<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934

     for the Fiscal Year ended December 28, 2003 or

[ ]  Transition Report Pursuant to Section 13 or 15(d) of the
     Securities and Exchange Act of 1934

     Commission File Number 1-9298

                               RAYTECH CORPORATION
              ----------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

          DELAWARE                                             06-1182033
-------------------------------                            ------------------
(State or Other Jurisdiction of                             (I.R.S. Employer
 Incorporation or Organization)                            Identification No.)

    Suite 295, Four Corporate Drive
         Shelton, Connecticut                                    06484
---------------------------------------                        ----------
(Address of Principal Executive Office)                        (Zip Code)

                                 (203) 925-8021
              ----------------------------------------------------
              (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 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 [ ]

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. [X]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

                                    Yes [ ]     No [X]

Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

                                    Yes [X]     No [ ]

As of March 18, 2004, 41,737,306 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 $21.8 million.

Documents incorporated by reference: None

<PAGE>

                          INDEX TO RAYTECH CORPORATION
                                 2003 FORM 10-K

<TABLE>
<CAPTION>
                                                                    Page
                                                                    ----
<S>                                                                 <C>
                                 PART I.

Caution Regarding Forward Looking Statements ...................       4

Item 1.  Business ..............................................       5

Item 2.  Properties ............................................      10

Item 3.  Legal Proceedings .....................................      11

Item 4.  Submission of Matters to a Vote of Security Holders ...      13

                                 PART II.

Item 5.  Market for Registrant's Common Equity and
         Related Stockholder Matters ...........................      14

Item 6.  Selected Financial Data ...............................      15

Item 7.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations ...................      17

Item 7a. Quantitative and Qualitative Disclosures About
         Market Risk ...........................................      40

Item 8.  Financial Statements and Supplementary Data ...........      41

Item 9.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure ...................      97

Item 9a. Controls and Procedures ...............................      97

                                 PART III.

Item 10. Directors and Executive Officers of the Registrant ....      98

Item 11. Executive Compensation ................................     102

Item 12. Security Ownership of Certain Beneficial
         Owners and Management and Related Stockholder Matters..     109

Item 13. Certain Relationships and Related Transactions ........     111

Item 14. Principal Accountant Fees and Services ................     111

                                PART IV.

Item 15. Exhibits, Financial Statement Schedules and
         Reports on Form 8-K ...................................     113
</TABLE>

                                       -2-

<PAGE>

<TABLE>
<CAPTION>
                                                                    Page
                                                                    ----
<S>                                                                 <C>
          (a)(1)  Financial Statements .........................     113

          (a)(2)  Financial Statement Schedules ................     113

          (a)(3)  Exhibits .....................................     113

          (b)     Reports on Form 8-K ..........................     113

          (c)     Index of Exhibits.............................     113

          (d)     Index to Consolidated Financial Statements
                  and Financial Statement Schedules
                  (reference)...................................     115

Signatures .....................................................     117

Certifications .................................................     120
</TABLE>

                                       -3-

<PAGE>

Caution Regarding Forward Looking Statements

         Statements in this Form 10-K relating to management's views of trends,
the effects of changing prices, plans, objectives and other matters for future
operating periods are "forward looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. These forward looking statements are
subject to significant risks and uncertainties that could cause actual results
to differ materially from the results in the statements. Forward looking
statements relating to Raytech Corporation's businesses are based on assumptions
concerning certain factors that are not predictable and are subject to change.
These factors include general economic conditions, worldwide demand for
automotive and heavy duty vehicles, consumer confidence, actions of our
competitors, vendors and customers, factors affecting our costs such as raw
material prices, labor relations and environmental compliance and remediation,
interest and foreign currency exchange rates, technological issues, accounting
standards, and the risks set forth in the section entitled "Risk Factors." The
forward-looking statements herein are made as of the date of this report. We
have no obligation to update our forward looking statements.

                                       -4-

<PAGE>
'
                                     PART I

Item 1. Business

         General

         Raytech Corporation ("Raytech" or the "Company") develops, manufactures
and supplies specialty engineered friction and energy absorption components used
in oil immersed (wet) and dry transmission and brake systems for on- and
off-road vehicles. The Company also makes and markets specialty engineered
products for heat resistant, inertia control, and energy absorption
applications. The Company's products are typically found in passenger cars,
heavy duty construction and agricultural equipment, trucks, buses and in
logging, mining and military vehicles. Unless the context indicates otherwise,
all references herein to Raytech or the Company include the Company and its
subsidiaries. The Company's operations are categorized into three business
segments: Wet Friction, Dry Friction and Aftermarket.

         The Wet Friction segment's products are used in an oil immersed (wet)
environment. Wet Friction products are primarily used in original equipment
vehicular automatic transmissions and braking systems for off-road heavy duty
equipment. The Company markets its products to automobile, heavy duty truck,
farm machinery, mining, truck, bus and military vehicle original equipment
manufacturers ("OEMs").

         The Dry Friction segment's products are used in a dry rather than an
oil immersed environment. Dry Friction products are primarily used in original
equipment and aftermarket automobile and truck manual transmissions. The clutch
facings produced by this segment are marketed to system assemblers who sell to
OEMs and aftermarket rebuilders.

         The Aftermarket segment produces products used for wet friction
applications, primarily plates and friction materials for automobile and light
truck transmissions. This segment also markets transmission filters and other
transmission related components to warehouse distributors and certain retail
operations in the automotive aftermarket.

         In fiscal 2003, the Company recorded an operating loss of $57.5
million. The operating loss included an impairment charge of $48.8 million. The
remaining operating loss of $8.7 million can be attributed primarily to losses
incurred in the Wet Friction segment offset by earnings in the aftermarket and
Dry Friction segment. The losses sustained in the Wet Friction operations led
the Company to conduct an impairment analysis of its goodwill and other
intangibles in accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets" and further to conduct
an impairment analysis of its long-lived assets in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The Company
with the assistance of a third party valuation firm developed a model that was
used by the Company to evaluate the future cash flows associated with the assets
and the impact on the current carrying values. The result of the analysis was
the impairment charge of $48.8 million of which $11.0 million was related to
long-lived tangible assets and $37.8 million was related to goodwill and other
intangible assets. See notes D and E in the Notes to Consolidated Financial
Statements contained in this report.

                                       -5-

<PAGE>

         Raytech was incorporated in June 1986 in Delaware and held as a
subsidiary of Raymark Corporation ("Raymark"). In October 1986, Raytech became
the publicly traded, New York Stock Exchange holding company of Raymark stock
through a triangular merger restructuring plan approved by Raymark's
shareholders whereby each share of common stock of Raymark was automatically
converted into a share of Raytech common stock. In May 1988, Raytech divested
all of the Raymark stock. In accordance with the restructuring plan, Raytech,
through its subsidiaries, purchased certain non-asbestos businesses of Raymark.
Despite the restructuring plan implementation and subsequent divestiture of
Raymark, Raytech was named a co-defendant with Raymark and other named
defendants in numerous asbestos-related lawsuits as a successor in liability to
Raymark. In order to stay the asbestos-related litigation, 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. In
April 2001, Raytech emerged from protection of the Bankruptcy Court under
Chapter 11 of Title 11, United States Code. Certain asbestos personal injury
claims and certain environmental claims were discharged at the reorganization
date in exchange for cash and equity of 37,058,900 shares, representing 89.2% of
the Company's outstanding common stock at that time.

         The effective date of the Company's emergence from bankruptcy was April
18, 2001; however, for accounting purposes, the reorganization and related
fresh-start adjustments have been recorded as of April 2, 2001. All financial
information prior to that date is presented as pertaining to the Predecessor
Company, while all financial information after that date is presented as
pertaining to the Successor Company.

         The percentage of net sales for each segment of the consolidated net
sales over the past three years is as follows:

<TABLE>
<CAPTION>
                                            Successor Company                   Predecessor Company
                           ------------------------------------------------     -------------------
                              For the Year Ended
                           ----------------------------    For the Period          For the Period
                           December 28,    December 29,   April 3, 2001 to        January 1, 2001
                              2003            2002        December 30, 2001       to April 2, 2001
                           ------------    ------------   -----------------     -------------------
<S>                        <C>             <C>            <C>                   <C>
Wet Friction operations        57%             61%               61%                     62%
Dry Friction operations        21%             17%               15%                     14%
Aftermarket operations         22%             22%               24%                     24%
</TABLE>

         The sales, gross profit, operating profit (loss) and other financial
information pertaining to the operation of the business segments is contained in
Note H Segment Reporting in the Notes to the Consolidated Financial Statements
of the Company.

         The Company's executive offices are located in Shelton, Connecticut.
Information about the Company, including its filings with the Securities and
Exchange Commission, is available on the Internet at www.raytech.com.

         Risk Factors

         The Company's businesses are subject to certain risks that could cause
material changes in its results of operations or financial condition in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors" for a more detailed description of these

                                      -6-

<PAGE>

risks.

         Sales Methods

         The Wet Friction operations, predominantly in the United States, serve
the on-highway and off-highway vehicular markets through sale of products to
OEM's of automobiles, heavy duty trucks, buses, construction and mining
equipment and agricultural machinery, and through distributors supplying
components and replacement parts for these vehicles. The Wet Friction segment
sells certain products to the Aftermarket segment, which, in turn, distributes
these products to warehouse distributors in the aftermarket.

         The Dry Friction operation sells clutch facings to manual transmission
system assemblers who, in turn, supply the OEM market and aftermarket in Europe
and the Far East.

         The Aftermarket segment sells its products primarily to warehouse
distributors and in certain instances directly to retail outlets predominantly
in the United States.

         Sales are made in all segments by Company sales representatives. Sales
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 and may include price
commitments for multiple years.

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

         Raw Material Availability

         The principal raw materials used in the manufacture of the Company's
energy absorption and transmission products include cold-rolled steel, metal
powders, synthetic resins, plastics and synthetic and natural fibers. All of
these materials are available from a number of competitive suppliers. The
availability of global steel supplies may impact both the availability of raw
materials and price of these materials. In 2004, worldwide increases in steel
demand have led to increased prices and concerns of a steel shortage. Potential
impacts on the Company from the current steel market conditions could include
reduced delivery levels of finished products to Raybestos customers and lower
profitability due to higher raw material costs.

         Patents and Trademarks

         Raytech owns a number of patents, both foreign and domestic. Such
patents expire between 2004 and 2018. In the opinion of management, the business
is not dependent upon the protection of any of its patents and would not be
materially affected by the expiration of any of such patents.

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

         Competition

         The automotive parts industry is extremely competitive. Each of the

                                      -7-

<PAGE>

Company's operating segments competes with several other manufacturers that
produce and sell similar products. Some of the Company's competitors are
considerably larger and have substantially greater financial resources than the
Company. The Wet Friction marketplace is comprised of four major competitors,
including the Company. The Company has one major competitor in the European Dry
Friction marketplace and competes with several Chinese and other Asian based
manufacturers in the Asian market. In the European Dry Friction market, several
of the Company's customers are also competitors. There are five major
competitors, including the Company, in the Aftermarket segment. Raytech believes
that it is competitive in all markets in which it is engaged due to its brand
recognition, product quality, service and price.

         Significant Customers

         During the years presented, sales to the following customers were
greater than 10 percent of the Company's consolidated sales:

<TABLE>
<CAPTION>
                                            Successor Company                   Predecessor Company
                           ------------------------------------------------     -------------------
                              For the Year Ended
                           ----------------------------    For the Period          For the Period
                           December 28,    December 29,   April 3, 2001 to        January 1, 2001
                              2003            2002        December 30, 2001       to April 2, 2001
                           ------------    ------------   -----------------     -------------------
<S>                        <C>             <C>            <C>                   <C>
DaimlerChrysler               12.4%           14.4%             14.0%                  13.8%

Caterpillar                    9.5%           11.4%             14.3%                  13.2%
</TABLE>

         Backlog

         Sales backlog at the end of fiscal 2003, 2002 and 2001, by segment, was
as follows:

<TABLE>
<CAPTION>
                               (in millions)
                         2003       2002       2001
                         ----       ----       ----
<S>                    <C>        <C>        <C>
Wet Friction           $   76.7   $   78.5   $   69.7
Dry Friction               12.3        8.7        2.7
Aftermarket                 1.5        2.0        1.9
                       --------   --------   --------
Total                  $   90.5   $   89.2   $   74.3
                       ========   ========   ========
</TABLE>

         The Company expects that the current backlog will be filled during
2004.

         Employees

         At December 28, 2003, Raytech employed 1,565 employees, compared with
1,593 employees at the end of 2002. 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 ("RPC") in Crawfordsville, Indiana, is due to expire
in May 2006. The term of the labor contract at Raybestos Automotive Components
Company ("RACC") in Sterling Heights, Michigan, is due to expire in October
2004. The Company's German subsidiary is a member of an industry employers'
association that is party to various employee union contracts on behalf of its
members. The current contract covering German employees' wages continues through
February 2005.

         Capital Expenditures

                                      -8-

<PAGE>

         Capital expenditures for the Successor Company were $9.0 million and
$9.6 million for fiscal years 2003 and 2002 and $7.5 million for the period
April 3, 2001 to December 30, 2001. Capital expenditures for the Predecessor
Company were $2.7 million for the period January 1, 2001 to April 2, 2001.
Capital expenditures for 2004 are budgeted at $10.0 million.

         Research and Development

         Research and development costs for the Successor Company were
approximately $7.2 million and $7.3 million in fiscal years 2003 and 2002,
respectively, and $5.3 million for the period April 3, 2001 to December 30,
2001. Research and development costs for the Predecessor Company were $1.7
million for the period January 1, 2001 to April 2, 2001. Separate research and
development facilities are maintained at appropriate manufacturing plants for
developing new products, improving existing production techniques and supplying
technical service to the business units and customers. Research and development
costs for 2004 are budgeted at $6.6 million.

         Environmental Matters

         The Company is subject to federal, state, local and foreign laws and
regulations governing the discharge of materials into the environment or
otherwise relating to the protection of the environment ("Environmental Laws").
The cost to the Company of complying with these Environmental Laws was
approximately $1.1 million during 2003, and it is projected at $1.1 million for
2004. Estimated capital expenditures for environmental control facilities for
2004 are budgeted to be $0.6 million.

         The compliance costs noted above exclude remediation costs incurred by
the Company for the same periods. See Item 3 - Legal Proceedings for a full
description of remediation costs.

                                      -9-

<PAGE>

Item 2. Properties

                  The Company, through its three operating segments, conducts
business at the following facilities:

                  The Wet Friction operation has facilities in Crawfordsville,
Indiana; Sterling Heights, Michigan; and Liverpool, England. The Crawfordsville,
Indiana, facility is owned and consists of approximately 461,000 square feet of
office, production, research and warehousing space. The Sterling Heights,
Michigan, facility is owned and consists of approximately 111,000 square feet of
office, production, research and warehousing space. The Liverpool, England,
facility is leased and consists of 52,000 square feet of office, production, and
warehousing space. The Wet Friction operation also leases sales office space in
Leverkusen, Germany, Peoria, Illinois, and Japan and leases an administrative
office in Indianapolis, Indiana.

                  The Dry Friction operation has facilities in Morbach, Germany,
and Suzhou, China. The Morbach, Germany, facility is owned and consists of
108,000 square feet of office, production, research and warehousing space. The
Suzhou, China, facility is owned and consists of 52,000 square feet of office,
production, and warehousing space on a long-term land lease. In addition, the
segment leases space from the Wet Friction segment at the Liverpool facility.

                  The Aftermarket operation has two facilities in Sullivan,
Indiana, that are owned and consist of 130,000 and 37,500 square feet of office
and warehousing space. These facilities are underutilized, leaving space for
future demand. A separate Crawfordsville, Indiana, aftermarket facility is owned
and consists of approximately 41,000 square feet. A portion of this facility has
been leased to the Company's Wet Friction segment; the remaining space houses
sales offices. The Aftermarket operation also leases sales office space in
Floral Park, New York.

                  The Company also leases 7,000 square feet of office space in
Shelton, Connecticut, for its headquarters staff.

                  The Company believes that its properties are substantially
suitable and adequate and have sufficient production capacity to meet the
reasonably anticipated demand for the Company's products.

                                      -10-

<PAGE>

Item 3. Legal Proceedings

ENVIRONMENTAL REMEDIATION

Crawfordsville, Indiana - Shelly's Ditch Contamination Removal

                  In October 1987, RPC, a wholly-owned subsidiary of the
Company, purchased a major manufacturing facility (the "RPC Facility") in
Crawfordsville, Indiana. Some time thereafter, the Company learned that the
previous owner of the RPC Facility had disposed of polychlorinated biphenyls
("PCBs") in the ground at the RPC Facility in the mid-1960s and that such PCBs
were leaching from the RPC Facility into an adjacent ditch ("Shelly's Ditch").

                  In 1996, the Indiana Department of Environmental Management
(the "IDEM") advised RPC that the RPC Facility may have contributed to, and was
potentially responsible for, the release of lead and PCBs found in Shelly's
Ditch. In the late 1990s, RPC and the IDEM entered into an agreed order (the
"Agreed Order") for a risk-based remediation of PCBs and lead in Shelly's Ditch.
When the IDEM later sought to unilaterally withdraw from the Agreed Order, RPC
appealed and the court ordered the IDEM to reinstate the Agreed Order.
Meanwhile, at the IDEM's request, the United States Environmental Protection
Agency (the "EPA") became involved in Shelly's Ditch.

                  In December 2000, before the Agreed Order was reinstated, the
EPA issued a Unilateral Administrative Order to RPC under CERCLA (the "EPA
Removal Order") demanding removal of contaminated soils from those Shelly's
Ditch areas identified as Reaches 1 through 3 (the "Site"). The EPA Removal
Order required more work at greater expense than the IDEM Order. Thereafter, RPC
proceeded with the work required under the EPA Removal Order. During the second
quarter of fiscal 2003, a provision of $1.8 million was recorded for the
completion of work required by the EPA Removal Order. By December 28, 2003, RPC
had spent approximately $18.7 million on removal of lead and PCB contaminated
soils from the Site and had accrued $400,000 for potential EPA oversight cost
assessments relating to that work.

                  On January 9, 2004, the EPA confirmed that RPC had completed
the action required under the EPA Removal Order, including the removal and
proper disposal of Site soils and sediments contaminated with PCBs and lead. In
its confirmation, the EPA noted that RPC would continue to be subject to certain
obligations under that order, including record retention and the payment of
oversight costs. Whether RPC will be required to pay oversight costs relating to
the work under the EPA Removal Order will depend on the outcome of future
negotiations with the EPA and the IDEM regarding potential environmental
remediation downstream of the Site.

Crawfordsville, IN - Environmental Remediation Downstream of
Reaches 1 through 3 of Shelly's Ditch

                  On May 6, 2003, the EPA indicated that RPC is potentially
liable for PCB and lead contamination downstream of the Site. The EPA has not
issued an order to RPC regarding this downstream area. However, during the third
quarter of 2003, the Company began negotiations with the EPA concerning such
possible additional remediation. As a result, during the third quarter of 2003,
the

                                      -11-

<PAGE>

Company recorded a $2.4 million provision relating to this potential liability
for future cleanup costs.

                                      -12-

<PAGE>

Crawfordsville, IN - Environmental Remediation and Expenses
relating to the RPC Facility

                  On May 15, 2001, the EPA issued a Pre-filing Notice and
Opportunity to Confer to RPC (the "Pre-filing Notice"). This notice stated that
the EPA might file a civil action lawsuit against RPC for violations of various
environmental statutes and would offer RPC the opportunity to participate in
pre-filing negotiations to resolve this matter. The EPA stated that it has
reason to believe that RPC committed violations of the Clean Air Act, Clean
Water Act, Resource Conservation and Recovery Act and Toxic Substances Control
Act and that RPC could be subject to substantial penalties. At that time, the
Company recorded a provision of $.3 million on advice of legal counsel. On
September 3, 2003, the EPA proposed that the parties settle the Pre-filing
Notice. The EPA stated that penalties for violations alleged in the Pre-filing
Notice could total approximately $180 million and suggested the following
resolution: RPC should pay approximately $2.4 million in fines and undertake
compliance activities, on-site investigative work that the EPA estimated would
cost about $1.0 million, and corrective action to resolve the Pre-filing Notice.
The parties have begun preliminary negotiations regarding the potential on-site
investigative work but have not obtained an overall EPA settlement proposal. The
Company recorded a provision of $3.1 million in the year-ended December 28, 2003
based on the EPA position.

Ferndale, MI - Potential Responsibility for Environmental Remediation

                  In a January 8, 2002 letter, the Michigan Department of
Environmental Quality asserted company responsibility for trichloroethylene
contamination at a Ferndale, Michigan industrial site that Advanced Friction
Materials Company ("AFM") leased from approximately 1974 to 1985. The Company
acquired 47% of the stock of AFM in 1996 and the balance of the shares in 1998.
The Company's liability at this site is indeterminable at this time.

ENVIRONMENTAL LITIGATION

Cost Recovery Actions against Insurers regarding Shelly's Ditch

                  In 1996, RPC notified its insurers and demanded defense and
indemnity regarding any environmental issues relating to alleged lead and PCB
contamination of Shelly's Ditch. In January 1997, one insurer filed a complaint
in the U.S. District Court, Southern District of Indiana, captioned Reliance
Insurance Company vs. Raybestos Products Company (the "Insurance Case"). The
complaint sought a declaratory judgment that the Reliance Insurance policies do
not provide coverage to RPC for defense and indemnity relating to investigation
and remediation of contamination in Shelly's Ditch. In January 2000, the
District Court rejected Reliance's claims and granted summary judgment to RPC.
In June 2001, Reliance Insurance Company was placed in liquidation in
Pennsylvania. The Company has filed claims in the Reliance liquidation for
recovery of its Shelly's Ditch expenses, but has not received a decision.

                  In February 2002, RPC filed a third-party complaint in the
Insurance Case against National Union and two other insurance carriers. The
third-party complaint seeks defense and indemnity from the insurers relating to
investigation and remediation of contamination in Shelly's Ditch.

                                      -13-

<PAGE>

                  In February 2004, National Union and its affiliates commenced
an adversary proceeding against the Company, RPC and others by filing a
complaint in U.S. Bankruptcy Court (the "Adversary Proceeding"). In the
Adversary Proceeding, National Union claims that RPC's third-party complaint
against National Union is barred by a January 2002 order of the U.S. Bankruptcy
Court in the Raymark Industries, Inc. and Raymark Corporation Chapter 11 cases
(the "Raymark Order"). National Union claims that the Raymark Order prohibited
RPC from pursuing its third-party complaint against National Union and declared
that the National Union insurance policies issued to the Company and RPC have
been exhausted. Also in February 2004, National Union filed a motion in the U.S.
District Court, Southern District of Indiana, asking that court to stay the
Insurance Case against National Union. The outcome of this Adversary Proceeding
and related motion for stay and their effects, if any, on the Insurance Case
against National Union cannot be predicted.

RPC Claims against IDEM

                  In July 2002, RPC filed an action against the IDEM for breach
of contract claiming damages based on the difference between the costs of
cleanup under the EPA Removal Order and the IDEM Agreed Order. The outcome of
this litigation cannot be predicted.

COMMERCIAL LITIGATION

                  On April 22, 2003, Automation by Design, Inc. filed a civil
action against RPC in U.S. District Court for the Southern District of Indiana.
The complaint alleges copyright infringement and breach of contract in
connection with RPC's purchase of certain equipment. In answer to plaintiff's
complaint, RPC denied liability and filed counterclaims for breach of contract
and declaratory judgment. The court has granted Automation by Design's motion to
amend its complaint to include Raytech Corporation and Production Design
Services, Inc. as defendants. RPC has agreed to defend and provide certain
indemnity protection to Production Design Services, Inc., which manufactured
certain equipment that is allegedly involved in this court action. The outcome
of this litigation cannot be predicted, and the Company's liability or
recoveries are indeterminable at this time.

EQUITY HOLDERS LITIGATION

                  In February 2002, lawyers claiming to represent the Committee
of Equity Holders of Raytech Corporation filed a motion in U.S. Bankruptcy Court
to compel Raytech to either issue up to approximately 700,000 additional shares
to the pre-reorganization holders of shares in Raytech or their successors, or
to proportionately reduce the shareholdings of the general unsecured creditor
shareholders under the Plan of Reorganization. The ultimate outcome of this
matter cannot be predicted; however, it is possible that its resolution could
cause the Company to issue additional shares to the original shareholder group,
or to retire shares held by the general unsecured creditor shareholder group.
This might directly impact the earnings per share calculations of the Company.
The Bankruptcy Court denied a Company motion to dismiss this action.

                  The Company is subject to certain other legal matters that
have arisen in the ordinary course of business, and management does not expect
them to have a significant adverse effect on the results of consolidated
operations,

                                      -14-

<PAGE>

financial condition or cash flow.

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

                  There were no matters submitted to a vote of security holders
during the fourth quarter of 2003.

                                     PART II

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

         The Company's common stock is traded on the New York Stock Exchange
under the trading symbol RAY. As of March 18, 2004, there were 1,492 holders of
record of the Company's common stock.

         Information regarding the quarterly high and low sales prices for 2003
and 2002 is set forth in Note U of the Consolidated Financial Statements, Part
II, Item 8 hereof.

         The Company continues not to pay dividends. As a holding company,
Raytech Corporation's ability to pay dividends is dependent upon the receipt of
dividends or other payments from its subsidiaries. The payment of dividends by
certain of the Company's subsidiaries is subject to certain restrictions under
the Company's credit agreements. See Note F of the Consolidated Financial
Statements.

         The following table sets forth information with respect to shares of
the Company's common stock that may be issued under the Company's existing
equity compensation plans as of December 28, 2003. The Company's equity
compensation plans are described in Note L to the Consolidated Financial
Statements.

Equity Compensation Plan Information

<TABLE>
<CAPTION>
                                                                                 Number of Securities
                                                                                 Remaining Available
                                                                                 For Future Issuance
                             Number of Securities       Weighted Average             Under Equity
                              to be Issued Upon          Exercise Price           Compensation Plans
                                  Exercise of             of Outstanding        [Excluding Securities
                              Outstanding Options,      Options, Warrants            Reflected in
    Plan Category             Warrants and Rights          and Rights                 Column (a)]
    -------------            ---------------------      -----------------       ---------------------
                                      (a)                      (b)                       (c)
<S>                          <C>                        <C>                     <C>
Equity compensation
  plans approved by
  security holders                 3,035,659                  $ 5.56                  1,227,000

Equity compensation
  plans not approved
  by security holders                      -                       -                          -
                                   ---------                  ------                  ---------
Total                              3,035,659                  $ 5.56                  1,227,000
                                   =========                  ======                  =========
</TABLE>

                                      -15-

<PAGE>

Item 6. Selected Financial Data

Consolidated Five-Year Financial Summary

         Selected historical consolidated financial data is presented for the
five fiscal years ended December 28, 2003. The information is separated between
Predecessor Company, pre-emergence from bankruptcy, and Successor Company, post-
emergence from bankruptcy. As a result of reorganization and fresh-start
adjustments recorded in conjunction with the Company's emergence from
bankruptcy, the financial data of the Successor Company for the years ended
December 28, 2003, December 29, 2002, the period April 3, 2001 to December 30,
2001 are not comparable to the Predecessor Company for the period January 1,
2001 to April 2, 2001 and for the years ended December 30, 2000 and December 31,
1999.

         The extraordinary gains on the settlement of liabilities recorded
during the period April 3, 2001 to December 30, 2001 (Successor Company) and the
period January 1, 2001 to April 2, 2001 (Predecessor Company) have been
reclassified to operating items in accordance with SFAS No. 145, "Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and
Technical Corrections."

                                      -16-

<PAGE>

Item 6. Selected Financial Data (continued)

FIVE-YEAR REVIEW OF OPERATIONS

(in thousands, except per share data)

<TABLE>
<CAPTION>
                                                  Successor Company                                 Predecessor Company
                                     ---------------------------------------------- -----------------------------------------------
                                         For the Year Ended                                                 For the Year Ended
                                     ---------------------------   For the Period     For the Period    ---------------------------
                                     December 28,   December 29,  April 3, 2001 to  January 1, 2001 to  December 30,    December 31,
                                         2003           2002      December 30, 2001  April 2, 2001(6)       2000            1999
                                     ------------   ------------  ----------------- ------------------  ------------    ------------
<S>                                  <C>            <C>           <C>               <C>                 <C>             <C>
Operating Results
  Net sales                          $    205,865   $    209,866    $    146,050       $     55,205     $    239,532    $    251,966
  Gross profit                             26,126         36,771          21,460             11,394           59,489          60,238
  Operating profit (loss)(1)              (57,473)         4,440          (3,291)             3,652           27,215          27,518
  Interest expense (2)                      1,061            903             873                444            2,218           2,279
  Gain on settlement of debt (3)                -              -           1,548                  -                -
  Reorganization items (4)                      -              -            (784)         7,158,896                -               -
  Net (loss) income (1),(4), (5)          (66,443)        (2,825)         (5,577)         6,995,257       (7,058,978)         16,364
                                     ------------   ------------    ------------       ------------     ------------    ------------
Share Data:
  Basic (loss) earnings
    per share (1),(4), (5)           $      (1.59)  $       (.07)   $       (.13)      $   1,778.88     $  (2,015.40)   $       4.76
  Weighted average shares                  41,727         41,608          41,527              3,932            3,503           3,439
  Diluted (loss) earnings
    per share (1),(4), (5)           $      (1.59)  $       (.07)   $       (.13)      $   1,772.62     $  (2,015.40)   $       4.65
  Adjusted weighted average
    shares                                 41,727         41,608          41,527              3,946            3,503           3,519
                                     ------------   ------------    ------------       ------------     ------------    ------------

Balance sheet (at year-end):
  Total assets                       $    206,024   $    294,221    $    320,788       $    323,636     $    320,316    $    188,686
  Working capital                          25,414         23,317          28,157             26,753           21,402          11,201
  Long-term obligations (7)                71,772         82,850          85,410             69,330           31,238          35,055
  Liabilities subject to
    compromise (5)                              -              -               -                  -        7,211,433               -
  Total shareholders' equity
    (deficit)                              75,910        142,110         144,083            158,352       (6,979,138)         80,788
                                     ------------   ------------    ------------       ------------     ------------    ------------

Property, plant and equipment
Capital expenditures                 $      8,968   $      9,648    $      7,488       $      2,717     $     13,539    $     22,969
Depreciation                               16,107         14,943          10,585              3,180           11,545          10,569
                                     ------------   ------------    ------------       ------------     ------------    ------------
</TABLE>

(1)      2003 includes $48.8 million impairment charge. (See Notes D and E to
         the Consolidated Financial Statements.)

(2)      Predecessor Company includes cessation of interest accruals on Raymark
         note in connection with a Bankruptcy Court Order.

(3)      Represents gain on the settlement of debt. See Note F to the
         Consolidated Financial Statements.

(4)      Reorganization items - see Note X to the Consolidated Financial
         Statements.

(5)      The year ended December 30, 2000 includes recording of the estimated
         amount of allowed claims in the amount of $7.2 billion relating to
         asbestos personal injury, environmental and employee benefits issues.
         See Note V to the Consolidated Financial Statements.

(6)      Includes the reorganization and the adoption of fresh-start reporting
         as a result of the Company's emergence from bankruptcy (See Notes V and
         W to the Consolidated Financial Statements).

(7)      Includes long-term liabilities and minority interest.

                                      -17-

<PAGE>

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

         The following discussion should be read in conjunction with the
Consolidated Financial Statements, including the related notes, included in
"Item 8 - Financial Statements and Supplemental Data." This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward- looking
statements as a result of certain factors, including, but not limited to, those
described in the section entitled "Caution Regarding Forward-Looking
Statements." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect our present expectations and analysis
and are inherently susceptible to uncertainty and changes in circumstances. We
assume no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting such
forward-looking statements.

Executive Summary

         The Company manufactures and distributes engineered products for heat
resistant, inertia control, energy absorption and transmission applications. The
Company's operations are categorized into three business segments: Wet Friction,
Dry Friction and Aftermarket. The Wet Friction segment manufactures and
distributes automatic transmission and wet wheel brake system components to OEMs
in North America, Europe and Asia. It is the largest segment and represents 57%
of total net sales and all of the recorded losses for 2003. The Dry Friction
segment manufactures and distributes manual transmission clutch facings in
Europe and Asia to system assemblers who sell manual transmission systems to
OEMs and the aftermarket. This segment represents 21% of total net sales. The
Aftermarket segment manufactures and sources automatic transmission parts, which
are sold predominantly to warehouse distributors who sell the product
domestically and to international customers. Approximately $8.6 million of sales
in 2003 represented parts manufactured by the Wet Friction segment, which were
sold through the Aftermarket segment. The Aftermarket segment represents 22% of
total net sales. Additional information on these business segments is presented
in Note H - Segment Reporting in the Notes to Consolidated Financial Statements.

         An executive summary of significant events is presented below, as well
as a tabular presentation of the effects on the Company's financial results. The
issues and events are more fully explained in the Management's Discussion and
Analysis, subsequent to this Executive Summary.

         Raytech Corporation recorded a $66.4 million loss for the year ended
December 28, 2003. The loss is due to certain events that occurred during the
2003 fiscal year.

         It should be noted that in determining the value of goodwill and other
intangible assets at the time the Company emerged from bankruptcy, the projected
performance in terms of future cash flows by business segment was used to
determine the values. The valuation distribution was as follows:

                                      -18-

<PAGE>

<TABLE>
<CAPTION>
                     Wet Friction   Aftermarket       Total
                     ------------   -----------       -----
<S>                  <C>            <C>              <C>
Technology             $ 13,862       $  2,400       $ 16,262
Distribution base             -          5,716          5,716
Trademarks               11,271          6,442         17,713
Goodwill                 28,855          5,912         34,767
                       --------       --------       --------
                       $ 53,988       $ 20,470       $ 74,458
                       ========       ========       ========
</TABLE>

         There were no goodwill or intangible values attributed to the Dry
Friction segment.

         In addition to the goodwill and other intangibles, the Company
increased the book value of certain long-lived tangible assets to fair market
value in accordance with Statement of Position 90-7 ("SOP"). The increased
values (the "Step-Up") attributable to the long-lived assets were distributed as
follows:

<TABLE>
<S>                                       <C>
Wet Friction segment                      $27,738
Aftermarket segment                         3,085
                                          -------
Total long-lived tangible assets
     Step-Up                              $30,823
                                          =======
</TABLE>

         There was no Step-Up in value attributed to the Dry Friction segment.

         At emergence from bankruptcy, it was determined that, in order to
maintain segment performance comparability, the increased asset values
associated with the recording of the goodwill and other intangibles and the
Step-Up for the long-lived tangible assets would be maintained at a corporate
level. Segment reporting is discussed in Note H of the Notes to the Consolidated
Financial Statements.

         Therefore, although the underlying financial analysis for the
impairment charges was determined using the financial projections for Wet
Friction and Aftermarket, the majority of the charges were recorded at the
corporate level. The $8.1 million charge recorded in the Wet Friction segment
represents assets held in that grouping.

         1.       The performance of the Wet Friction segment was materially
                  impacted by lower sales volume of $12.8 million and reduced
                  pricing on certain of its continuing sales. The operating loss
                  recorded by the segment for fiscal year 2003 of $20.0 million
                  compares to an operating profit of $3.3 million for the year
                  ended 2002, a change period over period of $23.3 million. The
                  operating loss in 2003 included an impairment charge of $8.1
                  million.

         2.       The Company, based on the deteriorating performance of the Wet
                  Friction segment, among other factors, developed projected
                  financial information, which provided a longer term view of
                  expected financial performance. The Company's previous
                  long-range plan was developed in 2000 during a much stronger
                  economic environment. The plan developed in 2000 served as the
                  basis for the application of the fresh-start accounting. The
                  results of the new financial plan showed substantially reduced
                  projected sales and profitability compared to the previous
                  plan. The Company used the services of an independent
                  consulting firm to develop valuation models based on the
                  financial projections. Using the new financial projections,
                  the Company:

                  A.       Reviewed its recorded goodwill and other intangible
                           assets in

                                      -19-

<PAGE>

                           accordance with SFAS 142, "Goodwill and Other
                           Intangible Assets." The results of the evaluation
                           determined that an impairment

                                      -20-

<PAGE>

                           existed and a writeoff of goodwill and other
                           intangibles was appropriate. An impairment charge of
                           $37.8 million was recorded.

                  B.       In conjunction with the analysis noted above, the
                           Company also evaluated its long-lived assets for
                           impairment in accordance with SFAS No. 144,
                           "Accounting for the Impairment or Disposal of Long-
                           Lived Assets." This review determined that $11.0
                           million of certain long-lived assets was impaired and
                           were written off.

         3.       The Company, in conjunction with the original recording of the
                  deferred tax asset recorded a payable to the Raytech Personal
                  Injury Trust (the " PI Trust") in accordance with a tax
                  agreement established as an element of the Chapter 11
                  agreement. The Company, in reviewing the financial plan noted
                  above, determined that collectibility of certain deferred tax
                  assets recorded on the Company's books was in question. See
                  Note I to the Consolidated Financial Statements.

                  Based on the determination that a valuation allowance was
                  needed against the deferred tax assets, the Company reduced
                  the non-current payable to the PI Trust $30.5 million, which
                  created $30.5 million of other income. In addition, the
                  Company recorded an increase of $2.8 million to the current
                  payable to the PI Trust to reflect the impact of certain state
                  taxes. This resulted in a reduction of $2.8 million to other
                  income. The net effect of these entries was the recording of
                  $27.7 million in other income in conjunction with a reduction
                  of the payable to the PI Trust.

                  The Company then determined the impact of all the adjustments
                  relating to the reduction in the deferred tax assets and
                  recorded a tax provision of $25.0 million. A reconciliation of
                  the loss from operations multiplied by the statutory federal
                  tax rate to the reported tax provision is summarized in Note I
                  in the Consolidated Financial Statements.

         4.       In the quarter ended June 29, 2003, the Company recorded a
                  $1.8 million charge for costs incurred in compliance with the
                  EPA Removal Order. In the quarter ended September 28, 2003,
                  the Company recorded an additional $5.5 million for certain
                  additional remediation costs, fines and investigation costs.
                  These costs are more fully explained below and in Note G to
                  the Consolidated Financial Statements. The total impact of the
                  above was a $7.3 million charge to operations in 2003.

         The impact of the above issues on reported financial results is set
forth in the table below.

                                      -21-

<PAGE>

<TABLE>
<CAPTION>
                                                      Adjustments
                                           ----------------------------------
                                                Impairment
                                           --------------------                                    Reported
                                  Core       SFAS         SFAS       Deferred                      Financial
                                Business      142          144         Taxes       Environmental    Results
                               ----------  --------     --------     --------      -------------  ----------
<S>                            <C>         <C>          <C>          <C>           <C>            <C>
Net sales                      $ 205,865   $            $            $             $              $ 205,865
Cost of sales                   (179,739)                                                          (179,739)
                               ---------                                                          ---------
Gross profit                      26,126                                                             26,126
SG&A                             (34,795)                                                           (34,795)
                               ---------                                                          ---------
Operating loss before
  impairment charges              (8,669)                                                            (8,669)
Impairment charges                          (37,770)     (11,034)                                   (48,804)
                               ---------   --------     --------     --------        -------      ---------
Operating loss                    (8,669)   (37,770)     (11,034)                                   (57,473)
Other income (expense), net       (1,016)                              27,743                        26,727
Interest expense                  (1,061)                                                            (1,061)
                               ---------   --------     --------     --------        -------      ---------
Loss before provision for
  environmental claims,
  income taxes and
  minority interest              (10,746)   (37,770)     (11,034)      27,743                       (31,807)
Provision for environmental
  claims                                                                              (7,262)        (7,262)
                               ---------   --------     --------     --------        -------      ---------
Loss before income taxes
  and minority interest          (10,746)   (37,770)     (11,034)      27,743         (7,262)       (39,069)
Provision for income taxes        (1,762)                             (24,983)                      (26,745)
Minority interest                   (629)                                                              (629)
                               ---------   --------     --------     --------        -------      ---------
Net (loss) income              $ (13,137)  $(37,770)    $(11,034)    $  2,760        $(7,262)     $ (66,443)
                               =========   ========     ========     ========        =======      =========
</TABLE>

         The core business column above represents the results of the Company's
businesses from recurring operations, excluding the impairment charges, the
impact of recording a valuation allowance against the deferred tax assets and
the environmental charges associated with the Crawfordsville, Indiana, facility.

Risk Factors

         The Company's businesses are subject to certain risks, including but
not limited to those described below, that could cause material changes in its
results of operations or financial condition in the future.

         -        The Company's businesses are greatly affected by general
                  economic conditions. The Company sells components to the
                  automotive and heavy duty equipment industries and in large
                  part is dependent upon consumer demand for automobiles,
                  consumer confidence and business investment in heavy
                  equipment. The Company's businesses sell components for
                  transmissions and brakes to automotive and heavy duty OEMs as
                  well as the automotive aftermarket. The economic slowdown and
                  recession of the last three years have resulted in reduced
                  heavy equipment and passenger vehicle production in the United
                  States and in foreign markets and reduced demand in the
                  aftermarket. It is possible that OEM vehicle and equipment
                  production will not increase significantly in 2004 and future
                  years. Continuation of the economic slowdown may adversely
                  affect the Company's revenues in all of its business segments.

         -        The Company's customers are large companies under pressure to
                  cut component costs. The Wet Friction segment's largest
                  customers are experiencing margin erosion due to reduced
                  volume, high labor costs and intense foreign competition. The
                  Company is a relatively small supplier of a limited number of
                  components. Due to their size, the Company's customers are
                  often able to demand component price reductions from their
                  suppliers, including all segments of the Company. These
                  customers may also demand technological changes and quality
                  improvements at the

                                      -22-

<PAGE>

                  Company's expense. In addition, the trend in the automotive
                  aftermarket is toward longer transmission service and
                  replacement cycles due to improved quality. If foreign
                  automotive manufacturers continue to take U.S. market share
                  from the Company's domestic OEM customers and economic
                  conditions do not improve significantly, the Company's
                  revenues will continue to be adversely affected by these
                  factors.

         -        The Company is subject to substantial environmental
                  remediation obligations for past contamination that are not
                  yet fixed in scope or amount. The nature of environmental
                  contamination and its remediation are such that the amount and
                  nature of work necessary is often unknown until late in the
                  process. The level of responsibility of the parties involved
                  and the level of remediation to be required by governmental
                  authorities is also uncertain. The Company also incurs
                  substantial ongoing environmental compliance costs in
                  operating its production facilities. Substantial unanticipated
                  environmental costs could adversely affect profitability. (See
                  "Environmental Claims" below and Note G to the Consolidated
                  Financial Statements.)

         -        Raytech's Common Stock is currently included in the Russell
                  3000 equity index. The Russell 3000 is a market
                  capitalization-weighted index of the 3,000 largest U.S.
                  companies. Russell reconstitutes the index annually in order
                  to accurately rank the 3,000 largest companies in the U.S.
                  stock market by market capitalization to provide a truer
                  reflection of stock market activity and performance. There is
                  a risk that Raytech may no longer be part of that index after
                  the next recalculation of the index in June 2004. If Raytech
                  ceases to be a member of the Russell 3000, its common stock
                  price may be adversely affected because mutual funds and other
                  investors who must own or wish to own the Russell 3000 index
                  will sell or no longer purchase Raytech common stock. The PI
                  Trust holds 82.9% and the EPA holds 5.5% of the outstanding
                  common stock of the Company at December 28, 2003.

         -        In 2004, worldwide increases in steel demand have led to
                  increased prices and concerns of a steel shortage. Potential
                  impacts on the Company from the current steel market
                  conditions could include reduced delivery levels of finished
                  products to Raybestos customers and lower profitability due to
                  higher raw material costs.

Significant Accounting Policies

         The Company's significant accounting policies are detailed in Note A in
the Notes to the Consolidated Financial Statements. The Consolidated Financial
Statements include the accounts of Raytech Corporation and its subsidiaries. The
investment by third parties in Allomatic Products Company ("APC") is accounted
for as minority interest in the Consolidated Financial Statements. There are no
unconsolidated entities. The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported and disclosures of contingent assets and
liabilities and the reported revenue and expenses made in the financial
statements and accompanying notes. Actual results could differ from these
estimates. Significant estimates include inventory, receivable and environmental
reserves; depreciable lives of property, plant and equipment and intangible
assets, the accruals for pension and other

                                      -23-

<PAGE>
postretirement and postemployment benefits; and the recoverable value of
deferred tax assets and the carrying value of goodwill and other intangible
assets.

         The most significant areas involving management's judgment are
described below.

-        Accruals for environmental matters are recorded when it is probable
         that a liability has been incurred and the amount of the liability can
         be reasonably estimated or if an amount is likely to fall within a
         range and no amount within the range can be determined to be the better
         estimate, the minimum amount of the range is recorded. Remediation
         obligations are not recorded on a discounted basis. Reimbursements from
         insurance carriers relating to environmental matters are not recorded
         until it is probable that such recoveries will be realized. The accrual
         for environmental matters is discussed in this Management Discussion
         and Analysis under the heading Provision for Environmental Remediation.

-        Pension benefits and welfare benefits represent financial obligations
         that will be ultimately settled in the future with employees who meet
         eligibility requirements. The court ordered that Raytech was liable for
         the maintenance and funding of the underfunded pension plan obligations
         of Raymark Corporation. Raytech, based on the court's order, assumed
         the role of plan sponsor of the Raymark plans upon the emergence from
         bankruptcy in the fall of 2001. Because of the uncertainties involved
         in estimating the timing and amount of future payments, significant
         estimates are required to calculate pension and welfare benefit
         expenses and liabilities related to the Company's plans. The Company
         utilizes the services of independent actuaries, whose models are used
         to facilitate these calculations. Several key assumptions are used in
         actuarial models to calculate pension expense and welfare benefit
         expense and liability amounts recorded in the financial statements.
         Management believes the three most significant variables in the pension
         models are the expected long-term rate of return on plan assets, the
         discount rate, and the expected rate of compensation increase.
         Management believes the most significant assumption in the welfare
         benefit model is the healthcare cost trend rate. The actuarial models
         also use assumptions for various other factors, including employee
         turnover, retirement age, and mortality. Company management believes
         the assumptions used in the actuarial calculations are reasonable and
         are within accepted practices in each of the respective geographic
         locations in which we operate.

-        The Company provides certain warranties relating to the quality and
         performance of its products. The primary product of the Company,
         friction plates, is used in manual and automatic transmissions,
         transfer cases and wet wheel brake systems for heavy duty equipment.
         The Company maintains product liability insurance that covers personal
         injuries and property damage alleged to have been caused by defective
         products. The Company also has insurance to cover the costs of product
         recalls arising from its German and Chinese operations. However, the
         Company currently carries only limited insurance for product recall
         costs in the United States, and none in the U.K., as management
         believes such insurance to be cost prohibitive given the Company's
         warranty experience. Warranty claims have historically been
         insignificant due to the quality of the Company's products and the
         impact of other potential parts interactions in these systems, which
         may contribute to the root cause of any system failure. The costs in
         2003 for product warranty support have been de minimis. Some sales
         contracts with customers

                                      -24-

<PAGE>

         provide that the Company will indemnify the customer and its affiliates
         against certain specified patent, copyright and trade secret
         infringement claims of third parties that are based on the use or sale
         of the Company components. There have been no significant claims to
         date.

-        At December 28, 2003, the Company had goodwill and other intangibles of
         $30.6 million, which were recorded as a result of the fresh-start
         accounting process in 2001. Management reviews goodwill and indefinite
         lived intangibles for impairment annually or when events or
         circumstances indicate that its value may have declined. The unpatented
         technology and distribution base are reviewed for impairment whenever
         events or circumstances indicate that their carrying value may not be
         recoverable. In order to evaluate impairment, assumptions about the
         future condition and operations of the reporting unit to which the
         goodwill relates are made. Using these assumptions, management
         determines, with the assistance of other professionals, whether an
         impairment charge is required to reduce goodwill and other intangible
         assets to its estimated fair value. In the case of long-lived tangible
         and definite-lived intangible assets, if the undiscounted future cash
         flows related to the long-lived assets are less than the assets'
         carrying value, a similar impairment charge would be recorded.
         Management believes that the assumptions made to evaluate goodwill,
         other intangibles and tangible long-lived assets impairment are
         appropriate and reasonable.

-        The assessment of the amount of the Company's deferred tax assets,
         which will be realizable, requires the use of significant judgments and
         estimates. In making its assessment, the Company evaluates all relevant
         evidence, including current industry dynamics within which the Company
         operates, to determine if it would be able to realize all or a part of
         its deferred tax assets in the future. Should the Company determine
         that it would not be able to realize certain of its deferred tax
         assets, a valuation allowance would be recorded in the period such a
         determination is made.

Historical Information and Methods of Presentation

         The Company, at December 28, 2003, completed its second full year of
operation as the Successor Company post-emergence from bankruptcy. In April
2001, Raytech emerged from the protection of Bankruptcy Court under Chapter 11
of Title 11 of the United States Bankruptcy Code. Raytech had been under the
Chapter 11 protection since March 1989. The bankruptcy history and emergence are
described in more detail in Note V to the Consolidated Financial Statements.

         As of April 2, 2001, the Company adopted fresh-start reporting pursuant
to the guidance provided by the American Institute of Certified Public
Accountant's SOP No. 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code". The Effective Date of the Company's emergence from
bankruptcy was considered to be the close of business on April 2, 2001 for
financial reporting purposes. The periods presented prior to April 2, 2001 have
been designated "Predecessor Company" and the periods subsequent to April 2,
2001 have been designated "Successor Company." In accordance with fresh-start
reporting, all assets and liabilities were recorded at their respective fair
values. The fair value of substantially all of the Company's long-lived assets
was determined using information provided by third-party appraisers.

         The Company has determined that the most meaningful presentation of
financial information would be to provide comparative analysis of the financial
performance of the Successor Company for the fiscal years ended December 28,
2003 and December 29, 2002 and for the thirty-nine-week periods ended December
29, 2002

                                      -25-

<PAGE>

and December 30, 2001.

         Additionally, the financial analysis detailed below provides a
comparative analysis of the financial performance of the Successor Company for
the period December 31, 2001 through March 31, 2002 compared to the Predecessor
Company financial performance for the period January 1, 2001 through April 1,
2001. The adjustments relating to the recording of reorganization expenses and
other fresh- start adjustments for the one-day period ended April 2, 2001 are
detailed in Note W to the Consolidated Financial Statements.

         The Company has elected not to present a comparative analysis of the
fifty- two-week period ended December 29, 2002 since such information in the
prior period would require consolidating statements of the Predecessor Company
and the Successor Company. It was determined that the significance of the
adjustments relating to the emergence from bankruptcy would render such an
analysis not meaningful.

Successor Company Discussion and Analysis for the Year Ended December 28, 2003
Compared to the Year Ended December 29, 2002

Net Sales

         Worldwide net sales were $205.9 million for the year ended December 28,
2003 compared to $209.9 million for the same period in the prior year, a decline
of $4.0 million. The decline in sales reflects a decrease in the Wet Friction
segment of $12.8 million and a decrease in the Aftermarket segment of $1.3
million offset by a $9.2 million increase in the Dry Friction segment. The
remaining change is due to lower intercompany sales from Wet Friction to
Aftermarket, which are eliminated in consolidation. The detailed discussion of
the individual segment performance is presented in "Business Segment and
Geographic Area Results."

Gross Profit

         The gross profit for the 2003 fiscal year of $26.1 million compares to
the gross profit of $36.8 million for fiscal 2002, a decline in gross profit of
$10.7 million or 29.1%. The gross profit percentage for 2003 of 12.7% compares
to the gross profit percentage for 2002 of 17.5%. The decline in gross profit is
due entirely to the reduced gross profit in the Wet Friction segment of $13.4
million, which was partially offset by increased gross margin in the Dry
Friction segment of $3.4 million. The gross profit analysis by business segment
is presented in "Business Segment and Geographic Area Results."

Selling, General and Administrative

         Selling, general and administrative expenses for the fiscal 2003 year
of $34.8 million compares to $32.3 million for the 2002 fiscal year, an increase
of $2.5 million or 7.7%. The increased costs were due to certain severance and
new hire costs in the Wet Friction segment of $.5 million. In addition, the Dry
Friction segment increased SG&A $1.7 million in support of the $9.2 million in
increased sales volume. The Aftermarket increased $.6 million due to primarily
providing for certain accounts receivable reserves in 2003. The above increases
were offset by $.3 million in reduced corporate costs.

Interest Expense

         Interest expense for the fiscal year 2003 of $1.1 million compares to

                                      -26-

<PAGE>

interest expense of $.9 million for the 2002 year. The increased interest
expense of $.2 million reflects the increased borrowings year-over-year.

Other Income

         The Company recorded other income of $26.8 million for fiscal 2003
compared to $.5 million for fiscal 2002, an increase in other income of $26.3
million. The other income component was significantly affected by the reduction
of certain net deferred tax assets and the corresponding payable to the PI
Trust, which generated other income in 2003. The payable to the PI Trust was
reduced $27.7 million due to the reduction of certain deferred tax assets, which
are more fully explained in Note I of the Consolidated Financial Statements and
within this Management's Discussion and Analysis.

         In addition, the Company recorded $1.0 million of other expense during
fiscal 2003, which relates more closely to the $.5 million of other income
recorded in fiscal 2002. The change year-over-year related to the disposal of
certain property, plant and equipment in Dry Friction and Wet Friction.

Provision for Environmental Remediation

         The Company recorded a provision in the second quarter of 2003 of $1.8
million for expected final remediation and administrative cost associated with
compliance with the EPA Removal, which is discussed in Note G - Litigation of
the Consolidated Financial Statements. The work required under the EPA Removal
Order has been completed at this time and a final report, which documents the
compliance actions, has been accepted by the EPA. During the thirteen-week
period ended June 29, 2003, the cost of contaminated soil removal increased over
the previously accrued amount by $1.6 million due to changes in the tonnage
required to be removed in order to comply with the EPA Removal Order compared to
the estimate. In addition, the EPA has estimated the administrative charge for
the agency's oversight of the execution of the EPA Removal Order will be
approximately $.4 million. Also, during the second quarter, the Company settled
a disputed billing amount, which arose in the first stage of the project from
the construction company hired to do the initial cleanup. The resolution of the
dispute resulted in a reduction of $.2 million of amounts previously recorded by
the Company. The construction company was replaced prior to the completion of
the first stage.

         Although the Company has, to the best of its knowledge, complied fully
with the EPA Removal Order, there exists the potential for additional
remediation. Further, the Company may be required to remediate additional
contiguous parcels of property not subject to the EPA Removal Order, subject to
potential future actions taken by the EPA. The Company has recorded a provision
in the third quarter of 2003 of $2.4 million as its current estimate of the
potential cost to remediate the additional contiguous parcels of property not
subject to the EPA Removal Order as noted above. The estimate of cost noted
above is based on preliminary engineering data at a level of compliance similar
to the requirements contained in the EPA Removal Order. The Company is currently
negotiating a settlement with the EPA for future remediation on this site. The
outcome of the negotiation could also impact the estimated cost noted above.

         On May 15, 2001, the EPA issued a Pre-filing Notice and Opportunity to
Confer to RPC. This notice stated that EPA is contemplating filing a civil
action against RPC for violations of various environmental statutes and is
offering RPC the opportunity to participate in pre-filing negotiations to
resolve this matter before initiation of litigation. The EPA stated that it has
reason to believe that RPC committed violations of the Clean Air Act, Clean
Water Act, Resource

                                      -27-

<PAGE>

Conservation and Recovery Act, and Toxic Substances Control Act and that RPC
could be subject to substantial penalty. The Company had previously recorded a
$.3 million provision for settlement of these violations. By letter dated
September 3, 2003, the EPA stated that penalties for violations alleged in the
Pre-filing Notice could total approximately $180 million and suggested that the
parties resolve the Pre-filing Notice claims as follows: RPC should pay
approximately $2.4 million and undertake compliance activities, onsite
investigative work that the EPA estimated would cost approximately $1 million,
and corrective action to resolve the Pre-filing Notice, with no estimate of such
cost of corrective action. The Company recorded a provision in the third quarter
of 2003 for $3.1 million based on the notice.

         The IDEM conducted a site review in May 2003 at the Crawfordsville,
Indiana, facility of RPC. In July 2003, the IDEM sent RPC a report of such
inspection. This report stated that IDEM believes that RPC has violated certain
environmental law requirements. The IDEM report stated that the agency intends
to notify enforcement authorities but did not specify any fines for the alleged
violations. In November 2003, the Company received a Notice of Violation and
Proposed Agreed Order relating to the May 2003 inspection. Subsequent to
year-end the Company settled the order for $35 thousand.

         In 2002, the Company recorded a charge of $5.4 million for compliance
with the EPA Removal Order discussed above, which increased the accrued
liability at year-end 2002 to $7.0 million.

         The accrued liability at year-end 2003 is $6.2 million. See Note G -
Litigation for a full discussion of the above.

Business Segment and Geographic Area Results

         The following discussion of operating results by industry segment and
geographic area related to information contained in Note H in the Consolidated
Financial Statements. Operating profit is income before income taxes and
minority interest.

Wet Friction Segment

<TABLE>
<CAPTION>
                             2003                2002
                             ----                ----
<S>                      <C>                 <C>
Net sales                $  125,095          $   137,930
Gross profit                  6,343               19,724
Operating profit (loss)     (19,972)               3,276
</TABLE>

         The segment recorded a decline in sales for fiscal 2003 of $12.8
million compared to fiscal 2002. The decline in sales is due to lower sales to
the automotive OEM component of the segment of $4.5 million due to lower demand
for the Company's product and reduced pricing. The domestic automotive
manufacturers, who represent the OEM customers of the Company, continue to lose
market share to foreign competition, and the reduced demand for the domestic
product directly impacts Raytech. A significant portion of the lost North
American market share has been consumed by Asian automakers, a market Raytech
has not penetrated. In addition, sales to the heavy duty component of the
segment declined $5.0 million compared to fiscal 2002 results. The decline
represents certain part sales lost to competition as well as price reductions.
Also, sales through the European component of this segment declined $2.2 million
compared to sales recorded in the 2002 fiscal year. The sales decline reflects
the decision by management in late

                                      -28-

<PAGE>
2002 to eliminate a non-core business product line produced at the United
Kingdom facility. The additional sales shortfall reflects reduced demand for
product.

         The segment recorded a decline in gross profit of $13.4 million
compared to fiscal 2002 results. The gross profit margin for 2003 of 5.1%
compares to a gross profit margin of 14.3%, a decline of 9.2 percentage points.
The decline in gross profit reflects the impact of lower sales and reduced
pricing. The lack of gross profit in this segment was the driving force in the
losses sustained by the Company in 2003.

         In addition to the impact of the reduced gross profit, the segment
recorded an impairment charge of $8.1 million in fiscal 2003. The charge
reflects the reduction in the book value of certain long-lived assets in
accordance with the guidelines set forth in SFAS 144. See Note D - Property,
Plant and Equipment of the Consolidated Financial Statements. The segment also
recorded certain charges relating to the net realizable value of inventory and
other charges relating to losses, which will be incurred when certain products
are produced and sold. The provision we recorded for 2003 was $1.5 million.

         The Company produces goods for its customers based on a purchase order
system, and in certain instances using longer term contracts that stipulate a
fixed selling price with no commitment as to quantity. In instances where the
product's cost exceeds the selling price, a reserve is established for the
expected loss on goods in inventory and customer purchase orders received by the
balance sheet date. The Company has not recorded an estimate of the loss over
the term of these contracts since the quantity and mix of parts is not known and
the future production costs will be impacted by, among other things, changes in
economic conditions and management's actions, including expected cost savings
initiatives.

         The operating loss for the 2003 fiscal year reflects the loss from
operations of $11.9 million and the impairment charge of $8.1 million for an
operating loss of $20.0 million. The segment had operating profit in fiscal 2002
of $3.3 million, a decline year-over-year of $23.3 million.

         The Company is reviewing alternatives to improve the operating results
for this segment. Alternatives being discussed include:

                  -        Creating a stronger focus on European Wet Friction
                           operations by transferring the management
                           responsibility for this component to the Dry Friction
                           management group, which is headquartered in Germany.
                           Subsequent to year-end, the Company transferred the
                           responsibility for the European Wet Friction group to
                           the Dry Friction management group. In 2004, the
                           results will be reported in that segment.

                  -        Conducting a facilities utilization review to
                           determine if improved performance can be obtained
                           through consolidating certain facilities with a focus
                           on improved overhead absorption. Additionally, the
                           Company has identified in excess of $12.0 million of
                           cost savings projects it will implement in 2004.

                  -        Reviewing the need for separate research and
                           development facilities and the potential to reduce
                           costs while maintaining Raytech technological
                           capabilities. Subsequent to year-end, the technical
                           facility staff was reduced, and the sales staff is
                           relocating to rented office space. The automotive OEM
                           research and development efforts will be supported at
                           the Crawfordsville facility. It is

                                      -29-

<PAGE>

                           anticipated that the cost savings inherent in this
                           consolidation will approximate $.5 million.

         These and other items will be explored by management in order to
improve on fiscal 2003 results.

Aftermarket Segment

<TABLE>
<CAPTION>
                                  2003             2002
                                  ----             ----
<S>                            <C>              <C>
Net sales                      $  44,931        $  46,192
Gross profit                      12,725           12,993
Operating profit                   7,171            7,990
</TABLE>

         This segment experienced a reduction in net sales of $1.3 million or
2.7% in fiscal 2003 compared to the 2002 year. The sales reduction reflects the
lower demand for the Company's products due to long-lived parts in the OEM
product due primarily to improved quality. In addition, the segment produces
assembled kits for transmission rebuilding. Kit sales in 2003 were $1.5 million
lower than the 2002 year sales.

                                      -30-

<PAGE>

         The gross profit declined $.3 million or 2.1% in the 2003 year compared
to 2002. The gross profit percentage for 2003 of 28.3% compared to 28.1% in the
2002 year. The decrease in gross profit is due to the decrease in sales volume.
The segment was able to maintain its gross profit percentage, in spite of the
lower sales.

         The operating profit declined $.8 million in fiscal 2003 compared to
2002. The decrease in operating profit is due to the decrease in gross profit
and a $.6 million increase in SG&A expense. The increase in SG&A expense is due
to an additional provision for accounts receivable reserves.

         The segment includes APC, which is 57% owned by the Company, 40% owned
by Raymark, a related party, and 3% owned by certain employees of the Company.
Net sales for APC were $30.0 million in 2003 and $31.1 million in 2002.
Operating profit for APC was $2.5 million in 2003 and $3.9 million in 2002. APC
is consolidated in the financial results and a minority interest is recorded to
reflect the minority shareholders' interest in APC. A minority interest charge
is recorded for the minority's percent of income.

Dry Friction

<TABLE>
<CAPTION>
                                  2003             2002
                                  ----             ----
<S>                            <C>              <C>
Net sales                      $  44,453        $  35,244
Gross profit                      12,284            8,856
Operating profit                   3,395            2,452
</TABLE>

         The segment reported an increase in net sales of $9.2 million or 26.1%
for fiscal 2003 compared to the 2002 year. The sales increase reflects an
increase in sales from the European Dry Friction component of this segment of
$8.2 million and an increase of $1.0 million through the Asian component of the
segment. The European increase reflects a volume increase of $2.2 million and an
increase due to the impact of foreign currency translation of $6.0 million. The
increase in the sales through the Asian operation are all volume related as the
operation, which is in China, is not impacted by translation since the currency
is fixed relative to the U.S. dollar. The sales growth reflects increased market
share as the Company's technology and competitive pricing continues to provide
growth in this segment.

         The gross profit improved $3.4 million or 39% in fiscal 2003 compared
to the 2002 year. The gross profit percentage for fiscal 2003 of 27.6% compares
to 25.1%, an increase of 2.5 percentage points. The increase both in dollars and
gross margin percent reflects the strong gross profit being realized in the
Asian operation of 33.3% combined with the gross profit being realized in the
European operation of 23.9%. The Asian facility continues to grow as demand in
China and other countries served by the facility continues to provide sales
opportunities.

         The operating profit increased $.9 million or 38.5% providing an
operating profit percentage of 7.6% compared to an operating profit percentage
of 7.0%, an increase of .6 percentage points. This segment represents
substantial growth and profitability opportunities for the Company as the
product technology and production methods continue to improve.

Corporate

         The Company does not distribute the costs of operating the corporate

                                      -31-

<PAGE>

headquarters and certain other costs, which it maintains in its corporate
group. In April 2001, the date the Company emerged from the Chapter 11
proceedings, it determined that the increased property, plant and equipment
value and the increase in recorded goodwill and other intangibles determined as
part of the requirement of SOP 90-7 would be maintained at the corporate level.
It was determined that this would provide historical comparability at the
operating segment level.

         Therefore, certain charges related to the impairments, more fully
described in Notes D and E of the Consolidated Financial Statements were
recorded as expense in the corporate group as opposed to the operating segments.

         In reviewing the impact of the corporate group on segment results, the
following should be noted:

         -        The operating loss of $29.7 million recorded as corporate
                  expenses includes the following (in millions):

<TABLE>
<S>                                     <C>
Impairment charge                       $  (40.7)
Depreciation and amortization               (4.7)
Environmental cost                          (7.5)
Corporate headquarters cost                 (6.1)
Reduction of payable to PI Trust            27.7
Other income                                 1.6
                                        --------
                                        $  (29.7)
                                        ========
</TABLE>

            Note the other income is due to the reduction in the payable
            to the PI

                     Trust payable due to the adjustment to deferred
            assets. See the other income discussion previous in this
            Management's Discussion and Analysis.

Liquidity, Capital Resources and Future Liquidity

         The Company recorded a net loss for the year ended December 28, 2003 of
$66.4 million. The impact on liquidity as measured by the net cash provided by
operating activities reflects a positive cash flow of $2.6 million. The impact
can be summarized as follows (in millions):

<TABLE>
<S>                                     <C>
Net loss                                $  (66.4)
Non-cash charges
 Depreciation and amortization              18.3
 Impairment charges                         48.8
 Other working capital                       1.9
                                        --------
 Total non-cash charges                     69.0
                                        --------
Net cash provided by
  operating activities                  $    2.6
                                        ========
</TABLE>

         The non-cash charges relating to the impairment are detailed in Note D
and

                                      -32-

<PAGE>

Note E to the Consolidated Financial Statements.

         Cash flows from operating activities for fiscal 2002 were $13.0
million. The decline in cash flows from operating activities year-over-year is
$10.3 million. The decline in cash flow reflects the losses recorded in the
business due to the poor performance of the Wet Friction segment.

         The Company's cash and cash equivalents at December 28, 2003 totaled
$16.4 million compared to $20.0 million at December 29, 2002, a decrease of $3.6
million. Capital expenditures for fiscal 2003 totaled $9.0 million compared to
$9.6 million for the 2002 fiscal year. In both years, the capital expenditures
were comparable to planned spending amounts.

         Changes in the components of working capital for fiscal 2003 provided
increased cash flow from reduced accounts receivable of $2.7 million, income tax
receivable of $3.7 million and inventories $4.2 million. Other current assets,
including restricted cash, required the use of cash of $2.2 million and accounts
payable of $.8 million. The reduction in the payable to the PI Trust of $27.7
million represents a non-cash reduction in the liability, which is explained in
Note I to the Consolidated Financial Statements and within this Management's
Discussion and Analysis.

         The total borrowings at year-end 2003 of $22.4 million compares to
total borrowings of $19.4 million at year-end 2002, an increase of $3.0 million
period- over-period. The available lines of credit at December 28, 2003 of $10.6
million compares to $8.8 million at year-end 2002, an increase in availability
of $1.8 million. Full details of the Company's debt are contained in Note F -
Debt to the Consolidated Financial Statements. In addition, refer to Note N -
Commitments to the Consolidated Financial Statements for disclosure of future
obligations and commitments.

         In connection with the recorded loss of $66.4 million, the Company
requested and obtained a waiver of the material adverse change clauses contained
in the domestic bank agreements.

         In summary of the above, the cash and available lines of credit at
December 28, 2003 were $27.0 million compared to $28.8 million at year-end 2002,
a decrease in cash and available lines of credit of $1.8 million.

                                      -33-

<PAGE>

         Items which will potentially require cash payments in 2004 other than
normal operating expenses include the following.

         -        The Company has recorded an accrued liability of $6.2 million
                  for certain environmental matters more fully discussed in this
                  section of the Form 10-K and in Note G to the Consolidated
                  Financial Statements. It is not certain at this time when
                  these funds will be expended. There exists the potential that
                  all or a portion of the funds will be spent in 2004.

                                      -34-
<PAGE>

         -        The Company assumed the liability for the Raymark pension
                  plans as part of the Chapter 11 reorganization. The plans,
                  which are discussed as part of Note M to the Consolidated
                  Financial Statements are under funded and the Company, through
                  an agreement with the Internal Revenue Service, is providing
                  both current contributions and catch-up contributions for
                  prior year funding deficiencies. The expected funding for the
                  plans in 2004 will be approximately $4.4 million. The funding
                  in fiscal 2003 was $6.9 million.

         -        Certain tax issues are discussed in Note I to the Consolidated
                  Financial Statements, which provides detail concerning the
                  status of the current Internal Revenue Service audit and the
                  use of certain future tax benefits.

         Management believes that existing cash balances, the Company's lending
facilities and cash flow from operations during 2004 will be sufficient to meet
all of the Company's obligations arising in the normal course of business,
including anticipated capital investments. However, the ability of the Company
to utilize its lending facilities is dependent on the Company's ability to meet
its financial forecasts for 2004, which is not assured, and to meet the
financial covenants contained in its credit facilities. These forecasts include
certain revenue assumptions generally consistent with the prior year for the Wet
Friction (on a comparable basis) and Aftermarket segments and modest growth in
the Dry Friction segment, as well as certain cost-saving initiatives. If the
Company does not comply with the financial covenants, an event of default would
occur and could result in the acceleration of the Company's indebtedness under
its domestic credit facilities. If that were to occur, the ability of the
Company to continue would be dependent upon, among other things, its ability to
amend the credit facilities, enact certain actions to generate cash and/or to
seek additional alternative financing from other lenders.

Contractual Obligations

         Securities and Exchange Commission regulations require that we present
our contractual obligations, and we have done so in the table that follows.
However, our future cash flow prospects cannot reasonably be assessed based on
such obligations. The most significant factor affecting our future cash flows is
our ability to earn and collect cash from customers. Future cash outflows,
whether they are contractual obligations or not, will vary based on our future
needs. While some such outflows are completely fixed (for example, commitments
to repay principal and interest on fixed-rate borrowings) most depend on future
events (for example, supply agreements to purchase commodity raw materials at
quantities to be determined in the future at then-market prices). Further,
normal operations involve significant expenditures that are not based on
"commitments," for example, expenditures for income taxes or for payroll.
Currently, certain sales agreements exist that will result in losses due to the
cost of production exceeding the agreed upon selling price. See the Wet Friction
segment discussion for the impact on financial results of these sales
agreements.

         As defined by reporting regulations, our consolidated contractual
obligations as of December 28, 2003, follow:

                                      -35-

<PAGE>

<TABLE>
<CAPTION>
                                       Less Than      1-3      3-5     More Than
                               Total     1 Year      Years    Years     5 Years
                               -----   ---------     -----    -----    ---------
                                                (in thousands)
<S>                           <C>      <C>         <C>       <C>       <C>
Long-term debt (a)            $22,125   $ 7,934    $ 6,060   $7,429     $  702
Capital lease obligations (b)     321       158        161        2          -
Operating leases (c)            4,455       886      1,204      525      1,840
Purchase obligations (d)            -         -          -        -          -
Other liabilities (e)
    Pension (f)                 5,190     5,190          -        -          -
    Postretirement (g)            613       613          -        -          -
    Environmental (h)           6,174         -      6,174        -          -
                              -------  --------    -------   ------     ------
Total                         $38,878  $ 14,781    $13,599   $7,956     $2,542
                              =======  ========    =======   ======     ======
</TABLE>

(a)  Bank debt, see Note F to the Consolidated Financial Statements.

(b)  Capital lease obligations - see Note F to the Consolidated Financial
     Statements.

(c)  Future minimum lease payments under operating leases, principally for
     office and warehouse space.

(d)  The Company does not have any material purchase obligations. Contracts for
     the purchase of materials are binding with regard to price but not
     quantity.

(e)  Because their future outflows are uncertain, the following non-current
     liabilities are excluded from the table above: pension obligation,
     postretirement benefits, deferred income taxes and the deferred payable to
     the PI Trust.

(f)  Represents the Company's estimated 2004 contribution to fund its pension
     plans. The pension plans are described in Note M of the Consolidated
     Financial Statements. The Company has not presented pension contribution
     amounts for the periods beyond 2004 because they cannot be accurately
     estimated at this time. The Company's long-term pension obligation at
     December 28, 2003 is $13.5 million.

(g)  Represents the current portion of the Company's postretirement obligation.
     The postretirement plan is described in Note M to the Consolidated
     Financial Statements. The Company has not presented the long-term portion
     of its post retirement obligation, $15.1 million at December 28, 2003. The
     timing of these payments cannot be accurately estimated.

(h)  Represents the Company's current estimate of costs to satisfy potential
     environmental fines, studies and remediation.

Off Balance Sheet Arrangements

         The Company has no off balance sheet arrangements.

Financial Risks

         The company maintains lines of credit with United States and foreign
banks, as well as other creditors detailed in Note F in the consolidated
financial statements. The company is naturally exposed to various interest rate
risk and foreign currency risk in its normal course of business.

         The company effectively manages its accounts receivable as evidenced by
the average days sales in trade receivables of 43 days. This allows for minimum
borrowings in supporting inventory and trade receivables. Management does not
anticipate a significant change in fiscal policy in any of its borrowing markets
in 2004 given current economic conditions. Further, the company can reduce the
short-term impact of interest rate fluctuation through deferral of capital.

                                      -36-
<PAGE>

Investment Should the Need Arise.

         The Company maintains borrowings in both fixed rate and variable rate
debt instruments. The fixed rate debt at year-end 2003 of $6.4 million had rates
of interest that ranged from 2.5% to 6.2%. The variable rate debt at year-end
2003 of $15.7 million had rates of interest that ranged from 2.7% to 4.8%. The
variable debt reprices either at prime rate or the eurodollar rate. The Company
has not entered into any interest rate management programs such as interest rate
swaps or other derivative type transactions. The amount of exposure in the
short- term, which could be created by increases in rates is not considered
significant by management.

         The local currencies of the Company's foreign subsidiaries have been
designated as their functional currencies. Accordingly, financial statements of
foreign operations are translated using the exchange rate at the balance sheet
date for assets and liabilities, historical exchange rates for elements of
stockholders' equity and an average exchange rate in effect during the year for
revenues and expenses. Where possible, the Company attempts to mitigate foreign
currency translation effects by borrowing in local currencies to fund
operations. The Company does not believe that the fluctuation in foreign
currency will have a material adverse effect on the Company's overall financial
condition. Additionally, the Company does not enter into agreements to manage
any currency transaction risks.

Recently Issued Accounting Pronouncements

         In May 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections." The Statement rescinds Statement 4,
which required all gains and losses from extinguishment of debt to be aggregated
and, when material, classified as an extraordinary item net of the related
income tax effect. SFAS No. 145 also amends SFAS 13 to require that certain
lease modifications having economic effect similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
The Company has adopted the provisions of SFAS No. 145 and has restated prior
periods to classify gains on the extinguishment of debt as extraordinary only
when in accordance with APB Opinion No. 30.

         In December 2003, FASB revised and reissued FASB Interpretation No.
("FIN") 46, "Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51." The interpretation requires that the
assets, liabilities and results of the activity of variable interest entities be
consolidated into the financial statements by the primary beneficiaries if the
entities do not effectively disperse the risks and rewards of ownership among
the owners and other parties involved. The provisions of FIN No. 46 must be
applied no later than as of the end of the first reporting period ending after
March 15, 2004. Management has determined that the adoption of FIN No. 46 will
have no significant impact on the Company's consolidated financial statements.

         In April, 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 Accounting for Derivative Instruments and Hedging Activities." This
Statement amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under FASB Statement No. 133. SFAS No. 149
is effective for contracts entered into or modified after June 30, 2003, with
all provisions applied prospectively. The Company has determined that the
statement

                                      -37-
<PAGE>

is not currently applicable to the Company. The Company will evaluate contracts
entered or modified in the future and record them in accordance with the
provisions of SFAS No. 149.

         In May, 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equities."
This Statement establishes standards regarding the manner in which an issuer
classifies and measures certain types of financial instruments having
characteristics of both liabilities and equity. SFAS No. 150 is generally
effective for financial instruments entered into or modified after May 31, 2003
and for contracts in existence at the start of the first interim period
beginning after June 15, 2003 for mandatorily redeemable financial instruments
issued by non-public companies; however, the effective date is for fiscal
periods beginning after December 15, 2004. The Company currently does not have
financial instruments with the characteristics described in the standard. The
Company will record financial instruments entered into or modified in future
periods in accordance with the provisions of SFAS No. 150.

         In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
Statement revises disclosures about pension plans and other postretirement
benefit plans. This Statement is effective for financial statements with fiscal
years ended after December 15, 2003. The Company has adopted the additional
disclosure requirements of this Statement. The additional disclosures are
presented in Note M of the Consolidated Financial Statements.

Successor Company Discussion and Analysis for the Thirty-Nine-Week Period Ended
December 29, 2002 Compared to the Thirty-Nine-Week Period Ended
December 30, 2001

         In developing a comparative analysis for the thirty-nine-week periods
ended December 29, 2002 and December 30, 2001, the following table sets forth
the quantitative information for the two periods.

<TABLE>
<CAPTION>
                                                             (in thousands)
                                                            Successor Company
                                                      Thirty-Nine Week Period Ended
                                                 ---------------------------------------
                                                 December 29, 2002     December 30, 2001
                                                 -----------------     -----------------
<S>                                              <C>                   <C>
Sales                                                $ 157,157             $ 146,050
Cost of sales                                         (130,911)             (124,590)
                                                     ---------             ---------
Gross profit                                            26,246                21,460
SG&A                                                   (24,737)              (24,782)
Other operating income                                       -                    31
                                                     ---------             ---------
Operating profit (loss)                                  1,509                (3,291)
Interest expense                                          (626)                 (873)
Reorganization items                                         -                  (784)
Gain on settlement of liabilities                            -                 1,548
Other                                                       (2)                  598
Provision for environmental and other claims            (5,400)               (5,860)
                                                     ---------             ---------
Loss before income taxes and minority interest          (4,519)               (8,662)
Income tax benefit                                       1,007                 3,970
                                                     ---------             ---------
Loss before minority interest                           (3,512)               (4,692)
Minority interest                                         (643)                 (885)
                                                     ---------             ---------
Net loss                                             $  (4,155)            $  (5,577)
                                                     =========             =========
</TABLE>

Net Sales

         Worldwide net sales were $157.2 million for the thirty-nine-week period
ended December 29, 2002 compared to $146.1 million for the same period in the
prior year, an increase of $11.1 million or 7.6%. The detailed discussion for
the increased sales period-over-period is contained in the Business Segment
section.

Gross Profit

                                      -38-
<PAGE>

         The gross profit for the thirty-nine-week period ended December 29,
2002 of $26.2 million compares to the gross profit of $21.5 million for the same
period in the prior year, an increase of $4.7 million or 22%. Gross profit as a
percent of sales for the 2002 period is 16.7% compared to 14.7% for the same
thirty-nine-week period in 2001, an increase of 2.0 percentage points. The gross
profit in the 2001 period was reduced by $5.9 million due to a step up in
inventory value to fair value at April 2, 2001, which was an effect of the
application of fresh-start accounting. The gross profit comparative
period-to-period, taking into consideration the inventory adjustment, shows a
margin decline of 2.0%. This decline is due substantially to certain startup
costs associated with a new product line in the Wet Friction segment.

Selling, General and Administrative

         Selling, general and administrative expenses for the thirty-nine-week
period ended December 29, 2002 were $24.7 million compared to $24.8 million in
the same period in the prior year, a decrease of $.1 million or 0.4%. The SG&A
costs in the 2002 period include approximately $1.5 million for severance costs
for two officers of the Company and $21 thousand for employment related costs
associated with the new hires. SG&A expense as a percent of sales in the 2002
period of 15.7% compares to 17.0% in the thirty-nine-week period ended December
30, 2001.

Interest Expense

         Interest expense for the thirty-nine-week period ended December 29,
2002 totaled $.6 million compared to $.9 million for the same period in the
prior year. Interest expense represents less than 1% of total expenses in both
periods.

Reorganization Item

         In connection with the bankruptcy proceedings, Raytech incurred
approximately $784 thousand in professional fees during the thirty-nine-week
period ended December 30, 2001. These fees related to accounting, legal,
consulting and other miscellaneous services.

Provision for Environmental Remediation

         The Company recorded, in the thirty-nine-week period ended December 29,
2002, a charge of $5.4 million for the completion of the remediation project
related to the Crawfordsville, Indiana, manufacturing facility. The accrued
liability for the completion of this project at fiscal 2002 year-end is $7.0
million. The historical and legal discussion of this project is contained in
Note E to the Notes to the Consolidated Financial Statements. This remediation
project, which is the subject of a unilateral administrative order of the U.S.
Environmental Protection Agency, requires the removal of polychlorinated
biphenyls (PCB's), which were found in a drainage ditch near the Indiana
facility. The remediation project consists of three separate segments of the
ditch. The first segment was completed in the summer of 2002. The second segment
was started in the fall of 2002 and completed in February 2003. The work on the
final segment is expected to begin in the spring of 2003 and be completed by the
fall of 2003. The completion of the third segment will fulfill the Company's
obligation under the U.S. EPA Order. In addition to the current year charge of
$5.4 million, the Company recorded a charge for remediation of $5.9 million in
2001 and $3.0 million in 2000. The Company is currently pursuing legal remedies
against various parties to recover the cost of the remediation. These legal
actions are discussed in the

                                      -39-
<PAGE>

litigation section of this document.

Income Tax (Provision) Benefit

         For tax reporting purposes, the Company's emergence from bankruptcy did
not create a new tax reporting entity. Accordingly, the adjustments to adopt
fresh- start accounting are not applicable for the Company's tax reporting.
Therefore, with the exception of goodwill, these adjustments have created new
deferred tax items.

         The effective tax rate for the thirty-nine-week period ended December
29, 2002 was a 22.3% benefit compared to a 45.8% benefit in the same period in
the prior year.

         The effective tax rate for the year ended December 29, 2002 was 5.0%
compared to 2.3% for the year ended December 30, 2001. In calculating the
effective tax rate, the distinction between Successor Company and Predecessor
Company is not relevant as explained above; therefore, the taxable income for
book purposes in 2001 was $7.2 billion. The income tax provision for the current
year is $.08 million on a pretax loss of $1.7 million.

         The Company's effective tax rate differs from the federal statutory
benefit of 35% due primarily to the effect of providing for certain state taxes
and the effect of an increase in the tax benefits payable to the PI Trust.

         In connection with the Company's emergence from bankruptcy, the Company
recorded an income tax receivable and payable to the PI Trust in the amount of
$38 million resulting from net operating losses arising from the transfer of
stock and cash to the PI Trust carried back to 1991 through 2000. Pursuant to
the Tax Benefits Assignment and Assumption Agreement (the "Agreement"), all tax
benefits received by the Company due to the reorganization are to be passed onto
the PI Trust as received. During 2002, Raytech received tax refunds of $33.1
million, which were paid to the PI Trust. Additionally, future payments to the
PI Trust and others will create additional tax deductions, which will inure to
the benefit of the PI Trust in accordance with the Agreement. These include
deductions for payments to the PI Trust of tax benefits associated with the
utilization of the operating losses created by the reorganization, and
contributions made to the Raymark pension plan. To the extent that Raytech
Corporation generates losses in future periods, exclusive of losses attributable
to the payments discussed above, those losses will be retained by the Company.
The method of allocation in utilizing future operating losses between the PI
Trust and Raytech Corporation has not been determined at this time. The Company
has tax loss carryforwards of $74.8 million and tax credit carryforwards of $1.2
million at December 29, 2002. The net operating loss carryforwards are allocated
between Raytech Corporation and the PI Trust in the amounts of $2.8 million and
$72.0 million, respectively. Additional tax recoveries expected to be received
in future periods are shown as deferred tax assets and a deferred payable to the
PI Trust which amounted to $42.4 million at December 29, 2002 and $41.8 million
at December 30, 2001.

         The Company is under audit for 1996 through 2001. Any tax assessment,
up to the amount of the refunds received, arising from this audit, or any other
years in the carryback period, are, pursuant to the Agreement, the
responsibility of the PI Trust and will therefore reduce the deferred tax asset
associated with, and liability payable to, the PI Trust.

         At December 29, 2002, the Company had foreign loss carryforwards of
$4.1

                                      -40-
<PAGE>

million (Germany $.6 million and U.K. $3.5 million), which do not expire. A full
valuation allowance has been provided against the tax benefit of the U.K.
carryforwards due to uncertainty of future profitability of these operations.

         In 2000, the Company recorded a deferred tax asset of $2.767 billion
relating to the tax effects of the liabilities subject to compromise. Total
deferred tax assets and liabilities at December 31, 2000 amounted to $2.772
billion. Based on its historical domestic taxable income, the Company expected
to realize approximately $140 million of the deferred tax asset through the
ten-year carryback of the previously paid domestic taxes and the expected tax
benefits during the twenty-year carryforward period. In addition, the Company
has recognized a deferred tax asset in connection with German loss
carryforwards. Accordingly, the Company in 2000 had recorded a valuation
allowance of $2.633 billion against the deferred tax asset to state it at its
expected net realizable value. The Plan became effective during 2001 and the
liabilities subject to compromise were settled for less than the recorded amount
of allowed claims. The net deferred tax asset was adjusted accordingly.

         The Company owns 57% of the stock of Allomatic Products Company
("APC"). The Company has not recorded a deferred tax liability for the
undistributed earnings of APC since management expects that those earnings will
be distributed to the Company in a tax-free transaction. However, the deferred
tax liability on the undistributed earnings of APC would be approximately $1.3
million at December 29, 2002, if all of APC's earnings were to be distributed
through the distribution of dividends.

Gain on Settlement of Debt

         A note payable to the former AFM principal dated April 1998 was settled
in October 2001. The settlement agreement required a payment of $3.1 million.
Prior to the settlement, the Company had a note payable of $3.0 million and
accrued interest of $1.6 million recorded. The Company has recorded a gain on
the settlement of this debt in the fourth quarter of 2001 in the amount of $1.5
million, which was comprised substantially of accrued interest.

Business Segment and Geographic Area Results

         The following discussion of operating results by industry segment and
geographic area related to information contained in Note H in the Consolidated
Financial Statements. Operating profit is income before income taxes, minority
interest, provision for asbestos litigation, provision for environmental claims
and extraordinary items.

<TABLE>
<CAPTION>
                                (in thousands)
                         Thirty-Nine-Week Period Ended
                    ---------------------------------------
Sales Summary       December 29, 2002     December 30, 2001
-------------       -----------------     -----------------
<S>                 <C>                   <C>
Wet Friction            $ 103,582             $  95,512
Aftermarket                33,708                34,384
Dry Friction               27,091                22,074
Eliminations               (7,224)               (5,920)
                        ---------             ---------

Net sales               $ 157,157             $ 146,050
                        =========             =========
</TABLE>

Wet Friction Segment

                                      -41-
<PAGE>

         The Wet Friction segment recorded sales of $103.6 million for the
thirty- nine-week period ended December 29, 2002 compared to $95.5 million for
the same period in the prior year, an increase of $8.1 million or 8.5%. The
increase was due to increased sales to the automotive OEM component of the Wet
Friction segment. The increased sales were substantially the result of acquiring
additional business with General Motors, which provided additional sales of $6.0
million, and a stronger automotive production environment in the
thirty-nine-week period in 2002, which contributed additional sales of $3.3
million, compared to the automotive market in the same period in 2001. Sales
growth in the automotive OEM component was offset by a decline in sales of $1.2
million in the heavy duty component of this segment due to the slow economy in
construction and mining and strong competition.

                                      -42-
<PAGE>

         The operating profit for the thirty-nine-week period ended December 29,
2002 of $1.8 million compares to the operating profit of $3.4 million for the
same period in the prior year. The reduced operating profit is the result of
startup costs associated with the expanded automotive OEM business acquired in
2002.

Aftermarket Segment

         The Aftermarket segment recorded sales of $33.7 million for the thirty-
nine-week period ended December 29, 2002 compared to $34.4 million for the same
period in the prior year, a decrease of $.7 million or 2.0%. Operating profit
for this thirty-nine-week period of $5.4 million compares to $6.0 million for
the same period in the prior year, a decrease of $.6 million, a reduction of
10.0%. The reduced operating profit is attributable to the lower sales
period-over- period and increased SG&A expenses.

Dry Friction Segment

         The Dry Friction segment recorded sales of $27.1 million for the
thirty- nine-week period ended December 29, 2002 compared to $22.1 million for
the same period in the prior year, an increase of $5.0 million or 22.6%. The
sales increase was due to improved sales through the production facility in
China, which accounted for a substantial portion of the sales growth. Sales
through the production facility in Germany measured in the euro, which is the
functional currency, were EUR21.6 million compared to EUR20.5 million in the
same period in the prior year. The operating profits for the Dry Friction
segment for the thirty-nine-week period of $.9 million compares to operating
profit of $.6 million in the same period in the prior year, an increase of $.3
million. Operating profit measured in euros for the German operation was EUR.7
million compared to EUR.8 million in 2001. The increased profit is attributable
to the growth in China.

Results of Operations for the Successor Company for the Period December 31, 2001
through March 31, 2002 and Predecessor Company for the Period January 1, 2001
through April 1, 2001

Net Sales

         Worldwide net sales of $52.7 million for the thirteen-week period ended
March 31, 2002 compared to $55.2 million for the same period in the prior year
for a decline of $2.5 million or 4.5%. The details of the sales performance are
presented below distinguishing the sales performance in each business segment.

         The Wet Friction segment reported sales of $34.3 million in the first
quarter of 2002 compared to $37.0 million in the same period in the prior year,
a decline of $2.7 million, representing a significant portion of the sales
decline for the Company in the period. The primary market impacted is the heavy
duty component of this segment in both Europe and domestically. The automobile
OEM component of this segment reflected sales at the same level as 2001.

         The Aftermarket segment recorded net sales of $12.5 million for the
thirteen-week period ended March 31, 2002 compared to $13.1 million for the same
period in the prior year, a decline of $.6 million or 4.6%. The sales decline
was due to a variety of issues including the mild winter weather, better
inventory management at our customers and the improved quality of components at
the OEM level.

                                      -43-
<PAGE>

         The Dry Friction segment recorded sales of $8.2 million for the first
quarter of 2002 compared to $8.1 million in the same period in the prior year.
The sales reflect increased sales through the operation in China of $1.3 million
offset by reduced sales through the operation in Germany of approximately the
same amount. The reduction in German sales includes a negative currency
translation impact of approximately $.4 million.

Gross Profit

         The Company recorded gross profit of $10.5 million for the
thirteen-week period ended March 31, 2002 on sales of $52.7 million yielding a
gross margin percentage of 20.0%. This compares to a gross profit of $11.4
million for the same period in the prior year on sales of $55.2 million, a gross
profit margin of 20.6%. The gross profit in 2002 was reduced by $1.1 million due
to increased depreciation and amortization as a result of the application of
fresh-start accounting post first quarter of 2001. The impact of the increased
amortization and depreciation was a reduction in the gross profit margin of
2.1%. On a comparable basis, the gross margin has increased period-over-period
1.5 percentage points due to cost reduction programs instituted throughout 2001
and the first quarter of 2002.

Selling, General and Administrative

         The selling, general and administrative expenses for the thirteen-week
period ended March 31, 2002 were $7.6 million compared to $7.7 million for the
same period in the prior year, a reduction of $.1 million or 1.3%. The lower
costs reflect the impact of certain cost reduction programs implemented in 2001
balanced with Raytech's commitment to investing in technology for future growth.

Interest Expense

         Interest expense for the first quarter of $.3 million compares to
interest expense, excluding Raymark interest, of $.4 million in the same period
in the prior year, a reduction of 25.0%. The reduction is due to lower rates in
2002 on domestic debt. The interest rate on foreign debt is approximately the
same.

Operating Profits

         The following discussion of operating profits by industry segment
relates to information contained in Note H - Segment Reporting to the
Consolidated Financial Statements. Operating profit is income before provision
for asbestos litigation, provision for environmental and other claims, income
taxes, minority interest.

         Operating profit of $2.8 million was recorded for the first quarter of
2002 compared to $3.5 million for the same period in the prior year, a decrease
of $.7 million or 20.0%. The operating profit was negatively affected by the
reduced sales period-over-period of $2.5 million. Additionally, operating
profits were reduced by the impact of fresh-start accounting due to the increase
in depreciation and amortization of $1.1 million in comparing first quarter 2002
to the first quarter of 2001.

         The Wet Friction segment posted operating profits of $1.5 million, an
increase of $.2 million over the same period in the prior year, or an increase
of 15.4%. This increase was accomplished on lower sales of $2.7 million and was
due

                                      -44-
<PAGE>

to implementing cost reduction programs in 2001 and 2002.

         The Aftermarket segment recorded operating profit for the quarter of
$2.6 million compared to $2.1 million in the same period in the prior year, an
increase of $.5 million or 23.8%. The improved operating income performance
despite a decrease in sales is due to cost reduction programs initiated in 2001
and 2002 coupled with improved material pricing. Additionally, management works
closely with the work force in this segment to maximize the peaks and valleys of
manufacturing and shipping product in the aftermarket industry.

         The Dry Friction segment recorded operating profit of $.8 million for
the thirteen-week period ended March 31, 2002 compared to $.8 million in the
same period in the prior year. The operating income reflects improved operating
profits from the operation in China offset by reduced operating profit in
Europe. The decline in Europe is due primarily to lower volume sales.

Income Taxes

         The effective tax rate for the thirteen-week period ended March 31,
2002 is 38.5% compared to an effective rate of 2.3% for the same period in the
prior year. The rate for the current period reflects a statutory federal rate
adjusted for state and foreign taxes. The rate differs from the 2001 rate by
36.2 percentage points caused primarily by certain adjustments in the prior
period related to the bankruptcy process.

Item 7a. Quantitative and Qualitative Disclosures about Market Risk

         See Item 7.

                                      -45-
<PAGE>

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        Financial Statements:

<TABLE>
<CAPTION>
                                                                       Page No.
                                                                       --------
<S>                                                                    <C>
Consolidated Balance Sheets at
December 28, 2003 and December 29, 2002
(Successor Company)                                                        42

Consolidated Statements of Operations for the years ended
December 28, 2003, December 29, 2002, for the period April 3,
2001 to December 30, 2001 (Successor Company), and for the
period January 1, 2001 to April 2, 2001
(Predecessor Company)                                                      43

Consolidated Statements of Cash Flows for the years ended
December 28, 2003, December 29, 2002, for the period April 3,
2001 to December 30, 2001 (Successor Company), and for the
period January 1, 2001 to April 2, 2001
(Predecessor Company)                                                      44

Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 28, 2003, December 29, 2002, for the
period April 3, 2001 to December 30, 2001 (Successor Company),
and for the period January 1,
2001 to April 2, 2001 (Predecessor Company)                                45

Notes to Consolidated Financial Statements                              46-95

Report of Independent Auditors                                             96
</TABLE>

                                      -46-
<PAGE>

RAYTECH CORPORATION
CONSOLIDATED BALANCE SHEETS (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                 December 28,          December 29,
               At Fiscal Year Ended                                  2003                   2002
---------------------------------------------------------------------------------------------------
<S>                                                              <C>                   <C>
ASSETS
Current assets
  Cash and cash equivalents                                      $     16,413          $     19,983
  Restricted cash                                                       4,872                 2,027
  Trade accounts receivable, less allowance
    of $1,250 for 2003 and $824 for 2002                               24,739                26,640
  Inventories, net                                                     30,877                34,057
  Income tax receivable                                                 1,085                 4,793
  Other current assets                                                  5,770                 5,078
                                                                 ------------          ------------
      Total current assets                                             83,756                92,578
                                                                 ------------          ------------

Property, plant and equipment                                         126,059               131,378
  Less accumulated depreciation                                       (36,824)              (25,257)
                                                                 ------------          ------------
      Net property, plant and equipment                                89,235               106,121
                                                                 ------------          ------------
Goodwill, net                                                           5,912                34,767
Other intangible assets, net                                           24,652                35,795
Deferred income taxes                                                       -                21,906
Other assets                                                            2,469                 3,054
                                                                 ------------          ------------
Total assets                                                     $    206,024          $    294,221
                                                                 ============          ============

LIABILITIES
Current liabilities
  Notes payable and current portion of long-term debt            $      8,092          $     15,091
  Current portion of pension obligation                                 5,190                 8,030
  Accounts payable                                                     14,609                15,089
  Accrued liabilities                                                  26,636                26,258
  Payable to the PI Trust                                               3,815                 4,793
                                                                 ------------          ------------
      Total current liabilities                                        58,342                69,261
                                                                 ------------          ------------

Long-term debt                                                         14,354                 4,293
Pension obligation                                                     13,453                12,815
Postretirement benefits other than pension                             15,103                13,800
Deferred payable to the PI Trust                                       11,887                42,356
Deferred income taxes                                                   6,881                     -
Other long-term liabilities                                               706                   827
                                                                 ------------          ------------
Total liabilities                                                     120,726               143,352
                                                                 ------------          ------------
Minority interest                                                       9,388                 8,759

Commitments and contingencies

SHAREHOLDERS' EQUITY
Capital stock
  Cumulative preferred stock, no par value
    5,000,000 shares authorized, none issued and
    outstanding                                                             -                     -
  Common stock, par value $1.00, 50,000,000 shares
    authorized, 41,737,306 and 41,701,554 issued and
    outstanding for 2003 and 2002, respectively                        41,737                41,701
Additional paid in capital                                            117,574               117,458
Accumulated deficit                                                   (74,845)               (8,402)
Accumulated other comprehensive loss                                   (8,556)               (8,647)
                                                                 ------------          ------------

      Total shareholders' equity                                       75,910               142,110
                                                                 ------------          ------------
Total liabilities and shareholders' equity                       $    206,024          $    294,221
                                                                 ============          ============
</TABLE>

The accompanying notes are an integral part of these statements.

                                      -47-
<PAGE>

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

<TABLE>
<CAPTION>
                                                            Successor Company                        Predecessor Company
                                        ---------------------------------------------------------    -------------------
                                               For the Year Ended
                                        ----------------------------------        For the Period     For the Period
                                        December 28,          December 29,        Apr. 3, 2001 to       January 1, 2001
        Fiscal Year                         2003                  2002             Dec. 30, 2001        to April 2, 2001
------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                   <C>                 <C>                <C>
Net sales                               $   205,865           $   209,866           $   146,050           $    55,205
Cost of sales                              (179,739)             (173,095)             (124,590)              (43,811)
                                        -----------           -----------           -----------           -----------

  Gross profit                               26,126                36,771                21,460                11,394

Selling, general and
  administrative expenses                   (34,795)              (32,331)              (24,782)               (7,742)
Impairment charge
  Goodwill                                  (28,855)                    -                     -                     -
  Other intangible assets                    (8,915)                    -                     -                     -
  Long-lived tangible assets                (11,034)                    -                     -                     -
Other operating income, net                       -                     -                    31                     -
                                        -----------           -----------           -----------           -----------

  Operating (loss) profit                   (57,473)                4,440                (3,291)                3,652

Currency transaction (loss)
  gain                                          (32)                 (352)                  194                    55
Interest expense - Raymark                        -                     -                     -                   (70)
Interest expense                             (1,061)                 (903)                 (873)                 (374)
Reorganization items                              -                     -                  (784)            7,158,896
Gain on settlement of debt                        -                     -                 1,548                     -
Other income, net                            26,759                   529                   404                   235
                                        -----------           -----------           -----------           -----------

Loss (income) before provision
  for environmental claims,
  income taxes and minority
  interest                                  (31,807)                3,714                (2,802)            7,162,394
Provision for environmental
  claims                                     (7,262)               (5,400)               (5,860)                    -
                                        -----------           -----------           -----------           -----------

(Loss) income before income
  taxes and minority interest               (39,069)               (1,686)               (8,662)            7,162,394
Income tax (provision) benefit              (26,745)                  (84)                3,970              (166,823)
                                        -----------           -----------           -----------           -----------
(Loss) income before minority
  interest                                  (65,814)               (1,770)               (4,692)            6,995,571
Minority interest                              (629)               (1,055)                 (885)                 (314)
                                        -----------           -----------           -----------           -----------

Net (loss) income                       $   (66,443)          $    (2,825)          $    (5,577)          $ 6,995,257
                                        ===========           ===========           ===========           ===========

Basic (loss) earnings
  per share                             $     (1.59)          $      (.07)          $      (.13)          $  1,778.88
                                        ===========           ===========           ===========           ===========

Diluted (loss) earnings
 per share                              $     (1.59)          $      (.07)          $      (.13)          $  1,772.62
                                        ===========           ===========           ===========           ===========
</TABLE>

The accompanying notes are an integral part of these statements.

                                      -48-
<PAGE>

RAYTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

<TABLE>
<CAPTION>
                                                                   Successor Company                       Predecessor Company
                                               ---------------------------------------------------------   -------------------
                                                       For the Year Ended
                                               ----------------------------------        For the Period         For the Period
                                               December 28,          December 29,        Apr. 3, 2001 to       January 1, 2001
             Fiscal Year                           2003                  2002             Dec. 30, 2001        to April 2, 2001
-------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>                   <C>                 <C>                   <C>
Cash flows from operating activities:
 Net (loss) income                             $   (66,443)          $    (2,825)          $    (5,577)          $ 6,995,257
   Adjustments to reconcile net
     (loss) income to net cash
     provided by (used in) operations:
   Deferred income tax provision (benefit)          27,701                (2,068)               (6,214)              165,354
   Inventory fair value adjustments                      -                     -                 5,923                     -
   Depreciation and amortization                    18,335                17,171                12,253                 3,382
   Impairment charge - goodwill                     28,855                     -                     -                     -
   Impairment charge - other intangibles             8,915                     -                     -                     -
   Impairment charge - long-lived
     tangible assets                                11,034                     -                     -                     -
   Reduction of payable to PI Trust                (27,743)                    -                     -                     -
   Reorganization items, fresh-start
     adjustments                                         -                     -                     -            (7,158,896)
   Gain on settlement of debt                            -                     -                (1,548)                    -
   Income applicable to minority
     interest                                          629                 1,055                   885                   314
   Loss on sale of fixed assets, net                 1,443                    91                   133                     6
   Other non-cash items                               (355)                  267                   596                   441
   Changes in operating assets
     and liabilities:
        Restricted cash                             (2,845)                3,369                (4,363)                   73
        Trade accounts receivable                    2,680                (3,218)                6,598                (5,097)
        Inventories                                  4,160                (1,720)                1,119                   383
        Income tax receivable                        3,708                33,084                     -                     -
        Other current assets                           601                    92                 1,963                (1,412)
        Other assets                                   397                (1,362)                  189                  (234)
        Accounts payable                              (823)                1,524                  (404)                1,088
        Accrued liabilities                         (1,600)                5,428                 3,154                (3,474)
        Payable to the PI Trust                     (3,704)              (32,487)                    -                     -
      Other long-term liabilities                   (2,301)               (5,444)                1,967                   342
                                               -----------           -----------           -----------           -----------
     Net cash provided by (used in)
       operating activities                          2,644                12,957                16,674                (2,473)
                                               -----------           -----------           -----------           -----------

Cash flows from investing activities:
  Capital expenditures                              (8,968)               (9,648)               (7,488)               (2,717)
  Proceeds on sales of property, plant
   and equipment                                       123                   125                   131                    10
                                               -----------           -----------           -----------           -----------

     Net cash used in investing
       activities:                                  (8,845)               (9,523)               (7,357)               (2,707)
                                               -----------           -----------           -----------           -----------

Cash flows from financing activities:
  Net (payments) borrowings (on)
    from short-term notes                           (6,749)                2,579                (2,710)                2,113
  Proceeds from long-term borrowings                11,709                   240                   105                    32
  Principal payments on long-term debt              (2,902)               (1,547)               (1,153)                 (482)
  Payments on borrowings from Raymark                    -                     -                     -                  (703)
  Cash overdrafts                                        -                     -                     -                  (371)
  Exercise of stock options                            152                   540                    19                     -
                                               -----------           -----------           -----------           -----------

     Net cash provided by (used in)
       financing activities                          2,210                 1,812                (3,739)                  589
                                               -----------           -----------           -----------           -----------

Effect of exchange rate changes on cash                421                   274                    14                   (78)

Net change in cash and cash equivalents             (3,570)                5,520                 5,592                (4,669)
Cash and cash equivalents at beginning
   of period                                        19,983                14,463                 8,871                13,540
                                               -----------           -----------           -----------           -----------

Cash and cash equivalents at end
   of period                                   $    16,413           $    19,983           $    14,463           $     8,871
                                               ===========           ===========           ===========           ===========
</TABLE>

The accompanying notes are an integral part of these statements.

                                      -49-
<PAGE>

                               RAYTECH CORPORATION
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                         (in thousands, except shares)

<TABLE>
<CAPTION>
                                                          (Accumulated      Accumulated       Treasury
                                           Additional       Deficit)           Other        Stock at Cost
                               Common        Paid in       Retained        Comprehensive    (2,132,059
                               Stock         Capital       Earnings        (Loss) Income       Shares)           Total
-------------------------------------------------------------------------------------------------------------------------
<S>                         <C>            <C>            <C>              <C>              <C>               <C>
PREDECESSOR COMPANY:

Balance,
 December 31, 2000          $     5,651    $    70,631    $(7,049,641)      $    (1,218)    $      (4,561)    $(6,979,138)

Comprehensive income:
  Net income                                                6,995,257                                           6,995,257
  Changes during
   the period                                                                      (284)                             (284)
                            -----------    -----------    -----------       -----------     -------------     -----------
Total comprehensive
  income                                                    6,995,257              (284)                        6,994,973
Reorganization                   35,870         46,200         54,384             1,502             4,561         142,517
                            -----------    -----------    -----------       -----------     -------------     -----------

Balance,
 April 2, 2001              $    41,521    $   116,831    $         -       $         -     $           -     $   158,352
                            ===========    ===========    ===========       ===========     =============     ===========

SUCCESSOR COMPANY:

Balance
 April 2, 2001              $    41,521    $   116,831    $         -       $         -     $           -     $   158,352

Comprehensive loss:
  Net loss                                                     (5,577)                                             (5,577)
  Changes during
   the period                                                                    (8,711)                           (8,711)
                            -----------    -----------    -----------       -----------     -------------     -----------

Total comprehensive
  loss                                                         (5,577)           (8,711)                          (14,288)
Stock options exercised
  (6,596 shares)                      7             12                                                                 19
                            -----------    -----------    -----------       -----------     -------------     -----------

Balance,
 December 30, 2001               41,528       $116,843         (5,577)           (8,711)               -          144,083

Comprehensive loss:
  Net loss                                                     (2,825)                                             (2,825)
  Changes during
   the year                                                                          64                                64
                            -----------    -----------    -----------       -----------     -------------     -----------

Total comprehensive
  loss                                                         (2,825)               64                            (2,761)
Stock options exercised
  (173,034 shares)                  173            367                                                                540
Tax benefits associated
  with stock options                               248                                                                248
                            -----------    -----------    -----------       -----------     -------------     -----------
Balance,
  December 29, 2002              41,701       $117,458         (8,402)           (8,647)               -          142,110

Comprehensive loss:
  Net loss                                                    (66,443)                                            (66,443)
  Changes during
   the year                                                                          91                                91
                            -----------    -----------    -----------       -----------     -------------     -----------

Total comprehensive
  loss                                                        (66,443)               91                           (66,352)
Stock options exercised
  (35,752 shares)                    36            116                                                                152
                            -----------    -----------    -----------       -----------     -------------     -----------
Balance,
  December 28, 2003         $    41,737    $   117,574    $   (74,845)      $    (8,556)    $          -      $    75,910
                            ===========    ===========    ===========       ===========     =============     ===========
</TABLE>

The accompanying notes are an integral part of these statements.

                                      -50-
<PAGE>

                               RAYTECH CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
      (dollars in thousands, unless otherwise noted, except per share data)

Introduction

         Raytech Corporation ("Raytech" or the "Company")manufactures and
distributes engineered products for heat resistant, inertia control, energy
absorption and transmission applications. The Company's operations are
categorized into three business segments: Wet Friction, Dry Friction and
Aftermarket. These segments are more fully described in Note H - Segment
Reporting. Demand for the Company's product is derived primarily from the
automotive original equipment markets for both manual and automatic
transmissions, the original equipment markets for agriculture, construction and
mining equipment and the aftermarket for primarily automatic transmission
products. All of these markets are highly competitive and can be highly
influenced by prevailing economic conditions.

         The Company emerged from bankruptcy in April 2001, see "Bankruptcy and
Fresh-Start Accounting" in Note A - Summary of Significant Accounting Policies.
Upon emergence from bankruptcy in 2001, the Company was held liable for the
maintenance and funding of the underfunded pension obligations of Raymark
Corporation ("Raymark"). The Company, based on the court's order, has assumed
the role of plan sponsor for the Raymark plans. As a condition of the
reorganization plan all tax benefits received by the Company as a result of the
reorganization inure to the benefit of the Raytech Personal Injury Trust ("PI
Trust").

Note A - Summary of Significant Accounting Policies

         The Company's accounting policies are detailed below. The consolidated
financial statements include the accounts of Raytech Corporation and its
subsidiaries. Intercompany balances and transactions are eliminated in
consolidation. The investment by third parties in Allomatic Products Company
("APC") is accounted for as minority interest in the consolidated financial
statements. There are no unconsolidated entities. The preparation of the
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported and disclosures of
contingent assets and liabilities and the reported revenue and expenses made in
the financial statements and accompanying notes. Actual results could differ
from these estimates. Significant estimates include inventory, receivable and
environmental reserves; depreciable lives of property, plant and equipment and
intangible assets; the accruals for pension and other postretirement and
postemployment benefits; the recoverable value of deferred tax assets and the
carrying value of goodwill and other intangible assets.

     -    Significant areas involving management's judgment are described below.
Pension benefits and welfare benefits represent financial obligations that will
be ultimately settled in the future with employees who meet eligibility
requirements. Because of the uncertainties involved in estimating the timing and
amount of future payments, significant estimates are required to calculate

                                      -51-
<PAGE>

pension and welfare benefit expenses and liabilities related to the Company's
plans. The Company utilizes the services of independent actuaries, whose models
are used to facilitate

Note A, continued

         these calculations. Several key assumptions are used in actuarial
         models to calculate pension expense and welfare benefit expense and
         liability amounts recorded in the financial statements. Management
         believes the three most significant variables in the pension models are
         the expected long-term rate of return on plan assets, the discount
         rate, and the expected rate of compensation increase. Management
         believes the most significant assumption in the welfare benefit model
         is the healthcare cost trend rate. The actuarial models also use
         assumptions for various other factors, including employee turnover,
         retirement age, and mortality. Company management believes the
         assumptions used in the actuarial calculations are reasonable and are
         within accepted practices in each of the respective geographic
         locations in which we operate.

         The Company provides certain warranties relating to the quality and
         performance of its products. The primary product of the Company,
         friction plates, is used in manual and automatic transmissions,
         transfer cases and wet wheel brake systems for heavy duty equipment.
         The Company maintains product liability insurance that covers personal
         injuries and property damage alleged to have been caused by defective
         products. The Company also has insurance to cover the costs of product
         recalls arising from its German and Chinese operations. However, the
         Company currently carries only limited insurance for product recall
         costs in the United States, and none in the U.K., as management
         believes such insurance to be cost prohibitive given the Company's
         warranty experience. Warranty claims have historically not been
         significant due to the quality of the Company's products and the impact
         of other potential parts interactions in these systems, which may
         contribute to the root cause of any system failure. The costs in 2003
         for product warranty support have been de minimis. Some sales contracts
         with customers provide that the Company will indemnify the customer and
         its affiliates against certain specified patent, copyright and trade
         secret infringement claims of third parties that are based on the use
         or sale of the Company components. There have been no significant
         claims to date.

         The assessment of the amount of the Company's deferred tax assets,
         which will be realizable, requires the use of significant judgments and
         estimates. In making its assessment, the Company evaluates all relevant
         evidence, including current industry dynamics within which the Company
         operates, to determine if it would be able to realize all or a part of
         its deferred tax assets in the future. Should the Company determine
         that it would not be able to realize certain of its deferred tax
         assets, a valuation allowance would be recorded in the period such a
         determination is made.

         Accruals for environmental matters are recorded when it is probable
         that a liability has been incurred and the amount of the liability can
         be

                                      -52-
<PAGE>

         reasonably estimated or if an amount is likely to fall within a range
         and no amount within the range can be determined to be the better
         estimate, the minimum amount of the range is recorded. Environmental
         remediation obligations are not recorded on a discounted basis.
         Revenues from insurance carriers relating to environmental matters are
         not recorded

Note A, continued

         until it is probable that such recoveries will be realized.

         At December 28, 2003, the Company had goodwill and other intangibles of
         $30.6 million, which were recorded as a result of the fresh-start
         accounting process in 2001. Management reviews goodwill and indefinite
         lived intangibles for impairment annually or when events or
         circumstances indicate that its value may have declined. In order to
         evaluate the impairment assumptions the Company develops a set of
         financial projections. Based on these financial projections, the
         Company, with the assistance of a financial adviser, using various
         valuation methods, the Company determines whether an impairment charge
         is required to reduce goodwill and other intangible assets to its
         estimated fair value. In the case of long-lived tangible assets, if the
         undiscounted cash flows related to the long-lived assets are less than
         the assets' carrying value, a similar impairment charge would be
         recorded. Management believes that the assumptions made to evaluate the
         impairment of goodwill and other intangibles are appropriate and
         reasonable. However, changes in circumstances or conditions affecting
         these assumptions could result in impairment charges in future periods
         that may be material.

-        Fiscal Year

         The Company's fiscal year is a 52-53-week period ending on the Sunday
         closest to December 31st. All three years presented included 52 weeks.

-        Cash Equivalents

         Cash equivalents are recorded at cost, which approximates fair value
         and consist of certificates of deposit with maturities of three months
         or less when purchased.

-        Inventories

         Inventories are stated at the lower of cost or market with cost
         determined primarily by using the first in, first out ("FIFO") method.
         Costs included in inventories consist of materials, labor and
         manufacturing overhead, which are related to the purchase and
         production of inventories.

-        Property, Plant and Equipment

         Upon emergence from bankruptcy, property, plant and equipment was
         recorded on April 2, 2001 based on their fair values determined by
         independent appraisals. Additions subsequent to April 2, 2001 have been
         recorded at cost. Depreciation is based on the estimated service life
         of the related asset and is provided using the straight line method.
         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

                                      -53-
<PAGE>

         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 or losses are reflected
         in the Consolidated Statements of Operations.

         Property, plant and equipment are reviewed for impairment whenever
         events or circumstances indicate that the carrying value may not be
         recoverable. When such events or circumstances arise, an estimate of
         the future cash

Note A, continued

         flows produced by an asset, or the appropriate grouping of assets, is
         compared to the asset's carrying value to determine if an impairment
         exists pursuant to the requirements of Statement of Financial
         Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
         or Disposal of Long-Lived Assets." If the asset is determined to be
         impaired, the impairment loss is measured based on the excess of its
         carrying value over its fair value. See Note D for a description of
         impairment charges recognized during the fourth quarter of 2003.

-        Intangible Assets

         Intangible assets consist primarily of goodwill, trademarks, unpatented
         technology and distribution base. Effective with the period beginning
         April 3, 2001, the Company has adopted SFAS No. 142, "Goodwill and
         Other Intangible Assets." In accordance with this standard, goodwill
         and trademarks have been classified as indefinite-lived assets no
         longer subject to amortization. Prior to the adoption of SFAS No. 142
         in fiscal 2001, intangible assets with an indefinite life were
         amortized on a straight-line basis over a period of not more than 40
         years. Unpatented technology and distribution base are classified as
         definite-lived assets and are being amortized on a straight line basis
         with estimated lives ranging from 6 to 20 years. Indefinite-lived
         Intangible assets are tested for impairment annually or more frequently
         when events or circumstances indicate that the carrying amount may be
         impaired. The unpatented technology and distribution base are reviewed
         for improvement whenever events or circumstances indicate that their
         carrying value may not be recoverable. Impairment testing is done at
         the reporting unit level for goodwill. Reporting units are one level
         below the business segment level but can be combined when reporting
         units within the same segment have similar economic characteristics. An
         goodwill impairment loss would be recognized when the carrying amount
         of the reporting unit's net assets exceeds the estimated fair value of
         the reporting unit. The estimated fair value of the reporting unit is
         determined using a future undiscounted cash flow analysis. See Note E -
         Goodwill and Other Intangible Assets for a description of impairment
         charges recognized during the fourth quarter of 2003.

-        Income Taxes

         The Company uses the liability method in accounting for income taxes.
         Deferred tax assets and liabilities are recorded for temporary
         differences between the tax basis of assets and liabilities and their
         reported amounts in the financial statements, using statutory tax rates
         in effect for the year in which the differences are expected to
         reverse. The effect on deferred tax assets and liabilities of a change
         in tax rates is recognized in the results of operations in the period
         that includes the enactment date. A valuation allowance is recorded to
         reduce the carrying amounts of

                                      -54-
<PAGE>

         deferred tax assets unless it is more likely than not that such assets
         will be realized.

         The Company has not provided for deferred U.S. taxes on the
         undistributed earnings of its foreign subsidiaries since a taxable
         distribution of those earnings is not anticipated. In addition,
         deferred U.S. income taxes have not been provided on the cumulative
         translation adjustment component of accumulated other comprehensive
         loss in shareholders' equity due to management's decision to
         permanently reinvest those earnings. Further, the Company has not
         provided for deferred U.S. taxes on the undistributed earnings of APC,
         its majority-owned subsidiary, since management expects

Note A, continued

         that these earnings will be distributed to the Company in a tax-free
         transaction.

         Pursuant to the Tax Benefits Assignment and Assumption Agreement, all
         tax benefits received by the Company due to the reorganization are to
         be passed onto the PI Trust as received.

-        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.

-        Translation of Foreign Currencies

         The local currency is the functional currency for the Company's foreign
         subsidiaries. The financial statements of foreign subsidiaries are
         translated to U.S. dollars using the period-end exchange rate for
         assets and liabilities, historical exchange rates for elements of
         stockholders' equity and an average exchange rate for each period for
         revenues and expenses. The effects of translating the Company's foreign
         subsidiaries' financial statements are recorded as a component of
         accumulated other comprehensive loss in shareholders' equity. Gains and
         losses on intercompany foreign currency transactions that are of a
         long-term investment nature are reported as translation adjustments as
         a component of accumulated other comprehensive loss in shareholders'
         equity.

-        Revenue Recognition

         Revenue from the sale of the Company's products is recognized upon
         shipment to the customer when title and risk of loss has transferred.
         Substantially all of the Company's revenues are derived from fixed
         price purchase orders. Costs and related expenses to manufacture the
         products are recorded as costs of sales when the related revenue is
         recognized. The Company establishes an allowance for doubtful accounts
         based on historical experience and believes that collections of
         revenues, net of the allowance for doubtful accounts, is reasonably
         assured.

                                      -55-
<PAGE>

         The Company produces goods for its customers based on a purchase order
         system, and in certain instances using longer term contracts that
         stipulate a fixed selling price with no commitment as to quantity. In
         instances where the product's cost exceeds the selling price, a reserve
         is established for the expected loss on goods in inventory and customer
         purchase orders received by the balance sheet date. The Company has not
         recorded an estimate of the loss over the term of these contracts since
         the quantity and mix of parts is not known and that future production
         costs will be impacted by, among other things, changes in economic
         conditions and management's actions, including expected cost savings
         initiatives.

Note A, continued

         the minimum amount of the range is recorded. Environmental remediation
         obligations are not recorded on a discounted basis. Revenues from
         insurance carriers relating to environmental matters are not recorded
         until it is probable that such recoveries will be realized.

-        Stock-Based Compensation

         The Company accounts for stock-based compensation using the intrinsic
         value-based method of accounting in accordance with Accounting
         Principles Board Opinion No. 25, under which no compensation cost is
         recognized for stock options granted at fair market value. Had
         compensation costs of stock options been determined under a fair value
         alternative method as stated in SFAS No. 148, "Accounting for
         Stock-Based Compensation - Transition and Disclosure, an Amendment of
         FASB Statement No. 123," the Company would have been required to record
         the fair value for such options and employees' purchase rights, and
         record such amount in the consolidated financial statements as
         compensation expense. Pro forma stock-based employee compensation
         costs, net (loss) income and (loss) earnings per share, as they would
         have been recognized if the fair value method had been applied to all
         awards, are presented in the table below.

<TABLE>
<CAPTION>
                                                  Successor Company                  Predecessor Company
                                      --------------------------------------------   -------------------
                                          For the Year Ended
                                      --------------------------   For the Period       For the Period
                                      December 28,  December 29,   Apr. 3, 2001 to     January 1, 2001
                                          2003          2002        Dec. 30, 2001      to April 2, 2001
                                      ------------  ------------   ---------------     ----------------
                                               (dollars in thousands, except per share data)
<S>                                   <C>           <C>            <C>                 <C>
Net (loss) income:
  As reported                          $ (66,443)    $  (2,825)       $ (5,577)           $6,995,257
  Deduct: Total stock-based employee
  Compensation expense determined
    under fair value based method
    for all awards, net of related
    tax effects                           (2,424)            -               -                     -
                                       ---------     ---------        --------            ----------
  Pro forma                            $ (68,867)    $  (2,825)       $ (5,577)           $6,995,257
                                       =========     =========        ========            ==========

Basic (loss) earnings per share:
  As reported                          $   (1.59)    $    (.07)       $   (.13)           $ 1,778.88
  Pro forma                            $   (1.65)    $    (.07)       $   (.13)           $ 1,778.88
Diluted (loss) earnings per share:
  As reported                          $   (1.59)    $    (.07)       $   (.13)           $ 1,772.62
  Pro forma                            $   (1.65)    $    (.07)       $   (.13)           $ 1,772.62
</TABLE>

                                      -56-
<PAGE>

         During the first quarter of fiscal 2003, the Company granted options
         for 1,601,000 shares of common stock with an exercise price of $5.70
         per share. The fair value of these options was estimated at $3.22 per
         common share on the date of grant, using the Black-Scholes option
         pricing model with the following assumptions: expected volatility of
         56.7%, dividend yield of 0.00%, risk free interest rate of 3.60% and an
         expected life of the options of six years. During the second quarter of
         fiscal 2003, the Company granted options for 1,172,000 shares of common
         stock with an exercise price of $5.70 per share. The fair value of
         these options was estimated at $2.05 per common share on the date of
         grant, using the Black-Scholes option pricing model with the following
         assumptions: expected volatility of 62.30%, dividend yield of 0.00%,
         risk free interest rate of 2.84% and an expected life of the options of
         six years.

         There was no pro forma impact on net (loss) income for the fiscal years
         2002 or 2001. Options outstanding during these years were fully vested
         in fiscal 1999.

Note A, continued

-        Property Taxes

         The Company provides for property taxes based on the most current
         information available, including actual taxes paid in the most current
         year, coupled with information which would impact the expected tax rate
         and property valuations. In instances where uncertainty exists as to
         the estimated amount of taxes, the Company's best judgment is used
         considering all information known at the time.

-        Reclassification

         The extraordinary gains on the settlement of liabilities recorded
         during the period April 3, 2001 to December 30, 2001 in the amount of
         $1.5 million and the period January 1, 2001 to April 2, 2001 in the
         amount of $7.1 billion have been reclassified to operating items in
         accordance with the SFAS No. 145, "Recision of FASB Statements No. 4,
         44 and 64, Amendment of FASB Statement No. 13 and Technical
         Corrections." See Note F - Debt and Note X - Reorganization Items for a
         further description of these items.

-        Bankruptcy and Fresh-Start Accounting

         Raytech was incorporated in June 1986 in Delaware and held as a
         subsidiary of 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 whereby
         each share of common stock of Raymark was automatically converted into
         a share of Raytech common stock. In May 1988, Raytech divested all of
         the Raymark stock. In accordance with the restructuring plan, Raytech,
         through its subsidiaries, purchased certain non- asbestos businesses of
         Raymark. Despite the restructuring plan implementation and subsequent
         divestiture of Raymark, Raytech was named a co-defendant with Raymark
         and other named defendants in numerous asbestos-related lawsuits as a
         successor in liability to Raymark. In order to stay the
         asbestos-related litigation, 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

                                      -57-
<PAGE>

         of Connecticut.

         The Effective Date of the Company's emergence from bankruptcy was April
         18, 2001; however, for accounting purposes, the Company has accounted
         for the reorganization and fresh-start adjustments on April 2, 2001.
         All financial information prior to that date is presented as pertaining
         to the Predecessor Company while all financial information after that
         date is presented as pertaining to the Successor Company. Accordingly,
         the Statement of Operations includes the results of the reorganization
         and fresh-start adjustments in the period January 1, 2001 to April 2,
         2001 as Predecessor Company information. Consequently, after giving
         effect to the reorganization and fresh-start adjustments, the financial
         statements of the Successor Company are not comparable to those of the
         Predecessor Company. For financial reporting purposes, the results of
         the Predecessor Company and the Successor Company cannot be combined
         for the 2001 fiscal year.

-        Recently Issued Accounting Pronouncements

         In May 2002, the Financial Accounting Standards Board ("FASB") issued
         SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
         Amendment of FASB Statement No. 13 and Technical Corrections." The
         Statement rescinds Statement 4, which required all gains and losses
         from extinguishment of

Note A, continued

         debt to be aggregated and, when material, classified as an
         extraordinary item net of the related income tax effect. SFAS No. 145
         also amends SFAS 13 to require that certain lease modifications having
         economic effect similar to sale-leaseback transactions be accounted for
         in the same manner as sale-leaseback transactions. The Company has
         adopted the provisions of SFAS No. 145 and has restated prior periods
         to classify gains on the extinguishment of debt as extraordinary only
         when in accordance with APB Opinion No. 30.

         In December 2003, FASB revised and reissued FASB Interpretation No.
         ("FIN") 46, "Consolidation of Variable Interest Entities, an
         Interpretation of Accounting Research Bulletin No. 51." The
         interpretation requires that the assets, liabilities and results of the
         activity of variable interest entities be consolidated into the
         financial statements by the primary beneficiaries if the entities do
         not effectively disperse the risks and rewards of ownership among the
         owners and other parties involved. The provisions of FIN No. 46 must be
         applied no later than as of the end of the first reporting period
         ending after March 15, 2004. Management has determined that the
         adoption of FIN No. 46 will have no significant impact on the Company's
         consolidated financial statements.

         In April, 2003, the FASB issued SFAS No. 149, "Amendment of Statement
         133 Accounting for Derivative Instruments and Hedging Activities." This
         Statement amends and clarifies financial accounting and reporting for
         derivative instruments, including certain derivative instruments
         embedded in other contracts and for hedging activities under FASB
         Statement No. 133. SFAS No. 149 is effective for contracts entered into
         or modified after June 30, 2003, with all provisions applied
         prospectively. The Company has determined that the statement is not
         currently applicable to the Company.

                                      -58-
<PAGE>

         The Company will evaluate contracts entered or modified in the future
         and record them in accordance with the provisions of SFAS No. 149.

         In May, 2003, the FASB issued SFAS No. 150, "Accounting for Certain
         Financial Instruments with Characteristics of both Liabilities and
         Equities." This Statement establishes standards regarding the manner in
         which an issuer classifies and measures certain types of financial
         instruments having characteristics of both liabilities and equity. SFAS
         No. 150 is generally effective for financial instruments entered into
         or modified after May 31, 2003 and for contracts in existence at the
         start of the first interim period beginning after June 15, 2003 for
         mandatorily redeemable financial instruments issued by non-public
         companies; however, the effective date is for fiscal periods beginning
         after December 15, 2004. The Company currently does not have financial
         instruments with the characteristics described in the standard. The
         Company will record financial instruments entered into or modified in
         future periods in accordance with the provisions of SFAS No. 150.

         In December 2003, the FASB issued SFAS No. 132 (revised 2003),
         "Employers' Disclosures about Pensions and Other Postretirement
         Benefits." This Statement revises disclosures about pension plans and
         other postretirement benefit plans. This Statement is effective for
         financial statements with fiscal years ended after December 15, 2003.
         The Company has adopted the

Note A, continued

         additional disclosure requirements of this Statement. The additional
         disclosures are presented in Note M of the Consolidated Financial
         Statements.

Note B - Restricted Cash

Restricted cash relates to the following:

<TABLE>
<CAPTION>
                                               December 28,   December 29,
                                                   2003           2002
                                               ------------   ------------
<S>                                            <C>            <C>
Payable to the PI Trust                          $  3,182       $   350
Letters of credit                                   1,630         1,617
Other                                                  60            60
                                                ---------       -------
                                                $   4,872       $ 2,027
                                                =========       =======
</TABLE>

         The payable to the PI Trust consists of tax refunds and other funds
received by the Company that will be paid to the PI Trust at a future date.

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

                                      -59-
<PAGE>

Note C - Inventories

Net Inventories

Inventories, net of inventory reserves, are as follows:

<TABLE>
<CAPTION>
                      December 28,    December 29,
                         2003            2002
                      ------------    ------------
<S>                   <C>             <C>
Raw material            $11,056         $ 11,049
Work in process           8,871            8,349
Finished goods           10,950           14,659
                        -------         --------
                        $30,877         $ 34,057
                        =======         ========
</TABLE>

Inventory Reserves

<TABLE>
<CAPTION>
                                    Successor Company                Predecessor Company
                      --------------------------------------------   -------------------
                          For the Year Ended
                      --------------------------    For the Period      For the Period
                      December 28,  December 29,   Apr. 3, 2001 to     January 1, 2001
                          2003          2002        Dec. 30, 2001      to April 2, 2001
                          ----          ----       ---------------     ----------------
<S>                   <C>           <C>            <C>                 <C>
Beginning balance       $ 3,174       $ 2,427         $  2,901             $ 3,025
Provisions                1,666           858              407                  30
Charge-offs                (252)         (111)            (881)               (154)
                        -------       -------         --------             -------
Ending balance          $ 4,588       $ 3,174         $  2,427             $ 2,901
                        =======       =======         ========             =======
</TABLE>

         In reviewing certain sales contracts, the Company determined the agreed
upon selling price was less than cost and established an inventory reserve of
$1.2 million with a corresponding charge to cost of goods sold.

         In connection with the implementation of fresh-start reporting on April
2, 2001, the Company adjusted the value of its inventories by $5.9 million on
that date to their estimated selling prices less costs to complete, cost of
disposal and a reasonable profit allowance for the completing and selling effort
as required by fresh-start reporting. This adjustment of $5.9 million was
recorded as cost of sales in the Statement of Operations during the second
quarter of 2001 as the inventory was sold.

                                      -60-
<PAGE>

Note D - Property, Plant and Equipment

         Property, plant and equipment, at cost, is summarized as follows:

<TABLE>
<CAPTION>
                                    December 28,    December 29,
                                        2003            2002
                                    ------------    ------------
<S>                                 <C>             <C>
Land                                  $  3,798        $  3,999
Buildings and improvements              28,676          30,920
Machinery and equipment                 89,129          90,728
Capital leases                             773             796
Construction in progress                 3,683           4,935
                                      --------        --------
                                       126,059         131,378
Less accumulated depreciation          (36,824)        (25,257)
                                      --------        --------
Net property, plant and equipment     $ 89,235        $106,121
                                      ========        ========
</TABLE>

         The estimated useful lives for buildings and improvements range from 5
to 40 years; the estimated useful lives for machinery and equipment range from 3
to 20 years.

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

         In connection with the implementation of fresh-start reporting on April
2, 2001, the Company recorded the property, plant and equipment at their fair
values as determined by independent third-party appraisers.

         In fiscal 2003, the Wet Friction segment had an operating loss. Due to
the operating loss, the Company determined that an impairment analysis was
appropriate and engaged the services of a third party valuation firm to evaluate
the carrying value of its long-lived assets in accordance with SFAS No. 144. The
Company developed a future cash flow analysis and based on the current year loss
and future cash flow analysis, it was determined that the carrying value of
certain asset groupings in the Wet Friction segment and certain assets contained
in the corporate asset grouping exceeded their fair value and that an impairment
had occurred. The Company has recorded a non- cash impairment of $8.1 million
relating to the Wet Friction assets and $2.9 million relating to the corporate
assets, for a total impairment of $11.0 million, reducing the carrying value of
its property, plant and equipment.

         Maintenance and repairs charged to expense amounted to approximately
$9,468 for 2003, $9,355 for 2002, $6,651 for the period April 3, 2001 to
December 30, 2001 (Successor Company), and $2,028 for the period January 1, 2001
to April 2, 2001 (Predecessor Company). Depreciation expense relating to
property, plant and equipment was $16,107 for the year ended December 28, 2003,
$14,943 for the year ended 2002, $10,585 for the period April 3, 2001 to
December 30, 2001 (Successor Company), and $3,180 for the period January 1, 2001
to April 2, 2001 (Predecessor Company).

                                      -61-
<PAGE>

Note E - Goodwill and Other Intangible Assets

         In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001, establishes specific criteria for the recognition of
intangible assets separately from goodwill, and requires that unallocated
negative goodwill be written off immediately as an extraordinary gain instead of
being deferred and amortized. SFAS No. 142 addresses the accounting for goodwill
and intangible assets subsequent to their acquisition. Under SFAS No. 142,
goodwill and indefinite-lived intangibles need to be reviewed for impairment at
least annually. In addition, the amortization period of intangible assets with
finite lives will no longer be limited to forty years. As discussed in Note W,
the Company adopted fresh-start reporting as described in the AICPA Statement of
Position ("SOP") No. 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code." SOP 90-7 requires that any change in accounting
principles that will be required within the twelve months following the adoption
of fresh-start reporting should be adopted at that time. Accordingly, the
Company adopted SFAS No. 141 and No. 142 as of April 2, 2001. All intangible
assets and goodwill have been valued at fair value as of the date of fresh-start
reporting.

         In fiscal 2003, the Wet Friction segment recorded an operating loss.
Due to the loss, the Company determined that an impairment analysis was
appropriate and engaged the services of a third party valuation firm to evaluate
the carrying value of its goodwill and intangible assets in accordance with SFAS
No. 142. The Company developed a future cash flow analysis and based on the
current year loss and future cash flow analysis, it was determined that its
carrying value of the Wet Friction segment, including step-up adjustments
recorded upon emergence from bankruptcy, exceeded the fair value and that an
impairment had occurred. Accordingly, the Company recorded an impairment charge
of $37.8 million as detailed in the table below. The goodwill and other
intangible assets are recorded in the corporate asset group. All impairment
charges related to the impairment of intangible assets are presented as a
component of corporate expense.

         The changes in the carrying value of goodwill and other intangible
assets for the year ended December 28, 2003 are as follows:

<TABLE>
<CAPTION>
                                Unpatented  Distribution
                                Technology      Base      Trademarks  Goodwill     Total
                                ----------  ------------  ----------  --------   --------
<S>                             <C>         <C>           <C>         <C>        <C>
Balance at December 29, 2002     $ 12,866     $ 5,216      $ 17,713   $ 34,767   $ 70,562
Amortization                       (1,941)       (287)                       -     (2,228)
Impairment charge                  (1,902)                   (7,013)   (28,855)   (37,770)
                                 --------     -------      --------   --------   --------
 Balance at December 28, 2003    $  9,023     $ 4,929      $ 10,700   $  5,912   $ 30,564
                                 ========     =======      ========   ========   ========
</TABLE>

         The following table represents the carrying value of goodwill and other
intangible assets at December 28, 2003 and December 29, 2002.

                                      -62-
<PAGE>

Note E, continued

<TABLE>
<CAPTION>
                                    December 28, 2003        December 29, 2002
                                 ----------------------   -----------------------
                                  Gross                    Gross
                                 Carrying  Accumulated    Carrying   Accumulated
                                  Amount   Amortization    Amount    Amortization
                                 --------  ------------   --------   ------------
<S>                              <C>       <C>            <C>        <C>
Finite life intangible assets:
  Unpatented technology          $ 14,360    $  5,337     $ 16,262     $ 3,396
  Distribution base                 5,716         787        5,716         500
                                 --------    --------     --------     -------
    Sub-total                    $ 20,076    $  6,124     $ 21,978     $ 3,896
                                 ========    ========     ========     =======
Indefinite life intangible
  assets:
  Trademarks                     $ 10,700                 $ 17,713
                                 ========                 ========
Goodwill
  Wet Friction                   $      -                 $ 28,855
  Aftermarket                       5,912                    5,912
                                 --------                 --------
    Subtotal                     $  5,912                 $ 34,767
                                 ========                 ========
Intangible assets, net           $ 30,564                 $ 70,562
                                 ========                 ========
</TABLE>

The weighted-average amortization periods for the unpatented technology and the
distribution base are between 6 and 20 years. Amortization expense for 2003,
2002 and the period April 3, 2001 to December 30, 2001 amounted to $2.2 million,
$2.2 million and $1.7 million, respectively.

         Estimated annual amortization expense is as follows:

<TABLE>
<CAPTION>
For the year ending:
<S>                       <C>
     2004                 $ 1,922
     2005                   1,922
     2006                   1,922
     2007                   1,622
     2008                   1,522
</TABLE>

         Reported net income presented exclusive of amortization expense
(including any related tax effects) recognized in prior periods relating to
goodwill of the Predecessor Company would have been:

<TABLE>
<CAPTION>
                                     Predecessor Company
                                     -------------------
                                        Period from
                                      January 1, 2001
                                      to April 1, 2001
                                      ----------------
<S>                                  <C>
Reported net income                        $ 1,715
Add back goodwill amortization                 207
                                           -------
Adjusted net income                        $ 1,922
                                           =======
Basic earnings per share:
  Reported net income                      $   .49
  Goodwill amortization                        .06
                                           -------
  Adjusted net income                      $   .55
                                           =======
Diluted earnings per share:
  Reported net income                      $   .48
  Goodwill amortization                        .06
                                           -------
  Adjusted net income                      $   .54
                                           =======
</TABLE>

                                      -63-
<PAGE>

Note F - Debt

Debt, at fiscal year-end, consists of the following:

<TABLE>
<CAPTION>
                                   December 28, 2003                December 29, 2002
                            -------------------------------  -------------------------------
                            Current   Non-Current    Total   Current   Non-Current   Total
                            -------   -----------  --------  --------  -----------  --------
<S>                         <C>       <C>          <C>       <C>       <C>          <C>
Domestic bank debt
  Line of credit            $  3,604    $     -    $  3,604  $  8,556   $      -    $  8,556
  Term loans
    Wet Friction               1,055      4,133       5,188     2,750          -       2,750
    Aftermarket                  996      5,921       6,917         -          -           -
                            --------    -------    --------  --------   --------    --------
  Total domestic bank debt     5,655     10,054      15,709    11,306          -      11,306
Foreign bank debt
  Line of credit                   -          -           -     1,449          -       1,449
                            --------    -------    --------  --------   --------    --------
  Term loans
    Dry Friction Europe          979      4,137       5,116       680      4,095       4,775
    Dry Friction Asia          1,300          -       1,300     1,480          -       1,480
                            --------    -------    --------  --------   --------    --------
  Total foreign bank debt      2,279      4,137       6,416     3,609      4,095       7,704
                            --------    -------    --------  --------   --------    --------
Total bank debt                7,934     14,191      22,125    14,915      4,095      19,010
Leases                           158        163         321       176        198         374
                            --------    -------    --------  --------   --------    --------

Total borrowings            $  8,092    $14,354    $ 22,446  $ 15,091   $  4,293    $ 19,384
                            ========    =======    ========  ========   ========    ========
</TABLE>

         The maturities of debt, as of December 28, 2003, are as follows:

<TABLE>
<S>                    <C>
2004                   $ 8,092
2005                     3,158
2006                     3,063
2007                     2,969
2008                     4,462
Thereafter                 702
                       -------
                       $22,446
                       =======
</TABLE>

         The domestic bank debt of the Company is at variable interest rates,
and the carrying amount approximates fair value. The Company maintains certain
of its foreign borrowings in fixed rate debt which approximates market value.

Domestic Bank Debt

         The Company, through its Wet Friction segment subsidiaries, Raybestos
Products Company ("RPC"), and Raytech Automotive Components Company ("RACC"),
maintains a Loan and Security Agreement, which provides for RPC and RACC to
borrow up to $25.3 million in the aggregate. The agreement, as amended in
November 2003, consists of a $20 million revolving line of credit and a term
loan of $5.3 million. The revolving line of credit is limited through a formula
which provides availability based on qualified accounts receivable and
inventory. The term loan is payable in 34 monthly payments of $88 thousand,
commencing December 1, 2003 and maturing on September 28, 2006, with the final
payment being the remainder of the balance. The revolving line of credit matures
September 28, 2006. The revolving line of credit and the term loan are
collateralized by accounts receivable, inventory and machinery and equipment.
Amounts outstanding under the revolving line of credit bear interest at a rate
equal to, at the Company's option, the prime rate or the adjusted Eurodollar
Rate, plus a margin of 0.5% and 2.75%, respectively. Amounts outstanding under
the term loan bear interest at a rate equal to, at the Company's option, the
Prime Rate or the

                                      -64-
<PAGE>

adjusted Eurodollar Rate, plus a margin of 0.75% and 3.0%, respectively. The
agreement contains financial and other covenants, including a fixed charge
coverage ratio and a material adverse change clause. At December 28, 2003 and

Note F, continued

December 29, 2002, the net pledged assets of RPC and RACC amounted to $70.1
million and $90.3 million, respectively, consisting of cash, accounts
receivable, inventory, property, plant and equipment and all other tangible and
intangible assets. The agreement permits RPC and RACC to pay dividends to the
Company for costs and expenses incurred by the Company in the ordinary course of
business so long as no event of default has occurred and is continuing.

         In October 2003, the Company, through its subsidiaries Raytech
Powertrain, Inc. ("RPI"), APC and Raytech Systems, Inc. ("RSI"), entered into a
loan agreement for $7.0 million with an interest rate at 1.65 basis points over
the adjusted Eurodollar rate with a five-year term. The loan is payable in 59
monthly payments of $83 thousand, commencing on December 1, 2003, with a balloon
payment of $2.1 million payable on November 3, 2008. The proceeds from this
facility will be used to pay environmental costs and pension costs. The loan is
collateralized by the assets of the borrowing entities. The agreement contains
financial and other covenants, including the maintenance of certain financial
ratios and a material adverse change clause. At December 28, 2003, the net
pledged assets of APC, RSI and RPI amounted to $54.0 million.

         In connection with the recorded loss of $66.4 million, the Company
requested and obtained a waiver of the material adverse condition clauses
contained in the domestic bank agreements.

Foreign Bank Debt - Dry Friction Segment

         The Company's wholly-owned German subsidiary, Raybestos
Industrie-Produkte GmbH ("RIP"), has available lines of credit with several
German banks amounting to EUR3.0 million ($3.8 million) as of December 28, 2003
and EUR5.0 ($5.2 million) at December 29, 2002. Interest is charged at rates
between 5.07% and 8.0%. The lines are repayable on demand.

         The Company's wholly-owned German subsidiaries, Raytech Composites
Europe GmbH ("RCE") and RIP have various loan agreements where the maturities
range from September 2006 through December 2012. The loans are payable in equal
monthly installments over the term of the loan. The loans bear interest at rates
ranging from 2.5% through 6.2%. At December 28, 2003 and December 29, 2002,
respectively, the net pledged assets, consisting of machinery and equipment,
amounted to EUR12.7 million ($16.0 million) and EUR10.2 million ($10.7 million).

         During the years presented, the Company's wholly-owned Chinese
subsidiary Raybestos Friction Products (Suzhou) Co. Ltd. ("RFP") has had various
loan agreements. The loans are short-term with maturities between six and twelve
months.

         The weighted average rates on all domestic and foreign bank notes
payable at December 28, 2003 and December 29, 2002 were 3.71% and 4.04%,
respectively.

Note Payable to Former AFM Principal

                                      -65-
<PAGE>

         The note payable to the former AFM principal dated April 1998 was
settled in October 2001. The settlement agreement required a payment of $3.1
million. Prior to the settlement, the Company had a note payable of $3.0 million
and accrued interest of $1.6 million recorded related to this debt. The Company
recognized a gain, related to the settlement of this note, in the amount of $1.5
million in the fourth quarter of 2001.

NOTE G - Litigation

ENVIRONMENTAL REMEDIATION

Crawfordsville, Indiana - Shelly's Ditch Contamination Removal

         In October 1987, RPC, a wholly-owned subsidiary of the Company,
purchased a major manufacturing facility (the "RPC Facility") in Crawfordsville,
Indiana. Some time thereafter, the Company learned that the previous owner of
the RPC Facility had disposed of polychlorinated biphenyls ("PCBs") in the
ground at the RPC Facility in the mid-1960s and that such PCBs were leaching
from the RPC Facility into an adjacent ditch ("Shelly's Ditch").

         In 1996, the Indiana Department of Environmental Management (the
"IDEM") advised RPC that the RPC Facility may have contributed to, and was
potentially responsible for, the release of lead and PCBs found in Shelly's
Ditch. In the late 1990s, RPC and the IDEM entered into an agreed order (the
"Agreed Order") for a risk-based remediation of PCBs and lead in Shelly's Ditch.
When the IDEM later sought to unilaterally withdraw from the Agreed Order, RPC
appealed and the court ordered the IDEM to reinstate the Agreed Order.
Meanwhile, at the IDEM's request, the United States Environmental Protection
Agency (the "EPA") became involved in Shelly's Ditch.

         In December 2000, before the Agreed Order was reinstated, the EPA
issued a Unilateral Administrative Order to RPC under CERCLA (the "EPA Removal
Order") demanding removal of contaminated soils from those Shelly's Ditch areas
identified as Reaches 1 through 3 (the "Site"). The EPA Removal Order required
more work at greater expense than the IDEM Order. Thereafter, RPC proceeded with
the work required under the EPA Removal Order. During the second quarter of
fiscal 2003, a provision of $1.8 million was recorded for the completion of work
required by the EPA Removal Order. By December 28, 2003, RPC had spent
approximately $18.7 million on removal of lead and PCB contaminated soils from
the Site and had accrued $400,000 for potential EPA oversight cost assessments
relating to that work.

         On January 9, 2004, the EPA confirmed that RPC had completed the action
required under the EPA Removal Order, including the removal and proper disposal
of Site soils and sediments contaminated with PCBs and lead. In its
confirmation, the EPA noted that RPC would continue to be subject to certain
obligations under that order, including record retention and the payment of
oversight costs. Whether RPC will be required to pay oversight costs relating to
the work under the EPA Removal Order will depend on the outcome of future
negotiations with the EPA and the IDEM regarding potential environmental
remediation downstream of the Site.

Crawfordsville, IN - Environmental Remediation Downstream of

                                      -66-
<PAGE>

Reaches 1 through 3 of Shelly's Ditch

         On May 6, 2003, the EPA indicated that RPC is potentially liable for
PCB and lead contamination downstream of the Site. The EPA has not issued an
order to RPC regarding this downstream area. However, during the third quarter
of 2003, the Company began negotiations with the EPA concerning such possible
additional remediation. As a result, during the third quarter of 2003, the
Company recorded a $2.4 million provision relating to this potential liability
for future cleanup costs.

                                      -67-
<PAGE>

Note G, continued

Crawfordsville, IN - Environmental Remediation and Expenses
relating to the RPC Facility

         On May 15, 2001, the EPA issued a Pre-filing Notice and Opportunity to
Confer to RPC (the "Pre-filing Notice"). This notice stated that the EPA might
file a civil action lawsuit against RPC for violations of various environmental
statutes and would offer RPC the opportunity to participate in pre-filing
negotiations to resolve this matter. The EPA stated that it has reason to
believe that RPC committed violations of the Clean Air Act, Clean Water Act,
Resource Conservation and Recovery Act and Toxic Substances Control Act and that
RPC could be subject to substantial penalties. At that time, the Company
recorded a provision of $.3 million on the advice of legal counsel. On September
3, 2003, the EPA proposed that the parties settle the Pre-filing Notice. The EPA
stated that penalties for violations alleged in the Pre-filing Notice could
total approximately $180 million and suggested the following resolution: RPC
should pay approximately $2.4 million in fines and undertake compliance
activities, on-site investigative work that the EPA estimated would cost about
$1.0 million, and corrective action to resolve the Pre-filing Notice. The
parties have begun preliminary negotiations regarding the potential on-site
investigative work but have not obtained an overall EPA settlement proposal. The
Company recorded a provision of $3.1 million in the year-ended December 28, 2003
based on the EPA position.

Ferndale, MI - Potential Responsibility for Environmental Remediation

         In a January 8, 2002 letter, the Michigan Department of Environmental
Quality asserted company responsibility for trichloroethylene contamination at a
Ferndale, Michigan industrial site that Advanced Friction Materials Company
("AFM") leased from approximately 1974 to 1985. The Company acquired 47% of the
stock of AFM in 1996, and the balance of the shares in 1998. The Company's
liability at this site is indeterminable at this time.

ENVIRONMENTAL LITIGATION

Cost Recovery Actions against Insurers regarding Shelly's Ditch

         In 1996, RPC notified its insurers and demanded defense and indemnity
regarding any environmental issues relating to alleged lead and PCB
contamination of Shelly's Ditch. In January 1997, one insurer filed a complaint
in the U.S. District Court, Southern District of Indiana, captioned Reliance
Insurance Company vs. Raybestos Products Company (the "Insurance Case"). The
complaint sought a declaratory judgment that the Reliance Insurance policies do
not provide coverage to RPC for defense and indemnity relating to investigation
and remediation of contamination in Shelly's Ditch. In January 2000, the
District Court rejected Reliance's claims and granted summary judgment to RPC.
In June 2001, Reliance Insurance Company was placed in liquidation in
Pennsylvania. The Company has filed claims in the Reliance liquidation for
recovery of its Shelly's Ditch expenses, but has not received a decision.

         In February 2002, RPC filed a third-party complaint in the Insurance
Case against National Union and two other insurance carriers. The third-party

                                      -68-
<PAGE>

complaint seeks defense and indemnity from the insurers relating to
investigation and remediation of contamination in Shelly's Ditch.

                                      -69-
<PAGE>

Note G, continued

         In February 2004, National Union and its affiliates commenced an
adversary proceeding against the Company, RPC and others by filing a complaint
in U.S. Bankruptcy Court (the "Adversary Proceeding"). In the Adversary
Proceeding, National Union claims that RPC's third-party complaint against
National Union is barred by a January 2002 order of the U.S. Bankruptcy Court in
the Raymark Industries, Inc. and Raymark Corporation Chapter 11 cases (the
"Raymark Order"). National Union claims that the Raymark Order prohibited RPC
from pursuing its third-party complaint against National Union and declared that
the National Union insurance policies issued to the Company and RPC have been
exhausted. Also in February 2004, National Union filed a motion in the U.S.
District Court, Southern District of Indiana, asking that court to stay the
Insurance Case against National Union. The outcome of this Adversary Proceeding
and related motion for stay and their effects, if any, on the Insurance Case
against National Union cannot be predicted.

RPC Claims against IDEM

         In July 2002, RPC filed an action against the IDEM for breach of
contract claiming damages based on the difference between the costs of cleanup
under the EPA Removal Order and the IDEM Agreed Order. The outcome of this
litigation cannot be predicted.

COMMERCIAL LITIGATION

         On April 22, 2003, Automation by Design, Inc. filed a civil action
against RPC in U.S. District Court for the Southern District of Indiana. The
complaint alleges copyright infringement and breach of contract in connection
with RPC's purchase of certain equipment. In answer to plaintiff's complaint,
RPC denied liability and filed counterclaims for breach of contract and
declaratory judgment. The court has granted Automation by Design's motion to
amend its complaint to include Raytech Corporation and Production Design
Services, Inc. as defendants. RPC has agreed to defend and provide certain
indemnity protection to Production Design Services, Inc., which manufactured
certain equipment that is allegedly involved in this court action. The outcome
of this litigation cannot be predicted, and the Company's liability or
recoveries are indeterminable at this time.

EQUITY HOLDERS LITIGATION

         In February 2002, lawyers claiming to represent the Committee of Equity
Holders of Raytech Corporation filed a motion in U.S. Bankruptcy Court to compel
Raytech to either issue up to approximately 700,000 additional shares to the
pre-reorganization holders of shares in Raytech or their successors, or to
proportionately reduce the shareholdings of the general unsecured creditor
shareholders under the Plan of Reorganization. The ultimate outcome of this
matter cannot be predicted; however, it is possible that its resolution could
cause the Company to issue additional shares to the original shareholder group,
or to retire shares held by the general unsecured creditor shareholder group.
This might directly impact the earnings per share calculations of the Company.
The Bankruptcy Court denied a Company motion to dismiss this action.

         The Company is subject to certain other legal matters that have arisen
in the ordinary course of business, and management does not expect them to have

                                      -70-
<PAGE>

a significant adverse effect on the results of consolidated operations,
financial condition or cash flow.

Note H - Segment Reporting

         The Company's operations are categorized into three operating segments
and a corporate group based on management structure, product type and
distribution channel as described below.

Wet Friction

         The Wet Friction segment produces specialty engineered products for
heat resistant, inertia control, energy absorption and transmission
applications. The Company markets its products to automobile original equipment
manufacturers for automatic transmissions and heavy duty original equipment
manufacturers, as well as farm machinery, mining, truck and bus manufacturers.

Dry Friction

         The Dry Friction segment produces engineered friction products,
primarily used in original equipment automobile and truck manual transmissions.
The clutch facings produced by this segment are marketed to companies who
assemble the manual transmission systems used in automobiles and trucks.

Aftermarket

         The Aftermarket segment produces specialty engineered products
primarily for automobile and lift truck automatic transmissions. In addition to
these products, this segment markets transmission filters and other transmission
related components. The focus of this segment is marketing to warehouse
distributors and certain retail operations in the automotive aftermarket.

         The segment includes APC, which is 57% owned by the Company, 40% owned
by Raymark, a related party, and 3% owned by certain employees of the Company.
Net sales for APC were $30.0 million in 2003 and $31.1 million in 2002.
Operating profit for APC was $2.5 million in 2003 and $3.9 million in 2002. APC
is consolidated in the financial results and a minority interest is recorded to
reflect the minority shareholders' interest in APC. A minority interest charge
is recorded for the minority's percent of income.

Corporate

         The Corporate group consists principally of corporate expenses,
including costs to maintain the corporate headquarters and certain environmental
costs, and certain assets, liabilities and related income and expense stemming
from the reorganization plan implemented when the Company emerged from
bankruptcy in 2001. The Company has chosen not to distribute these costs to the
operating segments to preserve the historical comparability at the operating
segment level.

         The operating loss of $29.7 million recognized in the Corporate group
for fiscal 2003 consists of the following:

<TABLE>
<S>                                                <C>
Impairment charge                                  $ (40.7)
Depreciation and amortization                         (4.7)
Environmental cost                                    (7.5)
Corporate headquarters cost                           (6.1)
Reduction of payable to PI Trust                      27.7
Other income                                           1.6
                                                   -------
                                                   $ (29.7)
                                                   =======
</TABLE>

The impairment charge is described in Notes D - Property, Plant and Equipment
and E - Goodwill and Other Intangible Assets. The other income is due to the

                                      -71-
<PAGE>

reduction in the payable to the PI Trust due to the adjustment to deferred tax
assets, described in Note I - Income Taxes.

         Information relating to operations by industry segment follows:

Note H, continued

<TABLE>
<CAPTION>
                                              Successor Company                 Predecessor Company
                                  -------------------------------------------   -------------------
                                      For the Year Ended
                                  --------------------------   For the Period      For the Period
                                  December 28,  December 29,   Apr. 3, 2001 to    January 1, 2001
                                      2003          2002        Dec. 30, 2001     to April 2, 2001
                                  ------------  ------------    -------------     ----------------
<S>                               <C>           <C>            <C>                <C>
NET SALES
Wet Friction                        $125,095      $137,930        $ 95,512           $   37,047
Aftermarket                           44,931        46,192          34,384               13,111
Dry Friction                          44,453        35,244          22,074                8,147
Intersegment elimination (1)          (8,614)       (9,500)         (5,920)              (3,100)
                                    --------      --------        --------           ----------
Net sales to external customers     $205,865      $209,866        $146,050           $   55,205
                                    ========      ========        ========           ==========

GROSS PROFIT
Wet Friction                        $  6,343      $ 19,724        $ 15,201           $    5,513
Aftermarket                           12,725        12,993           9,814                3,555
Dry Friction                          12,284         8,856           4,829                2,272
Intersegment elimination              (5,226)       (4,802)         (8,384)                  54
                                    --------      --------        --------           ----------
Consolidated                        $ 26,126      $ 36,771        $ 21,460           $   11,394
                                    ========      ========        ========           ==========

OPERATING (LOSS) PROFIT(2)
Wet Friction                        $(19,972)     $  3,276        $  3,387           $    1,327
Aftermarket                            7,171         7,990           6,035                2,109
Dry Friction                           3,395         2,452             603                  754
Corporate                            (29,663)      (15,404)        (18,687)           7,158,204
                                    --------      --------        --------           ----------
Consolidated                        $(39,069)     $ (1,686)       $ (8,662)          $7,162,394
                                    ========      ========        ========           ==========

DEPRECIATION
Wet Friction                        $  8,788      $  8,945        $  6,161           $    2,112
Aftermarket                            1,543         1,553           1,167                  491
Dry Friction                           3,246         2,664           1,607                  563
Corporate                              2,530         1,781           1,650                   14
                                    --------      --------        --------           ----------
Consolidated                        $ 16,107      $ 14,943        $ 10,585           $    3,180
                                    ========      ========        ========           ==========

INTEREST EXPENSE, NET
Wet Friction                        $  1,537      $  1,282        $    409           $      242(3)
Aftermarket                              (35)          (39)             20                   44
Dry Friction                             856           841             412                  154
Corporate                             (1,297)       (1,181)             32                    4
                                    --------      --------        --------           ----------
Consolidated                        $  1,061      $    903        $    873           $      444
                                    ========      ========        ========           ==========

EXPENDITURES FOR PROPERTY, PLANT,
  AND EQUIPMENT
Wet Friction                        $  4,525      $  5,010        $  4,707           $    1,822
Aftermarket                              772         1,068           1,061                  127
Dry Friction                           3,587         3,444           1,669                  768
Corporate                                 84           126              51                    -
                                    --------      --------        --------           ----------
Consolidated                        $  8,968      $  9,648        $  7,488           $    2,717
                                    ========      ========        ========           ==========

SEGMENT ASSETS (AT YEAR-END) (4)
Wet Friction                        $ 74,537      $ 95,369        $ 97,821           $  113,403
Aftermarket                           35,144        31,031          27,376               32,427
Dry Friction                          36,357        32,230          39,869               23,591
Corporate                             59,986       135,591         155,722              154,215
                                    --------      --------        --------           ----------
Consolidated                        $206,024      $294,221        $320,788           $  323,636
                                    ========      ========        ========           ==========
</TABLE>

                                      -72-
<PAGE>

Note H, continued

<TABLE>
<CAPTION>
                                           Successor Company                 Predecessor Company
                               -------------------------------------------   -------------------
                                   For the Year Ended
                               --------------------------  For the Period      For the Period
                               December 28,  December 29,  Apr. 3, 2001 to    January 1, 2001
                                   2003          2002       Dec. 30, 2001     to April 2, 2001
                               ------------  ------------  ---------------    ----------------
<S>                            <C>           <C>           <C>               <C>
LONG-LIVED ASSETS BY
  GEOGRAPHIC LOCATION
United States                    $ 96,326      $155,558       $163,537            $ 84,823
Germany                            14,888        13,362         11,356               9,291
Other foreign countries             8,585         7,763          7,189               7,322
                                 --------      --------       --------            --------
Consolidated                     $119,799      $176,683       $182,082            $101,436
                                 ========      ========       ========            ========

SALES BY GEOGRAPHIC LOCATION
United States                    $149,244      $161,020       $116,129            $ 43,379
Germany                            45,311        38,218         25,094              10,485
Other foreign countries            11,310        10,628          4,827               1,341
                                 --------      --------       --------            --------
Consolidated                     $205,865      $209,866       $146,050            $ 55,205
                                 ========      ========       ========            ========

SALES TO CUSTOMERS IN EXCESS
  OF 10% OF TOTAL SALES
DaimlerChrysler                  $ 25,623      $ 30,324       $ 20,501            $  7,640
Caterpillar                        19,554        23,948         20,872               7,276
</TABLE>

(1)      The Company records intersegment sales at an amount negotiated between
         the segments. All intersegment sales are eliminated in consolidation.
         Substantially all intersegment sales represent sales from the Wet
         Friction segment to the Aftermarket segment.

(2)      The Company's management reviews the performance of its reportable
         segments on an operating profit basis, consisting of (loss) income
         before income taxes, and minority interest.

(3)      Interest on debt due to affiliate and to Raymark.

(4)      The significant changes in segment assets consisted of the following:

         Wet Friction - reductions in accounts receivable of $1.3 million, a
                        reduction in inventory of $4.4 million and a reduction
                        in property, plant and equipment of $13.7 million of
                        which $8.1 million was due to impairment charges.

         Corporate    - a reduction in the deferred tax asset of $22.3 million,
                        a reduction in goodwill and other intangibles and
                        long-lived assets of $44.5 million and a reduction in
                        cash held at corporate of $6.5 million.

                                      -73-
<PAGE>

Note I - Income Taxes

         For tax reporting purposes, the Company's emergence from bankruptcy, in
2001, did not create a new tax reporting entity. Accordingly, the adjustments to
adopt fresh-start accounting are not applicable for the Company's tax reporting.
Therefore, with the exception of goodwill, these adjustments created new
deferred tax items in 2001.

         Pursuant to the Tax Benefits Assignment and Assumption Agreement (the
"Agreement"), all tax benefits received by the Company due to the reorganization
are to be passed onto the PI Trust as received. At December 28, 2003, the
Company has tax loss carryforwards of $101.2 million and tax credit
carryforwards of $3.5 million. The net operating loss carryforwards are
allocated between Raytech Corporation and the PI Trust in the amounts of $21.2
million and $80.0 million, respectively. The tax credit carryforwards all inure
to the benefit of the PI Trust. Additionally, future payments to the PI Trust
and others will create additional tax deductions, which will inure to the
benefit of the PI Trust in accordance with the Agreement. These include
deductions for payments to the PI Trust of tax benefits associated with the
utilization of the operating losses allocated to the PI Trust, and contributions
made to the Raymark pension plans. Losses generated by Raytech subsequent to the
emergence from bankruptcy, exclusive of losses attributable to the payments
discussed above, will be retained by the Company. The method of allocation in
utilizing current and future operating losses between the PI Trust and Raytech
Corporation has not been determined at this time. Additional tax recoveries
expected to be received in future periods are recorded as deferred tax assets,
net of valuation allowances, and a deferred payable to the PI Trust which
amounted to $11.9 million at December 28, 2003 and $42.4 million at December 29,
2002. The Company remitted $4.2 million to the PI Trust during 2003. In 2002
the Company paid the PI Trust $33.1 million.


         (Loss) income before (provision) benefit for income taxes and minority
interest consists of:

<TABLE>
<CAPTION>
                               Successor Company                Predecessor Company
                  -------------------------------------------   -------------------
                      For the Year Ended
                  -------------------------    For the Period     For the Period
                  December 28,  December 29,   Apr. 3, 2001 to   January 1, 2001
                      2003         2002         Dec. 30, 2001    to April 2, 2001
                  ------------  ------------   ---------------   ----------------
<S>               <C>           <C>            <C>              <C>
Domestic            $(42,033)     $(2,513)       $  (6,411)         $7,160,782
Foreign                2,964          827           (2,251)              1,612
                    --------      -------        ---------          ----------
                    $(39,069)     $(1,686)       $  (8,662)         $7,162,394
                    ========      =======        =========          ==========
</TABLE>

         The Company's income tax (provision) benefit consists of the following:

<TABLE>
<CAPTION>
                                  Successor Company                 Predecessor Company
                      -------------------------------------------   -------------------
                          For the Year Ended
                      -------------------------    For the Period     For the Period
                      December 28,  December 29,   Apr. 3, 2001 to   January 1, 2001
                          2003         2002         Dec. 30, 2001    to April 2, 2001
                      ------------  ------------   ---------------   ----------------
<S>                   <C>           <C>            <C>              <C>
Current:
  Federal              $  (1,035)     $(1,373)        $ (1,559)         $   (1,265)
  State                    2,502         (620)            (581)               (127)
  Foreign                   (511)        (159)            (104)                (77)
Deferred:
  Federal                (24,112)       1,973            5,668            (155,717)
  State                   (3,575)         203              546              (9,637)
  Foreign                    (14)        (108)               -                   -
                       ---------      -------         --------          ----------
Total income taxes     $ (26,745)     $   (84)        $  3,970          $ (166,823)
                       =========      =======         ========          ==========
</TABLE>
         The provision in 2003, 2002, and 2001 includes amounts for the
Company's profitable foreign entities in Germany and China, and Allomatic
Products Company, which is consolidated for financial reporting purposes, but
not for tax purposes. The provision for the period January 1, 2001 to April 2,
2001 also includes a deferred tax provision of $155.7 million, primarily
associated with the $7.1 billion gain on the settlement of liabilities subject
to compromise as a result of the Company's emergence from bankruptcy.

         Reconciliation of (loss) income from operations multiplied by the
statutory

                                      -74-
<PAGE>

federal tax rate to reported income tax (provision) benefit is summarized as
follows:

                                      -75-
<PAGE>

Note I, continued

<TABLE>
<CAPTION>
                                                    Successor Company                 Predecessor Company
                                        -------------------------------------------   -------------------
                                            For the Year Ended
                                        --------------------------   For the Period     For the Period
                                        December 28,  December 29,   Apr. 3, 2001 to   January 1, 2001
                                            2003         2002         Dec. 30, 2001    to April 2, 2001
                                        ------------  ------------   ---------------   ----------------
<S>                                     <C>           <C>            <C>              <C>
Pretax (loss) income
  multiplied by the
  statutory rate (35%)                    $ 13,674      $    590        $  3,032         $(2,506,838)

Increases (decreases) resulting from:
   Effect of foreign income
     taxes net of loss
     carryforwards utilized                    290            22            (892)                487
   Reorganization adjustments                    -             -            (275)              8,202
   Change in tax rate of
     deferred assets                           477             -               -                   -
   Net change in domestic
     valuation allowance                   (43,424)            -               -           2,339,255
   State income taxes, net
     of federal benefit                      2,502          (271)            (23)             (6,376)
   Adjustment of prior years' accruals           -             -           1,425                   -
   Reduction in Trust payable                9,710             -               -                   -
   Goodwill write-down                     (10,099)            -               -                   -
   Raymark pension provision                     -          (412)              -                   -
   Permanent tax items                        (770)            -               -                 (72)
   Other                                       895           (13)            703              (1,481)
                                          --------      --------        --------         -----------
Income tax (provision) benefit            $(26,745)     $    (84)       $  3,970         $  (166,823)
                                          ========      ========        ========         ===========
</TABLE>


         Deferred tax assets (liabilities), at fiscal year-end, are comprised of
the following:

<TABLE>
<CAPTION>
                                    December 28, 2003   December 29, 2002
                                    -----------------   -----------------
<S>                                 <C>                 <C>
Tax benefit to PI Trust                 $ 41,823            $  42,356
Raytech minimum pension liability            503                  360
Excess of book provisions
  over tax deductions                      5,735                5,403
Postretirement benefit                     6,305                5,531
Excess of tax basis over
  book basis of assets due
  to restructuring                           544                  655
Foreign loss carryforwards                 1,465                1,286
Non PI Trust net operating
  loss carryforwards                       7,425                  963
                                        --------            ---------
Gross deferred tax assets                 63,800               56,554
Deferred tax asset
  valuation allowance                    (44,889)              (1,063)
                                        --------            ---------
Deferred tax assets                       18,911               55,491
Excess of book basis of
  intangibles over tax basis              (9,909)             (13,735)
Excess of book basis of fixed
  assets over tax basis                  (12,265)             (17,318)
                                        --------            ---------
Net deferred tax (liability) asset      $ (3,263)           $  24,438
                                        ========            =========
</TABLE>

                                      -76-
<PAGE>

Note I, continued

         During 2003, as a result of certain industry dynamics and the Company's
deteriorating profitability in its domestic Wet Friction segment, including the
effect of changes associated with environmental remediation, the Company did not
recognize any tax benefits associated with the cumulative 2003 operating losses
incurred by the Company's U.S. operations due to doubts concerning future
recoverability.

         Also, during 2003, the Company recorded an increase to the valuation
allowance of $43.8 million against certain domestic deferred tax assets due to
doubts about their future recoverability. The establishment of the valuation
allowance resulted in a charge against deferred income tax assets, of which
$43.4 million is included in the tax provision, and which also resulted in a
reduction in deferred income tax assets that inure to the benefit of the PI
Trust in accordance with the Tax Assignment and Assumption Agreement, as more
fully described above. Accordingly, the deferred payable to the Trust was
reduced by $30.5 million and other income was increased by an equal amount. In
addition, the short-term payable to the PI Trust was increased by $2.8 million
to reflect the increase in the state tax receivable that will inure to the
benefit of the PI Trust. This resulted in an equal amount of other expense. The
overall domestic net deferred tax liabilities relate to the tax effects of the
indefinite-lived intangible assets which cannot be used to support the
realization of existing deferred tax assets.

         At year-end 2003, the Company's deferred tax asset valuation allowance
of $44.9 million consisted of a valuation allowance of $43.4 million for the
U.S. wholly-owned subsidiaries and $1.5 million for operations in the United
Kingdom ("U.K."). The Company had a valuation allowance for the U.K. operations
of $1.1 million and $.5 million for 2002 and 2001, respectively. There was no
reduction in the valuation allowance in any of the periods presented.

         The Company has recorded a tax receivable in the amount of $1.0
million, due from state governments for returns filed in 2003. In accordance
with the Agreement, this amount inures to the benefit of the PI Trust. The
Company has received $7.1 million tax and interest, as a partial recovery of
state taxes. The State of Indiana has completed its audit of Raytech for the
years 1992 through 2001. As a result of the audit, Raytech was denied refunds
claimed for Indiana Gross Income tax paid in the years 1992 through 1997 of $1.0
million and certain interest on amounts refunded. Raytech filed a protest with
respect to these items with the Indiana Department of Revenue, and a hearing was
held on August 20, 2003. On September 18, 2003, Raytech received an order
denying the claim for refund. In response to the order, Raytech has filed a
petition with the Indiana Tax Court requesting a refund of Indiana gross income
tax and interest on amounts refunded. Pursuant to the Agreement, any tax refunds
received will be payable, net of Federal tax, to the PI Trust.

         The Company is under an IRS audit for 1996 through 2001. Any tax
assessment, up to the amount of the refunds previously received as a result of
the bankruptcy, arising from this audit or any other years in the carryback
period, are, pursuant to the Agreement, the responsibility of the PI Trust and
will therefore reduce the deferred tax asset associated with, and liability

                                      -77-
<PAGE>

payable to, the PI Trust.

         At December 28, 2003, the Company had foreign loss carryforwards of
$4.4 million all relating to the U.K. operations, which do not expire. A full

                                      -78-
<PAGE>

Note I, continued

valuation allowance continues to be provided against the tax benefit of the U.K.
carryforwards due to uncertainty of future profitability of these operations.

         The Company owns 57% of the stock of APC. The Company has not recorded
a deferred tax liability for the undistributed earnings of APC since management
expects that those earnings will be distributed to the Company in a tax-free
transaction. However, the deferred tax liability on the undistributed earnings
of APC would be approximately $1.5 million at December 28, 2003, if all of APC's
earnings were to be distributed through the distribution of dividends.

                                      -79-
<PAGE>

Note J - Liquidity

         Cash flows from operating activities for fiscal 2003 were $2.6 million
compared to $13.0 million in 2002. The decline in cash flows from operating
activities of $10.4 million year over year is primarily due to the poor
performance of the Wet Friction segment.

         The Company recorded a net loss for the year ended December 28, 2003 of
$66.4 million. Included in the Company's net loss for the year were significant
non-cash charges. Following is a reconciliation of the net loss to operating
cash flow (in millions)

<TABLE>
<S>                                    <C>
Net loss                               $ (66.4)
Non-cash charges
    Depreciation and amortization         18.3
    Impairment charge                     48.8
    Other charges                          1.9
                                       -------
    Total non-cash charges                69.0
                                       -------

Net cash provided by
   operating activities                $   2.6
                                       =======
</TABLE>

         The non-cash charges relating to the impairment are detailed in Note D
- Property, Plant and Equipment and Note E - Goodwill and Other Intangible
Assets.

         Capital expenditures for fiscal 2003 totaled $9.0 million compared to
$9.6 million for the 2002 fiscal year. In both years, the capital expenditures
were comparable to planned spending amounts.

         The Company's cash and cash equivalents at December 28, 2003 totaled
$16.4 million compared to $20.0 million at December 29, 2002, a decrease of $3.6
million.

         The total borrowings at year-end 2003 of $22.4 million compares to
total borrowings of $19.4 million at year-end 2002, an increase of $3.0 million
period- over-period. The available lines of credit at December 28, 2003 of $10.6
million compares to $8.8 million at year-end 2002, an increase in availability
of $1.8 million. Full details of the Company's debt are contained in Note F -
Debt to the notes to the audited consolidated financial statements.

         In summary of the above, the cash and available lines of credit at
December 28, 2003 were $27.0 million compared to $28.8 million at year-end 2002,
a decrease in cash and available lines of credit of $1.8 million.

         The most significant factor affecting the Company's future cash flows
is its ability to earn and collect cash from customers. The automotive parts
industry is extremely competitive. Many of the Company's customers and
competitors are significantly larger than the Company. The Company's customers
are often able to demand price reductions from the suppliers including all
segments of Raytech. Some of the Company's sales are made under standard sales
contracts that include price commitments for multiple years. Specifically in the
Wet Friction segment, the Company is selling certain products to certain
customers at a loss under the terms of its current sales contracts. The Company
is currently working with its customers to re-negotiate the terms of these loss
contracts. In addition, the Company is reviewing alternatives to improve its
cost structure including:

         X        Transferring management of the European Wet Friction
                  operations to the European Dry Friction management group
                  headquartered in Germany.

                                      -80-
<PAGE>

                                      -81-
<PAGE>

Note J, continued

         X        Conducting a facilities utilization review to determine if
                  certain facilities can be consolidated.

         X        Consolidating research and development facilities.

         The Company effectively manages its accounts receivable as evidenced by
the average days sales in trade receivables of 43 days.

         Items which will potentially require the use of cash in 2004 other than
normal operating expenses include the following.

         X        The Company has recorded an accrued liability of $6.2 million
                  for certain environmental matters more fully discussed in Note
                  G - Litigation. It is not certain at this time when these
                  funds will be expended. There exists the potential that all or
                  a portion of the funds will be spent in 2004.

         X        The Company assumed the liability for the Raymark pension
                  plans as part of the Chapter 11 reorganization. The plans,
                  which are discussed as part of Note M - Employee Benefits are
                  under funded and the Company, through an agreement with the
                  Internal Revenue Service, is providing both current
                  contributions and catch-up contributions. The expected funding
                  for the plans in 2004 will be approximately $4.4 million. The
                  funding in fiscal 2003 was $6.9 million.

         X        Certain tax issues are discussed in Note I - Income Taxes,
                  which provides detail concerning the status of the current
                  Internal Revenue Service audit and the use of certain future
                  tax benefits.

         Management believes that existing cash balances, the Company's lending
facilities and cash flow from operations during 2004 will be sufficient to meet
all of the Company's obligations arising in the normal course of business,
including anticipated capital investments. However, the ability of the Company
to utilize its lending facilities is dependent on the Company's ability to meet
its financial forecasts for 2004, which is not assured, and to meet the
financial covenants contained in its credit facilities. These forecasts include
certain revenue assumptions generally consistent with the prior year for the Wet
Friction (on a comparable basis) and Aftermarket segments and modest growth in
the Dry Friction segment, as well as certain cost-saving initiatives. If the
Company does not comply with the financial covenants, an event of default would
occur and could result in the acceleration of the Company's indebtedness under
its domestic credit facilities. If that were to occur, the ability of the
Company to continue would be dependent upon, among other things, its ability to
amend the credit facilities, enact certain actions to generate cash and/or to
seek additional alternative financing from other lenders.

                                      -82-
<PAGE>

Note K - Earnings Per Share

<TABLE>
<CAPTION>
                                         (in thousands, except share data)
                                                 Successor Company                 Predecessor Company
                                    --------------------------------------------   -------------------
                                        For the Year Ended
                                    ---------------------------   For the Period      For the Period
                                    December 28,   December 29,   Apr. 3, 2001 to    January 1, 2001
                                        2003          2002         Dec. 30, 2001     to April 2, 2001
                                        ----          ----        ---------------    ----------------
<S>                                 <C>            <C>            <C>              <C>
Basic EPS Computation

  Net (loss) income                 $    (66,443)  $     (2,825)    $    (5,577)       $ 6,995,257
                                    ============   ============     ===========        ===========
  Weighted average shares             41,701,554     41,528,520      41,521,924          3,519,313
  Weighted average shares issued
    as a result of reorganization              -              -               -            413,072
  Weighted average stock options
    exercised                             25,913         79,537           5,383                  -
                                    ------------   ------------     -----------        -----------
  Adjusted weighted average shares    41,727,467     41,608,057      41,527,307          3,932,385
                                    ============   ============     ===========        ===========

  Basic (loss) earnings per share   $      (1.59)  $       (.07)    $      (.13)       $  1,778.88
                                    ============   ============     ===========        ===========

Diluted EPS Computation

  Net (loss) income                 $    (66,443)  $     (2,825)    $    (5,577)       $ 6,995,257
                                    ============   ============     ===========        ===========
  Weighted average shares             41,701,554     41,528,520      41,521,924          3,519,313
  Weighted average shares issued
    as a result of reorganization              -              -               -            413,072
  Weighted average stock options
    exercised                             25,913         79,537           5,383                  -
  Dilutive potential common shares             -              -               -             13,897
                                    ------------   ------------     -----------        -----------
  Adjusted weighted average shares
    and equivalents                   41,727,467     41,608,057      41,527,307          3,946,282
                                    ============   ============     ===========        ===========

Diluted (loss) earnings per share   $      (1.59)  $       (.07)    $      (.13)       $  1,772.62
                                    ============   ============     ===========        ===========
</TABLE>

                                      -83-
<PAGE>

Note K, continued

         Options to purchase 579,288, 70,707, 493,473, and 487,550 shares of
common stock were excluded from the calculation of diluted earnings per share
for the Successor Company for the years ended December 28, 2003, December 29,
2002, the period April 3, 2001 to December 30, 2001 and for the Predecessor
Company for the period January 1, 2001 to April 2, 2001, respectively, due to
their antidilutive effect due either to their exercise price compared to the
average market price or the Company incurring a net loss for the period.

         In connection with the Plan of Reorganization, 38 million shares were
issued.

         In February 2002, lawyers claiming to represent the Committee of Equity
Holders filed a motion in U.S. Bankruptcy Court to compel Raytech to either
issue up to approximately 700,000 additional shares to the pre-reorganization
holders of shares in Raytech or their successors, or to proportionately reduce
the shareholdings of the general unsecured creditor shareholders under the Plan
of Reorganization. The ultimate outcome of this matter is unknown; however, it
is possible that its resolution could cause the Company to issue additional
shares to the original shareholder group, or to retire shares held by the
general unsecured creditor shareholder group. This might directly impact the
earnings per share calculations of the Company. The Company has filed a motion
for summary judgment asking the Court to dismiss the action and the court has
denied that motion.

                                      -84-
<PAGE>

Note L - Stock Option Plans

         In 1991, the Company established a non-qualified stock option plan (the
"1990 Plan"), which was amended in 1997 to increase the number of shares of
common stock as to which options may be granted. In 2002, the Company
established an incentive stock option plan (the "2002 Plan"). Types of grants
allowed under the 2002 Plan include Non-Qualified Stock Options, Incentive Stock
Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units,
Performance Units, Performance Shares, Stock Awards, and Cash-Based Awards.
Under the 1990 Plan, as amended, the number of shares of common stock as to
which options may be granted from time to time may not exceed 1,000,000. Under
the 2002 Plan, the number of shares of common stock as to which options may be
granted from time to time may not exceed 4,000,000 shares. Under the terms of
all plans, the exercise price of any option may not be less than 100% of the
fair market value of the common stock on the date of grant.

         Stock options granted under the 1990 and 2002 Plans generally vest over
a four-year period. In general, stock options granted under both of the Plans
expire ten years from the date of grant. The term during which options could be
granted under the 1990 Plan expired on December 31, 2000. At December 28, 2003,
there were 1,227,000 shares available for future grant under the 2002 Plan.

         The following table summarizes stock option transactions for the fiscal
years ended December 28, 2003, December 29, 2002 and December 30, 2001:

<TABLE>
<CAPTION>
                                  Successor Company
                      -----------------------------------------
                               2003                2002                  2001
                      --------------------  -------------------  -------------------
                                  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      332,017   $   4.25   573,757    $ 3.78    700,413    $ 3.79
Granted               2,773,000       5.70         -         -          -         -
Exercised               (35,752)      4.25  (173,034)     3.13     (6,596)     2.75
Lapsed                   (5,606)      4.25   (53,234)     2.89          -         -
Canceled                (28,000)         -   (15,472)     4.03   (120,060)     3.92
                      ---------             --------             --------    ------

Outstanding at
  end of year         3,035,659   $   5.56   332,017    $ 4.25    573,757    $ 3.78
                      =========   ========  ========    ======   ========    ======

Options exercisable
 at end of year         290,659   $   4.25   332,017    $ 4.25    573,757    $ 3.78
                      =========   ========  ========    ======   ========    ======
</TABLE>

         The following table summarizes information concerning options
outstanding and exercisable at December 28, 2003:

<TABLE>
<CAPTION>
                 Options Outstanding                 Options Exercisable
--------------------------------------------------  ---------------------
                              Weighted
                               Average    Weighted               Weighted
                              Remaining   Average                Average
   Range of       Number     Contractual  Exercise    Number     Exercise
Exercise Price  Outstanding  Life Years    Price    Exercisable   Price
--------------  -----------  -----------  --------  -----------  --------
<S>             <C>          <C>          <C>       <C>          <C>
     $ 4.25       290,659      4.62        $ 4.25     290,659     $ 4.25
     $ 5.70     l,601,000      9.00        $ 5.70           -     $ 5.70
     $ 5.70     1,144,000      9.54        $ 5.70           -     $ 5.70
                ---------      ----        ------     -------     ------
$4.25-$5.70     3,035,659      8.78        $ 5.56     290,659     $ 4.25
                =========      ====        ======     =======     ======
</TABLE>

                                      -85-
<PAGE>

Note M - Employee Benefits

         Raytech Corporation sponsors both defined benefit plans and defined
contribution plans for certain groups of employees. Raytech also provides a
postretirement benefit plan, which covers the hourly workers at the
Crawfordsville, Indiana, facility and certain other employees who qualify for
benefits based on age and years of service.

         In connection with the Company's Chapter 11 proceedings, the Pension
Benefit Guaranty Corporation filed certain motions claiming that Raytech
Corporation was responsible for the funding and sponsorship of two Raymark
Corporation pension plans. The Court ordered that Raytech was liable for the
maintenance and funding of the underfunded pension plan obligations of Raymark
Corporation. Raytech, based on the Court's order, assumed the role of Plan
sponsor of the Raymark Plans upon the emergence from bankruptcy in April 2001.

         The U.S. Medicare Prescription Drug, Improvement and Modernization Act
of 2003 is not expected to have a significant effect on the Company's
postretirement benefit obligations.

         The plans are summarized as follows:

         -     The Raytech Corporation Retirement Plan for Hourly Employees
               provides defined benefits for the hourly employees located at the
               Crawfordsville, Indiana, manufacturing facility.

         -     The German pension plan provides for defined benefits for certain
               salaried employees of Raytech's German subsidiary.

         -     The Postretirement Benefit Plan provides for certain welfare
               benefits for hourly employees of the Crawfordsville, Indiana,
               facility. In addition, certain other employees of Raytech are
               eligible for these benefits based on a combination of years of
               service and age.

         -     The Raymark Industries, Inc. Retirement Plan for Hourly Paid
               Employees provides for defined benefits for hourly employees of
               the former Raymark Corporation. There are two separate plans
               based on the former manufacturing locations of Raymark.

         -     The Company also sponsors certain defined contribution plans for
               salaried and hourly employees. The contributions are based on a
               percent of annual base compensation, the percentage ranging from
               4% to 6%, dependent on performance to the annual Business Plan of
               Raytech Corporation. Company contributions to the defined
               contribution plans were $532 for 2003, $520 for 2002 and $409 for
               the period April 3, 2001 through December 30, 2001 (Successor
               Company). Contributions were $150 for the period January 1, 2001
               through April 2, 2001 (Predecessor Company).

         -     The Company also sponsors a Supplemental Executive Retirement
               Plan ("SERP"), a supplemental defined contribution plan pursuant
               to which the Company makes contributions for the benefit of its
               members of senior management in the amounts of 2% of salary and
               bonus up to $200 and 8% of salary and bonus over $200.
               Company contributions to the SERP were $36 for 2003 and
               $21 for 2002.

                                      -86-
<PAGE>

Note M, continued

         The following information summarizes activities in the pension and
postretirement benefit plans:

         RAYTECH PENSION PLAN

<TABLE>
<CAPTION>
                                              December 28,  December 29,
                                                 2003          2002
                                                 ----          ----
<S>                                           <C>           <C>
Change in benefit obligations
Projected benefit obligations at
  beginning of year                             $ 6,844       $ 5,779
Service cost                                        429           344
Interest cost                                       494           395
Amendments                                          765             -
Actuarial loss                                      804           461
Benefits paid                                      (158)         (135)
                                                -------       -------
Projected benefit obligations at end of year    $ 9,178       $ 6,844
                                                =======       =======

Accumulated benefit obligation                  $ 8,544       $ 6,844
                                                =======       =======

Change in plan assets
Fair value of plan assets
  at beginning of year                          $ 5,474       $ 5,317
Actual return on plan assets                        270           292
Employer contribution                               296             -
Benefits paid                                      (158)         (135)
                                                -------       -------
Fair value of plan assets
  at end of year                                $ 5,882       $ 5,474
                                                =======       =======

Funded Status Reconciliation
Funded status                                   $(3,296)      $(1,370)
Unrecognized prior service cost                     704             -
Unrecognized actuarial loss                       1,769           923
                                                -------       -------
Net amount recognized                           $  (823)      $  (447)
                                                =======       =======

Amounts recognized in the statements of
  financial position consist of:
Accrued benefit liability                       $(2,662)      $(1,370)
Intangible asset                                    704             -
Accumulated other comprehensive loss              1,135           923
                                                -------       -------
Net amount recognized                           $  (823)      $  (447)
                                                =======       =======

Weighted average assumptions used to
  determine benefit obligations
 Discount rate                                     6.00%         6.50%
Rate of compensation increase                       n/a           n/a

Weighted average assumptions used to
  determine net periodic benefit cost
Discount rate                                      6.50%         7.00%
Expected return on plan assets                     6.00%         6.50%
 Rate of compensation increase                      n/a           n/a

Plan Assets
Mutual funds                                        100%          100%
</TABLE>

         Due to the size of this plan, it was determined that the use of mutual
         funds would provide a reasonable return with a low risk. The overall
         yield in 2003 was 5%. In 2004, the Company intends to use one asset
         manager for both the Raytech and Raymark pension plans.

         The Company expects to contribute $.8 million to the Raytech pension
         plan in 2004.

                                      -87-
<PAGE>

Note M, continued

        RAYTECH PENSION PLAN, continued

<TABLE>
<CAPTION>
                                              Successor Company                Predecessor Company
                                -------------------------------------------    -------------------
                                   For the Year Ended
                                --------------------------   For the Period       For the Period
                                December 28,  December 29,  April 3, 2001 to     January 1, 2001
 Net Periodic Benefit Expense       2003         2002       December 30, 2001    to April 2, 2001
 ----------------------------   ------------  ------------  -----------------    ----------------
<S>                             <C>           <C>           <C>                 <C>
Service cost                       $  429        $  344          $ 243              $   81
Interest cost obligations             494           395            265                  88
Expected return on plan assets       (330)         (315)          (208)                (65)
Amortization of prior
  service costs                        60             -              -                   9
Recognized actuarial loss              19             -              -                   -
                                   ------        ------          -----              ------
Total net periodic
  benefit cost                     $  672        $  424          $ 300              $  113
                                   ======        ======          =====              ======
</TABLE>

                  In connection with the implementation of fresh-start reporting
on April 2, 2001, the Company increased the value of the liability related to
the Raytech pension plan by $.8 million to reflect the present value of future
obligations.

Raytech German Pension

         The Company's German subsidiaries have an unfunded defined benefit plan
covering certain employees.

        GERMAN PLAN

<TABLE>
<CAPTION>
                                              December 28,  December 29,
                                                  2003          2002
                                                  ----          ----
<S>                                           <C>           <C>
Change in benefit obligations
Projected benefit obligations at
  beginning of year                             $ 3,177       $ 2,455
Service cost                                         72            75
Interest cost                                       194           154
Actuarial loss                                        6            47
Amendments                                           73             -
Benefits paid                                      (110)          (89)
Translation adjustment                              655           535
                                                -------       -------

Projected benefit obligations at end of year    $ 4,067       $ 3,177
                                                =======       =======

Accumulated benefit obligations                 $ 3,900       $ 3,037
                                                =======       =======

Change in plan assets
Fair value of plan assets
  at beginning of year                          $     -       $     -
Actual return on plan assets                          -             -
Employer contribution                               110            89
Plan participants' contributions                      -             -
Benefits paid                                      (110)          (89)
                                                -------       -------

Fair value of plan assets
  at end of year                                $     -       $     -
                                                =======       =======
</TABLE>

                                      -88-
<PAGE>

Note M, continued

        GERMAN PLAN, continued

<TABLE>
<CAPTION>
                                              December 28,  December, 29
                                                  2003          2002
                                                  ----          ----
<S>                                           <C>           <C>
Funded Status Reconciliation
Funded status                                   $(4,067)      $(3,177)
Unrecognized prior service cost                      81             -
Unrecognized actuarial loss                         704           599
                                                -------       -------
Net amount recognized                           $(3,282)      $(2,578)
                                                =======       =======

Amounts recognized in the statements of
  financial position consist of:

Accrued benefit liability                       $(3,900)      $(3,037)
Accumulated other comprehensive loss                618           459
                                                -------       -------
Net amount recognized                           $(3,282)      $(2,578)
                                                =======       =======
</Table>

         The German Plan is denominated in Euro's. As a result, the net amount
recognized is impacted by the effect of the change in exchange rates year over
year.

<Table>
<S>                                           <C>           <C>
Weighted average assumptions used to
  determine benefit obligations
Discount rate                                      5.75%         6.00%
Rate of compensation increase                      2.50%         2.50%

Weighted average assumptions used to
    determine net periodic benefit cost
Discount rate                                      6.00%         7.00%
Expected return on plan assets                     0.00%         0.00%
Rate of increase in future compensation            2.50%         2.50%
</TABLE>

<TABLE>
<CAPTION>
                                            Successor Company                Predecessor Company
                              -------------------------------------------    -------------------
                                 For the Year Ended
                              ------------------------     For the Period       For the Period
                              December 28,  December 29,  April 3, 2001 to     January 1, 2001
Net Periodic Benefit Expense     2003         2002        December 30, 2001    to April 2, 2001
----------------------------  ------------  ------------  -----------------    ----------------
<S>                           <C>           <C>           <C>                <C>
Service cost                       72          $  75           $  43                $  15
Interest cost                     194            154             107                   37
Amortization of net
  actuarial loss                    6             47               -                    -
                                  ---          -----           -----                -----
Total net periodic
  benefit cost                    272          $ 276           $ 150                $  52
                                  ===          =====           =====                =====
</TABLE>

         The estimated pension contribution for 2004 is $.1 million.

         In connection with the implementation of fresh-start reporting on April
2, 2001, the Company increased the value of the liability related to the German
pension plan by $.4 million to reflect the present value of future obligations.

                                      -89-
<PAGE>

Note M, continued

    POSTRETIREMENT BENEFIT PLAN

<TABLE>
<CAPTION>
                                                                              December 28,  December 29,
                                                                                 2003          2002
                                                                                 ----          ----
<S>                                                                           <C>           <C>
Change in benefit obligations
Benefit obligations at
  beginning of year                                                             $ 16,587      $ 13,815
Service cost                                                                         684           587
Interest cost                                                                      1,117         1,004
Plan participants' contributions                                                      26            25
Actuarial loss                                                                     1,931         1,514
Benefits paid                                                                       (636)         (358)
                                                                                --------      --------
Benefit obligations at end of year                                              $ 19,709      $ 16,587
                                                                                ========      ========

Change in plan assets
Fair value of plan assets
  at beginning of year                                                          $      -      $      -
Employer contribution                                                                610           333
Plan participants' contribution                                                       26            25
Benefits paid                                                                       (636)         (358)
                                                                                --------      --------
Fair value of plan assets
  at end of year                                                                $      -      $      -
                                                                                ========      ========

Funded Status Reconciliation
Funded status                                                                   $(19,709)     $(16,587)
Unrecognized actuarial loss                                                        4,007         2,185
                                                                                --------      --------
Net amount recognized                                                           $(15,702)     $(14,402)
                                                                                ========      ========

Amounts recognized in the
  statements of financial
  position consist of:

Accrued benefit liability                                                       $(15,702)     $(14,402)
                                                                                ========      ========

Weighted average assumptions used to determine benefit obligations
Discount rate                                                                        6.0%         6.50%
Rate of compensation increase                                                       5.00%         5.00%

Weighted average assumptions used to determine net periodic benefit cost
Discount rate                                                                       6.50%         7.00%
Expected return on plan assets                                                       n/a           n/a
Rate of compensation increase                                                       5.00%         5.00%

Assumed healthcare cost trend rates
Assumed healthcare cost trend rate for next year                                    8.50%         7.50%
Rate at which cost is assumed to decline                                            4.50%         5.00%
Year that the rate reaches the ultimate trend rate                                  2012          2008
</TABLE>

The Company expects to contribute $.6 million to the postretirement benefit plan
  in 2004.

                                      -90-
<PAGE>

Note M, continued

         POSTRETIREMENT BENEFIT PLAN (continued)

         Sensitivity Analysis, Postretirement Benefits:

         For measurement purposes, a 8.5% annual rate of increase in the per
         capita cost of covered healthcare benefits was assumed for 2004. This
         rate was assumed to decrease gradually to 4.5% through 2012 and remain
         at that level thereafter. The healthcare cost trend rate assumption has
         a significant effect on the amounts reported. To illustrate the impact,
         increasing or decreasing the assumed health care cost trend rates by 1
         percentage point in each year would have the following effects:

<TABLE>
<CAPTION>
                              1 Percentage Point     1 Percentage Point
                                   Increase              Decrease
                               2003       2002         2003      2002
                               ----       ----         ----      ----
<S>                           <C>        <C>         <C>       <C>
Effect on total of service
  and interest cost
  components of expense       $   176    $  152      $  (154)  $  (134)
Effect on accumulated post-
  retirement benefit
  obligations                 $ 1,609    $1,347      $(1,427)  $(1,201)
</TABLE>

<TABLE>
<CAPTION>
                                            Successor Company                Predecessor Company
                              -------------------------------------------    -------------------
                                 For the Year Ended
                              --------------------------   For the Period        For the Period
                              December 28,  December 29,   April 3, 2001 to      January 1, 2001
Net Periodic Benefit Expense     2003         2002        December 30, 2001     to April 2, 2001
----------------------------  ------------  ------------  -----------------     ----------------
<S>                           <C>           <C>           <C>                   <C>
Service cost                    $   684        $  587          $   399               $ 133
Interest cost                     1,117         1,004              670                 224
Amortization of prior
  service cost                        -             -                -                   1
Amortization of net
  actuarial gain (loss)             109             -                -                  (3)
                                -------        ------          -------               -----
Total net periodic benefit
  cost                          $ 1,910        $1,591          $ 1,069               $ 355
                                =======        ======          =======               =====
</TABLE>

         In connection with the implementation of fresh-start reporting on April
2, 2001, the Company decreased the value of the liability of the postretirement
benefit plan by $1.3 million to reflect the present value of future obligations.

                                      -91-
<PAGE>

Note M, continued

       RAYMARK PENSION PLANS

<TABLE>
<CAPTION>
                                                 December 28,  December 29,
                                                     2003          2002
                                                     ----          ----
<S>                                              <C>           <C>
Change in benefit obligations
Projected benefit obligations at
  beginning of year                                $ 34,900      $ 36,199
Interest cost                                         2,194         2,268
Actuarial (gain) loss                                 3,529          (936)
Benefits paid                                        (2,638)       (2,631)
                                                   --------      --------
Projected benefit obligations at end of year       $ 37,985      $ 34,900
                                                   ========      ========

Accumulated benefit obligations                    $ 37,985      $ 34,900
                                                   ========      ========

Change in plan assets
Fair value of plan assets at beginning of year     $ 18,462      $ 16,215
Actual return (loss) on plan assets                   3,208        (1,262)
Employer contribution                                 6,872         6,140
Benefits paid                                        (2,638)       (2,631)
                                                   --------      --------
Fair value of plan assets at end of year           $ 25,904      $ 18,462
                                                   ========      ========

Funded Status Reconciliation
Funded status                                      $(12,081)     $(16,438)
Unrecognized actuarial loss                          11,204         9,555
                                                   --------      --------
Net amount recognized                              $   (877)     $ (6,883)
                                                   ========      ========

Amounts recognized in the statements of
  financial position consist of:

Accrued benefit liability                          $(12,081)     $(16,438)
Accumulated other comprehensive loss                 11,204         9,555
                                                   --------      --------
Net amount recognized                              $   (877)     $ (6,883)
                                                   ========      ========

Weighted average assumptions used to
  determine benefit obligations
Discount rate                                          5.50%          6.5%
Rate of compensation increase                           n/a           n/a

Net Periodic Benefit Expense
Interest cost                                      $  2,194      $  2,268
Expected return on plan assets                       (1,616)       (1,324)
Recognized actuarial loss                               288            95
                                                   --------      --------
Total net periodic benefit cost                    $    866      $  1,039
                                                   ========      ========

Weighted average assumptions used to
  determine net periodic benefit cost
Discount rate                                          6.50%         7.00%
Expected return on plan assets                         8.00%         8.00%
Rate of compensation increase                           n/a           n/a

Plan Assets
Equity securities                                        55%           46%
Debt securities                                          36            48
Other                                                     9             6
                                                   --------      --------
                                                        100%          100%
                                                   ========      ========
</TABLE>

The plans' current asset distribution reflects the increase in equity securities
in 2003 compared to 2002 as the equity markets have improved. The overall yield
in 2003 was 14%. The Company intends to use one asset manager in 2004 for both
the Raymark and Raytech pension plans.

The Company expects to contribute $4.4 million to the Raymark pension plan in
2004.

                                      -92-
<PAGE>

Note N - Commitments

         The Company leases office space in Indianapolis, Indiana; Peoria,
Illinois; Floral Park, New York; Leverkusen, Germany; Shelton, Connecticut, and
warehouse space in Sullivan, Indiana. Rental expense amounted to $1,172 for the
year ended December 28, 2003, $1,570 for the year ended December 29, 2002, $914
for the period April 3, 2001 to December 30, 2001 (Successor Company) and $313
for the period January 1, 2001 to April 2, 2001 (Predecessor Company). The
Company also leases various machinery and equipment.

         The approximate future minimum rental payments as of December 28, 2003
were as follows:

<TABLE>
<S>            <C>
2004           $  886
2005              756
2006              448
2007              336
2008              189
After 2008      1,840
               ------
               $4,455
               ======
</TABLE>

                                      -93-
<PAGE>

Note O - Comprehensive Income

         The components of and changes in accumulated other comprehensive (loss)
income are as follows:

<TABLE>
<CAPTION>
                                       Foreign       Minimum     Accumulated
                                       Currency      Pension        Other
                                     Translation    Liability   Comprehensive
                                     Adjustments   Adjustments  (Loss) Income
                                     -----------   -----------  -------------
<S>                                  <C>           <C>          <C>
PREDECESSOR COMPANY
Balance December 31, 2000               $ (926)      $   (292)      $(1,218)
  Changes during the period                926            292         1,218
                                        ------       --------       -------
Balance April 2, 2001                   $    -       $      -       $     -
                                        ======       ========       =======

SUCCESSOR COMPANY

Balance April 2, 2001                   $    -       $      -       $     -
  Changes during the period               (272)        (8,439)       (8,711)
                                        ------       --------       -------
Balance December 30, 2001                 (272)        (8,439)       (8,711)
  Changes during the year                2,202         (2,138)           64
                                        ------       --------       -------
Balance December 29, 2002                1,930        (10,577)       (8,647)
  Changes during the year                2,111         (2,020)           91
                                        ------       --------       -------
Balance December 28, 2003               $4,041       $(12,597)      $(8,556)
                                        ======       ========       =======
</TABLE>

         In connection with the implementation of fresh-start reporting on April
2, 2001, the Company eliminated accumulated other comprehensive loss as required
by fresh-start reporting.

         The Company has not provided for the future tax deduction associated
with foreign currency translation adjustments due to management's decision to
permanently reinvest the earnings of their foreign subsidiaries.

         In 2003, the Company recorded a deferred tax asset of $143 thousand
associated with the additional minimum pension liability recorded for the
Raytech and German pension plans. Due to the limitation on the realizability of
the deferred tax assets, the Company recorded an increase to the valuation
allowance for this amount.

         The $583 thousand additional minimum pension liability recorded during
2002 for the Raytech and German pension plans is net of taxes of $360 thousand.
No tax benefit was provided for the future tax deduction associated with the
additional minimum pension liability recorded for the Raytech and German pension
plans for the periods April 3, 2001 to December 30, 2001 (Successor Company) and
January 3, 1999 to April 2, 2001 (Predecessor Company) due to the limitations on
the realizability of deferred tax assets.

                                      -94-

<PAGE>

         The tax benefits resulting from any tax deductions relating to the
Raymark Pension Plan have been assigned to the PI Trust in accordance with the
Plan, and

Note O, continued

therefore, Raytech will not receive the future tax deduction. Accordingly, the
future tax deduction relating to the minimum pension liability for the fiscal
years 2003 and 2002 and for the period April 3, 2001 to December 30, 2001
(Successor Company) was recorded as a deferred tax asset with a corresponding
payable to the PI Trust.

Note P - Research and Development

         Cost of research and new product development amounted to $7,207 for
2003, $7,318 for 2002, $5,314 for the period April 3, 2001 to December 30, 2001
(Successor Company) and $1,726 for the period January 1, 2001 to April 2, 2001
(Predecessor Company). All of the aforementioned costs are included in selling,
general and administrative expenses in the Consolidated Statements of
Operations.

Note Q - Concentration of Credit Risk

         Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and cash equivalents
and trade receivables. 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 are the automotive and heavy duty
equipment markets and the related aftermarkets within the United States, Europe
and Asia. At December 28, 2003 and December 29, 2002, the Company's five largest
uncollateralized receivables represented approximately $8.3 million or 33.7% and
$10.9 million or 40.9%, respectively, of the Company's trade accounts receivable
balance. 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.

                                      -95-
<PAGE>

Note R - Statements of Cash Flows

         The following table sets forth certain supplemental disclosures of cash
flow information:

<TABLE>
<CAPTION>
                                                       Successor Company                   Predecessor Company
                                         ----------------------------------------------    -------------------
                                            For the Year Ended
                                         --------------------------     For the Period       For the Period
                                         December 28,  December 29,    April 3, 2001 to      January 1, 2001
                                            2003          2002        December 30, 2001     to April 2, 2001
                                         -----------   ------------   -----------------     ----------------
<S>                                      <C>           <C>            <C>                  <C>
Cash paid during the period for:
    Income taxes                          $  1,582       $  1,874          $  1,800          $     61
    Interest                                 1,792            746               839               306
Other non-cash activities:
    PP&E in accounts payable
      or under capital lease                 1,399            933               549              (769)
    Deferred payable to the
      PI Trust                             (27,743)           597             5,123            36,636
    Minimum pension liability                2,020          2,498             8,439                 -
</TABLE>

                                      -96-
<PAGE>

Note S - Related Parties

         In 1990 and 1991, RPI, a subsidiary of the Company, and owner of all of
the common stock of APC, sold approximately 45% of common stock of APC to a
group of outside investors for the purpose of providing needed financing of
APC's business activities. In January 2002, approximately 40% of the common
stock of APC was acquired by Raymark from minority shareholders. Raymark is in
bankruptcy and controlled by a court appointed trustee. With the majority of the
creditors of Raymark being asbestos-related claimants, it is anticipated that
the assets of Raymark, including the 40% of APC's common stock, will be
transferred to the PI Trust that owns approximately 83% of Raytech, a related
party. Raytech directors Richard Lippe and Archie Dykes are Trustees of the PI
Trust and director Robert Carter is the Legal Representative of the PI Trust.

         During 1998 and 1997, the Company purchased yarn from Universal
Friction Composites ("UFC"), a company that is in bankruptcy which was
consolidated with the Raymark bankruptcy in January 2002. With the majority of
the creditors of UFC being asbestos-related claimants, it is anticipated that
the assets of UFC will be transferred to Raytech's personal injury trust that
owns approximately 83% of Raytech, a related party. At December 28, 2003,
and December 29, 2002.

         In 1998, the Company acquired manufacturing equipment from UFC for
$1,051, of which $907 is included in accounts payable at December 28, 2003,
and December 29, 2002.

         Also see discussion regarding Raymark in Note A.

                                      -97-

<PAGE>

Note T - Supplementary Financial Statement Information at the end of the
         Fiscal Year

<TABLE>
<CAPTION>
                                              December 28,        December 29,
                                                  2003                2002
                                              ------------        ------------
<S>                                           <C>                 <C>
OTHER CURRENT ASSETS

Deferred income taxes                           $ 3,618             $  2,532
Non-trade receivables                             1,336                  541
Prepaid insurance                                   816                  145
Other                                                 -                1,860
                                                -------             --------
                                                $ 5,770             $  5,078
                                                =======             ========
ACCRUED LIABILITIES

Property taxes                                  $ 3,771             $  3,625
Wages and other compensation and
  related taxes                                   6,421                7,808
Income taxes payable                              2,713                2,409
Employee benefits                                 2,826                1,313
Environmental cleanup                             6,174                7,023
Other                                             4,731                4,080
                                                -------             --------
                                                $26,636             $ 26,258
                                                =======             ========
</TABLE>

<TABLE>
<CAPTION>
                                          Successor Company                Predecessor Company
                            --------------------------------------------   -------------------
                               For the Year Ended
                            ------------------------    For the Period       For the Period
                            December 28, December 29,  April 3, 2001 to      January 1, 2001
                               2003         2002       December 30, 2001     to April 2, 2001
                            -----------  -----------   -----------------     ----------------
<S>                         <C>          <C>           <C>                   <C>
ALLOWANCE FOR BAD DEBTS

Beginning balance             $   824      $   729          $ 1,234             $ 1,234
Provisions                        454          239              130                 143
Charge-offs                       (28)        (144)            (635)               (143)
                              -------      -------          -------             -------
Ending balance                $ 1,250      $   824          $   729             $ 1,234
                              =======      =======          =======             =======
</TABLE>

<TABLE>
<CAPTION>
                                              Successor Company                  Predecessor Company
                               ----------------------------------------------    -------------------
                                   For the Year Ended
                               --------------------------    For the Period         For the Period
                               December 28,  December 29,   April 3, 2001 to        January 1, 2001
                                  2003          2002        December 30, 2001      to April 2, 2001
                               -----------   ------------   -----------------      ---------------
<S>                            <C>           <C>            <C>                  <C>
OTHER INCOME, NET

Interest income                  $    165       $    342        $    474             $    106
Reduction of payable to
  PI Trust                         27,743              -               -                    -
Loss on the disposal of
  fixed assets                     (1,443)           (91)           (133)                  (6)
Other income, net                     294            278              63                  135
                                 --------       --------        --------             --------
</TABLE>

                                      -98-
<PAGE>

<TABLE>
<S>                              <C>            <C>             <C>                  <C>
                                 $ 26,759       $    529        $    404             $    235
                                 ========       ========        ========             ========
</TABLE>

                                      -99-

<PAGE>

Note U - Summarized Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
                                              2003 Fiscal Quarters Ended
                                    ------------------------------------------------
                                     March 30   June 29   September 28   December 28
                                     --------   -------   ------------   -----------
                                       (in thousands except share and market data)
<S>                                 <C>        <C>          <C>           <C>
Net sales                           $ 55,735   $ 54,093     $ 47,878      $ 48,159
Gross profit                           8,885      8,136        5,537         3,568
Income (loss) before
  income taxes and
  minority interest                      384     (1,906)      15,124       (52,671)
Net loss                                 (73)    (1,539)     (17,066)      (47,765)
Basic loss per
  share                                  .00       (.04)        (.41)        (1.14)
Diluted loss per
  share                                  .00       (.04)        (.41)        (1.14)
Market range:
  -high                                 7.22       8.20         4.85          3.94
  -low                                  4.15       3.00         3.23          3.15
</TABLE>

         During the fiscal quarter ended December 28, 2003, the Company recorded
certain adjustments that specifically impacted the comparability of quarterly
results. The most significant of which was a charge of $48.8 million for the
impairment of goodwill and other intangible assets of $37.8 million and an
impairment charge to long-lived assets of $11.0 million. Further, the Company
recorded an inventory reserve of $1.2 million related to certain parts that are
sold below the cost of production. In addition, a reversal of $1.9 million for
an over- accrual of property taxes was recorded.

         During the fiscal quarter ended September 28, 2003, the Company
recognized income of $23.7 million and a corresponding amount in the income tax
provision related to the reduction of the deferred payable to the PI Trust as a
result of the establishment of a valuation allowance of an equal amount against
the deferred tax asset that will inure to the benefit of the PI Trust in
accordance with the Tax Assignment and Assumption Agreement. See Note I - Income
Taxes for more details.

<TABLE>
<CAPTION>
                                              2002 Fiscal Quarters Ended
                                    -----------------------------------------------
                                     March 31   June 30   September 29  December 29
                                     --------   -------   ------------  -----------
                                       (in thousands except share and market data)
<S>                                 <C>        <C>        <C>           <C>
Net sales                           $ 52,709   $ 55,305    $ 51,740       $ 50,112
Gross profit                          10,525     11,086       8,566          6,594
Income (loss) before
  income taxes and
  minority interest                    2,833      2,331      (4,803)        (2,047)
Net income (loss)                      1,330      1,070      (3,189)        (2,036)
Basic earnings (loss) per
  share                                  .03        .03        (.08)          (.05)
Diluted earnings (loss) per
  share                                  .03        .03        (.08)          (.05)
Market range:
  -high                                 4.65       9.12        9.30           8.25
  -low                                  2.35       3.85        4.85           4.98
</TABLE>

                                     -100-
<PAGE>

Note U, continued

         Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not equal
the total computed for the year.

         The Company determined subsequent to the filing of the Form 10-Q for
the quarter ended September 29, 2002 that depreciation expense had been
overstated in both the second quarter filing, at June 30, 2002, by $475 and in
the third quarter filing, at September 29, 2002, by $368. The quarterly
reporting herein reflects the corrected amounts for the quarters ended June 30,
2002 and September 29, 2002.

Note V - Formation of Raytech Corporation, Sale of Raymark,
         Chapter 11 Proceeding and Emergence from Bankruptcy

         Raytech was incorporated in June, 1986 in Delaware and held as a
subsidiary of 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 whereby each share of
common stock of Raymark was automatically converted into a share of Raytech
common stock. In May 1988, Raytech divested all of the Raymark stock.

         In accordance with the restructuring plan, Raytech, through its
subsidiaries, purchased certain non-asbestos businesses of Raymark in 1987,
including the Wet Clutch and Brake Division and Raybestos Industrie-Produkte
GmbH, a German subsidiary. Despite the restructuring plan implementation and
subsequent divestiture of Raymark, Raytech was named a co-defendant with Raymark
and other named defendants in numerous asbestos-related lawsuits as a successor
in liability to Raymark.

         In one of the asbestos-related personal injury cases 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. The effect of this decision
extended beyond the Oregon District due to a Third Circuit 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.

         In order to stay the asbestos-related litigation, 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.

         After several Court rulings, including an appeal to the U.S. Supreme
Court, the Oregon case, as affirmed by the Ninth Circuit Court of Appeals,
remained as the prevailing decision holding Raytech to be a successor to
Raymark's asbestos-related liabilities.

         As a result of the referenced Court rulings, in October, 1998 Raytech
reached a tentative settlement with its creditors for a consensual plan of
reorganization (the "Plan"), providing for all general unsecured creditors
including all asbestos and environmental claimants to receive 90% of the equity

                                     -101-
<PAGE>

in Raytech in exchange for their claims. As such, the PI Trust established under
Note V, continued

the Bankruptcy Code would receive approximately 83% of the equity of Raytech and
the Governments and others would receive approximately 7% of the equity of
Raytech. In addition, any and all refunds of taxes resulting from the
implementation of the Plan would be paid to the PI Trust. The existing equity
holders in Raytech were to retain 10% of the equity in Raytech.

         As a result of the final estimation of allowed claims, Raytech recorded
asbestos claims of $6.8 billion, Government claims of $431.8 million, pension
liability claims of $16.0 million and retiree benefit claims of $2.5 million
during 2000. The total estimated amount of allowed claims was $7.2 billion.

         On August 31, 2000, the Bankruptcy Court confirmed Raytech's Plan,
which confirmation was affirmed by the U.S. District Court on September 13,
2000. The Plan became effective on April 18, 2001 ("Effective Date"), resulting
in Raytech emerging from bankruptcy. On the Effective Date, a channeling
injunction ordered by the Bankruptcy Court pursuant to Section 524(g) of the
Bankruptcy Code has and will permanently and forever stay, enjoin and restrain
any asbestos-related claims against Raytech and subsidiaries, thereby channeling
such claims to the PI Trust for resolution. On the Effective Date, the rights
afforded and the treatment of all claims and equity interests in the Plan were
in exchange for and in complete satisfaction, discharge and release of, all
claims and equity interests against Raytech. The Company's Certificate of
Incorporation was amended and restated in accordance with the Plan providing for
authority to issue up to 55 million shares of stock, of which 50 million is
common and 5 million is preferred. In settlement of the estimated amount of
allowed claims of $7.2 billion, approximately 38 million shares of common stock
were issued and $2.5 million in cash was payable to the allowed claimants and a
commitment was made to pay to the PI Trust any and all refunds of taxes paid or
net reductions in taxes resulting from the implementation of the Plan. The
shares issued were exempt from registration pursuant to the Bankruptcy Code;
however, shares issued to the PI Trust have restrictions on resale as a result
of the high percentage of ownership in Raytech.

         In addition, Raytech had assumed the liability for the Raymark pension
plan claim. In September 2002 with the final Court decision denying Raytech's
appeal, the Company assumed the administration of the plans. It has been
represented to Raytech by the Raymark Trustee that the retiree benefit claim
will be retained by Raymark. Settlement of the Raymark claims resulted in
cancellation in full of the Raymark debt and accrued interest of $12.0 million
and a commitment of Raytech to backstop the Raymark Trustee for professional
fees in the event the Raymark Trustee has insufficient recovery of funds for
such purposes up to $1 million. At December 28, 2003, the Company has $1 million
included in accrued liabilities related to this commitment.

         See Note W - Fresh-Start Reporting.

                                     -102-
<PAGE>

Note W - Fresh-Start Reporting

         The Effective Date of the Company's emergence from bankruptcy was April
18, 2001; however, for accounting purposes it is considered to be the close of
business on April 2, 2001. As of April 2, 2001, the Company adopted fresh-start
reporting pursuant to the guidance provided by SOP 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code." In accordance with
fresh-start reporting, all assets and liabilities were recorded at their
respective fair market values. The fair value of substantially all of the
Company's property, plant and equipment and identifiable intangible assets were
determined by independent third-party appraisers.

         The reorganization value of the Successor Company was determined based
on the equity value (which represents enterprise value less debt) of the
Successor Company plus the Successor Company's outstanding liabilities. The
reorganization value was approximately $324 million, which was approximately $35
million in excess of the aggregate fair value of the Company's tangible and
identifiable intangible assets. Such excess is classified as goodwill in the
accompanying Consolidated Balance Sheet and is being accounted for in accordance
with SFAS No. 142, (see Note E - Goodwill and Intangible Assets).

         To facilitate the calculation of the equity value of the Successor
Company, the Company developed a set of financial projections. Based on these
financial projections, the equity value was determined by the Company, with the
assistance of a financial advisor, using various valuation methods, including
(i) a comparison of the Company and its projected performance to the market
values of comparable companies, (ii) a review and analysis of several recent
transactions of companies in similar industries to the Company, and (iii) a
calculation of the present value of the future cash flows under the projections.
The estimated equity value is highly dependent upon achieving the future
financial results set forth in the projections as well as the realization of
certain other assumptions which are not guaranteed. The total equity value as of
the Effective Date was determined to be approximately $158 million.

         The reorganization and the adoption of fresh-start reporting resulted
in the following adjustments to the Company's Condensed Consolidated Balance
Sheet as of April 2, 2001:

                                     -103-
<PAGE>

Note W, continued

                              Adjustments to Record
                   Effectiveness of the Plan of Reorganization
                                 (in thousands)

<TABLE>
<CAPTION>
                                   Predecessor                                        Reorganized
                                  Balance Sheet  Reorganization       Fresh-Start     Balance Sheet
                                  April 2, 2001    Adjustments        Adjustments     April 2, 2001
                                  -------------    -----------        -----------     -------------
<S>                                <C>           <C>                   <C>            <C>
ASSETS
Current assets
  Cash and cash equivalents        $    11,371   $       (2,500)(a)    $              $       8,871
  Restricted cash                        1,986            2,500 (a)                           4,486
  Trade accounts receivable             29,207                                               29,207
  Inventories                           32,590                             5,923 (b)         38,513
  Income taxes receivable                    -           37,877 (c)                          37,877
  Other current assets                   6,134                            (2,381)(f)          3,753
                                   -----------   --------------        ---------      -------------
      Total current assets              81,288           37,877            3,542            122,707
                                   -----------   --------------        ---------      -------------
Net property, plant and
  equipment                             82,138                            30,823 (d)        112,961
Goodwill                                18,923                            15,844 (e)         34,767
Other intangible assets                    375                            39,316 (g)         39,691
Deferred income taxes                  137,202          (99,341)(f)(c)   (27,308)(f)         10,553
Other assets                             2,957                                                2,957
                                   -----------   --------------        ---------      -------------
Total assets                       $   322,883   $      (61,464)       $  62,217      $     323,636
                                   ===========   ==============        =========      =============

LIABILITIES
Current liabilities
  Notes payable and current
    portion of long-term debt      $    12,144   $                     $              $      12,144
  Raymark debt                          10,709          (10,709)(h)                               -
  Current portion of pension
    obligations                            353            8,500 (j)          134 (k)          8,987
  Accounts payable                      14,220            2,500 (a)                          16,720
  Accrued liabilities                   20,501             (275)(i)                          20,226
  Payable to PI Trust                      -             37,877 (c)                          37,877
                                   -----------   --------------        ---------      -------------
    Total current liabilities           57,927           37,893              134             95,954
                                   -----------   --------------        ---------      -------------
Liabilities subject to
  compromise                         7,211,433       (7,211,433)(j)                               -
Long-term debt                           8,536                                                8,536
Pension obligations                      1,636           10,000 (j)       (6,916)(k)          4,720
Postretirement benefits
  other than pensions                   13,404                            (1,308)(k)         12,096
Deferred payable to the PI Trust             -           36,636 (c)                          36,636
Other long-term liabilities              7,654                              (312)(f)          7,342
                                   -----------   --------------        ---------      -------------
Total liabilities                    7,300,590       (7,126,904)          (8,402)           165,284
                                   -----------   --------------        ---------      -------------
    Total shareholders'
      (deficit) equity              (6,977,707)       7,065,440 (l)       70,619 (m)        158,352
                                   -----------   --------------        ---------      -------------
Total liabilities and
  shareholders' (deficit) equity   $   322,883   $      (61,464)       $  62,217      $     323,636
                                   ===========   ==============        =========      =============
</TABLE>

                                     -104-
<PAGE>

Note W, continued

The explanation of the "Reorganization Adjustments" and "Fresh Start
Adjustments" columns of the condensed consolidated balance sheet in the
preceding table are as follows:

a)       The Plan required the Company to pay $2.5 million to the unsecured
         creditors, which has been reflected as restricted cash. During April
         2001, $2.1 million of the liability was paid and $.4 million has been
         retained by the Company as restricted cash.

b)       Finished goods and work-in-progress inventories have been valued based
         on their estimated net selling prices less costs to complete, costs of
         disposal and a reasonable profit allowance for estimated completing and
         selling effort.

c)       Income taxes receivable and the payable to the PI Trust reflect the
         payable to the PI Trust of current tax recoveries in accordance with
         the Plan. Additional tax recoveries to be received in future periods
         are shown as deferred tax assets and a deferred payable to the PI
         Trust.

d)       Property, plant and equipment has been adjusted to reflect the fair
         values of the assets based on independent appraisals.

e)       The unamortized balance of goodwill of the Predecessor Company has been
         eliminated. Reorganization value in excess of amounts allocable to
         identifiable assets has been classified as goodwill. The goodwill is
         being accounted for in accordance with SFAS No. 142 (see Note E -
         Goodwill and Intangible Assets).

f)       Deferred tax assets and liabilities have been adjusted for the
         settlement of the liabilities subject to compromise and the recording
         of deferred taxes relating to the differences in book and tax bases of
         assets and liabilities after applying fresh start reporting. The
         Company has used a statutory tax rate, which approximates the Company's
         historic tax rate.

g)       Other intangible assets have been adjusted to reflect their fair values
         as determined by an independent valuation (see Note E - Goodwill and
         Intangible Assets).

h)       Raymark debt has been canceled to reflect the resolution of the claims
         on the Effective Date.

i)       Accrued liabilities have been adjusted to reflect the $1 million
         backstop commitment agreed to as a result of the settlement of the
         Raymark debt (see Note X), the write-off of accrued interest on the
         Raymark debt ($2.2 million), and an accrual for bankruptcy-related fees
         ($.9 million) that were recorded against the Raymark debt in accordance
         with the previous indemnification between Raymark and the Company prior
         to the effective date.

j)       Liabilities Subject to Compromise have been adjusted to reflect the
         settlement of the claims for cash, assumption of certain pension
         obligations, the issuance of common shares in the reorganized company
         and tax recoveries in accordance with the Plan.

k)       The pension and post retirement benefits other than pensions have been
         adjusted to include the present values of future obligations.

l)       Shareholders' equity was adjusted to reflect adjustments for the
         issuance of 90% of the outstanding common shares to the unsecured
         creditors at an overall equity value of $158.3 million in accordance
         with the Plan.

m)       Shareholders' equity was adjusted to reflect the elimination of the
         accumulated deficit, accumulated other comprehensive loss and treasury
         shares (which have been retired).

                                     -105-
<PAGE>

NOTE X - Reorganization Items

         Reorganization (expense) income included in the accompanying
Consolidated Statements of Operations consists of the following items:

<TABLE>
<CAPTION>
                                  Successor Company    Predecessor Company
                                  -----------------    -------------------
                                   For the Period        For the Period
                                  April 3, 2001 to       January 1, 2001
                                  December 30, 2001      to April 2, 2001
                                  -----------------    -------------------
<S>                               <C>                  <C>
Fresh-start adjustments                $    -              $   99,996
  Gain on the settlement of
  liabilities subject
  to compromise                             -               7,058,900
Professional fees                        (784)                      -
                                       ------              ----------
                                       $ (784)             $7,158,896
                                       ======              ==========
</TABLE>

         The fresh-start adjustments are discussed in Note W - Fresh-Start
Reporting. The professional fees listed above include accounting, legal,
consulting, appraisal and other miscellaneous services associated with the
implementation of the Plan. There were no reorganization items for any periods
prior to April 2, 2001 due to the indemnification agreement between Raytech and
Raymark, which allowed for all bankruptcy-related costs to be offset against the
outstanding Raytech debt to Raymark.

         As a result of the consummation of the Plan, the Company recognized a
gain on the settlement of liabilities subject to compromise and related items,
net on April 2, 2001 as follows:

<TABLE>
<S>                                            <C>
Settlement of liabilities subject
    to compromise                              $ 7,211,433
Assumption of pension-related obligations          (18,500)
Settlement of Raymark debt                          11,984
Cash payment to the PI Trust                        (2,500)
Back-stop settlement with Raymark                   (1,000)
Issuance of common stock                          (142,517)
                                               -----------
    Gain on settlement of liabilities
      subject to compromise and related
      items, net                               $ 7,058,900
                                               ===========
</TABLE>

                                     -106-
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders
of Raytech Corporation:

In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 on page 41 present fairly, in all material respects, the
financial position of Raytech Corporation and its subsidiaries (the "Company")
at December 28, 2003 and December 29, 2002 (Successor Company), and the results
of their operations and their cash flows for the fiscal years ended December 28,
2003, December 29, 2002, the period April 3, 2001 to December 30, 2001
(Successor Company) and the period January 1, 2001 to April 2, 2001 (Predecessor
Company) in conformity with accounting principles generally accepted in the
United States of America. 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 of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note V to the consolidated financial statements, effective April
18, 2001, the Company was reorganized under a plan confirmed by the United
States Bankruptcy Court and adopted fresh-start accounting as further discussed
in Notes A and W to the consolidated financial statements. Accordingly, the
consolidated financial statements for the periods subsequent to the
reorganization (Successor Company financial statements) are not comparable to
the consolidated financial statements for the prior period (Predecessor Company
financial statements).

As discussed in Note A to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 145,
"Rescission of FAS Statements No. 4, 44 and 64, Amendment of FAS Statement No.
13 and Technical Corrections" ("SFAS 145") in 2003. Accordingly, the gain on
settlement of debt and the gain on settlement of liabilities subject to
compromise settlement of liabilities and reorganization items that previously
were classified as extraordinary items have been reclassified as operating items
within the consolidated statements of operations of the Company for the period
April 3, 2001 to December 30, 2001 (Successor Company) and the period January 1,
2001 to April 2, 2001 (Predecessor Company), for presentation purposes in
accordance with SFAS 145.


PricewaterhouseCoopers LLP

April 8, 2004
                                     -107-
<PAGE>

Hartford, Connecticut
April , 2004

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

         Not applicable

Item 9a. Controls and Procedures

         (a)      Based on evaluation of the effectiveness of the design and
                  operation of the Company's disclosure controls and procedures,
                  which evaluation was made under the supervision and with the
                  participation of management, including the Company's principal
                  executive officer and principal financial officer, the
                  Company's principal executive officer and principal financial
                  officer have each concluded that such disclosure controls and
                  procedures are effective in ensuring that information required
                  to be disclosed by the Company in reports that it files under
                  the Exchange Act is recorded, processed, summarized and
                  reported within the time periods specified in Securities and
                  Exchange Commission rules and forms.

         (b)      There has been no change during the year ended December 28,
                  2003 in the Company's internal controls over financial
                  reporting that has materially affected, or is reasonably
                  likely to materially affect, the Company's internal control
                  over financial reporting.

                                     -108-
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

Directors

         Set forth below are the names of all directors, together with their
ages as of March 1, 2004, principal occupations and business experience during
the last five years, present directorships, and the year each first became a
director.

<TABLE>
<CAPTION>
                               Principal Occupation
                                Business Experience
                                During Last 5 Years         First
                                    and Present             Became
      Name            Age          Directorships           Director
      ----            ---  -----------------------------   --------
<S>                   <C>  <C>                             <C>
Albert A. Canosa      58   President and Chief               1998
                           Executive Officer,
                           Raytech Corporation;
                           Trustee, Quinnipiac
                           University; Director,
                           The Marlin Firearms
                           Company

Robert F. Carter      58   Attorney, Carter &                2001
                           Civitello

Archie R. Dykes       73   Chairman and Chief                2002
                           Executive Officer,
                           Fleming Companies, Inc.,
                           a food distribution company,
                           since 2003; Chairman and
                           Chief Executive Officer of
                           Capital City Holdings, Inc.,
                           an investment company, from
                           1988-2003; Director, Midas,
                           Inc. and PepsiAmericas, Inc.

Kevin S. Flannery     59   President, Whelan                 2001
                           Financial Corporation,
                           a financial consulting
                           company; Chairman,
                           Telespectrum, Inc.;
                           Director, Geneva
                           Steel Corporation and
                           Redback Networks, Inc.
</TABLE>

                                     -109-
<PAGE>

<TABLE>
<CAPTION>
                               Principal Occupation
                                Business Experience
                                During Last 5 Years         First
                                    and Present             Became
      Name            Age          Directorships           Director
      ----            ---  -----------------------------   --------
<S>                   <C>  <C>                             <C>

David N. Forman       66   President, DBL Land               2002
                           Company, a real estate
                           developer, builder and
                           consultant

John H. Laeri, Jr.    68   Chairman, Meadowcroft             2001
                           Associates, Inc.,
                           investment bankers;
                           Director, President and
                           Chief Executive Officer,
                           The GolfCoach, Inc., a
                           golf products distributor;
                           Director and member of the
                           Audit Committee of UNR
                           Asbestos Disease Trust and
                           Claims Processing
                           Facility, Inc.

Stanley J. Levy       69   Attorney, Levy, Phillips          2001
Chairman of the            & Konigsberg LLP
Board

Richard A. Lippe      65   Attorney, Meltzer, Lippe,         2002
                           Goldstein & Schlissel,
                           P.C.

Gene Locks            66   Attorney, Greitzer and Locks      2001

John J. Robbins       64   Accountant, retired               2003
                           partner of Kenneth
                           Leventhal and Company;
                           Director and member of
                           the Audit Committee of
                           Hovnanian Enterprises,
                           Inc., since 2001
</TABLE>

                                     -110-
<PAGE>

Directors' Compensation

         The directors' compensation includes the following annual retainers:

<TABLE>
<S>                                        <C>
Chairman of the Board Retainer             $ 75,000
Other Directors Retainer                     25,000
Additional Audit Committee Chair Retainer    10,000
Additional Other Committee Chair Retainer     5,000
Additional Audit Committee Member
    (Non-Chair) Retainer                      4,000
Additional Other Committee Member
    (Non-Chair) Retainer                      2,000
</TABLE>

In addition, each director receives $1,500 for each directors meeting attended
and $1,500 for each committee meeting attended. There is no minimum attendance
rule and any director that misses all meetings would receive the annual retainer
but no meeting fees.

Audit Committee

         Raytech has a standing Audit Committee, consisting of directors John J.
Robbins (Chairman), Kevin S. Flannery, and David N. Forman, established by the
Board of Directors for the purpose of overseeing the accounting and financial
reporting processes and audits of the financial statements of Raytech. The Audit
Committee complies with the corporate governance rules of the New York Stock
Exchange ("NYSE") applicable to Audit Committees and all of its members are
"independent," as defined in the NYSE Listing Standards.

Audit Committee Financial Expert

         The Board of Directors has determined that it has at least one "audit
committee financial expert," as defined in Regulation S-K of the Securities and
Exchange Commission ("SEC"), serving on its Audit Committee. The Board of
Directors has determined that the Chairman of the Audit Committee, John J.
Robbins, is an audit committee financial expert and that Mr. Robbins is
"independent," as defined in NYSE Listing Standards.

Executive Officers

         Set forth below are the names of all executive officers, of which the
Company has only four, including the CEO, together with their ages as of March
1, 2004, principal occupations and business experience during the last five
years, and the year in which each first became an officer.

<TABLE>
<CAPTION>
                                                                First Became
    Name                 Age           Positions Held             Officer
    ----                 ---    ------------------------------  ------------
<S>                      <C>    <C>                             <C>
Albert A. Canosa         58     President and                       1986
                                Chief Executive
                                Officer

John B. Devlin           52     Vice President,                     1998
                                Treasurer and Chief
                                Financial Officer
</TABLE>

                                     -111-
<PAGE>

Executive Officers (cont.)

<TABLE>
<S>                      <C>    <C>                                 <C>
Edgar P. DeVylder        59     Vice President, Administration      2002
                                General Counsel and Secretary
                                since 2002; Previously,
                                Partner, Pepe & Hazard,
                                2001-2002; Counsel, Cummings &
                                Lockwood, 2000-2001; Vice
                                President, General Counsel and
                                Secretary, BTR, Inc.,
                                1988-1999

Harold L. Pope           56     Vice President since 2002;          2002
                                previously General Manager,
                                AAC-Belcan, 2001-2002; Vice
                                President, Automated Analysis
                                Corporation, 1997-2001,
                                engineering staffing and
                                consulting firms
</TABLE>

                                     -112-
<PAGE>

Item 11. Executive Compensation

Summary Compensation Table:

            The following Summary Compensation Table identifies compensation
paid to the Chief Executive Officer and the three other executive officers for
2003 and the two prior years:

         Long-Term
<TABLE>
<CAPTION>
                                                      Compensation
                                                    ---------------
                             Annual Compensation    Awards   Payouts
                             -------------------    -------  ------    All Other
 Name/                        Salary       Bonus    Options   LTIP    Compensation
Position               Year     ($)         ($)        #        $        ($)(1)
--------               ----   -------      -----    -------   ----    ------------
<S>                    <C>    <C>          <C>      <C>       <C>     <C>
Albert A. Canosa       2003   402,744 (2)    -      800,000     -        50,444
President and Chief    2002   321,352        -            -     -        58,779
Executive Officer      2001   311,352        -            -     -        12,248

John B. Devlin         2003   214,424        -      267,000     -        27,310
Vice President,        2002   187,377        -            -     -        32,963
Treasurer and          2001   168,451        -            -     -         8,439
Chief Financial
Officer

Edgar P. DeVylder(3)   2003   196,633        -      267,000     -        12,324
Vice President,        2002    14,295        -            -     -           285
Administration,        2001         -        -            -     -             -
General Counsel
and Secretary

Harold L. Pope(4)      2003   176,983        -      267,000     -        80,214
Vice President         2002    30,121        -            -     -           431
                       2001         -        -            -     -             -
</TABLE>

(1)      The numbers stated include the Company's contributions to Messrs.
         Canosa, Devlin, DeVylder and Pope under its employee 401(k)plan in the
         amounts of $8,000, $7,518, $7,659 and $7,044, respectively, for 2003;
         $8,000, $6,937, $0 and $0, respectively, for 2002, and in the amounts
         of $6,800, $6,742, $0, and $0, respectively, for 2001. This column also
         includes the following contributions by the Company to the Senior
         Executive Retirement Plan, a supplemental defined contribution plan for
         senior management, for the benefit of Messrs. Canosa, Devlin, DeVylder
         and Pope in the amounts of $19,666, $4,980, $3,913 and $3,522,
         respectively, for 2003; and $12,908, $3,748, $285 and $431,
         respectively, for 2002. "All Other Compensation" includes executive
         life and disability insurance for Messrs. Canosa, Devlin, DeVylder and
         Pope of $19,828, $4,360, $752 and $651, respectively, for 2003, and
         $19,204, $3,790, $0 and $0, respectively, for 2002. The column also
         includes country club dues for Mr. Devlin of $1,713 for 2003 and for
         Messrs. Canosa and Devlin $7,764 and $10,414 for 2002. The column also
         includes personal use of company cars of $2,950, $8,741 and $2,153 for
         Messrs. Canosa, Devlin and Pope, respectively, for 2003 and $10,903 and
         $8,074 for Messrs. Devlin and Canosa, respectively for 2002. and in the
         case of Mr. Pope, relocation compensation of $66,844.

(2)      This number includes a retroactive salary adjustment of $45,000 for
         2002 that was paid in March 2003.

(3)      Mr. DeVylder was hired in December 2002.

(4)      Mr. Pope was hired in November 2002.

         Each of the executive officers has a termination pay agreement that
applies if (a) the company terminates his employment (except where he is
terminated for cause,

                                     -113-
<PAGE>

as defined), (b) he terminates his employment due to (i) a significant
diminution in his position, authority, duties or responsibilities, (ii) a
material reduction in base salary, opportunity to earn annual bonuses other than
as a result of adverse changes in the company's operating results, or other
compensation or benefits, or (iii) relocation of his place of business by more
than 35 miles from his previous place of business without his consent, or (c)
his employment is terminated by death or disability (a "Qualifying
Termination"). These agreements remain in effect for one year after a change in
control of the Company, which is defined as the Company ceasing to be a public
company, any person acquiring more than 25% of the outstanding common stock, or
the shareholders approving a merger in which the Company is not the surviving
entity or a sale of all or substantially all of the assets of the Company or of
the Company and its majority-owned subsidiaries. If the termination pay becomes
applicable, the Company will pay the executive 1 1/2 times (i) his annual base
salary then in effect plus (ii) the average annual bonus awarded to him for the
preceding three years, and continue his medical, life and other benefits for 2
1/2 years or until he obtains coverage from another employer. One-half of the
severance payment is subject to mitigation, i.e. will not be paid to the extent
the executive has been paid for other employment.

Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
                                                                               Potential Realizable
                   Number of Shares    Percent of                                Value at Assumed
                       Underlying    Total Options   Exercise                 Annual Rates of Stock
                       Options         Granted to      Price     Expiration   Price Appreciation For
     Name              Granted         Employees     ($/Share)      Date          Option Term ($)
     ----          ----------------  -------------   ---------   ----------   ----------------------
                                                                                 5%            10%
                                                                                ---        ---------
<S>                <C>               <C>             <C>         <C>            <C>        <C>
Albert A. Canosa        800,000          29.15          5.70      12/31/12       0         1,648,000

John B. Devlin          267,000           9.73          5.70      12/31/12       0           550,020

Edgar P. DeVylder       267,000           9.73          5.70      12/31/12       0           550,020

Harold L. Pope          267,000           9.73          5.70      12/31/12       0           550,020
</TABLE>

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values

<TABLE>
<CAPTION>
                                                           Value of
                                          Number of       Unexercised
                                         Unexercised      In-the-Money
                    Shares                 Options          Options
                   Acquired              at 12/28/03      at 12/28/03
                      on       Value    Exercisable/     Exercisable/
                   Exercise  Realized   Unexercisable    Unexercisable
      Name           (#)        ($)          (#)              ($)
      ----         --------  --------  ---------------   -------------
<S>                <C>       <C>       <C>               <C>
Albert A. Canosa      -          -     126,363/800,000       0/0

John B. Devlin        -          -        0/267,000          0/0

Edgar P. DeVylder     -          -        0/267,000          0/0

Harold L. Pope        -          -        0/267,000          0/0
</TABLE>

Section 16(a) Beneficial Ownership Reporting Compliance

         Based upon a review of the filings furnished to the Company and on

                                     -114-
<PAGE>

representations from its directors and executive officers, the directors and
executive officers of the Company and holders of more than 10% of the Company's
Common Stock complied with all filing requirements of Section 16(a) of the
Securities Exchange Act of 1934, as amended, during fiscal year 2003.

Code of Ethics

         Raytech has adopted a code of ethics, the Code of Business Conduct,
that applies to all directors, officers and employees, including the principal
executive officer, principal financial officer, principal accounting officer or
controller and persons performing similar functions. The Code of Business
Conduct is posted on the Company's Website, www.raytech.com, and is available in
print to any shareholder by contacting Edgar P. DeVylder, Raytech Corporation,
Suite 295, Four Corporate Drive, Shelton, CT 06484.

Performance Table

         The following table compares the Company's cumulative total shareholder
return on its common stock with certain indexes and peer groups for a five-year
period:

                 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
                 AMONG RAYTECH CORPORATION, RUSSELL 2000 INDEX*
                 AND DOW JONES AUTO PARTS INDUSTRY GROUP INDEX*

<TABLE>
<CAPTION>
                              Dow Jones Auto
                Russell 2000  Parts Industry
      Raytech      Index       Group Index
      -------   ------------  --------------
<S>   <C>       <C>           <C>
1998    100          100           100
1999    117          120           101
2000     76          115            72
2001     87          116            92
2002    219           91            82
2003    114          132           114
</TABLE>

* Based on closing index on the last trading day of the calendar year.

Assumes $100 invested on December 31, 1998 in Raytech common stock, Russell 2000
Index, and Dow Jones Auto Parts Industry Group Index.

                                     -115-
<PAGE>

Compensation Committee Report on Executive Compensation

         The Compensation Committee of the Board of Raytech, consisting of four
directors, makes this report of its compensation policies applicable to the
executive officers and the basis for the Chief Executive Officer's compensation
for the last completed fiscal year.

         The compensation philosophy of the Compensation Committee is based upon
the premise that all salaried personnel should be eligible to receive additional
compensation for outstanding contribution to Raytech and consists of the
following two elements: a fixed base salary and a management incentive in
variable amounts in accordance with the levels of eligibility and performance
criteria. The objectives under this philosophy are to maintain an equitable
internal classification of positions by grade, to maintain compensation
opportunity equal to or greater than the competition, to provide for aggregate
compensation related to performance achievement, to maintain an effective system
of salary planning and control and to provide executives with the opportunity to
earn additional compensation based on achievement of certain goals for Raytech
and its stockholders attributable to excellence in management and performance.

         To accomplish the compensation objectives, all salaried positions,
including the Chief Executive Officer, are graded to reflect the level of
responsibility inherent in the position and its market value. The grading takes
into account the following factors: organizational relationships, knowledge
requirements, impact potential on corporate profitability, scope of monetary
responsibility, scope of managerial control and the areas of functional
responsibility requiring direction. The Compensation Committee considers all
such factors but places no relative weight on any of the factors. Though the
determination of executive compensation is performed in an organized manner,
using documented criteria as referenced below, the Compensation Committee
retains full discretionary authority in establishing executive compensation. On
February 9, 2004, the Board of Directors approved the Compensation Committee
Charter. Pursuant to the Compensation Committee Charter, that Committee shall
recommend to the Board, for its approval, the future compensation levels of the
CEO and executive officers of the Company.

         The base salary for executive officers was set in 2002 in relation to
the base salary policy and practice of other bonus paying employers in the
metalworking/fabricating industry. The data source for determining the base
salary practice of bonus paying employers was Hewitt Associates Total
Compensation Measurement Survey, which resulted from an integration of
Management Compensation Services Project 777 Study and Hewitt's Compensation
Data Base used in the past. This data source was selected as a model for
executives' salaries based upon the similarities of industry, operations and
products to Raytech and the prestige of the sponsoring firm. Special pay
practice surveys may be conducted if the Compensation Committee deems it
appropriate in its discretion but no such survey has been conducted within the
last four years. The other bonus paying employers used in establishing the base
salary of executives are listed in the referenced Total Compensation Measurement
Survey. Of all industry groups of corporations set forth in the Total
Compensation Measurement Survey, the metalworking/fabricating group was
determined by the Compensation Committee to be the closest and most fitting in
type of operations, products and job responsibilities to Raytech. The Committee
also obtained 2001 compensation data from Watson Wyatt Worldwide, compensation
consultants.

                                     -116-
<PAGE>

         The base salaries of executive officers, including the Chief Executive
Officer, were generally low compared to those in the selected group listed.
Since this base salary tends to be lower than the salary policy of non-bonus
paying employers, comparable levels of total compensation are achieved or
exceeded only when the variable element of compensation is added to the base. To
strengthen the executives' commitment to improvement of the financial
performance of Raytech, the amount available for distribution as variable
compensation in any year is determined by either the return on equity or
earnings before tax at the Board's discretion. The formula necessitates that
Raytech achieve a stipulated earnings before tax or return on equity goal before
variable compensation is paid.

         In accordance with the philosophy recited above, the Board stipulated
earnings before tax goals in each of the fiscal years 2001, 2002 and 2003 based
upon a Board approved Business Plan for each year. The stipulated earnings
before tax goal was not achieved for any of the 2001, 2002 and 2003 fiscal
years, resulting in no variable compensation or bonuses being paid to any
executive officers, including the Chief Executive Officer, for the years 2001,
2002 and 2003. The total compensation of the executive officers in the year in
which no variable compensation or bonuses were paid was low compared to the
metal working/fabricating group in Hewitt's Total Compensation Measurement
Survey grouping referenced above.

         The bonus opportunities in the fiscal years 2001, 2002 and 2003 for
executive officers and the Chief Executive Officer were based on the following
factors:

         (i)      Each such position was graded in accordance with the level of
                  responsibility inherent in the position including market
                  value, organizational relationships, knowledge requirements,
                  impact on corporate profitability, scope of monetary
                  responsibility, scope of managerial control and areas of
                  functional responsibility, all as set forth in the established
                  compensation plan and was determined to be eligible for
                  participation in variable compensation.

         (ii)     In 2001 and 2002, the executive officers' positions all
                  received a grade providing for variable compensation
                  eligibility of 75% or 100% of each executive officer's base
                  salary.

         (iii)    In 2001 and 2002, the Chief Executive Officer's position
                  received a grade providing for variable compensation
                  eligibility of 100% of the Chief Executive Officer's base
                  salary.

         (iv)     In 2003, the maximum potential variable compensation for the
                  Chief Executive Officer and the other executive officers was
                  limited to 50% of each officer's base salary.

         In addition to the annual variable compensation opportunities based
upon achieving earnings before tax goals, the Variable Compensation Plan
provides for long-term variable compensation opportunities for any three-year
strategic planning period determined by earnings per share goals established at
the Board's discretion. Being part of the Variable Compensation Plan, the
strategic plan variable compensation program has an identical philosophy to the
annual variable compensation program recited above. Additionally, the strategic
plan variable compensation program is designed to (i) provide stockholder
returns comparable to other high performance publicly traded companies; (ii)
strengthen key management commitment to improve the long-term financial
performance of Raytech; (iii)

                                     -117-
<PAGE>

provide key management with a shareholder perspective; and (iv) focus key
employee resources on technology driven growth.

         In accordance with the recited philosophy above, the Board stipulated
annual earnings per share goals for the strategic planning period for 2001
through 2003. The stipulated earnings per share goals were not achieved for the
years 2001, 2002 and 2003 resulting in no long-term (three-year) variable
compensation payouts to the executive officers, including the Chief Executive
Officer, for those years.

         Effective January 1, 2003, the Chief Executive Officer and the other
named executive officers were granted options to purchase the common stock of
the Company at the then market price of $5.70 per share, in the amounts set
forth in the table above. The grants were made in order to provide an additional
incentive for such individuals through the potential for appreciation of the
stock and to more closely align the financial interests of the executives with
those of the stockholders. The Company had not granted any stock options to its
executives since 1998.

         Raytech's contributions under the 401(k) defined contribution plan to
the executive officers, including the Chief Executive Officer, were made to all
participants in the plan in accordance with the operative provisions of said
plan. Such provisions, which apply to all participants, provide for a basic
company contribution, a matching company contribution and a supplemental company
contribution, subject to IRS contribution and income limits. Only the
supplemental company contribution is discretionary under the plan and if granted
is made to all participants. In 2002, the Compensation Committee approved and in
2003 the Company established the Supplemental Executive Retirement Plan
("SERP"), pursuant to which the Company makes supplemental contributions of 2%
of salary plus bonus up to $200,000, and 8% of salary and bonus over $200,000,
to accounts for the benefit of the CEO, the executive officers and another CEO
direct report. The SERP is an unfunded deferred compensation plan designed to
supplement the 401(k) plan, and Company contributions vest on the same schedule
as under the 401(k) plan.

         Raytech currently has not established any policy with respect to
qualifying compensation paid to executive officers under Section 162(m) of the
Internal Revenue Code. In the event such a policy is established, it will be
included in this Compensation Committee Report on Executive Compensation.

                                                    Compensation Committee

                                                    Richard A. Lippe, Chairman
                                                    Robert F. Carter
                                                    John H. Laeri, Jr.
                                                    Gene Locks

Compensation Committee Interlocks and Insider Participation

         Messrs. Carter, Laeri, Levy, Lippe and Locks served as members of the
Compensation Committee for various periods in fiscal year 2003. None of such
committee members (i) was, during fiscal year 2003, an officer or employee of
the Company or any of its subsidiaries, (ii) was formerly an officer of the
Company or any of its subsidiaries, or (iii) had any relationship requiring

                                     -118-
<PAGE>

disclosure by the Company pursuant to any paragraph of Item 404 of SEC
Regulation S-K, except Mr. Lippe is a trustee and Mr. Carter is the Legal
Representative of the PI Trust, which has the relationship with the Company
described in Item 13, "Certain Relationships and Related Transactions."

                                     -119-
<PAGE>

         No executive officer served as an executive officer, director or member
of a compensation committee of any entity of which an executive officer is a
member of the Compensation Committee of the Company or the Company's Board of
Directors.

                                     -120-
<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management and
         Related Stockholder Matters

         The following table sets forth information as of March 1, 2004
concerning:

         -        beneficial ownership of Raytech's common stock by persons
                  beneficially owning more than 5% of the outstanding common
                  stock, including the Raytech Personal Injury Trust;

         -        beneficial ownership of Raytech's common stock by each of the
                  directors and the executive officers named in the Summary
                  Compensation Table herein; and

         -        beneficial ownership of Raytech's common stock by all
                  directors and executive officers as a group.

         The number of shares beneficially owned by each entity, person,
director or executive officer is determined under the rules of the SEC and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rules, beneficial ownership includes any shares as to which
the individual has the sole or shared voting power or investment power and also
any shares which the individual has the right to acquire as of April 30, 2004,
60 days after March 1, 2004, through the exercise of any stock option or other
right. Unless otherwise indicated, each person has sole investment and voting
power, or shares such powers with his or her spouse, with respect to the shares
set forth in the following table.

<TABLE>
<CAPTION>
                                              Shares of Common Stock
                                               Beneficially Owned
                                            --------------------------
                                                            Percent
              Shareholders                     Total      Of Class (1)
              ------------                  ----------    ------------
<S>                                         <C>              <C>
Raytech Corporation Asbestos Personal
  Injury Settlement Trust                   34,584,432       82.86%

U.S. Environmental Protection Agency         2,300,868       5.51%

Non-Management Directors

               Robert F. Carter                      0
               Archie R. Dykes                       0
               Kevin S. Flannery                     0
               David N. Forman                       0
               John H. Laeri, Jr.                    0
               Stanley J. Levy                       0
               Richard A. Lippe                      0
               Gene Locks                            0
               John J. Robbins                       0

Executive Officers

    Albert A. Canosa                           361,781 (2)         (3)
    President, Chief Executive Officer
    and Director

    John B. Devlin                              67,435 (4)         (3)
    Vice President, Treasurer
    and Chief Financial Officer
</TABLE>

                                     -121-
<PAGE>

<TABLE>
<S>                                         <C>              <C>
    Edgar P. DeVylder                           66,750 (5)         (3)
    Vice President, Administration,
    General Counsel and Secretary

    Harold L. Pope                              66,750 (6)         (3)
    Vice President

All Directors and Executive Officers
               as a Group (13)                 562,031 (7)         (3)
</TABLE>

(1)      Based on 41,737,306 shares of common stock outstanding, plus, in the
         case of persons holding options, shares subject to options that are
         exercisable within the next 60 days.

(2)      Total includes 326,363 shares which Mr. Canosa holds options to
         purchase within 60 days.

(3)      Less than 1%.

(4)      Includes 66,750 shares Mr. Devlin holds options to purchase that are
         exercisable within the next 60 days.

(5)      Includes 66,750 shares Mr. DeVylder holds options to purchase that are
         exercisable within the next 60 days.

(6)      Includes 66,750 shares Mr. Pope holds options to purchase that are
         exercisable within the next 60 days.

(7)      Total includes 526,613 shares which the Executive Officers as a group
         hold options to purchase that are exercisable within the next 60 days.

                                     -122-
<PAGE>

Item 13. Certain Relationships and Related Transactions

         In connection with its Plan of Reorganization, in 2001, Raytech entered
into a Tax Benefits Assignment and Assumption Agreement ("Tax Benefits
Agreement") with the PI Trust, which was created in the reorganization to
represent the interests of asbestos-related claimants. The PI Trust owns
approximately 83% of Raytech. Pursuant to the Tax Benefits Agreement, all tax
benefits received by Raytech due to the reorganization are to be passed onto the
PI Trust as received. At December 28, 2003, the Company had tax loss
carryforwards of $ 101.2 million and tax credit carryforwards of $3.5 million.
The net operating loss carryforwards are allocated between Raytech and the PI
Trust in the amounts of $21.2 million and $80.0 million, respectively.
Additionally, future payments to the PI Trust and others will create additional
tax deductions, which will inure to the benefit of the PI Trust in accordance
with the Tax Benefits Agreement. These include deductions for payments to the PI
Trust of tax benefits associated with the utilization of the net operating
losses created by the reorganization, and contributions made to the Raymark
pension plans.

         In 1990 and 1991, RPI, a subsidiary of the Company, and owner of all of
the common stock of APC, sold approximately 45% of common stock of APC to a
group of outside investors. In 2002 approximately 40% of the common stock of APC
was acquired by Raymark from some of these minority shareholders. Raymark is in
bankruptcy and controlled by a court appointed trustee.

         During 1998 and 1997, the Company purchased yarn from Universal
Friction Composites ( UFC ), a company that is in bankruptcy which was
consolidated with the Raymark bankruptcy in January 2002. At December 29, 2003
and December 30, 2002, $246 was owed to UFC relating to these purchases. In
addition, in 1998, the Company acquired manufacturing equipment from UFC for
$1,051, of which $907 was owed to UFC at December 28, 2003 and December 29,
2002.

         With the majority of the creditors of both Raymark and of UFC being
asbestos-related claimants, it is anticipated that a majority of the equity or
the assets of Raymark and UFC will be transferred to the PI Trust, a related
party.

         Raytech directors Richard Lippe and Archie Dykes are trustees of the PI
Trust and director Robert Carter is the Legal Representative of the PI Trust.

Item 14. Principal Accountant Fees and Services

         For the fiscal years ended December 28, 2003 and December 29, 2002,
fees for services provided by PricewaterhouseCoopers LLP ("PwC") were as
follows:

<TABLE>
<CAPTION>
                      (in thousands)
                      2003     2002
                     ------   ------
<S>                  <C>      <C>
Audit Fees           $  691   $  481
Audit-Related Fees       14       12
Tax Fees                214      337
Other fees                3        -
                     ------   ------
Total                $  922   $  830
                     ======   ======
</TABLE>

                                     -123-
<PAGE>

                                     -124-
<PAGE>

         Audit Fees

         As noted above, fees billed by PwC for professional services rendered
for the audit of Raytech's annual financial statements for 2003 and for the
reviews of the financial statements included in Raytech's Forms 10-Q in 2003 (or
services that are normally provided by the accountant in connection with
statutory and regulatory filings) were $691 thousand. The Audit Committee
approved in advance PwC's provision of all audit and audit-related services.

         Audit-Related Fees

         The audit-related fees listed above are those fees for services
reasonably related to the performance of the audit or review of the registrant's
financial statements and not included in "Audit Fees."

         Tax Fees

         The tax fees listed in the table were for services rendered for tax
compliance (including federal and state returns) and tax examination assistance.

         Other Fees

         Fees billed by PwC for non-audit services rendered in 2003 (including
tax assistance) were $3 thousand.

         Financial Information Systems Design and Implementation Fees

         PwC did not render or bill any Financial Information Systems Design and
Implementation services to Raytech in 2003.

         Audit Committee Pre-Approval

         It is the policy of the Audit Committee to pre-approve all non-audit
services that PwC is permitted to provide, either by express prior approval of
the particular engagement or entry into such engagement pursuant to detailed
pre-approval policies and procedures established by the Committee. The Audit
Committee approved in advance PwC's provision of all non-audit services. The
Audit Committee considered whether and determined that the provision of these
services was compatible with maintaining PwC's independence.

                                     -125-
<PAGE>

                                     PART IV

Item 15. 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 at December 28, 2003 and December
                  29, 2002

                  Consolidated Statements of Operations for the years ended
                  December 28, 2003 and December 29, 2002, for the period April
                  3, 2001 to December 30, 2001 (Successor Company), and for the
                  period January 1, 2001 to April 2, 2001 (Predecessor Company)

                  Consolidated Statements of Cash Flows for the years ended
                  December 28, 2003 and December 29, 2002, for the period April
                  3, 2001 to December 30, 2001 (Successor Company), and for the
                  period January 1, 2001 to April 2, 2001 (Predecessor Company)

                  Consolidated Statements of Changes in Shareholders' Equity for
                  the years ended December 28, 2003 and December 29, 2002, for
                  the period April 3, 2001 to December 30, 2001 (Successor
                  Company), and for the period January 1, 2001 to April 2, 2001
                  (Predecessor Company)

                  Notes to Consolidated Financial Statements

                  Report of Independent Accountants

         (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

         There were no reports on Form 8-K filed for the quarter ended December
         28, 2003.

(c)      Index of Exhibits                                                  Page
                                                                            ----

         2(a)     Raytech Corporation's Second Amended Plan of
                  Reorganization (g)

         3(a)     Amended and Restated Certificate of Incorporation
                  of Raytech (filed herewith)

                                     -126-
<PAGE>

         3(b)     Amended and Restated By-Laws of Raytech (filed herewith)

                                     -127-
<PAGE>

         4(a)     Amendment No. 1 to Form S-4 Registration Statement,
                  Registration No. 33-7491 (b)

         4(b)     Loan and Security Agreement dated September 28, 2000, between
                  Raybestos Products Company and Raytech Automotive Components
                  Company and Congress Financial Corporation (New England), as
                  amended November 12, 2003 (filed herewith)

         4(c)     Loan Agreement, Security Agreement and Promissory Note dated
                  October 23, 2003, between Raytech Powertrain, Inc., Allomatic
                  Products Company and Raytech Systems, Inc. and Wachovia Bank,
                  National Association (filed herewith)

         10(a)    Raytech Corporation's 1990 Non-Qualified Stock Option Plan (d)

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

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

         10(d)    Asset Purchase Agreement dated October 29, 1987 between
                  Raymark Industries, Inc. and Raytech Composites, Inc. (c),
                  Amendment dated July 18, 1991 (f) and Amendment dated December
                  21, 1992 (e)

         10(e)    Stock Purchase Agreement dated May 18, 1988 between Raytech
                  Corporation and Asbestos Litigation Management, Inc. (c)

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

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

         10(h)    Loan Agreement dated January 10, 1994 between Raytech
                  Composites, Inc. and Raymark Industries, Inc. (f)

         10(i)    Raytech Corporation 2002 Incentive Compensation Plan (filed
                  herewith)

         21       Subsidiaries of Raytech

         23       Consent of Independent Accountants

         31.1     Certification of Chief Executive Officer pursuant to Section
                  302 of the Sarbanes-Oxley Act of 2002

         31.2     Certification of Chief Financial Officer pursuant to Section
                  302 of the Sarbanes-Oxley Act of 2002

         32.1     Certification of Chief Executive Officer and Chief Financial
                  Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002

                                     -128-
<PAGE>

                                     -129-
<PAGE>

Footnotes to Exhibits

         (a)      Incorporated by reference to the 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)      Incorporated by reference to the Exhibit to Registrant's
                  Report on Form 10-K filed with the Securities and Exchange
                  Commission on March 29, 1989.

         (d)      Incorporated by reference to the Registrant's Registration
                  Statement on Form S-8 (Registration No. 33-42420) filed with
                  the Securities and Exchange Commission on August 23, 1991.

         (e)      Incorporated by reference to the Exhibit to Registrant's
                  Report on Form 10-K filed with the Securities and Exchange
                  Commission on March 22, 1993.

         (f)      Incorporated by reference to the Exhibit to Registrant's
                  Report on Form 10-K filed with the Securities and Exchange
                  Commission on March 14, 1994.

         (g)      Incorporated by reference to the Exhibit to Registrant's
                  Report on Form 10-K filed with the Securities and Exchange
                  Commission on March 23, 2001.

         Copies of exhibits, which are not included herewith, 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: Edgar P. DeVylder, Secretary, Raytech Corporation, Suite
         295, Four Corporate Drive, Shelton, Connecticut 06484.

(d)      The Index to Consolidated Financial Statements and Financial Statement
         Schedules is included beginning on page 116 hereafter.

                                     -130-
<PAGE>

                   Index to Consolidated Financial Statements

Financial Statements:

<TABLE>
<CAPTION>
                                                                     Page
                                                                     ----
<S>                                                                  <C>
Consolidated Balance Sheets at December 28, 2003 and December
29, 2002 (Successor Company)                                          42

Consolidated Statements of Operations for the years ended
December 28, 2003, December 29, 2002, for the period April 3,
2001 to December 30, 2001 (Successor Company), and for the
period January 1, 2001 to April 2, 2001 (Predecessor Company)         43

Consolidated Statements of Cash Flows for the years ended
December 28, 2003, December 29, 2002 for the period April 3,
2001 to December 30, 2001 (Successor Company), and for the
period January 1, 2001 to April 2, 2001 (Predecessor Company)         44

Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 28, 2003, December 29, 2002, for the
period April 3, 2001 to December 30, 2001 (Successor Company),
and for the period January 1, 2001 to April 2, 2001
(Predecessor Company)                                                 45

Notes to Consolidated Financial Statements                            46

Report of Independent Auditors                                        96
</TABLE>

                                     -131-
<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/JOHN B. DEVLIN
                                                 ------------------------------
                                                 John B. Devlin
                                                 Vice President, Treasurer
                                                 and Chief Financial Officer

Date: April 12, 2004

                                     -132-
<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: April 12, 2004

                                     -133-
<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 April 12, 2004.

<TABLE>
<CAPTION>
     Signature and Title                       Signature and Title
     -------------------                       -------------------
<S>                                       <C>
/s/ALBERT A. CANOSA                       /s/DAVID N. FORMAN
------------------------------            ------------------------------
Albert A. Canosa                          David N. Forman
President, Chief Executive                Director
Officer and Director

/s/JOHN B. DEVLIN                         /s/STANLEY J. LEVY
------------------------------            -------------------------------
John B. Devlin                            Stanley J. Levy
Vice President, Treasurer and             Director
Chief Financial Officer

/s/ROBERT F. CARTER                       /s/JOHN H. LAERI, JR.
------------------------------            ------------------------------
Robert F. Carter                          John H. Laeri, Jr.
Director                                  Director

/s/ARCHIE R. DYKES                        /s/RICHARD A. LIPPE
------------------------------            -----------------------------
Archie R. Dykes                           Richard A. Lippe
Director                                  Director

/s/KEVIN S. FLANNERY                      /s/GENE LOCKS
------------------------------            ------------------------------
Kevin S. Flannery                         Gene Locks
Director                                  Director

                                          /s/JOHN J. ROBBINS
                                          ------------------------------
                                          John J. Robbins
                                          Director
</TABLE>

                                     -134-