also, in May
1995, the Company reclaimed the balance in the escrow and
suspended payment of the monthly installments as a result of the
Third Circuit Court of Appeals decision that jeopardizes the
assets purchased from Raymark in 1987 being free of all Raymark
related encumbrances and liabilities.  Monthly installments were
resumed in February 1997 and subsequently suspended in December
1998 (see Note F).  During 1996, the Company incurred costs of
$917 and $1,705 subject to the indemnification clause which were
applied as a reduction of the note obligation in December 1996
and February 1997, respectively.  As of December 1997, the
Company had incurred $1,773 of additional costs which were
applied as a reduction of the note pursuant to the
indemnification clause.

       In 1990 and 1991, Raytech Powertrain, Inc., a subsidiary of
the Company, and owner of all of the capital stock of Allomatic
Products Company ("APC"), sold approximately 45% of the capital
stock of APC to a group of investors, including Craig Smith, for
the purpose of partially financing APC's move from New York to
Indiana and for the further growth of its business. 
Subsequently, all APC stock held by Craig Smith was transferred
to relatives and related companies, including Universal Friction
Composites, Inc., and accordingly, in the opinion of General
Counsel of the Company, remains 40% beneficially owned by him. 
In March 1997, APC declared a cash dividend of $2.81 per share
payable in equal quarterly installments to shareholders of record
in March 1997.  At the record date, Craig Smith beneficially
owned 41,904 shares of the outstanding shares of APC stock.  The
first, second and third quarter installments of the declared 
<PAGE>
Note H, continued


dividend were paid in 1997.  The Company's Board of Directors
reviewed Craig Smith's beneficial ownership of the APC stock and
resulting payment of dividends at length and has recommended 
continued disclosure of the related party transactions and
appointed the General Counsel of the Company to monitor and
report all such related party transactions in the future.

       In September 1993 and January 1994, Raytech Composites,
Inc., a wholly-owned subsidiary of the Company, borrowed $2,500
and $500 under the loan agreements with Raymark.  The loans bear
interest at 6% per annum.

       During 1997 and 1996, the Company purchased yarn from
Raymark amounting to $3,926 and $3,011, and at December 28, 1997
and December 29, 1996, the related payable amounted to $373 and   
$103, respectively.

       During 1988, the Company repurchased 200,000 shares of its
common stock from Echlin Inc. in exchange for approximately
$1,200 of credit on future product sales from the Company to
Echlin, which is pre-petition debt under the Company's bankruptcy
filing.  As of December 28, 1997, Echlin's voting interest in the
Company is 16.8%.  

       In September 1996, Craig R. Smith entered into a consulting
agreement with Raymark for services regarding asbestos
litigation.  Proceeds were paid to Raytech in the form of an
offset against the note due Raymark in the amounts of $43 and $13
during 1997 and 1996, respectively.

       Earnings attributable to minority shareholders of Allomatic
Products Company have been presented net of income tax as
minority interest in the Condensed Consolidated Statement of
Operations.
<PAGE>
Note I - Income Taxes


     Income before provision for income taxes and minority
interest consists of:

                                1997         1996      1995  

         Domestic             $22,460       $19,982   $23,811
         Foreign                1,309           673       375

                              $23,769       $20,655   $24,186

       The Company's provision for taxes consists of the following:

                                1997         1996      1995
         Current:
           Federal            $ 6,437       $ 3,004   $ 7,876
           State                1,392         1,421     1,852
           Foreign                147           156       133

         Deferred:
           Federal             (1,076)         (975)     (852)

         Total income taxes   $ 6,900       $ 3,606   $ 9,009 

       The analysis of the variance from the U.S. statutory income
tax rate for consolidated operations is as follows:

                                          1997      1996      1995
 
       U.S. statutory rate                35.0%     35.0%     35.0%
       
       Increases (decreases) 
       resulting from:
       Effect of foreign income  
         taxes net of loss carry-
         forwards utilized                (1.3)       -         -  
       Utilization of tax credits         (1.4)     (1.0)      (.1)
       Net decrease (increase) in
         benefit from carryback of
         future deductible amounts         2.8      (3.0)     (3.6)
       State income taxes, net of
         federal benefit                   3.8       4.2       5.0 
       Adjustment of prior years'
         accruals                          3.4     (15.0)      (.1)
       Raymark indemnification
         payments                         (4.6)     (7.8)     (1.3)
       Reversal of foreign loss      
         carryforward valuation
         allowance                        (6.4)       -         -
       Other                              (2.3)      (.9)      2.3 

         Effective income tax rate        29.0%     17.5%     37.2%

<PAGE>
Note I, continued


       During 1996, the Company finalized its federal income tax
audits for the fiscal years 1992-1994 resulting in a favorable
adjustment of $3,100 to prior year income tax accruals.

       Deferred tax assets (liabilities) are comprised of the
following:
                                                      
                                        1997      1996      1995
  
     Excess of book provisions 
       over tax deductions           $ 3,994   $ 4,977   $ 5,247
     Postretirement benefit            4,040     3,592     3,238
     Excess of tax basis over
       book basis of assets due
       to restructuring                2,807     3,346     2,277
     Foreign loss carryforwards        1,832     3,660     3,865
     Other                               947       947       798
     Gross deferred tax assets        13,620    16,522    15,425
     Deferred tax asset
       valuation allowance            (4,260)   (9,175)   (8,547)
     Deferred tax assets               9,360     7,347     6,878 
     Gross deferred tax 
       liabilities (excess of
       tax over book depreciation)    (3,783)   (2,846)   (3,352)
     
     Net deferred tax asset          $ 5,577   $ 4,501   $ 3,526 

       The net deferred tax asset represents future tax deductions
that can be realized upon carryback to prior years and German
loss carryforwards.

       The deferred tax asset valuation allowance increased
(decreased) by $(4,915), $628 and $82 during 1997, 1996 and 1995,
respectively.  The 1997 amount includes $1,519 of valuation
allowance reversal based upon management's conclusion that German
net operating loss carryforwards are more likely than not to be
realizable.

       During 1997 and 1996, the Company utilized foreign loss
carryforwards, which reduced income tax expense by $417 and $366,
respectively.  At December 28, 1997, the Company had foreign loss
carryforwards of $6,011, which do not expire.



         
<PAGE>
Note J - Employee Benefits


     Raytech has several pension plans covering substantially all
employees.  Pension expense for the defined benefit plan includes
current service costs and the amortization of prior service costs
over an average of twelve years.  

     The Company also provides self-insured health care and life
insurance benefits for its active and retired employees. 

     In January 1988, the Company formed Raytech Corporation's
Retirement Plan for Hourly Employees (the "Raytech Plan").  The
Raytech Plan covers substantially all hourly employees of RPC in
Indiana retroactive to November 1, 1987 and calls for benefits to be
paid to eligible employees at retirement based upon an annual normal
retirement allowance multiplied by the number of years of credited
service.  Effective in January 1997, the retirement allowance was 
$204.00, and in March 1997, it was increased to $210.00.  Prior to
November 1, 1987 all obligations due to Raybestos Products Company
employees and the related assets were covered under Raymark
Industries, Inc. Retirement Plan for Hourly Employees (the
"Predecessor Plan").  In May of 1988, pursuant to the divestiture of
Raymark, all assets and obligations of the Predecessor Plan
transferred to Asbestos Litigation Management (see Notes A and H).

     Employees covered under the Raytech Plan are eligible to
participate upon the attainment of age 21 and the completion of one 
year of service.  The benefits are based on negotiated benefits and
years of credited service.  Employees who were eligible under the
Predecessor Plan became immediately eligible at November 1, 1987 for
the Raytech Plan.  Upon retirement, these employees will receive
benefits from both plans.

     The Company's funding policy is to contribute annually at least
the minimum amount required by the Employee Retirement Income
Security Act.  The plan invests primarily in short-term investment
contracts.  The Company uses the "projected unit credit method" for
determining the amounts and incidence of employer contributions to
provide for pension benefits.

     The net periodic pension cost for defined benefit plans was
comprised of:

                                           1997      1996     1995    
                                                   
     Service cost                        $ 254    $  247    $ 174
     Interest cost on projected benefit                 
       obligations                         190       155      124
     Actual return on plan assets         (122)      (99)     (79)
     Net amortization and deferral          33        30       11 

     Net periodic pension cost           $ 355     $ 333    $ 230 

<PAGE>
Note J, continued


     The funded status of the Raytech Plan is as follows:


                                       December 28,    December 29,
                                          1997            1996      
Actuarial present value of                              
  benefit obligations:                                    
    Vested                                $(2,940)      $(2,390)
    Non-vested                               (302)         (205)
Total accumulated benefit obligations     $(3,242)      $(2,595)
                                                              
Projected benefit obligations             $(3,242)      $(2,595)
Plan net assets at fair value               2,372         1,931 
Excess of projected benefit                              
  obligation over plan assets                (870)         (664)
Unrecognized past service cost                225            71 
Unrecognized actuarial loss                   590           514 
Adjustment required to recognize                         
  minimum liability                          (815)         (585)
Net accrued pension liability             $  (870)      $  (664)
    

     The assumptions used for the fiscal years ending 1997, 1996 and
1995 were:

                                Dec. 28,    Dec. 29,     Dec. 31,
                                  1997        1996         1995 

Discount rate                     6.75%       7.0%         7.0% 
Expected long-term rate of
  return on assets                6.00%       6.0%         6.0% 

     The Company's German subsidiaries have unfunded defined benefit
plans covering certain employees.  The net periodic pension cost for
these defined benefit plans is comprised of:

                                     1997      1996       1995

Service cost                        $  86    $   96      $ 105
Interest cost on projected                                          
  benefit obligation                  165       178        190
Amortization of transition amount      52        59         62
Amortization of actuarial gain       (176)     (204)      (182)

Net periodic pension cost           $ 127    $  129      $ 175

Discount rate                         7.0%      7.0%       7.0% 

<PAGE>
Note J, continued


     The status of the German plans is as follows:

                                          Dec. 28,    Dec. 29,
                                            1997       1996   

Actuarial present value
  benefit obligations:     
  Vested                                  $(2,022)    $(2,214) 
  Non-vested                                 (143)       (149) 
Total accumulated benefit obligations     $(2,165)    $(2,363) 

Projected benefit obligations             $(2,254)    $(2,477) 
Unrecognized past service cost                296         404  
Unrecognized actuarial gain                    34        (154) 
Current maturities                            100         117  

Net accrued pension liability             $ 1,824     $(2,110) 


     The Company also sponsors a defined contribution plan which
covers essentially all salaried employees of Raytech.  Contributions
generally aggregate up to 6% of each salaried employee's base salary
in stock or cash.  The total Company contributions in 1997, 1996 and
1995 under the salary defined contribution plan was $800, $632, and
$598, respectively.  In 1988, Raytech established a voluntary defined
contribution plan available to all bargaining unit and other hourly-
paid employees of the Company and its subsidiaries that are
authorized to participate.  At Allomatic Products Company, a Company
incentive contribution of 2% is payable upon the attainment of
certain operating earnings goals.  The total Company contributions in
1997, 1996, and 1995 under the hourly defined contribution plan was
$24, $18, and $18, respectively.

     The Company also provides certain postretirement life insurance
and medical benefits covering certain hourly and salaried domestic
employees.  These benefits and similar benefits for active employees
are provided through an insurance company and a third-party
administrator whose premiums are based on benefits paid during the 
years.  

     Under the Company's non-contributory postretirement life
insurance plan, at retirement, participants meeting eligibility
requirements, which are based on age and years of service, are
entitled to receive a death benefit of $3 for hourly employees; or
for salaried employees an amount equal to 50% of final annual base
salary for pre-October 1, 1988 hires or an amount equal to the 

<PAGE>
Note J, continued


greater of $5 or 10% of final annual base salary for post-October 1,
1988 hires.  These benefits are provided by the purchase of
individual life insurance policies upon the participants' retirement.

     The Company also has a contributory, self-insured post-
retirement health plan.  The plan provides certain medical coverage
to retirees and their dependents during the retirees' lifetime, and 
benefits are subject to deductibles, an 80% coinsurance provision and
a $10 lifetime maximum for post age 65 hourly employees and a $50 
lifetime maximum for post age 65 salaried employees.  Eligibility is
based on age and years of service.  Hourly participant contributions
are governed by the Company's collective bargaining agreement for
pre-age 65 coverage and are based on scheduled amounts for post age-65 
coverage.  Contributions for pre-age 65 salaried participants are
based on 15% of pooled cost for retirees and 25% of pooled cost for
spouses with no contribution required for post-age 65 participants.

     The Company funds the costs associated with providing the post-
retirement life insurance and health benefits on a "pay-as-you-go"
basis.

     The components of the accumulated postretirement benefit
obligation are as follows:

                                             1997         1996 

Retirees and dependents                   $ 1,790      $ 1,227 
Actives fully eligible                      3,052        2,780 
Actives not fully eligible                  5,491        4,775 
Unfunded accumulated postretirement
  benefit obligation                       10,333        8,782 
Unrecognized net gain(loss)                   (21)         657 
Accrued postretirement benefit cost        10,312        9,439 
Less current portion                          268          196 
                                          $10,044      $ 9,243 

     The components of net periodic postretirement benefit expense 
for fiscal 1997, 1996 and 1995 are as follows:

                                             1997    1996    1995

     Service cost                          $  446  $  511  $  383
     Interest cost on accumulated
       post-retirement benefit obligation     634     680     623
     Unrecognized net gain(loss)              (13)     77     (11)
      Net periodic expense                 $1,067  $1,268  $  995

     The assumed discount rates used to measure the accumulated
postretirement benefit obligation at December 28, 1997, December 29,
1996 and December 31, 1995 were 6.75%, 7.0%, and 7.0%, respectively. 
The assumed health care cost trend rate used to measure the expected 
<PAGE>
Note J, continued


cost of benefits is 6.5% for both fiscal 1998 and 1997.  The health
care cost trend rate has a significant effect on the amounts
reported.  For example, a one percentage point increase in the health
care cost trend rate would increase the accumulated postretirement
benefit obligation by $1,100 and increase net periodic expense by
$100.

     The following table summarizes the number of active and retired
employees at the end of the last three fiscal years who are covered
under these plans:

             Year            Active          Retirees
             
             1997            1,360               60
             1996            1,259               45
             1995            1,244               41

     During 1988, certain assets of the employee savings plans were
invested in a long-term investment contract with Executive Life
Insurance Company.  In April 1991, Executive Life Insurance Company
was placed in conservation by the California Insurance Commission and
pursuant to the terms of a Rehabilitation Plan approved by a
California Superior Court effective September 1993, all contracts
were restructured adjusting the values downward.  In 1994, the
Company committed to make additional contributions to the employee
savings plans to reinstate certain designated employee investment
values lost as a result of the Executive Life Insurance Company
failure and subsequent conservation and rehabilitation plan. 
Following receipt of governmental approvals, the Company made the
contributions to the employee savings plans in April 1995 in the
amount of $1,068 covering full reinstatement of investment losses in
Executive Life contracts.  In May 1997, May 1996 and October 1995,
the Company was reimbursed $120, $79 and $224, respectively, from
Executive Life holdbacks.

<PAGE>
Note K - Geographic Information
<TABLE>
   

   Raytech, through its principal subsidiaries, is a multinational
manufacturer and marketer of specialty engineered products for heat
resistant, inertia control, energy absorption and transmission
applications.  Its products are used in the vehicular, aerospace,
nucleonics, petrochemical, energy, metal working, construction,
agriculture, utility and electronic industries, among others.    
    
    A summary of information about Raytech's operations by geographic
segments at year-end 1997, 1996 and 1995 and for the fiscal years
then ended follows:

<CAPTION>
                                        
                              Net    Operating   Identifiable 
                             Sales     Income       Assets    
<S>                        <C>        <C>          <C>

1997

Domestic                   $191,822   $ 23,829     $130,948    
Europe (1)                   42,653      2,335       22,569    

  Consolidated             $234,475   $ 26,164     $153,517    


1996

Domestic                   $172,424   $ 22,153     $119,821    
Europe (1)                   45,259      1,450       20,334    

  Consolidated             $217,683   $ 23,603     $140,155    


1995

Domestic                   $128,629   $ 19,835     $ 90,258    
Europe (1)                   48,869      1,124       24,178    

  Consolidated             $177,498   $ 20,959     $114,436    

<FN>
(1)  Primarily Germany

     Domestic sales to a single customer, Caterpillar, Inc., were 
14%, 15%, and 14% of consolidated sales for 1997, 1996 and 1995,
respectively.

  Domestic operating income includes corporate, general and
administrative expenses.
</TABLE>
<PAGE>
NOTE L - Summarized Quarterly Financial Data (Unaudited)
         (in thousands except share and market data)                    
                                                          



                                       Fiscal Quarters Ended 1997         
                               March 30   June 29    Sept. 28  December 28

Net sales                     $ 59,121   $ 60,760    $ 56,251   $ 58,343
Gross profit                    13,928     13,683      11,782     12,182
Income before provision
  for taxes and minority
  interest                       6,482      7,405(b)    5,572(b)   4,310
Net income                    $  4,282   $  5,143    $  3,710   $  2,403
Basic income per share        $   1.32   $   1.58    $   1.14   $    .73
Diluted income per share      $   1.22   $   1.46    $   1.05   $    .68

Market range: 
  -high                          7-1/8     6-5/16       6-5/8      6-5/8
  -low                           4-1/8     5            5-1/4      5-3/16
Dividends                          -         -            -          -

                                       Fiscal Quarters Ended 1996         
                               March 31    June 30   Sept. 29  December 29
 
Net sales                     $ 52,037    $ 60,142   $ 53,660   $ 51,844
Gross profit                    13,799      14,790     12,799     12,881
Income before provision
  for taxes and minority 
  interest                       6,598       7,322      5,196      1,539
Net income                    $  3,691    $  4,592   $  4,754(a)$  2,954(a)
Basic income per share        $   1.14    $   1.42   $   1.47   $    .91
Diluted income per share      $   1.09    $   1.31   $   1.38   $    .86

Market range:
  -high                          3-7/8       6-3/4       5         4-1/2
  -low                           2-7/8       3-1/2       3-3/4     3-1/2
Dividends                          -           -          -          -




(a)  Includes adjustments to income tax expense for prior year accruals
     no longer required.

(b)  Includes adjustments related to environmental accruals established
     in 1996 that are no longer required.





<PAGE>
Note M - Supplementary Financial Statement Detail


                                                              
Fiscal Year                                 1997         1996 

OTHER CURRENT ASSETS

Deferred income taxes                    $  4,128     $  4,000
Prepaid insurance                             762          769
Prepaid expenses                            1,751        1,260
Other                                       1,949        2,091
                                         $  8,590     $  8,120 

ACCOUNTS PAYABLE

Trade accounts payable                   $ 17,609     $ 11,882
Amounts due to AFM                            -          7,076
Cash overdraft                              3,090           -
Other                                           4           41
                                         $ 20,703     $ 18,999
 
                                                              
Fiscal Year                                 l997         l996 
                                                       
ACCRUED LIABILITIES                                    
                                                       
Property taxes                           $  1,925     $  1,933
Legal                                       1,366          728
Taxes                                         946          113
Wages and related taxes                     6,997        8,547
Pensions and employee benefits              2,649        2,616  
Product due Echlin (see Note H)             1,183        1,183
Other(1)                                    7,376        7,639 
                                         $ 22,442     $ 22,759 
                                                   
OTHER LONG-TERM LIABILITIES                            

Long-term pensions                       $  1,823     $  2,110
Other                                       3,606        2,309
                                         $  5,429     $  4,419 

(1)  In fiscal 1997, the Company reversed $1.8 million of accruals
     established in 1996 to reflect management's revised estimate
     of probable liability for environmental violations at the
     Sterling Heights facility.

<PAGE>
Note M, continued
<TABLE>
<CAPTION>
                                                              
Fiscal Year                         1997        1996      1995

OTHER OPERATING INCOME (EXPENSE), NET
                                   <C>       <C> <C>   <C>

Production equipment write-down    $  -       $   -    $(1,746)
Insurance recovery                    -          183       -   
Reimbursement of savings plan
 contributions (Note J)               120         79       224 
Other, net                            152        (65)      -  
                                   $  272    $   197   $(1,522)
                                            
OTHER INCOME (EXPENSE), NET

Interest income                    $  410    $   218   $   227
Lawsuit judgment                      -          -       4,597
Note settlement                       -          -         489
Income from equity
 investment in affiliate              647        -         -
Other, net                            268        (97)      604 
                                   $1,325    $   121   $ 5,917 

ALLOWANCE FOR BAD DEBTS

Beginning balance                  $  726    $   822   $   519
Provisions                            524         28       303
Charge-offs                           (64)      (124)      -   
Ending balance                     $1,186    $   726   $   822

AMORTIZATION EXPENSE OF
  INTANGIBLE ASSETS

Advanced Friction Materials        $  370    $   343   $   -
Allomatic Products Company             57         57        57
Other                                  21         30        32
Ending balance                     $  448    $   430   $    89

<CAPTION>





<PAGE>
Note M, continued


</TABLE>
<TABLE>
CONDENSED FINANCIAL INFORMATION OF RAYTECH CORPORATION (PARENT)
<CAPTION>
Summary financial information of the parent holding company, Raytech Corporation, 
which is operating under Chapter 11 of the U.S. Bankruptcy Code, is as follows:


Balance Sheet
                                                                        
                                                      1997              1996  
    <S>                                            <C>                <C>
                                                                     
Current Assets:                                                      
  Cash                                             $    296          $    134
  Deferred taxes                                      3,971             3,761
  Other current assets                                    2               794
     Total current assets                             4,269             4,689

  Investment in subsidiaries                         46,503            32,148
  
  Deferred taxes                                      1,449               501
  Other long-term assets                              1,580             1,344
     Total assets                                  $ 53,801          $ 38,682

                                                                     
                                                                    
Current Liabilities:                                                 

  Accounts payable and   
    accrued liabilities                            $  3,456          $  3,995

  Other liabilities                                   1,883               672

     Total liabilities                                5,339             4,667
                                                                  

                                                                             
Shareholders' equity 
  Common stock                                        5,417             5,372
  Additional paid in capital                         70,275            70,208
  Accumulated deficit                               (23,384)          (38,922)
  Cumulative translation adjustment                     715             1,918 
                                                                              
                                                     53,023            38,576 
                                                                              
Less treasury stock at cost                          (4,561)           (4,561)
                                                                              
  Total shareholders' equity                         48,462            34,015 
                                                                              
  Total liabilities and shareholders'                                         
    equity                                         $ 53,801           $38,682 

</TABLE>
<PAGE>
Note M, continued


Statements of Operations
<TABLE>
<CAPTION>
                                                                    
                                                1997           1996          1995       
                                                                  
<S>                                          <C>            <C>           <C>
                                                                                     
General and administrative expenses          $ 1,837        $ 2,489       $ 4,436 
                                                                                  
Income (loss) before equity in earnings                                                
in subsidiaries                               (1,837)        (2,489)       (4,436)
                                                                                    
Equity in earnings of subsidiaries            17,375         18,480        18,773 

Net income                                   $15,538        $15,991       $14,337 
                              
</TABLE>



Statement of Cash Flows
<TABLE>
<CAPTION>
                                                                                        
                                               1997           1996          1995
                                                                                    
<S>                                          <C>            <C>           <C>
                                                                    
Net cash used in operating activities        $(4,693)       $(2,972)      $(2,082)
                                                                    
Net cash provided by investing activities:                                       
  Dividends from subsidiary                    4,743          3,015         2,070 
                                                                            
Net cash provided by financing activities:                                       
  Proceeds from sale of stock                    112             26            25

Net change in cash                               162             69            13 
                                                                     
Cash, beginning of period                        134             65            52 
                                                             
Cash, end of period                          $   296         $  134        $   65 
                                                                                        
 


<PAGE>
Note M, continued


NOTE TO CONDENSED FINANCIAL INFORMATION
OF RAYTECH CORPORATION (PARENT)


Note 1:   Basis of Presentation

     The accompanying financial statements of Raytech Corporation, a
     holding company, include the following accounts:

            -  Cash in debtor-in-possession accounts.

            -  Income tax accounts except as related to Allomatic Products
               Company and foreign subsidiaries.  Under the Company's 
               corporate tax allocation policy, income taxes are provided
               on a stand-alone basis.

            -  Costs and expenses and related accounts payable and accrued     
              liabilities which in the opinion of management relate to the    
              operation of the holding company.  Such costs consist
              principally of compensation and related costs of certain
              employees designated as employees of the Registrant, operating
              costs of the Shelton, Connecticut, headquarters facility,
              certain professional fees, shareholder fees and public
              relations expenses.  These costs are financed with subsidiary
              dividends.

           -  Capital accounts of the holding company.

     The investment in and operating results of the holding company's
     wholly- and majority-owned subsidiaries are reflected on the equity
     method.  

  







<PAGE>
Note N - Commitments 


       Rental expense amounted to $1,050, $995, and $894, in 1997,
1996 and 1995, respectively.  The approximate minimum rental
commitments under non-cancelable leases at December 28, 1997 were
as follows:  1998, $454; 1999, $385; 2000, $220; 2001, $219; 2002,
$219 and 2003 and thereafter, $787.

<PAGE>
Note O - Stock Option Plans


          The Company's 1980 Non-Qualified Stock Option Plan (the
"Plan"), as amended, provided for the grant of options for up to 600,000
shares of common stock and any accompanying stock appreciation rights. 
The Company granted both non-qualified and incentive stock options.  In
general, options granted under the Plan are at 100% of the fair market
value on grant date or par value, whichever is higher.  Once granted,
options become exercisable in whole or in part after one year and expire
on the tenth anniversary of the grant.  Prior to the merger (refer to
Note A), options were generally exercisable at the cumulative rate of
20% per year beginning one year from the date of grant.  At the 1986
Annual Meeting, par value was reduced to $1.00 per share, and options
granted below par value in 1985 were approved.  On the effective date of
the merger, all outstanding options under the Plan were canceled and new
non-qualified options were issued by the Company at an option price of
$6.81 which was equal to the fair market value at the date of grant. 
The term during which any future options may be granted under the Plan
expired on December 31, 1989.

          In 1991, the shareholders approved the adoption of a new non-
qualified stock option plan ("1990 Plan") to replace the expired Plan. 
The terms and provisions of the 1990 Plan are similar to the expired
Plan, providing for the grant of options for up to 500,000 shares of
common stock authorized for such purpose by the shareholders.  Effective
November 1, 1992, the Company granted 479,071 non-qualified options at
an option price of $2.75.  At the date of grant the market price per
share was $2.375.  In 1997, the shareholders approved an amendment of
the 1990 Plan authorizing 500,000 additional shares of common stock for
grant.

          The Company applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations in accounting for its
stock plans as allowed under FAS Statement No. 123, "Accounting for
Stock-Based Compensation."  Accordingly, the adoption of this statement
in fiscal 1996 did not affect the Company's results of operations,
financial position or liquidity.  Had compensation cost been determined
consistent with FAS No. 123, pro forma net income and earnings per share
would not have changed from the reported amounts since no options have
been granted since December 15, 1994.
<PAGE>
Note O, continued


          Changes during the three years ended December 28, 1997 in shares
under option were as follows:

</TABLE>
<TABLE>
<CAPTION>
                                    1997                    1996                 1995
                                Weighted                Weighted             Weighted
                                 Average                 Average              Average
                                Exercise                Exercise             Exercise
                      Options      Price    Options        Price   Options      Price
 <S>                  <C>           <C>     <C>             <C>    <C>           <C>

Outstanding at
 beginning of year    658,350     $ 3.56    697,234       $ 3.66   813,055     $ 4.04

Granted                   -                     -                      -
Exercised             (45,546)      2.52     (9,682)        2.75   (11,115)      2.25
Lapsed                (82,154)      7.88    (25,000)        6.75  (103,406)      6.81
Canceled               (4,600)      1.75     (4,202)        2.94    (1,300)      1.75

Outstanding at
  end of year         526,050       2.99    658,350         3.56   697,234       3.66

Options available
 for future awards
 at end of year        30,299                30,299                 26,747

Options exercisable
 at end of year       526,050       2.99    658,350         3.56   697,234       3.66


          Options outstanding and exercisable at December 28, 1997 were as
follows:

                                    Options Outstanding         Options Exercisable
                                    Weighted
                                     Average   Weighted                    Weighted
                                   Remaining    Average                     Average
                        Number   Contractual   Exercise          Number    Exercise
 Exercise Price    Outstanding          Life      Price     Exercisable       Price

    $1.75             78,450          1.84      $ 1.75        78,450        $ 1.75
    $2.75            405,489          4.85        2.75       405,489          2.75
    $7.63             42,111           .16        7.63        42,111          7.63

    $1.75            526,050          4.03      $ 2.99       526,050        $ 2.99
</TABLE>

<PAGE>
Note P - Concentration of Credit Risk


     Financial instruments, which potentially subject the Company
to concentration of credit risk, consist principally of cash and
cash equivalents, trade receivables and investments in marketable
securities.  The Company places its cash with high credit quality
institutions.  At times such amounts may be in excess of the FDIC
insurance limits.  The primary businesses of the Company's U.S.
subsidiaries are the automotive and heavy duty equipment markets
and the related aftermarkets within the United States.  As of
December 28, 1997 and December 29, 1996, the Company had
uncollateralized receivables with two customers approximating
$7,375 and $6,804, respectively, which represents 27.4% and 28.5%
of the Company's trade accounts balance, respectively.  The Company
performs ongoing credit evaluations of its customers' financial
condition but does not require collateral to support customer
receivables.  The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information. 

<PAGE>
Note Q - Acquisition     


     On January 31, 1996, Raytech Composites, Inc.
("Composites"), a subsidiary of Raytech, and Raybestos Products
Company ("RPC"), a subsidiary of Composites, entered into a
series of related transactions with Advanced Friction Materials
("AFM") and related entities and persons as follows:  Composites
acquired a 47% minority share of the common stock of AFM for $9.4
million cash at closing; RPC acquired 100% of the common stock of
AFM Management Company, which leases employees to AFM, for $1.0
million, which was paid for on January 31, 1997; RPC acquired the
machinery and equipment and certain other operating assets of AFM
for $3.5 million cash at closing; RPC committed to acquire land
and building utilized in AFM's manufacturing operations (land and
building located at 44650 Merrill, Sterling Heights, Michigan)
from a principal owner of AFM for $6.6 million, which was
consummated on January 31, 1997; RPC loaned AFM $1.3 million cash
at closing bearing interest at the prime rate and maturing on
January 31, 2003; RPC agreed to acquire AFM's inventory
subsequent to closing, which has amounted to approximately $3.2
million.  In addition, the parties entered into various other
agreements, including supply and technology exchange agreements. 
Subsequent to the transaction, RPC is supplying AFM with products
(automobile transmission component parts) manufactured at the
Sterling Heights facility.  Sales prices between RPC and AFM are
established under the terms of the supply agreement entered into
at closing.  AFM bears responsibility principally for sales and
marketing of the products to original equipment manufacturers and
development of new products.  
  
     Composites 47% ownership interest in AFM is accounted for
under the equity method commencing February 1, 1996. The excess
of purchase price over the Company's equity in the underlying net
assets of AFM is being amortized on a straight line basis over a
30-year period. 
     
     The machinery and equipment and real property have been
recorded based upon the fair value of the assets.  Had the
transactions described above occurred on January 1, 1996 or
January 2, 1995, the estimated pro forma effect on the Company's
net income would not have been material.
  
<PAGE>
Note R - Earnings Per Share
<TABLE>
<CAPTION>
                                    1997      1996       1995

<S>                             <C>        <C>        <C>

Basic EPS computation


Numerator                        $ 15,538   $ 15,991   $ 14,337

Denominator:

  Common shares outstanding
   at beginning of the year     3,239,762  3,230,080  3,218,968

  Weighted average of treasury      
   stock acquired                     -          -           (2)

  Stock options exercised          23,375      2,594      6,996

  Weighted average shares       3,263,137  3,232,674  3,225,962

Basic EPS                           $4.76      $4.95      $4.44



Diluted EPS Computation


Numerator                        $ 15,538   $ 15,991   $ 14,337

Denominator:

  Common shares outstanding
   at beginning of the year     3,239,762  3,230,080  3,218,968

  Weighted average of treasury
   stock acquired                     -          -           (2)

  Dilutive potential common
   shares                         261,254    208,971    143,041 

  Stock options exercised          23,375      2,594      6,996

  Adjusted weighted
   average shares               3,524,391  3,441,645  3,369,003

Diluted EPS                         $4.41      $4.65      $4.26
</TABLE>
<PAGE>


                             REPORT OF INDEPENDENT ACCOUNTANTS





To the Board of Directors and Shareholders
of Raytech Corporation:



We have audited the consolidated financial statements of Raytech
Corporation (the "Company," a holding company) and subsidiaries
listed in Item 14(a) of this Form 10-K.  These financial
statements are the responsibility of the Company's management. 
Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted
auditing standards.  Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation.  We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Raytech Corporation and subsidiaries as of
December 28, 1997 and December 29, 1996 and the consolidated
results of their operations and their cash flows for each of the
three fiscal years in the period ended December 28, 1997, in
conformity with generally accepted accounting principles. 

As discussed in Note A to the consolidated financial statements,
Raymark Corporation ("Raymark") is a defendant in numerous
lawsuits seeking substantial damages relating to airborne
asbestos fibers.  The Company has been named a co-defendant in
approximately 3,300 of these asbestos-related lawsuits as a
successor in liability to Raymark.  In addition, the Company is
co-defendant with Raymark in lawsuits involving environmental 
matters as a successor in liability to Raymark.  On March 10,
1989, Raytech filed a petition seeking relief under Chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code").  Under
the provisions of the Bankruptcy Code, the Company is operating
as a debtor-in-possession.  The Company's operating subsidiaries, 
<PAGE>
none of which have filed for protection under Chapter 11,
continue to operate their businesses in the ordinary course of
business.  Raytech filed to protect itself from the lawsuits
mentioned above and to obtain a binding ruling for all
jurisdictions on whether Raytech is liable as a successor for
asbestos-related claims, including any claims yet to be filed,
relating to the operations of Raymark or its predecessors.  
During 1995, Raytech received adverse rulings precluding it from
relitigating the 1988 ruling holding Raytech to be a successor to
Raymark's asbestos-related claims.  Determination of Raytech's
actual liabilities as successor to Raymark's asbestos-related and
environmental claims is subject to the uncertainties inherent in
the process of reorganizing under the Bankruptcy Code.  Such
liabilities could have a material adverse effect on the Company. 
These uncertainties raise substantial doubt about the Company's
ability to continue as a going concern.  The financial statements
do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or adjustments relating
to establishment, settlement and classification of liabilities
that may be required in connection with reorganizing under the
Bankruptcy Code.





                                       COOPERS & LYBRAND L.L.P.



Stamford, Connecticut
March 9, 1998

<PAGE>
Item 9.  Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosures

          None


                                           PART III

Item 10.  Directors and Executive Officers of Registrant

Item 11.  Executive Compensation

Item 12.  Security Ownership of Certain Beneficial Owners and
          Management

Item 13.  Certain Relationships and Related Transactions

         Responses to Items 10 through 13 are included in the
Registrant's definitive proxy statement filed pursuant to    
Regulation 14A for the 1997 Annual Meeting of Shareholders.



                                           PART IV 
       
Item 14.  Exhibits, Financial Statement Schedules
          and Reports on Form 8-K                

(a)  The following financial statements are included in Part II,
     Item 8:

         (1)  Financial Statements

              Consolidated Balance Sheets - December 28, 1997 and         
              December 29, 1996

              Consolidated Statements of Operations for the 1997,
              1996 and 1995 fiscal years

              Consolidated Statements of Cash Flows for the 1997,
              1996 and 1995 fiscal years

              Consolidated Statements of Shareholders' Equity
              for the 1997, 1996 and 1995 fiscal years

              Notes to Consolidated Financial Statements

              Report of Independent Accountants 

<PAGE>
         (2) Financial Statement Schedules

              Schedules not included with this additional financial       
              information have been omitted either because they are not
              applicable or because the required information is shown in
              the consolidated financial statements or footnotes.

         (3)  The Exhibits are listed in the index of Exhibits at Item 
              (c) hereafter.

    (b)  Reports on Form 8-K

         In Form 8-K dated August 14, 1997, the Registrant received a
         ruling of the United States Bankruptcy Court, District of
         Connecticut, in the Adversary Proceeding No. 96-5181 filed in
         the Registrant's bankruptcy proceedings, granting a motion for
         summary judgment filed by the official committee of unsecured
         creditors.  The Adversary Proceeding was filed by the Registrant
         in November 1996 seeking a declaratory judgment that its
         liability for asbestos-related and other liabilities is limited
         as a successor to Raymark Industries, Inc.  To support the
         summary judgment, the Court relied upon Schmoll v. AcandS, Inc.,
         703 F. Supp. 868 (D.Or. 1988) which held the Registrant to be a
         successor to the Raymark liabilities.  The Court's ruling was
         stated from the bench and is subject to a written order to be
         issued at a later date.  The Registrant considers the grant of
         the summary judgment dismissing the proceeding as unfounded in
         fact and law and intends to exhaust its legal remedies through
         appeal of the order when received.

         In Form 8-K dated January 12, 1998, the Board of Directors
         terminated Craig R. Smith as President, Chief Executive Officer
         and Director of the Registrant corporation, effective
         January 12, 1998, and elected Albert A. Canosa as President,
         Chief Executive Officer and Director in replacement.  Mr. Canosa
         previously served as Vice President of Administration, Chief
         Financial Officer and Treasurer of the Registrant corporation
         and will continue to hold the offices of Chief Financial Officer
         and Treasurer.
         
    (c)  Index of Exhibits                                         Page

         2(a)   Plan or Reorganization dated May 31, 1994
                filed by the Registrant (k)

         2(b)   Plan of Reorganization dated September 12,
                1994 filed by the unsecured creditors'
                committee (l)
<PAGE>
                                                             Page

    3(a)   Certificate of Incorporation of Raytech (d)        

    3(b)   By-laws of Raytech (d)

    4(a)   Amendment No. 1 to Form S-4 Registration             
           Statement, Registration No. 33-7491 (b)     
    10(a)  Raytech Corporation's 1980 Non-Qualified Stock
           Option Plan, as amended (c)

    10(b)  Raytech Corporation's Variable Compensation 
           Program as amended and restated December 14, 1990      
           (g)

    10(c)  Amended and Restated Agreement and Plan of  
           Merger dated as of September 4, 1986 (a)

    10(d)  Stock Purchase Agreement dated March 30, 1987 
           between Raymark Industries, Inc. and Raytech
           Composites (e), Amendment dated July 18, 1991 
           (h) and Amendment dated December 21, 1992 (i)

    10(e)  Asset Purchase Agreement dated October 29, 1987
           between Raymark Industries, Inc. and Raytech
           Composites, Inc. (e), Amendment dated July 18,
           1991 (h) and Amendment dated December 21, 1992 (i)
                                                                               
    10(f)  Stock Purchase Agreement dated May 18, 1988 
           between Raytech Corporation and Asbestos 
           Litigation Management, Inc. (f) 

    10(g)  Asset Purchase Agreement (Notarial Deed) dated
           June 19, 1992 between Ferodo Beral GmbH and
           Raytech Composites, Inc. and Raybestos
           Reibbelag GmbH (i)

    10(h)  Loan Agreement dated September 16, 1993 between 
           Raytech Composites, Inc. and Raymark Industries,
           Inc. (j)

    10(i)  Loan Agreement dated January 10, 1994 between
           Raytech Composites, Inc. and Raymark Industries,
           Inc. (j)
   
    10(j)  Loan and Security Agreement dated March 29, 1995
           between Raybestos Products Company and The CIT
           Group/Credit Finance, Inc. (m)

    10(k)  Loan and Security Agreement dated November 21,
           1997 between Raybestos Products Company and
           NationsCredit Commercial Corporation (n)           96
    <PAGE>

                                                               Page

         22     Subsidiaries of Raytech                             131  

         24     Consent of Independent Accountants                  132  


         Footnotes to Exhibits 

         (a)  Filed as an Exhibit to Registrant's Amendment No. 1 to    
              Form S-4, Registration Statement, Registration No. 33-7491, 
              filed with the Securities and Exchange Commission on        
              September 5, 1986.

         (b)  Filed with the Securities and Exchange Commission on
              September 5, 1986.
          
         (c)  Included in Registrant's Registration Statement on Form    
              S-8 (Registration No. 2-95251) filed with the Securities
              and Exchange Commission on January 11, 1985.
       
         (d)  Included as an Exhibit to Registrant's Report on Form
              10-K filed with the Securities and Exchange Commission 
              on March 23, 1987.
       
         (e)  Included as an Exhibit to Registrant's Report on Form  
              10-K filed with the Securities and Exchange Commission on
              March 28, 1988, as amended by Form 8 filed on April 11,
              1988 and Form 8 filed on April 19, 1988.
         
         (f)  Included as an Exhibit to Registrant's Report on Form
              10-K filed with the Securities and Exchange Commission on
              March 29, 1989.

         (g)  Included as an Exhibit to Registrant's Report on Form 
              10-K filed with the Securities and Exchange Commission on
              March 20, 1991.

         (h)  Included as an Exhibit to Registrant's Report on Form
              10-Q filed with the Securities and Exchange Commission on
              September 29, 1991, as amended by Form 8 filed on
              February 27, 1992.
         
         (i)  Included as an Exhibit to Registrant's Report on Form
              10-K filed with the Securities and Exchange Commission on
              March 22, 1993.

         (j)  Included as an Exhibit to Registrant's Report on Form 10-K
              filed with the Securities and Exchange Commission on
              March 14, 1994.

       <PAGE>
 (k)  Included as an Exhibit to Registrant's Report on Form 10-Q
              filed with the Securities and Exchange Commission on
              August 9, 1994.

         (l)  Included as an Exhibit to Registrant's Report on Form
              10-Q filed with the Securities and Exchange Commission
              on November 7, 1994.

         (m)  Included as an Exhibit to Registrant's Report on Form
              10-Q filed with the Securities and Exchange Commission
              on April 2, 1995.

         (n)  Included as an Exhibit to Registrant's Report on Form 10-K
              filed with the Securities and Exchange Commission on
              March 18, 1998.
         
         Copies of exhibits which are not included herewith and which
         have not previously been filed with the Securities and Exchange
         Commission may be obtained by submitting a written request,
         specifying the name of the exhibit and including payment of
         $2.00 for each exhibit to cover handling and postage, to: 
         LeGrande L. Young, Secretary, Raytech Corporation, Suite 512,
         One Corporate Drive, Shelton, Connecticut 06484.

    (d)  The Index to Consolidated Financial Statements and Financial   
         Statement Schedules is included beginning on page 93
         hereafter.  
<PAGE>
  

                        Index To Consolidated Financial Statements


                                                                 Page
   Financial Statements:

     Consolidated Balance Sheets for the
     Fiscal Years Ended December 28, 1997
     and December 29, 1996                                        35
     
     Consolidated Statements of Operations
     for the 1997, 1996 and 1995 Fiscal Years                     36
     
     Consolidated Statements of Cash Flows 
     for the 1997, 1996 and 1995 Fiscal Years                     37
     
     Consolidated Statements of Shareholders'
     Equity for the 1997, 1996, and 1995              
     Fiscal Years                                                 38

     Notes to Consolidated Financial Statements                   41

     Report of Independent Accountants                            86
<PAGE>






                                        SIGNATURES



         Pursuant to the requirements of Section 13 or 15(d) 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 CORPORATION


                                                 By: /s/ALBERT A. CANOSA
                                                     Albert A. Canosa
                                                     President and 
                                                     Chief Executive Officer

Date:  March 18, 1998
<PAGE>
  
  
  
  
  
                                        SIGNATURES
          



         Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities shown
on  March 18, 1998.          


         Signature and Title                Signature and Title



/s/ ALBERT A. CANOSA                 /s/DENNIS G. HEINER          
Albert A. Canosa                     Dennis G. Heiner
President, Chief Executive           Director
Officer and Director


/s/ALBERT A. CANOSA                  /s/DONALD P. MILLER          
Albert A. Canosa                     Donald P. Miller
Treasurer and Chief                  Director
Financial Officer  
                

/s/ROBERT L. BENNETT                 /s/ROBERT B. SIMS            
Robert L. Bennett                    Robert B. Sims
Director                             Director


/s/ROBERT M. GORDON                  
Robert M. Gordon               
Director