<PAGE>   1
                                                                      EXHIBIT 13


FINANCIAL REVIEW

RESULTS OF OPERATIONS
--------------------------------------------------------------------------------

OVERVIEW

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
(in millions, except per share data)                     1997       1996       1995
                                                       -------    -------    -------
<S>                                                    <C>        <C>        <C>    
Revenues                                               $ 1,765    $ 1,672    $ 1,531
                                                       -------    -------    -------
Core business "ongoing" pretax income(a)               $   263    $   230    $   146
  Unusual items:
   Provision for restructuring and divestitures            (53)       (44)       (24)
   Insurance settlement                                     --          7         -- 
   Gain on sale of assets                                   23          3          5
   Severance, plant consolidation, and other charges        (6)       (18)        (9)
                                                       -------    -------    -------
Core business pretax income                                227        178        118
(Benefit) provision for income taxes                       (26)        (2)        21
                                                       -------    -------    -------
Core business net income                                   253        180         97
Loss on reorganization/formation of Ericsson Raynet
  joint venture and other Raynet items                      --         (2)       (32)
Equity in net loss of Ericsson Raynet                       --        (30)       (86)
                                                       -------    -------    -------
Income (loss) before extraordinary item and
  change in accounting principle                           253        148        (21)
Extraordinary item                                          --         --         (6)
Change in accounting principle                              --         --         (2)
                                                       -------    -------    -------
Net income (loss)                                      $   253    $   148    $   (29)
                                                       =======    =======    =======
Earnings (loss) per share                              $  5.54    $  3.22    $ (0.67)
                                                       =======    =======    =======
</TABLE>
-----------------
(a)   Core business refers to the company, excluding Ericsson Raynet; "ongoing"
      refers to the core business, excluding unusual items.


The company reported record revenues, net income, and earnings per share in
1997. Revenues increased 6% to $1.8 billion in 1997 from $1.7 billion in 1996.
Net income and earnings per share in 1997 were both up significantly from prior
years.

Key components of the company's profitability are summarized in the table above.
Raychem's core business "ongoing" pretax income was $263 million in 1997, up 14%
from 1996, which was up 58% from 1995. As a percentage of core business
revenues, "ongoing" pretax income was 15% in 1997 compared to 14% in 1996 and
10% in 1995.

                                [CHART OMITTED]


The increase in "ongoing" pretax income between 1996 and 1997 was driven by
higher sales volume and greater operating efficiency, partially offset by
adverse currency effects. During the second half of 1997, the U.S. dollar and
the British pound appreciated significantly against most European currencies
compared to their 1996 levels. These currency movements reduced "ongoing" pretax
income by approximately $12 million in the second half of 1997. If exchange
rates remain at June 30, 1997 levels, the company expects further downward
pressure on profitability during the first half of fiscal 1998. The increase in
"ongoing" pretax income between 1995 and 1996 was driven by higher sales volume
and benefits of earlier restructuring actions.

Provisions for restructuring and divestitures are more fully described on page
11. The 1996 insurance settlement of $7 million related to insurance proceeds
received in connection with a previously settled shareholder lawsuit. Gain on
sale of assets included a gain of $23 million in 1997 from the sale of
intellectual property; a gain of $3 million in 1996 from the sale of the
company's shape memory metals components business; and a gain of $5 million in
1995 from the sale of the company's minority interest in Menlo Care, Inc.

Income taxes in 1997 were a net benefit of $26 million compared to a net benefit
of $2 million in 1996 and a provision of $21 million in 1995. The income tax
benefits in 1997 and 1996 arose from the company's reassessment of the valuation
allowance related to its deferred tax assets. These reassessments of the
valuation allowance were based on changes in the company's outlook for future
U.S. taxable income. As a result of these reassessments the company recorded
discrete tax benefits of $55 million in 1997 and $25 million in 1996. The
provision for income taxes in 1995 resulted primarily from profitable non-U.S.
operations. 



                                       8
<PAGE>   2

Profitability for 1996 and 1995 was adversely impacted by losses related to
Ericsson Raynet, a joint venture formed in 1995 with LM Ericsson. In 1995,
Raychem incurred losses of $28 million upon formation of the joint venture, $4
million of other Raynet items, and $86 million of equity in net losses of the
joint venture. Effective January 1, 1996, the joint venture agreement was
amended to provide that Raychem would no longer share in the ongoing operating
losses of the joint venture. Therefore, Raychem now accounts for the venture on
the cost basis. In 1996, Raychem's equity in net losses of Ericsson Raynet
through December 31, 1995, was $30 million and the company incurred $2 million
of charges in connection with the reorganization of the joint venture.

The results for 1995 included an extraordinary loss of $6 million, or $0.15 per
share, for the prepayment of debt. For details, see "Extraordinary Item--Loss
Related to Early Retirement of Debt" in the notes to consolidated financial
statements. In addition, the company adopted, effective July 1, 1994, Financial
Accounting Standards Board (FASB) Statement No. 112, "Employers' Accounting for
Postemployment Benefits." This statement changed the method of accounting for
certain postemployment benefits from a cash basis to an accrual basis. The
cumulative effect of this accounting change was a charge of $1 million, or $0.03
per share.

The following discussion of the results of operations is based on the company's
core business, including the impact of the previously mentioned unusual items.

CORE BUSINESS OPERATIONS

REVENUES AND REVENUE GROWTH

Core business revenues were $1.8 billion in 1997, up 6% from 1996; revenues in
1996 were $1.7 billion, up 9% from $1.5 billion in 1995. If foreign exchange
rates had remained constant in those years, the company's growth would have been
9% in 1997, and 8% in 1996. Reported revenues and growth were also impacted by
price reductions in several product lines due to volume discounts and
competitive pressures as shown in the table below. 

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30 
(percent change over prior year)                            1997         1996
                                                           ------       ------
<S>                                                        <C>          <C>
Components of reported revenue growth:
  Growth in unit volumes, net of
  product mix changes                                          13%          12%
  Effect of price reductions(a)                                (4%)         (4%)
                                                               ---          ---
Constant currency revenue growth                                9%           8%
  Effect of exchange rate changes                              (3%)          1%
                                                               ---          ---
Total reported revenue growth                                   6%           9%
                                                               ===          ===
</TABLE>

-----------------
(a)   A management estimate based on year-over-year changes in revenues at
      constant volume and mix.

On a regional basis, revenues in 1997 compared to 1996 in constant currencies
were up 22% in Asia, 8% in North America, and 5% in Europe, and declined
slightly in Latin America. Within Europe, revenues in the Eastern European
countries grew 47%, but were relatively flat in Western Europe. During the
latter part of the fiscal year, some of the markets in Germany, the United
Kingdom, and Italy began to strengthen, which helped to increase the Western
European growth rate in the fourth quarter to 7% over the prior-year quarter.

Revenues in 1996 compared to 1995 in constant currencies were up 23% in Latin
America, 14% in Asia, and 12% in North America. European revenues were flat
compared to 1995, reflecting 34% growth in Eastern Europe offset by a slight
decline in Western Europe. 

GROSS PROFIT AND OPERATING EXPENSES 

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
(percent of revenues)                               1997       1996       1995
                                                   ------     ------     ------
<S>                                                <C>        <C>        <C>
Gross profit                                           50%        51%        50%
Selling, general, and administrative
  (SG&A) expense                                       28%        30%        32%
Research and development (R&D)
  expense                                               7%         7%         8%
</TABLE>

Gross profit as a percent of revenues was 50% in 1997, compared to 51% in 1996,
and 50% in 1995. The decline in gross profit margin from 1996 to 1997 was
primarily due to adverse currency movements and a mix shift to newer product
lines that currently have lower margins than the corporate average. The increase
in gross profit margin between 1995 and 1996 was due principally to the benefits
of past restructuring actions.

SG&A expense as a percent of revenues declined to 28% in 1997 from 30% in 1996
and 32% in 1995. SG&A expense included charges for severance and other costs of
$6 million in 1997 and $12 million in 1996. The reduction in SG&A costs as a
percent of revenues is largely the result of benefits from recent restructuring
actions. R&D expense as a percent of revenues remained at 7% for 1997 and 1996,
down from 8% in 1995.


                                       9


<PAGE>   3
BUSINESS SEGMENTS

During 1997, the company realigned its segment reporting to more closely reflect
the company's management structure. The company's financial results are now
reported as three business segments, described below, and the corporate group.

ELECTRONICS OEM COMPONENTS

This business segment serves original equipment manufacturers (OEMs) in
transportation, defense, and a wide range of commercial electronics industries.
It was previously reported as the electronics business segment.

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
(dollars in million)                         1997          1996          1995 
                                           --------      --------      --------
<S>                                        <C>           <C>           <C>     
Revenues                                   $    758      $    671      $    611
Constant currency growth                         16%(a)        10%           13%
</TABLE>
-------------------
(a)   Includes TouchPanel Systems, a Japanese joint venture in the Elo
      TouchSystems Division previously accounted for under the equity method. On
      a comparable constant currency basis, segment growth was 12% in 1997.

1997 revenues for the electronics OEM components business segment were $758
million, up 16% in constant currencies over 1996. During 1997, the company
combined the leadership of the Electronics, PolySwitch, and Elo TouchSystems
divisions to strengthen the company's presence in growth markets and to lower
operating costs. Revenues in the segment increased significantly over the prior
year with solid performance across all markets. Sales of PolySwitch circuit
protection devices were up 27% compared to 1996, reflecting an increase of 42%
in unit volumes, partially offset by an 8% price reduction and a mix shift
toward lower-priced devices. Sales of electronic interconnect products were up
14% in commercial markets and up slightly in defense markets. Elo TouchSystems'
revenues, including TouchPanel Systems in both years, on a constant currency
basis increased 19% in 1997 with strong sales of touchscreen products. Gross
profit as a percent of revenues remained essentially unchanged, as a decrease in
prices was offset by improved manufacturing efficiencies.

Revenues in 1996 were $671 million, up 10% in constant currencies from 1995.
Electronic interconnect products sales were up sharply and accounted for the
majority of the segment's growth. Sales of PolySwitch devices were up only 2%
despite a 25% unit volume growth, as planned price reductions impacted revenue.
Elo TouchSystems experienced strong growth in sales of its touchscreen products.
Gross profit as a percent of revenues for the electronics OEM components
business segment remained essentially unchanged. 

TELECOMMUNICATIONS AND ENERGY NETWORKS 

This business segment serves telephone operating companies, cable television
providers, electric utilities, and industrial customers. It was previously
reported as the Telecom Division, which was included in the telecommunications
business segment, and as the Electrical Products Division, which was included in
the industrial business segment.

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
(dollars in millions)                       1997          1996          1995 
                                          --------      --------      --------
<S>                                       <C>           <C>           <C>     
Revenues                                  $    752      $    757      $    690
Constant currency growth                         2%            8%           (0%)
</TABLE>

1997 revenues for the telecommunications and energy networks business segment
were $752 million, up 2% on a constant currency basis. Strong sales growth of
transmission electronics and fiber-optic products more than offset a 6% decline
in sales of copper cable accessories. Sales of electrical products declined due
to lower surge arrester sales, principally in Canada. Gross profit as a percent
of revenues declined 1% compared to 1996, primarily reflecting a mix shift from
copper closures to transmission electronics products that currently have lower
margins.

Segment revenues were $757 million in 1996, up 8% in constant currencies from
1995. Sales of transmission electronics products in North America were up
strongly from 1995 levels. Telecom products also had strong growth in Latin
America, notably in Peru where the company won several large projects, while
revenues actually declined in Europe. Sales of electrical products grew in all
geographic regions. Prices generally declined in the segment's markets in 1996.
In addition, the shift away from traditional copper closures put downward
pressure on profit margins. Despite the price and margin impacts, gross profit
as a percent of revenues increased slightly, reflecting benefits of current and
prior-year restructuring actions. 

COMMERCIAL AND INDUSTRIAL INFRASTRUCTURE

This business segment serves customers who build and maintain the world's
commercial and industrial infrastructure, including industrial plants and
pipelines, gas and water utilities, and commercial construction. It was
previously reported as the Chemelex Division, which was included in the
industrial business segment.

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
(dollars in millions)                       1997          1996          1995 
                                          --------      --------      --------
<S>                                       <C>           <C>           <C>     
Revenues                                  $    255      $    244      $    230
Constant currency growth                         9%            4%           (1%)
</TABLE>

1997 revenues for the commercial and industrial infrastructure business segment
were $255 million, up 9% in constant currencies over 1996. Revenue growth was
led by strong sales of heat-tracing products while sales of corrosion prevention
products remained essentially flat. The segment experienced strong revenue
growth in Europe and North America. Gross profit as a percent of revenues
improved slightly over the prior year, reflecting benefits of earlier
restructuring actions.

The segment's revenues for 1996 were $244 million, up 4% over 1995 on a constant
currency basis, reflecting higher sales of heat-tracing products. Prices were
lower in 1996, causing a decline in the segment's gross profits.


                                       10

<PAGE>   4

PROVISION FOR RESTRUCTURING AND DIVESTITURES

Over the past several years, the company has strengthened its core businesses
and improved its results of operations through a series of initiatives. These
actions were designed to streamline the company's operations, reduce operating
costs, and position the company for profitable growth.

The company incurred a pretax restructuring charge of $53 million in the third
quarter of 1997 to implement several streamlining programs and eliminate
approximately 500 positions (the 1997 restructuring). The charge impacted the
operating income of the business segments as follows: electronics OEM
components--$12 million; telecommunications and energy networks--$29 million;
commercial and industrial infrastructure--$3 million; and the corporate
group--$9 million. A significant portion of the restructuring expenses was for
consolidating the Telecom and Electrical Products divisions to achieve greater
sales, manufacturing, and product development efficiencies in their cable
accessories businesses. Additional one-time costs were incurred to consolidate
the Electronics and PolySwitch divisions, to streamline the worldwide operations
of the commercial and industrial infrastructure business segment and to
restructure the R&D organization in the United Kingdom. Approximately $36
million of the 1997 restructuring charge is cash in nature and is expected to be
funded through operating cash flow. The 1997 restructuring is expected to be
substantially completed by the end of the next fiscal year.

The core business incurred a pretax restructuring charge of $44 million in the
third quarter of 1996 as the company moved to simplify operations and reduce
costs (the 1996 restructuring). The charge impacted operating income of the
company's business segments as follows: electronics OEM components--$14 million;
telecommunications and energy networks--$13 million; commercial and industrial
infrastructure--$15 million; and the corporate group--$2 million. The
restructuring charge included $38 million for employee severance costs and
approximately 600 positions have been eliminated. The bulk of these actions
affected Europe where the company's manufacturing and support operations in
Belgium, France, and the United Kingdom have been reconfigured. In addition, a
variety of other restructuring actions at both divisional and corporate levels
took place throughout Raychem's worldwide organization. The 1996 restructuring
was substantially completed by June 30, 1997. The charge, excluding $4 million
in net asset writedowns, was cash in nature and funded through operating cash
flow.

The core business incurred a pretax charge of $24 million in the first quarter
of 1995 for the restructuring of the Telecom Division (the 1995 restructuring).
The restructuring charge included $13 million for severance costs related to a
net workforce reduction of 340 employees, resulting from the closure of the
division's manufacturing operations in Germany and the restructuring of its
North American activities. The remaining charge of $11 million related to plant
consolidations and the shutdown of unprofitable product lines. The charge,
excluding $8 million of asset writedowns, was cash in nature and was funded
through operating cash flow. The 1995 restructuring was substantially completed
by June 30, 1995.

The company expects each of the 1997 and 1996 restructuring charges to be
recovered over an 18 to 24 month period. Each restructuring action is expected
to result in an annual run-rate savings in the range of $35-$40 million. The
1995 restructuring actions resulted in approximately $24 million of annualized
savings; approximately $10 million of these savings were realized in 1995, and
the full amount was realized in 1996. Substantially all of these restructuring
savings are cash related. See "Restructuring and Divestitures" in the notes to
consolidated financial statements for further details on these restructuring
actions.

OTHER (INCOME) EXPENSE, NET

Other (income) expense, net, consists primarily of net foreign exchange gains
and losses, bank charges, gains and losses on the disposition of fixed assets
and investments, and certain other nonoperating items. Other (income) expense,
net, was net income of $14 million in 1997 and $3 million in 1996, and net
expense of $4 million in 1995. The change from 1996 to 1997 was due principally
to the $23 million pretax gain arising from the sale of a portfolio of patents
and intellectual property to Medtronic, Inc. The change from 1995 to 1996 was
due principally to the $7 million insurance settlement, the $3 million gain from
the sale of the shape memory metals components business, and lower foreign
exchange losses.

NEW ACCOUNTING STANDARDS 

In February 1997, the FASB issued Statement No. 128, "Earnings Per Share" (FAS
128). The statement simplifies the standards for computing earnings per share
(EPS) previously found in Accounting Principles Board (APB) Opinion No. 15,
"Earnings Per Share," and makes them comparable to international EPS standards.
FAS 128 must be adopted for the second quarter of fiscal 1998. See "Earnings Per
Share" in the notes to consolidated financial statements for further description
and pro forma disclosures in accordance with FAS 128.

In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" (FAS 130), and Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). For a description of these
statements see "Summary of Significant Accounting Policies" in the notes to
consolidated financial statements. The disclosures prescribed by FAS 130 must be
made beginning with the first quarter of fiscal 1999. The disclosures prescribed
by FAS 131 will first be adopted in the company's 1999 annual report. 

LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------

The company's financial position continues to be strong. At June 30, 1997, the
company had $87 million in cash and cash equivalents and $567 million in unused
credit facilities, of which $439 million are committed facilities. On July 16,
1997, the company filed a shelf registration with the Securities and Exchange
Commission to enable it to issue up to $400 million in debt securities; this
registration statement became effective on July 24, 1997. In connection with the
shelf registration, the company received preliminary investment-grade ratings
from the two principal credit rating agencies. The combination of cash and cash
equivalents, available lines of credit, public debt issuance capabilities, and
future cash flows from operations is expected to be sufficient to satisfy
substantially all of the company's needs for anticipated capital expenditures,
working capital, dividends and share repurchases, and for potential
acquisitions.



                                       11

<PAGE>   5

The following table presents certain measures of liquidity and capital
resources:

<TABLE>
YEARS ENDED JUNE 30
(dollars in millions)                           1997        1996         1995 
                                               ------      ------       ------
<S>                                            <C>         <C>          <C>   
Debt net of cash                               $  137      $   79       $  175
Increase (decrease) in
  debt net of cash                             $   58      $  (96)      $  (22)
Debt net of cash as a percent
  of stockholders' equity                          16%          9%          23%
Days' sales outstanding (DSO)                      59          60           61
Days' sales in inventory (DSI)                     99         104          109
</TABLE>

The $58 million increase in debt net of cash in 1997 was principally due to
increased share repurchases. The $96 million decrease in debt net of cash in
1996 resulted primarily from improved profitability in the core business and
reduced funding requirements for Raynet losses.

DSI improved in 1997 and 1996, reflecting ongoing efforts by the company to
reduce the number of locations holding inventory and the levels of inventory
being held. The company will continue to focus on further reducing DSI during
the next year.

The table below summarizes the company's cash flows from operating, investing,
and financing activities:

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30 
(dollars in millions)                             1997        1996        1995 
                                                 ------      ------      ------
<S>                                              <C>         <C>         <C>   
Cash provided by (used in):
  Operating activities                           $  220      $  224      $  129
  Investing activities                              (60)       (101)       (112)
  Financing activities                             (294)        (11)         18
Effect of exchange rate changes on
  cash and cash equivalents                          (4)         (6)          5
                                                 ------      ------      ------
(Decrease) increase in cash and
  cash equivalents                               $ (138)     $  106      $   40
                                                 ======      ======      ======

</TABLE>

OPERATING ACTIVITIES

Cash flows from operating activities in 1997 remained approximately level with
1996. Improvements in pretax profitability were offset by additional tax
payments and increased levels of inventory and accounts receivable. The increase
in cash flows from operating activities in 1996 from 1995 resulted primarily
from improved profitability. Net cash payments for restructuring and
divestitures were $24 million in 1997, $17 million in 1996, and $16 million in
1995. At June 30, 1997, $32 million of accrued severance liability remained,
which is expected to be substantially paid in cash in 1998. Also, in 1997 and
1996, the company reported deferred tax benefits based on the likelihood of
future realization of U.S. income. The majority of these tax benefits are
expected to generate cash flow in the range of $40-$50 million per year from
1999 through 2001.

INVESTING ACTIVITIES

The company spent $60 million on investment activities in 1997, compared to $101
million in 1996 and $112 million in 1995. In 1997, the company received $25
million from the sale of intellectual property and $8 million from liquidations
of other investments, and invested $10 million in Superconducting Core
Technologies, Inc. In 1996, the company made a cash advance of $23 million to
Ericsson Raynet. Also, in 1996, the company received $7 million in cash proceeds
from the sale of its shape memory metal components business. In 1995, the
company received $4 million in cash proceeds from the sale of its minority
interest in Menlo Care, Inc. Capital expenditures were $90 million in 1997, $79
million in 1996, and $94 million in 1995. Capital expenditures are expected to
increase moderately in 1998 as manufacturing capacity is added to support
anticipated revenue growth.

In November 1994, the company completed the transactions related to the
formation of the Ericsson Raynet joint venture. In forming the joint venture,
Raychem sold certain specified assets of its Raynet subsidiary to LM Ericsson in
exchange for $40 million in cash. In January 1995, the company entered into a
revolving credit agreement with the joint venture. Through June 30, 1995, the
company made net advances to Ericsson Raynet of $62 million, of which $4 million
was under the above credit agreement and the remaining $58 million was
capitalized as an investment in the joint venture. In 1996, the company made
advances to Ericsson Raynet of $23 million under this credit agreement,
increasing the amount due to the company to $27 million. As a result of the
reconfiguration of the Ericsson Raynet partnership, Raychem converted the amount
due under the revolving credit agreement to capital. Raychem subsequently
terminated the revolving credit agreement.

BellSouth Enterprises Inc. (BSE) had financed a portion of the software
development work at Raynet and held a royalty interest in the software-related
revenues of Raynet. With the creation of the joint venture, this royalty payment
was reconfigured. Raychem made the last of three annual $10 million payments to
BSE in November 1996.

FINANCING ACTIVITIES

Cash outflows from financing activities were $294 million in 1997, up
significantly from 1996 due to additional share repurchases and payments on
long-term debt.

In 1997, the company repurchased 3.4 million shares of the company's Common
Stock for $247 million. The company repurchased 1.5 million shares in 1996 for
$95 million and 0.7 million shares in 1995 for $26 million. In July 1997, the
board of directors authorized management to spend up to $300 million during any
fiscal year, commencing with fiscal 1998, to repurchase the company's stock. The
company's philosophy is to repurchase its common stock to offset the dilutive
effects of the company's stock purchase and stock option plans. 



                                       12

<PAGE>   6

In September 1996, the company entered into a new syndicated five-year revolving
credit agreement for $400 million, replacing an existing $250 million revolving
credit facility. Borrowings under the revolving credit agreement bear interest
at variable spreads over LIBOR. The revolving credit agreement includes
covenants that, among other things, specify a maximum leverage limit and a
minimum fixed charge coverage ratio.

In April 1996, the company entered into a lease financing secured by the
majority of its manufacturing equipment in the United States. The company has
the option of terminating the transaction for a fixed amount in 10 years. The
arrangement is accounted for as 10-year partially amortizing secured debt with
interest that varies periodically with LIBOR. Cash proceeds from the financing
were approximately $113 million and were used in roughly equal proportions for
reduction of long-term debt and for other corporate purposes. The arrangement
lowers the company's long-term borrowing costs.

Net interest expense was $5 million in 1997 compared to $10 million in 1996 and
$13 million in 1995. The decrease in 1997 is principally due to lower average
debt levels during the year and the prepayment of higher-cost long-term debt.
The decrease in 1996 resulted from higher interest income on larger cash
balances and lower interest costs due to the effect of declining interest rates
on variable rate debt.

Proceeds from the issuance of Common Stock to employees participating in the
company's employee stock purchase plan and stock option plans amounted to $62
million in 1997 down from $81 million in 1996, when a larger number of stock
options were exercised.

The company's quarterly cash dividend has been paid consistently since the
second quarter of 1978. In the third quarter of 1996, the quarterly dividend was
increased 25% to $0.10 per share. During 1996, the company paid $16 million in
dividends to its stockholders. Effective in the third quarter of 1997, the
company increased the quarterly dividend an additional 40% to $0.14 per share.
During 1997, the company paid $21 million in dividends to its stockholders. The
company expects to continue to pay cash dividends in the foreseeable future.

MARKET RISK DISCUSSION
--------------------------------------------------------------------------------

The company's cash flow and earnings are subject to fluctuations due to exchange
rate variation. The company attempts to limit its exposure to changing foreign
currency exchange rates through both operational and financial market actions.
The company manufactures its products in a number of locations around the world,
and hence has a cost base that is well diversified over a number of European and
Asian currencies as well as the U.S. dollar. This diverse base of local currency
costs serves to partially counterbalance the earnings effect of potential
changes in value of the company's local currency denominated revenues. Also, the
company denominates its third-party export sales in the currency of the selling
Raychem entity, whenever possible.

Short-term exposures to changing foreign currency exchange rates are managed by
financial market transactions, principally through the purchase of forward
foreign exchange contracts (with maturities of six months or less) to offset the
earnings and cash flow impact of the non-functional currency denominated
receivables and payables of the company's operating units. Forward foreign
exchange contracts are denominated in the same currency as the receivable or
payable being covered, and the term of the forward foreign exchange contract
matches the term of the underlying receivable or payable. The company covers all
known and measurable exposed receivables and payables denominated in currencies
that have a liquid, cost-effective forward foreign exchange market. The
receivables and payables being covered arise from trade and intercompany
transactions of and among the company's operating units and intercompany loans
between the company's operating units.

The company does not hedge its foreign currency exposure in a manner that would
entirely eliminate the effects of changes in foreign exchange rates on the
company's consolidated net income.

The company does not have significant exposure to changing interest rates
because of the low levels of both marketable securities and debt on the
company's balance sheet. The company does not undertake any specific actions to
cover its exposure to interest rate risk and the company is not a party to any
interest rate risk management transactions.

The company does not purchase or hold any derivative financial instruments for
trading purposes.

INTEREST RATE SENSITIVITY

A 55 basis point move in interest rates (10% of the company's weighted average
worldwide interest rate) affecting the company's floating financial instruments,
including both debt obligations and investments, would have an immaterial effect
on the company's pretax earnings over the next fiscal year. The 55 basis point
move in interest rates would also have an immaterial effect on the fair value of
the company's fixed rate financial instruments.



                                       13

<PAGE>   7

EXCHANGE RATE SENSITIVITY

The table below provides information about the company's derivative financial
instruments and related balance sheet items by currency and presents such
information in U.S. dollar equivalents. The table summarizes information on
instruments and related underlying transactions that are sensitive to foreign
currency exchange rates, including foreign currency forward exchange contracts
and non-functional currency-denominated receivables and payables. The net amount
that is exposed to changes in foreign currency rates is then subjected to a 10%
change in the value of the foreign currency versus the U.S. dollar. The company
has no material sensitivity to changes in foreign currency exchange rates on its
net exposed derivative financial instrument position.

The following table presents the impact on the company's earnings of a 10%
appreciation and 10% depreciation of the U.S. dollar against the indicated
foreign currencies:

<TABLE>
<CAPTION>
JUNE 30, 1997                  U.S.DOLLAR    NET UNDERLYING                              FOREIGN           FOREIGN
(dollars in millions)        VALUE OF NET           FOREIGN       NET EXPOSED      EXCHANGE GAIN     EXCHANGE LOSS
                                  FOREIGN          CURRENCY      LONG/(SHORT)           FROM 10%          FROM 10%
                                 EXCHANGE       TRANSACTION          CURRENCY    APPRECIATION OF   DEPRECIATION OF
CURRENCY                        CONTRACTS         EXPOSURES          POSITION        U.S. DOLLAR       U.S. DOLLAR
--------                     ------------    --------------      ------------    ---------------   --------------- 
<S>                          <C>             <C>                 <C>             <C>               <C>
Belgian Franc                $        1.6      $        8.1      $       (6.6)      $        0.6      $       (0.7)
German Mark                           9.0               9.4               0.4                 --                -- 
French Franc                         13.3              11.1              (2.2)               0.2              (0.3)
British Pound                         1.7               1.2              (0.4)                --                -- 
Italian Lira                          9.4              10.2               0.8                 --                -- 
Japanese Yen                         35.4              34.6              (0.9)                --                -- 
Others                               41.6              39.0              (2.8)               0.3              (0.3)
                             ------------      ------------      ------------       ------------      ------------ 
Total                        $      112.0      $      113.6      $      (11.7)      $        1.1      $       (1.3)
                             ============      ============      ============       ============      ============ 
</TABLE>

FORWARD-LOOKING STATEMENTS AND RISK FACTORS
--------------------------------------------------------------------------------

Statements made in this financial review or elsewhere in this annual report or
other communications (including press releases and analyst calls) that are not
statements of historical fact are forward-looking statements, including without
limitation those relating to anticipated product and alliance plans, litigation
matters, restructuring actions, expected tax position, currency effects,
dividends, profitability, and other financial, economic, and growth-related
commitments, targets, trends, or goals. Forward-looking statements are subject
to a number of risks and uncertainties that could cause actual results to differ
materially from the statements made, including those discussed below.

The company is in the process of implementing a number of complex restructuring
actions. Implementation difficulties or market factors could reduce the
estimated benefit of these actions, and timelines could be longer than
anticipated. The company's revenues, operating results, and financial condition
could also be adversely affected by its ability to effectively manage the
transition to the new organizational structures and to outsource certain
activities. There can be no assurance that the company will be successful in
achieving its goals or that it will be able to do so without unintended adverse
consequences.

The company has historically achieved part of its revenue growth by developing
or acquiring new and innovative materials science technologies and products. The
company remains committed to continued internal research and development
efforts, although the company will continue to pursue the acquisition of new or
compatible technologies and businesses as an important part of the company's
growth strategy. In addition, the company has entered, and in the future may
enter, into arrangements with other companies to expand product offerings and to
enhance its own manufacturing capabilities. The success of the company's
research and development efforts, acquisitions of new technologies and products,
or arrangements with third parties, is not predictable and there can be no
assurance that the company will be successful in realizing its objectives, or
that realization may not take longer than anticipated, or that there will not be
unintended adverse consequences from these actions.

Approximately two-thirds of the company's revenues result from sales outside the
United States, a significant portion of which are denominated in foreign
currencies. In addition, the company has several production facilities located
outside the United States. The company's financial results therefore can be
affected by changes in foreign currency rates. To mitigate these effects, the
company hedges its transaction exposure (i.e. the effect on earnings and cash
flows of changes in foreign exchange rates on receivables and payables
denominated in foreign currencies). The company does not hedge its foreign
currency exposure in a manner that would entirely eliminate the effects of
changes in foreign exchange rates on the company's consolidated net income.
Accordingly, the company's reported revenue and net income have been and in the
future may be affected by changes in foreign exchange rates. See "Market Risk
Discussion" above and "Financial Instruments" in the notes to consolidated
financial statements for a description of the company's policies towards hedging
foreign currency exposures.

In addition, because of the extensive nature of the company's foreign business
activities, the company's financial results can also be adversely affected by
changes in worldwide economic conditions, changes in trade policies or tariffs,
changes in interest rates, and political unrest overseas.



                                       14

<PAGE>   8

As a result of the Ericsson Raynet reorganization, effective January 1, 1996,
Raychem no longer shares in the ongoing operating losses of the joint venture.
While there is the potential for some future charges related to warranty claims,
the company believes that Ericsson Raynet's existing warranty reserves are
adequate.

The income tax provision is determined by the company's level of profitability
in each jurisdiction in which it is subject to tax. The geographic distribution
and level of profitability are difficult to predict and may vary from forecasts,
which could result in changes in estimates of the annual effective tax rate and
could cause the estimated tax rate in interim quarters to vary from the actual
annual effective tax rate for the year.

In addition, the company has a deferred tax asset valuation allowance that is
primarily attributable to U.S. federal and state deferred tax assets.
Realization of the deferred tax asset is dependent on the likelihood of
generating sufficient future U.S. taxable income to utilize deductions and
credits prior to their expiration. Management believes sufficient uncertainty
exists regarding the realization of a portion of these deferred tax assets that
a valuation allowance is required. The amount of the valuation allowance is
periodically reassessed and may be adjusted depending on the company's outlook
for future U.S. taxable income. During the latter half of the fiscal year, the
company develops its strategic and annual business plans. These plans provide
additional insight into the outlook for the company's future U.S. taxable income
and, when combined with other factors (such as recent operating results), may
serve as the basis for a future adjustment of the valuation allowance.

A portion of any future reduction in the valuation allowance would reduce the
income tax provision. A significant portion of the remaining valuation allowance
relates to deductions arising from the company's stock plans. Any reduction of
the valuation allowance related to stock plan deductions would be reported as an
increase to equity rather than as a reduction of the income tax provision. The
company anticipates a fiscal 1998 tax rate in the mid-twenty percent range. The
company does not expect to report a significant discrete tax benefit in fiscal
1998 or thereafter. Commencing in fiscal 1999, the company anticipates a
normalized tax rate in the low- to mid-thirty percent range.

The company has manufacturing facilities in many countries and is subject to
environmental regulations. These regulations, and any changes in them, can
affect the company's manufacturing processes as well as the cost, availability,
and use of raw materials. Although compliance with such environmental
regulations has not had a material effect on capital expenditures or operating
results in the past, there is no assurance that any such regulations, or changes
in regulations, will not have a material adverse effect on future capital
expenditures or operating results.

In the past, supplies of certain raw materials the company uses have become
limited, and it is possible that this may occur again in the future. In
addition, certain components purchased by the company are presently available
from only one or a few sources of supply. In such cases, disruptions of
established supply channels could result in increased prices, rationing, and
shortages. In response, the company tries to identify alternative materials and
technologies for such raw materials and components and to develop alternative
sources of supply. In addition, from time to time, the company experiences other
capacity constraints in its manufacturing operations. Disruptions in the supply
of raw materials and components and other capacity constraints can adversely
affect financial results.

From time to time, the company and/or its subsidiaries become involved in
lawsuits arising from various types of commercial claims, including, but not
limited to, product liability, unfair competition, antitrust, breach of
contract, and intellectual property matters. Currently, the principal product
liability litigation involves a variety of claims arising from the company's
heat-tracing and freeze-protection products. The company sells its products in
several markets where product liability issues could be material, for example,
the aerospace and automotive markets. Litigation tends to be unpredictable and
costly and may be affected by events outside the company's control. There is no
assurance that litigation will not have an adverse effect on the company's
future financial position or results of operations.

The company has a substantial investment in intellectual properties--consisting
of patents, trademarks, copyrights, and trade secrets--and relies significantly
on the protection these intellectual property rights provide. Accordingly, the
company protects these rights and from time to time becomes involved in issues
of infringement or theft by third parties and related counterclaims, including
unfair competition or infringement claims, by such third parties. The company
has been involved, as both a defendant and a plaintiff, in intellectual property
lawsuits and could become involved in others in the future. Litigation can be
unpredictable and costly. It is possible that an unfavorable outcome in a suit
related to intellectual property could be material to the company's future
financial position or results of operations.

The company maintains property, cargo, auto, product, general liability, and
directors and officers liability insurance to protect itself against potential
loss exposures. To the extent that losses occur, there could be an adverse
effect on the company's financial results depending on the nature of the loss,
and the type and level of insurance coverage maintained by the company. From
time to time, the company may reevaluate and change the types and levels of
insurance coverage that it purchases. There can be no assurance that insurance
coverage will continue to be available to the company under all circumstances at
commercially reasonable rates or, if available, will be adequate in amount.

A portion of the company's research and development activities, its corporate
headquarters, and other critical business operations are located near major
earthquake faults. The ultimate impact of a major earthquake on the company,
significant suppliers, and the general infrastructure is unknown, but operating
results could be materially affected. The company is predominantly not insured
for losses and interruptions caused by earthquakes.



                                       15

<PAGE>   9

The company's products are sold in competition with other products or
technologies. The company's competitors include some of the largest companies in
the world, many of which have financial, technical and other resources
substantially greater than the company's. Even when the company has strong
intellectual property protection for its products, its products face competition
from products based on other, sometimes lower-cost, technologies. In some of the
company's markets, prices trend downward over time, requiring improvements in
manufacturing and design to remain competitive. In addition, operating results
are subject to fluctuations in demand and the seasonal activity of certain
product lines. The company also sells certain of its products to customers in
industries and countries that are experiencing periods of rapid change, which
can adversely affect demand for the company's products. For example, the
telecommunications industry is going through a period of rapid technological
change, and customers in this industry may delay purchases of the company's
products until technology issues are more clearly resolved. In addition, many
electric power utilities in foreign countries are being privatized, which may
affect the purchasing policies of these utility companies.

A shortfall in revenue could result from a number of other factors, including
but not necessarily limited to overall economic conditions, lower than expected
demand, or supply constraints. In addition, changes in the geographic or product
mix of sales may impact gross profits. A substantial amount of the company's
revenues are realized through orders and shipments booked within a quarter, and
the backlog at the end of any quarter may not be predictive of the company's
financial results for the following quarter. In addition, occurrences of any of
the foregoing risks discussed in this section could have an impact on cash flow.

From time to time the company identifies (for itself, its divisions, and its
strategic alliances) expectations, commitments, targets, trends, and goals
related to various product, financial, economic, and operating matters, such as
the company's growth, profitability, cash flow, capital spending, income
statement and balance sheet items, tax position, share repurchases and cash
dividends, currency movements, geographic trends, product plans, and alliances.
These expectations, commitments, targets, trends and goals are not projections
and there can be no assurance as to their accuracy. Whether these expectations,
commitments, targets, trends, or goals will be fulfilled is subject to a variety
of factors, including those listed above and those appearing in all documents
filed with the Securities and Exchange Commission.

Because of the foregoing factors, in addition to other factors that affect the
company's operating results and financial position, past financial performance
or management's expectations should not be considered to be a reliable indicator
of future performance. Investors should not use historical trends to anticipate
results or trends in future periods. Further, the company's stock price is
subject to volatility. Any of the factors discussed above could have an adverse
impact on the company's stock price. In addition, failure of revenues or
earnings in any quarter to meet the investment community's expectations, as well
as broader market trends, can have an adverse impact on the company's stock
price.

The company does not undertake an obligation to update its forward-looking
statements or risk factors to reflect future events or circumstances.



                                       16

<PAGE>   10

REPORT OF MANAGEMENT

Responsibility for the preparation, integrity, and objectivity of the financial
information presented in this annual report rests with Raychem management. The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, applying certain estimates and
judgments as required.

Raychem maintains a system of internal accounting controls designed to be
cost-effective while providing reasonable assurance that assets are safeguarded
and that transactions are executed in accordance with management's authorization
and are properly recorded in the financial records. Internal control
effectiveness is supported through written communication of policies and
procedures, careful selection and training of personnel, quarterly financial
reviews with divisions and major subsidiaries, and audits by a professional
staff of internal auditors. The company's control environment is further
enhanced through a formal Statement of Corporate Values, which sets standards of
professionalism and integrity for employees worldwide.

Price Waterhouse LLP, independent accountants, are retained to examine Raychem's
financial statements. Their accompanying report is based on an examination
conducted in accordance with generally accepted auditing standards, including a
review of financial controls and tests of accounting procedures and records as
deemed necessary.

The Audit Committee of the Board of Directors is composed solely of nonemployee
directors, and is responsible for recommending to the Board the independent
accounting firm to be retained for the coming year, subject to stockholder
approval. The Audit Committee meets periodically and privately with the
independent accountants, with our internal auditors, and with Raychem
management, to review accounting, auditing, financial control, and financial
reporting matters.

/s/ RICHARD A. KASHNOW                       /s/ RAYMOND J. SIMS

Richard A. Kashnow                           Raymond J. Sims
President and Chief                          Senior Vice President and  
Executive Officer                            Chief Financial Officer    



REPORT OF INDEPENDENT ACCOUNTANTS

[LOGO]
PRICE WATERHOUSE LLP

To the Board of Directors and Stockholders of Raychem Corporation

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, cash flows, and stockholders' equity
present fairly, in all material respects, the financial position of Raychem
Corporation and its subsidiaries at June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1997, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards, 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 the opinion expressed above.

As discussed in the notes to consolidated financial statements, the company
changed its method of accounting for postemployment benefits in 1995.

/s/ PRICE WATERHOUSE LLP

San Jose, California
July 16, 1997



                                       17

<PAGE>   11

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
JUNE 30
(in thousands except share data)                                                1997              1996 
                                                                            -----------       -----------
<S>                                                                         <C>               <C>        
Assets
Current assets:
  Cash and cash equivalents                                                 $    86,583       $   224,115
  Accounts receivable, net of allowances for doubtful
    accounts of $8,797 and $10,033, respectively                                339,142           308,341
  Inventories:
    Raw materials                                                                82,008            86,562
    Work in process                                                              54,677            50,965
    Finished goods                                                              111,154            91,796
                                                                            -----------       -----------
  Total inventories                                                             247,839           229,323
  Prepaid taxes                                                                  42,998            50,312
  Other current assets                                                           89,541            95,765
                                                                            -----------       -----------
Total current assets                                                            806,103           907,856
                                                                            -----------       -----------
Property, plant, and equipment:
  Land                                                                           35,706            39,314
  Buildings                                                                     348,836           364,494
  Machinery and equipment                                                       689,528           657,951
  Leasehold improvements                                                         44,607            42,887
                                                                            -----------       -----------
Total property, plant, and equipment                                          1,118,677         1,104,646
  Less accumulated depreciation and amortization                                645,229           613,207
                                                                            -----------       -----------
Net property, plant, and equipment                                              473,448           491,439
                                                                            -----------       -----------
Deferred tax assets                                                             136,325            56,203
                                                                            -----------       -----------
Other assets                                                                     93,384            95,118
                                                                            -----------       -----------
Total assets                                                                $ 1,509,260       $ 1,550,616
                                                                            ===========       ===========
Liabilities and Stockholders' Equity

Current liabilities:
  Notes payable to banks                                                    $    54,063       $    35,011
  Accounts payable                                                               88,625            69,230
  Compensation and benefits                                                      87,735            86,735
  Other accrued liabilities                                                     102,861           112,437
  Income taxes                                                                   40,598            27,721
  Current maturities of long-term debt                                            5,752           119,618
                                                                            -----------       -----------
Total current liabilities                                                       379,634           450,752
                                                                            -----------       -----------
Long-term debt                                                                  164,004           148,352
                                                                            -----------       -----------
Deferred tax liabilities                                                         25,827            23,722
                                                                            -----------       -----------
Other long-term liabilities                                                      86,017            80,422
                                                                            -----------       -----------
Minority interests                                                                8,759             6,162
                                                                            -----------       -----------
Commitments and contingencies (See notes)
                                                                            -----------       -----------
Stockholders' equity:
  Preferred Stock, $1.00 par value
    Authorized: 15,000,000; Issued: none                                             --                --
  Common Stock, $1.00 par value                                                    
    Authorized: 72,150,000
    Issued: 45,044,515 and 44,890,881 shares, respectively                       45,045            44,891
  Additional contributed capital                                                413,208           408,866
  Retained earnings                                                             540,623           361,876
  Currency translation                                                           (9,336)           25,137
  Treasury Stock, at cost (2,082,423 and 115,753 shares, respectively)         (143,106)           (8,630)
  Other                                                                          (1,415)            9,066 
                                                                            -----------       -----------
Total stockholders' equity                                                      845,019           841,206
                                                                            -----------       -----------
Total liabilities and stockholders' equity                                  $ 1,509,260       $ 1,550,616
                                                                            ===========       ===========
</TABLE>


See accompanying notes to consolidated financial statements.


                                       18

<PAGE>   12

CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
(in thousands except share data)                                   1997             1996             1995 
                                                               ------------     ------------     ------------
<S>                                                            <C>              <C>              <C>         
Revenues                                                       $  1,764,706     $  1,671,561     $  1,530,573
Cost of goods sold                                                  880,928          815,352          758,566
Research and development expense                                    119,336          122,137          118,762
Selling, general, and administrative expense                        492,879          508,206          495,537
Provision for restructuring and divestitures                         52,812           43,571           23,900
Loss on reorganization/formation of Ericsson Raynet
  joint venture and other Raynet items                                   --            2,103           32,032
Equity in net losses of affiliated companies                             --           27,280           84,758
Interest expense, net                                                 4,651            9,631           13,046
Other (income) expense, net                                         (13,640)          (2,849)           4,242
                                                               ------------     ------------     ------------
Income (loss) before income taxes, extraordinary
  item, and change in accounting principle                          227,740          146,130             (270)
(Benefit) provision for income taxes                                (25,604)          (1,782)          21,178
                                                               ------------     ------------     ------------
Income (loss) before extraordinary item and
  change in accounting principle                                    253,344          147,912          (21,448)
Extraordinary item--loss related to early
  retirement of debt, net of $0 income taxes                             --               --           (6,318)
Cumulative effect of change in accounting
  principle, net of $0 income taxes                                      --               --           (1,477)
                                                               ------------     ------------     ------------
Net income (loss)                                              $    253,344     $    147,912     $    (29,243)
                                                               ============     ============     ============
Earnings (loss) per share before extraordinary
  item and change in accounting principle                      $       5.54     $       3.22     $      (0.49)
Earnings (loss) per share on extraordinary item                          --               --            (0.15)
Earnings (loss) per share on change in accounting principle              --               --            (0.03)
                                                               ------------     ------------     ------------ 
Earnings (loss) per share                                      $       5.54     $       3.22     $      (0.67)
                                                               ============     ============     ============
Average number of shares outstanding                             45,724,198       45,908,894       43,538,028
                                                               ============     ============     ============
</TABLE>


See accompanying notes to consolidated financial statements.


                                       19

<PAGE>   13

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
(in thousands)                                                      1997           1996           1995 
                                                                 ----------     ----------     ----------
<S>                                                              <C>            <C>            <C>        
Cash flows from operating activities:
  Net income (loss)                                              $  253,344     $  147,912     $  (29,243)
  Adjustments to reconcile net income (loss) to
    net cash provided by operating activities:
    Provisions for restructuring and divestitures,
      net of payments                                                28,510         26,992          7,620
    Loss on reorganization/formation of
      Ericsson Raynet joint venture                                      --          2,103         14,517
    Equity in net losses of affiliated companies                         --         27,280         84,758
    Extraordinary loss related to early retirement of debt               --             --         (1.043)
    Change in accounting principle                                       --             --          1,477
    Gain on sale of intellectual property                           (23,601)            --             -- 
    Depreciation and amortization                                    78,557         79,427         74,798
    Deferred income tax (benefit) provision                         (81,114)       (45,353)         3,465
    Other                                                             2,574            108         (1,558)
    Changes in certain assets and liabilities, net of effects
      from restructuring and divestitures, joint venture
      reorganization/formation, extraordinary item, and
      change in accounting principle:
      Accounts receivable                                           (38,574)       (18,375)       (12,911)
      Inventories                                                   (24,686)        (9,380)        (1,107)
      Accounts payable and accrued liabilities                       47,133          7,761         (1,166)
      Income taxes                                                    9,840         12,537        (14,822)
      Other assets and liabilities                                  (31,572)        (6,564)         4,479
                                                                 ----------     ----------     ----------
    Net cash provided by operating activities                       220,411        224,448        129,264
                                                                 ----------     ----------     ----------
Cash flows from investing activities:
  Investment in property, plant, and equipment                      (90,485)       (78,589)       (94,041)
  Disposition of property, plant, and equipment                       6,934          3,973          6,342
  Proceeds from sale of specified Raynet assets                          --             --         40,000
  Advances to affiliated companies                                   (2,500)       (33,001)       (63,427)
  Cost of acquisitions, net of cash acquired                             --             --         (3,930)
  Proceeds from sale of investments and other                        33,538          7,443          4,387
  Purchase of investments                                            (7,652)        (1,075)        (1,000)
                                                                 ----------     ----------     ----------
    Net cash used in investing activities                           (60,165)      (101,249)      (111,669)
                                                                 ----------     ----------     ----------
Cash flows from financing activities:
  Net proceeds from short-term debt                                  11,023          7,618          5,031
  Proceeds from long-term debt                                       39,090        119,277        225,498
  Payments of long-term debt                                       (138,479)      (108,802)      (213,100)
  Common Stock repurchased                                         (246,964)       (95,184)       (26,139)
  Common Stock issued under employee  
    benefit plans                                                    61,999         81,378         39,877
  Proceeds from repayments of stockholder  
    notes receivable                                                    383            428            320
  Cash dividends                                                    (21,379)       (16,038)       (13,950)
                                                                 ----------     ----------     ----------
  Net cash (used in) provided by financing activities              (294,327)       (11,323)        17,537
                                                                 ----------     ----------     ----------
  Effect of exchange rate changes on cash
    and cash equivalents                                             (3,451)        (5,828)         4,845
                                                                 ----------     ----------     ----------
  (Decrease) increase in cash and cash equivalents                 (137,532)       106,048         39,977
  Cash and cash equivalents at beginning of year                    224,115        118,067         78,090
                                                                 ----------     ----------     ----------
  Cash and cash equivalents at end of year                       $   86,583     $  224,115     $  118,067
                                                                 ==========     ==========     ==========
  Supplemental Disclosures
  Cash paid for:
    Interest (net of amounts capitalized)                        $   16,116     $   20,312     $   25,710
    Income taxes (net of refunds)                                    47,413         29,436         25,623

</TABLE>

See accompanying notes to consolidated financial statements.


                                       20

<PAGE>   14

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                     ADDITIONAL
                                                          COMMON    CONTRIBUTED       RETAINED        CURRENCY
(in thousands except share data)                           STOCK        CAPITAL       EARNINGS     TRANSLATION
                                                     -----------    -----------    -----------     -----------
<S>                                                  <C>            <C>            <C>             <C>        
Balance June 30, 1994                                $    43,006    $   354,660    $   319,905     $    16,077
                                                     -----------    -----------    -----------     -----------
Net loss                                                      --             --        (29,243)             -- 
Common Stock issued (891,490 shares)                         891         25,467             --              -- 
Cash dividends ($0.32  per share
  of Common Stock)                                            --             --        (13,950)             -- 
Currency translation                                          --             --             --          45,869
Treasury Stock purchased (700,000 shares),
  net of issuances (473,360 shares)                           --             --         (4,055)             -- 
Additions to notes receivable from sale of stock              --             --             --              -- 
Repayments of notes receivable from sale of stock             --             --             --              -- 
                                                     -----------    -----------    -----------     -----------
Balance June 30, 1995                                     43,897        380,127        272,657          61,946
                                                     -----------    -----------    -----------     -----------
Net income                                                    --             --        147,912              -- 
Common Stock issued (993,606 shares)                         994         28,739             --              -- 
Cash dividends ($0.36  per share
  of Common Stock)                                            --             --        (16,038)             -- 
Currency translation                                          --             --             --         (36,809)
Treasury Stock purchased (1,500,000 shares),
  net of issuances (1,610,887 shares)                         --             --        (42,655)             -- 
Unrealized gain on available-for-sale
  marketable securities                                       --             --             --              -- 
Additions to notes receivable from sale of stock              --             --             --              -- 
Repayments of notes receivable from sale of stock             --             --             --              -- 
                                                     -----------    -----------    -----------     -----------
Balance June 30, 1996                                     44,891        408,866        361,876          25,137
                                                     -----------    -----------    -----------     -----------
Net income                                                    --             --        253,344              -- 
Common Stock issued (153,634 shares)                         154          4,342             --              -- 
Cash dividends ($0.48  per share of
  Common Stock)                                               --             --        (21,379)             -- 
Currency translation                                          --             --             --         (34,473)
Treasury Stock purchased (3,400,000 shares),
  net of issuances (1,433,330 shares)                         --             --        (53,218)             -- 
Unrealized loss on available-for-sale
  marketable securities                                       --             --             --              -- 
Additions to notes receivable from sale of stock              --             --             --              -- 
Repayments of notes receivable from sale of stock             --             --             --              -- 
Deferred compensation--restricted stock                       --             --             --              -- 
                                                     -----------    -----------    -----------     -----------
Balance June 30, 1997                                $    45,045    $   413,208    $   540,623     $    (9,336)
                                                     ===========    ===========    ===========     ===========
</TABLE>

<TABLE>
<CAPTION>
                                                        TREASURY
(in thousands except share data)                           STOCK           OTHER           TOTAL
                                                     -----------     -----------     -----------
<S>                                                  <C>             <C>             <C>        
Balance June 30, 1994                                $        --     $      (724)    $   732,924
                                                     -----------     -----------     -----------
Net loss                                                      --              --         (29,243)
Common Stock issued (891,490 shares)                          --              --          26,358
Cash dividends ($0.32  per share
  of Common Stock)                                            --              --         (13,950)
Currency translation                                          --              --          45,869
Treasury Stock purchased (700,000 shares),
  net of issuances (473,360 shares)                       (8,330)             --         (12,385)
Additions to notes receivable from sale of stock              --            (235)           (235)
Repayments of notes receivable from sale of stock             --             320             320
                                                     -----------     -----------     -----------
Balance June 30, 1995                                     (8,330)           (639)        749,658
                                                     -----------     -----------     -----------
Net income                                                    --              --         147,912
Common Stock issued (993,606 shares)                          --              --          29,733
Cash dividends ($0.36  per share
  of Common Stock)                                            --              --         (16,038)
Currency translation                                          --              --         (36,809)
Treasury Stock purchased (1,500,000 shares),
  net of issuances (1,610,887 shares)                       (300)             --         (42,955)
Unrealized gain on available-for-sale
  marketable securities                                       --           9,861           9,861
Additions to notes receivable from sale of stock              --            (586)           (586)
Repayments of notes receivable from sale of stock             --             430             430
                                                     -----------     -----------     -----------
Balance June 30, 1996                                     (8,630)          9,066         841,206
                                                     -----------     -----------     -----------
Net income                                                    --              --         253,344
Common Stock issued (153,634 shares)                          --              --           4,496
Cash dividends ($0.48  per share of
  Common Stock)                                               --              --         (21,379)
Currency translation                                          --              --         (34,473)
Treasury Stock purchased (3,400,000 shares),
  net of issuances (1,433,330 shares)                   (134,476)             --        (187,694)
Unrealized loss on available-for-sale
  marketable securities                                       --          (9,097)         (9,097)
Additions to notes receivable from sale of stock              --          (1,011)         (1,011)
Repayments of notes receivable from sale of stock             --             384             384
Deferred compensation--restricted stock                       --            (757)           (757)
                                                     -----------     -----------     -----------
Balance June 30, 1997                                $  (143,106)    $    (1,415)    $   845,019
                                                     ===========     ===========     ===========
</TABLE>

See accompanying notes to consolidated financial statements. 



                                       21
<PAGE>   15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------

BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of all wholly owned
and majority owned subsidiaries and entities of which the company has control.
Investments in entities of which the company owns between 20% and 50% and
entities on which the company has the ability to exercise significant influence,
but not control, are accounted for under the equity method. Other investments
are accounted for using the cost method. All significant intercompany accounts
and transactions are eliminated.

FOREIGN CURRENCY TRANSLATION 

Assets and liabilities of operations outside the United States, except for
operations in highly inflationary economies (principally in Latin America), are
translated into U.S. dollars using the exchange rate in effect at each period
end. Revenues and expenses are translated at the average exchange rate
prevailing during the period. The effects of foreign currency translation
adjustments arising from differences in exchange rates from period to period are
deferred and included as a component of "Stockholders' equity." The effects of
foreign currency transactions, and of remeasuring the financial position and
results of operations into the functional currency, are included in "Other
(income) expense, net."

CASH EQUIVALENTS 

All highly liquid investments with a maturity of three months or less at the
date of purchase are classified as cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined
principally using the first-in, first-out method and includes materials, direct
and indirect labor, and manufacturing overhead.

PROPERTY, PLANT, AND EQUIPMENT 

Property, plant, and equipment are carried at cost. Effective July 1, 1990, the
company adopted the straight-line method of depreciation for property, plant,
and equipment placed in service on or after that date. Fixed assets placed in
service prior to 1991 continue to be depreciated using principally accelerated
methods. Property, plant, and equipment are depreciated over the estimated
useful lives of the individual assets and, for leasehold improvements, over the
terms of their respective leases, if shorter. The estimated useful lives of
major classes of depreciable assets are as follows:

<TABLE>
<S>                             <C>
   Buildings and improvements    10--45 years
   Machinery and equipment       3--10 years
   Leasehold improvements        Term of lease or life of asset
</TABLE>

INTANGIBLE ASSETS 

Goodwill represents the excess of purchase price over the fair value of
identifiable net assets of businesses acquired and is amortized on a
straight-line basis over periods not exceeding 20 years. Patents and trademarks
are amortized on a straight-line basis over their legal or estimated useful
lives, whichever is shorter. The company reviews the carrying value of
intangible assets whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. 

REVENUE RECOGNITION 

Revenue from product sales is recognized when the earnings process is complete.
This generally occurs at the time product is shipped. Other revenues are
principally from licensing and royalty arrangements and are recognized according
to the terms of the specific agreements.

ENVIRONMENTAL COSTS 

Environmental liabilities are recorded when environmental assessments and/or
remedial efforts are probable, and the cost can be reasonably estimated.

INCOME TAXES 

Deferred income taxes result primarily from temporary differences between
financial and tax reporting. Deferred tax assets and liabilities are determined
based on the difference between the financial statement bases and tax bases of
assets and liabilities using enacted tax rates. A valuation allowance is
recorded to reduce deferred tax assets to that portion that is likely to be
realized based on expectations of future profitability.

EARNINGS (LOSS) PER SHARE

Primary earnings per share is computed by dividing net income by the weighted
average number of shares outstanding after giving effect to stock options
considered to be dilutive common stock equivalents. Shares outstanding includes
issued shares less shares held in treasury. In the case that fully diluted
earnings per share is materially different from primary earnings per share,
fully diluted earnings per share is calculated by dividing net income by the sum
of the weighted average number of shares outstanding, dilutive stock options,
and shares


                                       22

<PAGE>   16

issuable under the company's Employee Stock Purchase Plan at the end of the
period. Common stock equivalents would be excluded from both the primary and
fully diluted calculations if a net loss was incurred for the period as they
would be anti-dilutive. 

TREASURY STOCK 

In December 1994, the board of directors authorized the repurchase, at
management's discretion, of up to 1.5 million shares of the company's stock
during any one fiscal year. In April 1996, the board of directors increased this
authorization to repurchase up to 2.0 million shares of the company's stock
during any one fiscal year, effective July 1, 1996. In April 1997, the board of
directors further increased this authorization to repurchase up to 3.0 million
shares of the company's stock during any rolling 12-month period commencing on
or after April 16, 1997. In July 1997, the board of directors modified its share
repurchase authorization. Commencing with fiscal 1998, management is permitted,
at its discretion, to repurchase up to $300 million of the company's stock
during any fiscal year. Shares repurchased under the board of directors'
authorization are used to offset the dilution caused by the company's employee
stock purchase and stock option plans. The company's repurchases of shares of
Common Stock are recorded as "Treasury Stock" and result in a reduction of
"Stockholders' equity." When treasury shares are reissued, the company uses a
first-in, first-out method and the excess of repurchase cost over reissuance
price is treated as a reduction of "Retained earnings."

NEW ACCOUNTING STANDARDS

In the first quarter of 1997, the company adopted the Financial Accounting
Standards Board (FASB) Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121). The
statement requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The statement also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell, except for assets that are covered by
Accounting Principles Board (APB) Opinion No. 30. There was no impact on the
company's results of operations or financial condition upon adoption of
Statement No. 121. 

In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). This statement encourages, but does not require,
companies to recognize compensation expense for grants of stock options, and
other equity instruments based on a fair-value method of accounting.

Companies that do not adopt the new expense recognition rules of FAS 123 will
continue to apply the existing accounting rules contained in APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and are required to provide pro
forma disclosures of the compensation expense determined under the fair-value
provisions of FAS 123. APB Opinion No. 25 does not require recognition of
compensation expense for most of the stock-based compensation arrangements by
the company, namely employee stock purchase plans and option grants where the
exercise price is equal to the market price at the date of grant. The company
has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in APB Opinion No. 25. See "Stock" in the
notes to consolidated financial statements for pro forma disclosures in
accordance with FAS 123.

In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" (FAS 130). FAS 130 establishes standards for reporting and display of
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from nonowner sources. Examples of items to be included in comprehensive income,
which are excluded from net income, include foreign currency translation
adjustments and unrealized gain/loss on available-for-sale securities. The
disclosures prescribed by FAS 130 must be made beginning with the first quarter
of fiscal 1999.

In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (FAS 131). This statement establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The company is in the process of reassessing current business segment reporting
to determine if changes in reporting will be required in adopting this new
standard. The disclosures prescribed by FAS 131 will first be adopted in the
company's 1999 annual report.

USE OF ESTIMATES 

The preparation of financial statements in conformity with generally accepted 
accounting principles requires management to make estimates and assumptions 
that affect the amounts reported in the consolidated financial statements and 
related notes to financial statements.  Changes in such estimates may affect 
amounts reported in future periods.


FINANCIAL PRESENTATION 

Certain prior-year amounts have been reclassified to conform with the 1997
financial statement presentation.



                                       23

<PAGE>   17

FINANCIAL INSTRUMENTS
--------------------------------------------------------------------------------

Currently, the company is not a party to any interest rate risk management
transactions. The company does not hold any derivative financial instruments for
trading purposes. The company has written policies that place all foreign
currency forward transactions under the direction of corporate treasury and
restrict all derivative transactions to those intended for hedging purposes.

The company operates in more than 85 countries worldwide, with approximately
two-thirds of its revenues occurring outside the United States. The company
attempts to limit its exposure to changing foreign currency exchange rates
through both operational and financial market actions. The company manufactures
its products in a number of locations around the world, and hence has a cost
base that is well diversified over a number of European and Asian currencies as
well as the U.S. dollar. This diverse base of local currency costs serves to
partially counterbalance the income effect of potential changes in the value of
the company's local currency denominated revenues. Also, the company denominates
its third-party export sales in the currency of the selling Raychem entity,
whenever possible.

FORWARD FOREIGN EXCHANGE CONTRACTS

Short-term exposures to changing foreign currency exchange rates are managed by
financial market transactions, principally through the purchase of forward
foreign exchange contracts (with maturities of six months or less) to offset the
earnings and cash flow impact of the non-functional currency denominated
receivables and payables of the company's operating units. Forward foreign
exchange contracts are denominated in the same currency as the receivable or
payable being covered, and the term of the forward foreign exchange contract
matches the term of the underlying receivable or payable. Forward foreign
exchange contracts are revalued monthly at balance sheet foreign exchange
translation rates and the resultant realized and unrealized gains and losses are
included in "Other (income) expense, net." The company is subject to credit risk
exposure from nonperformance by the counterparties to these transactions,
typically large international financial institutions.

Net gains and losses from forward foreign exchange contracts used to cover
receivables and payables totaled a $3 million loss, a $5 million gain, and a $4
million gain for the years ended June 30, 1997, 1996, and 1995, respectively.
The company incurred total net foreign exchange losses of $2 million, $1
million, and $4 million for 1997, 1996, and 1995, respectively. The net amount
of foreign exchange exposure covered was $112 million and $163 million at June
30, 1997 and 1996, respectively. The company covers exposures that arise from
trade and intercompany receivables and payables, and intercompany loans in
non-functional currencies. These exposures are primarily in Japanese yen (32% of
net contract value), French francs (12%), Italian lire (8%), and German marks
(8%).

The company does not cover non-functional currency translation and transaction
exposures in countries whose currencies do not have a liquid, cost-effective
forward market available for hedging. Such exposures at June 30, 1997, included
$6 million in net intercompany payables in non-functional currencies and $5
million of net monetary assets in foreign countries with the U.S. dollar as
functional currency.

The company has periodically entered into forward foreign exchange contracts to
hedge a portion of its equity in foreign subsidiaries. The gains and losses on
these contracts were included in "Currency translation" as a component of
"Stockholders' equity." There were no such hedges of foreign equity outstanding
at June 30, 1997 and 1996.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the company to significant
concentrations of credit risk consist primarily of cash and trade accounts
receivable.

The company maintains cash and cash equivalents and certain other financial
instruments with various financial institutions. These financial institutions
are located throughout the world, and the company's policy is designed to limit
exposure to any one institution. The company's periodic evaluations of the
relative credit standing of these financial institutions are considered in the
company's investment strategy.

Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of entities comprising the company's customer
base and their dispersion across many different industries and countries. Credit
risk to certain countries is further limited through the use of irrevocable
letters of credit and bank guarantees. As of June 30, 1997 and 1996, the company
had no significant concentrations of credit risk.

FAIR VALUE OF FINANCIAL INSTRUMENTS 

For certain of the company's financial instruments, including cash and cash
equivalents, accounts receivable, notes payable to banks, accounts payable, and
other accrued liabilities, the carrying amounts approximate fair value due to
their short maturities. Consequently, such instruments are not included in the
following table, which provides information regarding the estimated fair values
of other financial instruments.

The fair value of long-term debt is estimated using discounted cash flow
analysis, based on the incremental borrowing rates currently available to the
company for loans with similar terms and maturities. The estimated fair value of
forward foreign exchange contracts is primarily based on quoted market prices of
comparable contracts.


                                       24

<PAGE>   18

<TABLE>
<CAPTION>
                                                                1997                              1996
JUNE 30                                             ----------------------------      ----------------------------
ASSET (LIABILITY)                                     CARRYING          FAIR           CARRYING           FAIR
(in thousands)                                         AMOUNT           VALUE           AMOUNT            VALUE
                                                    -----------      -----------      -----------      -----------
<S>                                                 <C>              <C>              <C>              <C>         
Long-term debt, including current maturities,
  and accrued interest of $2,998 and
  $1,056 in 1997 and 1996, respectively             $  (172,754)     $  (173,477)     $  (269,026)     $  (269,212)
Forward foreign exchange contracts included in:     
  Other current assets                                      694              694              594              594   
  Other accrued liabilities                                (463)            (463)            (494)            (494)  
</TABLE>


MARKETABLE SECURITIES
--------------------------------------------------------------------------------

Marketable securities are classified as available for sale and carried at fair
value as determined by quoted market prices. The aggregate fair value of the
marketable securities held at June 30, 1997 and 1996, was $6 million and $12
million, respectively. Gross unrealized holding gains were $1 million and $10
million as of June 30, 1997 and 1996, respectively, and are included as a
separate component of "Stockholders' equity." 

RETIREMENT BENEFITS 
--------------------------------------------------------------------------------

The company has noncontributory defined benefit pension plans that cover
substantially all U.S. employees and a number of its employees in foreign
countries. The benefits for these plans are based primarily on years of service
and employee compensation. The company funds these pension plans when legally or
contractually required, or earlier.

Plan assets for the U.S. and non-U.S. defined benefit pension plans generally
consist of publicly traded securities, bonds, and cash investments. Amortization
of prior service cost is calculated on a straight-line basis over the expected
future years of service of the plans' active participants.

On July 1, 1997, the company amended its U.S. defined benefit pension plan by
converting it from a career-average-pay plan to a final-pay plan. The amendment
generated an unrecognized prior service cost of $7.3 million.

On July 1, 1997, the company amended its 401(k) pension plan. The company's
contribution to this plan is based upon the amount of the employees'
contribution to the plan. The estimated cost of this plan in fiscal 1998 is
approximately $3 million.

On January 1, 1996, the U.S. defined benefit pension plan was amended to update
the years used to calculate past service benefits. The amendment generated an
unrecognized prior service cost of $5.8 million.

Effective January 1, 1995, the company adopted amendments to the International
Pension Plan to expand benefit coverage to include more employees. This change
resulted in an increase of $0.2 million in pension expense for 1995 and an
increase of approximately $2.5 million in the projected benefit obligation.

In 1995, the U.S. plan recognized a curtailment loss of $1.2 million related to
a transfer of Raynet employees to the Ericsson pension plan.

The assumptions used to measure the projected benefit obligation and to compute
the expected long-term return on assets for the company's defined benefit
pension plans are as follows:

<TABLE>
                                                 1997             1996             1995 
                                              ----------       ----------       ----------
<S>                                           <C>              <C>              <C>  
U.S. plans:
  Discount rate                                     7.75%            7.75%            7.75%
  Average increase in compensation levels           4.75%            4.75%            4.75%
  Expected long-term return on assets                9.0%             8.5%             8.5%
                                              ----------       ----------       ----------
Non-U.S. plans:
  Discount rates                                4.5--9.0%        5.5--9.0%        5.5--9.3%
  Average increase in compensation levels       4.0--6.3%        4.0--6.9%        3.0--6.9%
  Expected long-term return on assets           7.0--9.5%        7.5--9.5%       7.5--10.0%
                                              ----------       ----------       ----------
</TABLE>


                                       25

<PAGE>   19

Net periodic pension cost includes the following components:

<TABLE>
<CAPTION>
                                                                U.S. PLANS                              NON-U.S. PLANS
YEARS ENDED JUNE 30                               --------------------------------------    --------------------------------------
(in thousands)                                       1997          1996          1995          1997          1996          1995 
                                                  ----------    ----------    ----------    ----------    ----------    ----------
<S>                                               <C>           <C>           <C>           <C>           <C>           <C>       
Service cost--benefits earned during the period   $    6,632    $    6,319    $    6,105    $    8,244    $    9,151    $    9,584
Interest cost on projected benefit obligation          9,902         9,206         9,009        13,451        14,113        13,161
Actual (return) loss on plan assets                  (24,910)      (23,936)      (16,342)      (21,168)      (24,706)       (3,969)
Net amortization and deferral                         15,411        18,367         9,820         6,059        12,805        (6,241)
                                                  ----------    ----------    ----------    ----------    ----------    ----------
Net periodic pension cost                         $    7,035    $    9,956    $    8,592    $    6,586    $   11,363    $   12,535
                                                  ==========    ==========    ==========    ==========    ==========    ==========
</TABLE>

The following table sets forth the funded status of the plans:

<TABLE>
<CAPTION>
                                            ASSETS EXCEED ACCUMULATED BENEFITS
                                   ----------------------------------------------------
                                           U.S. PLANS               NON-U.S. PLANS
JUNE 30                            ------------------------    ------------------------
(in thousands)                        1997          1996          1997          1996 
                                   ----------    ----------    ----------    ----------
<S>                                <C>           <C>           <C>           <C>        
Actuarial present value of
  benefit obligations:
Vested benefit obligation          $ (123,894)   $ (115,852)   $  (85,116)   $  (64,461)
                                   ----------    ----------    ----------    ----------
Accumulated benefit obligation     $ (128,143)   $ (118,120)   $  (87,489)   $  (65,434)
                                   ----------    ----------    ----------    ----------
Projected benefit obligation       $ (130,991)   $ (126,976)   $ (137,305)   $ (116,374)
Plan assets at fair value             131,737       122,169       172,430       142,693
                                   ----------    ----------    ----------    ----------
Plan assets more (less) than
  projected benefit obligation            746        (4,807)       35,125        26,319
Unrecognized net (gain) loss           (4,246)       10,312       (32,223)      (27,326)
Unrecognized net transition
  (asset)liability                         --          (127)       (6,423)       (6,967)
Unrecognized prior service cost        16,241        10,599         2,622         2,728
Adjustment required to recognize
  additional minimum liability             --            --            --            -- 
                                   ----------    ----------    ----------    ----------
Prepaid (accrued) pension cost     $   12,741    $   15,977    $     (899)   $   (5,246)
                                   ==========    ==========    ==========    ==========
</TABLE>

<TABLE>
<CAPTION>
                                            ACCUMULATED BENEFITS EXCEED ASSETS
                                   ----------------------------------------------------
                                           U.S. PLANS               NON-U.S. PLANS
JUNE 30                            ------------------------    ------------------------
(in thousands)                        1997          1996          1997          1996 
                                   ----------    ----------    ----------    ----------
<S>                                <C>           <C>           <C>           <C>        
Actuarial present value of
  benefit obligations:
Vested benefit obligation          $   (3,293)   $   (3,107)   $  (44,266)   $  (42,288)
                                   ----------    ----------    ----------    ----------
Accumulated benefit obligation     $   (3,376)   $   (3,107)   $  (45,816)   $  (44,038)
                                   ----------    ----------    ----------    ----------
Projected benefit obligation       $   (5,543)   $   (6,641)   $  (51,664)   $  (51,387)
Plan assets at fair value                  --            --            --            -- 
                                   ----------    ----------    ----------    ----------
Plan assets more (less) than
  projected benefit obligation         (5,543)       (6,641)      (51,664)      (51,387)
Unrecognized net (gain) loss           (1,567)         (504)       (3,043)       (5,931)
Unrecognized net transition
  (asset)liability                        584           614          (335)         (444)
Unrecognized prior service cost         5,502         6,237            --            -- 
Adjustment required to recognize
  additional minimum liability         (2,520)       (2,813)           --            --
                                   ----------    ----------    ----------    ----------
Prepaid (accrued) pension cost     $   (3,544)   $   (3,107)   $  (55,042)   $  (57,762)
                                   ==========    ==========    ==========    ==========
</TABLE>

OTHER POSTRETIREMENT BENEFITS
--------------------------------------------------------------------------------

The company provides postretirement health care benefits to U.S. employees who
qualify for the company's defined benefit pension plan and retire on or after
age 55, until the employees reach age 65. Such benefits are limited to allowing
retirees to continue their participation in the company's group medical plan.
Eligible retirees pay monthly premiums, thus reducing the cost to the company.

The cost of providing medical and dental benefits to early retirees was $0.4
million, comprised of a service cost of $0.2 million and interest cost of $0.2
million, in each of 1997, 1996, and 1995.

The assumed discount rate used to measure the accumulated postretirement benefit
obligation was 7.75% at June 30, 1997 and 1996. The assumed health care cost
trend rate for 1997 is 8.0%, declining to an ultimate rate in 2001 of 6%. A one
percentage point increase in the assumed health care cost trend rate for each
future year increases annual net periodic postretirement benefit cost and the
accumulated postretirement benefit obligation as of June 30, 1997, by $0.1
million and $0.3 million, respectively.


The following table sets forth components of the accumulated postretirement
benefit obligation: 

<TABLE>
<CAPTION>
JUNE 30
(in thousands)                                               1997         1996 
                                                           --------     --------
<S>                                                        <C>          <C>     
Accumulated postretirement benefit
  obligation attributable to:
   Retirees                                                $    740     $    803
   Fully eligible employees                                     634          689
   Other active employees                                     1,530        1,614
                                                           --------     --------
Accumulated postretirement benefit
  obligation                                                  2,904        3,106
Unrecognized net gain                                           770          399
                                                           --------     --------
Accrued postretirement benefit
  obligation                                               $  3,674     $  3,505
                                                           ========     ========
</TABLE>


                                       26

<PAGE>   20

DEBT STRUCTURE
--------------------------------------------------------------------------------

Long-term debt consists of the following:

<TABLE>
<CAPTION>
JUNE 30
(in thousands)                                                                      1997          1996 
                                                                                 ----------    ----------
<S>                                                                              <C>           <C>       
2.90% to 9.66% notes payable to banks and other debt requiring payments
  in varying amounts through 2017                                                $   53,764    $   35,325
Secured debt requiring varying semi-annual payments from January 1997
  through December 2006. The interest rate fluctuates semi-annually
  and was 5.51% at June 30, 1997                                                    115,992       114,645
Syndicated term loan requiring varying quarterly payments beginning
  December 1996. The interest rate fluctuates periodically and was 5.86%
  at June 30, 1996                                                                       --       118,000
                                                                                 ----------    ----------
Total long-term debt                                                                169,756       267,970
Less current maturities                                                               5,752       119,618
                                                                                 ----------    ----------
Long-term portion                                                                $  164,004    $  148,352
                                                                                 ==========    ==========
</TABLE>

In September 1996, the company entered into a new syndicated five-year revolving
credit agreement providing for borrowings of up to $400 million, replacing an
existing $250 million revolving credit facility. Borrowings under the revolving
credit agreement bear interest at variable spreads over LIBOR. The revolving
credit agreement includes covenants that, among other things, specify a maximum
leverage limit and a minimum fixed charge coverage ratio.

In April 1996, the company entered into a lease financing covering the majority
of its manufacturing equipment in the United States. The arrangement is
accounted for as 10-year partially amortizing secured debt with interest that
varies periodically with LIBOR. The proceeds of approximately $113 million were
used in roughly equal portions for prepayment of a portion of the outstanding
term loan and for other corporate purposes.

On September 29, 1994, the company entered into syndicated loan agreements
providing for a five-year partially amortizing loan of $225 million, and a
renewable 364-day revolving credit facility of $200 million. Interest on the
term loan and revolving credit facility was at variable spreads over LIBOR.
Proceeds from the term loan were drawn on November 1, 1994, and used for
retirement of the company's 9.55% privately placed senior notes and for general
corporate purposes. The prepayment of the privately placed senior notes resulted
in an extraordinary loss of $6 million (see note "Extraordinary Item--Loss
Related to Early Retirement of Debt"). The revolving credit facility replaced
existing committed credit facilities.

The syndicated loan agreements included covenants that, among other things,
specified a minimum net worth requirement, a maximum leverage limit, a minimum
fixed charge coverage ratio, and limits on further advances to fund Raynet
operations. On September 28, 1995, the company amended its syndicated loan
agreements. The revolving credit facility was increased to $250 million and
extended to a term of four years. Variable pricing terms for both the term loan
and revolving credit facility were improved, and certain restrictive covenants
were relaxed.

In May 1996, a portion of the lease financing proceeds was used to prepay $57
million of the outstanding term loan principal. Additional term loan prepayments
of $50 million each were made in both June and July 1996, and the remaining
balance was prepaid in August 1996.

Long-term debt maturing during the five years subsequent to June 30, 1997, is as
follows: 1998--$6 million; 1999--$44 million; 2000--$6 million; 2001--$6
million; 2002--$13 million; and thereafter--$95 million. Assets pledged as
security for long-term debt totaled $45 million at June 30, 1997.

On July 16, 1997, the company filed a shelf registration with the Securities and
Exchange Commission to enable it to issue up to $400 million in debt securities;
this registration statement became effective on July 24, 1997.

In addition to short-term borrowings, lines of credit are used for letters of
credit, bank guarantees, and other purposes. The company had no significant
compensating balance requirements or capital lease obligations at June 30, 1997.

Information regarding short-term debt is as follows:

<TABLE>
<CAPTION>
JUNE 30
(dollars in thousands)                                  1997            1996 
                                                     ----------      ----------
<S>                                                  <C>             <C>       
Total lines of credit                                $  631,373      $  484,702
Available unused credit lines                        $  567,382      $  433,197
                                                     ----------      ----------
Worldwide weighted average
  interest rate                                             5.5%            9.8%
                                                     ----------      ----------
</TABLE>


                                       27

<PAGE>   21


STOCK
--------------------------------------------------------------------------------

EMPLOYEE STOCK PURCHASE PLANS

The company's employee stock purchase plans provide that eligible employees may
contribute up to 15% of their base earnings toward the quarterly purchase of the
company's Common Stock. The employees' purchase price is derived from a formula
based on the fair market value of the Common Stock. No compensation expense is
recorded in connection with the plans. Shares issued under the plans were
461,000 in 1997; 767,000 in 1996; and 905,000 in 1995. At June 30, 1997, a total
of 3,974 of the 7,676 eligible employees were participants in the plans.

On November 9, 1994, the stockholders approved an amendment to the employee
stock purchase plans to increase the aggregate number of shares issuable under
the plans by 700,000. Also, on each of November 1, 1995, and November 1, 1996,
the stockholders approved plan amendments to increase issuable shares by
1,000,000. The total number of shares reserved for future issuance under the
plans was 1,505,000 at June 30, 1997.

STOCK OPTION AND INCENTIVE PLANS

The company has various stock option and management incentive plans for selected
employees, officers, directors, and consultants. The plans provide for awards in
the form of stock options, restricted stock, and performance shares. As of June
30, 1997, only stock options and restricted stock had been awarded under the
plans. Options to purchase Common Stock have been granted at no less than fair
market value on the date of grant. Substantially all of these options have a
10-year term and vest over a four-year period. 

On November 1, 1995, and November 1, 1996, the stockholders approved amendments
to the 1990 Incentive Plan to increase the aggregate number of shares issuable
under the plan by 1,250,000 and 2,800,000 respectively. Also, on November 1,
1996, the stockholders approved an amendment to the 1990 Incentive Plan to
increase the limit on shares that may be granted to any one individual in any
one year to 500,000 and to include performance shares within that limit.

During 1997, 17,200 shares of restricted stock were awarded under the 1990
Incentive Plan. Of these shares 1,000 shares were forfeited and the balance of
16,200 shares remains outstanding at June 30, 1997. The difference between par
value and fair market value on the date the restricted stock was awarded will be
amortized over the 3-year restriction period as compensation expense.
Approximately $0.3 million of compensation expense was recognized during 1997
related to restricted stock. During 1996, 37,500 shares of restricted stock were
issued under the 1990 Incentive Plan resulting in compensation expense totaling
$1.65 million as the restrictions lapsed during the year.

At June 30, 1997, 889 optionees held options for the purchase of Common Stock
with expiration dates occurring between August 1, 1997 and June 30, 2007, with
an average exercise price of $49 a share.

The following table summarizes the company's option activity during the years
ending June 30, 1997, 1996, and 1995:


<TABLE>
<CAPTION>
                                                1997                          1996                          1995
                                     --------------------------     -------------------------     -------------------------
                                                       WEIGHTED                      WEIGHTED                      WEIGHTED
                                                        AVERAGE                       AVERAGE                       AVERAGE
OPTION SHARES, JUNE 30                                 EXERCISE                      EXERCISE                      EXERCISE
(in thousands except exercise price)     SHARES           PRICE         SHARES          PRICE         SHARES          PRICE
                                     ----------      ----------     ----------     ----------     ----------     ----------
<S>                                  <C>             <C>            <C>            <C>            <C>            <C>       
Outstanding at beginning of year          4,815      $    39.38          5,588     $    33.74          5,211     $    32.81
Granted                                   1,015      $    77.56          1,443     $    50.54          1,051     $    35.56
Exercised                                (1,144)     $    35.14         (1,909)    $    31.48           (466)    $    25.80
Canceled                                   (211)     $    49.79           (307)    $    38.98           (208)    $    37.51
                                     ----------      ----------     ----------     ----------     ----------     ----------
Outstanding at end of year                4,475      $    48.59          4,815     $    39.38          5,588     $    33.74
                                     ==========      ==========     ==========     ==========     ==========     ==========
Exercisable at end of year                2,085      $    36.56          2,295     $    33.87          3,256     $    32.53
                                     ==========      ==========     ==========     ==========     ==========     ==========
</TABLE>



                                       28

<PAGE>   22

The weighted average fair market value of options granted in 1997 was $32.08,
approximately 41% of the average exercise price of $77.56. The weighted average
fair market value of options granted in 1996 was $21.33, approximately 42% of
the average exercise price of $50.54. The fair market value of each option
granted was estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions for 1997 and 1996,
respectively: risk free interest rate of 6.30% and 6.01%; dividend yield of
0.54% and 0.67%; volatility of 29.9% and 32.07%; and expected life of 6 years in
both years.

The following table summarizes information on outstanding and exercisable stock
options as of June 30, 1997:

<TABLE>
<CAPTION>
                                   OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE
                     -----------------------------------------------     ------------------------
                                       WEIGHTED AVERAGE     WEIGHTED                     WEIGHTED
                           NUMBER            REMAINING       AVERAGE           NUMBER     AVERAGE
       RANGE OF       OUTSTANDING     CONTRACTUAL LIFE      EXERCISE      EXERCISABLE    EXERCISE
EXERCISE PRICES     (IN THOUSANDS)              (YEARS)        PRICE    (IN THOUSANDS)      PRICE
---------------      ------------     ----------------      --------     ------------    --------
<S>                 <C>              <C>                    <C>          <C>             <C>
$  5.03--$10.66                22                 5.98       $  8.62               22     $  8.62
$ 16.50--$25.00               159                 3.43       $ 24.45              159     $ 24.45
$ 26.75--$34.50               519                 4.62       $ 30.51              518     $ 30.51
$ 35.00--$47.38             2,590                 6.90       $ 41.03            1,332     $ 39.42
$ 62.63--$86.00             1,185                 9.29       $ 77.03               54     $ 72.44
---------------      ------------     ----------------      --------     ------------    --------
$  5.03--$86.00             4,475                 7.14       $ 48.59            2,085     $ 36.56
===============      ============     ================      ========     ============    ========
</TABLE>

The company has elected to continue to follow APB Opinion No. 25 for accounting
for its employee stock options and stock purchase plans. Fair values of the
options and employee stock purchase plan shares were calculated using the
methodology prescribed by FAS 123.

The pro forma effects of using these fair values are presented below: 

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30 
(in thousands except per share data)                     1997            1996 
                                                     -----------     -----------
<S>                                                  <C>             <C>        
Net income - as reported                             $   253,344     $   147,912
Net income - pro forma                               $   237,616     $   139,641
Earnings per share - as reported                     $      5.54     $      3.22
Earnings per share - pro forma                       $      5.38     $      3.04
</TABLE>


                                       29

<PAGE>   23


EARNINGS PER SHARE
--------------------------------------------------------------------------------

In February 1997, the FASB issued Statement No. 128, "Earnings Per Share"
(FAS 128). The statement simplifies the standards for computing earnings per
share (EPS) previously found in APB Opinion No. 15, "Earnings Per Share," and
makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the financial
statements for all entities with complex capital structures. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of shares outstanding for the period. Diluted EPS is
computed similarly to fully diluted EPS under APB Opinion No. 15. FAS 128 must 
be adopted for the second quarter of fiscal 1998. The following table represents
pro forma disclosures of basic and diluted earnings per share in accordance with
FAS 128 assuming the standard was applied during all periods presented below:

<TABLE>
<CAPTION>
EARNINGS (LOSS) PER SHARE--PRO FORMA                                       BASIC                           DILUTED
                                                              ------------------------------    ------------------------------
YEARS ENDED JUNE 30                                             1997       1996       1995        1997       1996       1995 
-------------------                                           --------   --------   --------    --------   --------   --------
<S>                                                           <C>        <C>        <C>         <C>        <C>        <C>      
Earnings (loss) per share before extraordinary item and
  change in accounting principle                              $   5.70   $   3.33   $  (0.49)   $   5.54   $   3.22   $  (0.49)
Earnings (loss)per share on extraordinary item                      --         --      (0.15)         --         --      (0.15)
Earnings (loss) per share on change in accounting principle         --         --      (0.03)         --         --      (0.03)
                                                              --------   --------   --------    --------   --------   --------
Earnings (loss) per share                                     $   5.70   $   3.33   $  (0.67)   $   5.54   $   3.22   $  (0.67)
                                                              ========   ========   ========    ========   ========   ========
</TABLE>

The company has reported earnings per share data in accordance with APB Opinion
No. 15 as follows:

<TABLE>
<CAPTION>
EARNINGS (LOSS) PER SHARE--AS REPORTED                                      PRIMARY
                                                              ------------------------------------
YEARS ENDED JUNE 30                                              1997         1996         1995 
-------------------                                           ----------   ----------   ----------
<S>                                                           <C>          <C>          <C>        
Earnings (loss) per share before extraordinary item and
  change in accounting principle                              $     5.54   $     3.22   $    (0.49)
Earnings (loss) per share on extraordinary item                       --           --        (0.15)
Earnings (loss) per share on change in accounting principle           --           --        (0.03)
                                                              ----------   ----------   ----------
Earnings (loss) per share                                     $     5.54   $     3.22   $    (0.67)
                                                              ==========   ==========   ==========
</TABLE>

RESTRUCTURING AND DIVESTITURES
--------------------------------------------------------------------------------

Over the past several years, the company has strengthened its core businesses
and improved its results of operations through a series of initiatives. These
actions were designed to streamline the company's operations, reduce operating
costs, and position the company for profitable growth.

The company incurred a pretax restructuring charge of $53 million in the third
quarter of 1997 to implement several streamlining programs and eliminate
approximately 500 positions (the 1997 restructuring). A significant portion of
the restructuring expenses was for consolidating the Telecom and Electrical
Products divisions to achieve greater sales, manufacturing, and product
development efficiencies in their cable accessories businesses. Additional
one-time costs were incurred to consolidate the Electronics and PolySwitch
divisions, to streamline the worldwide operations of the commercial and
industrial infrastructure business segment, and to restructure the R&D
organization in the United Kingdom. Approximately $36 million of the 1997
restructuring charge is cash in nature and is expected to be funded through
operating cash flow. The 1997 restructuring is expected to be substantially
completed by the end of the next fiscal year. The remaining $17 million
represents asset writedowns of inventory, facilities, and machinery and
equipment related to discontinued products and consolidation of manufacturing
and distribution activities. As a result of the 1997 restructuring,
approximately 170 employees have separated from the company as of June 30, 1997.

The core business incurred a pretax restructuring charge of $44 million in the
third quarter of 1996 as the company moved to simplify operations and reduce
costs (the 1996 restructuring). The bulk of these actions affected Europe where
the company's manufacturing and support operations in Belgium, France, and the
United Kingdom have been reconfigured. In addition, a variety of other
restructuring actions at both divisional and corporate levels took place
throughout Raychem's worldwide organization. The charge, excluding $4 million in
net asset writedowns, was cash in nature, substantially paid in 1997, and funded
through operating cash flow. Approximately 700 positions were to be eliminated,
some portion of which might be replaced elsewhere. As of June 30, 1997,
approximately 600 employees have separated from the company as a result of the
1996 restructuring.

The core business incurred a pretax charge of $24 million in the first quarter
of 1995 for the restructuring of the Telecom Division. The restructuring charge
included $13 million for severance costs related to net workforce reduction of


                                       30
<PAGE>   24
340 employees, resulting from the closure of the division's manufacturing
operations in Germany and the restructuring of its North American activities.
The remaining charge of $11 million related to plant consolidations and the
shutdown of unprofitable product lines. The charge, excluding $8 million of
asset writedowns, was cash in nature and was funded through operating cash flow.
The 1995 restructuring was substantially completed by June 30, 1995.

The following table sets forth components of the company's "Provision for
restructuring and divestitures" for the years ended June 30, 1997, 1996, and
1995:

<TABLE>
<CAPTION>
PROVISION FOR RESTRUCTURING AND DIVESTITURES
YEARS ENDED JUNE 30                        EMPLOYEE        ASSET          
(in thousands)                                COSTS   WRITEDOWNS        LEASES        OTHER        TOTAL
-------------------                        --------   ----------      --------     --------     --------
<S>                                        <C>          <C>           <C>          <C>          <C>     
1997
  Employee severance and related costs     $ 35,533     $     --      $     --     $     --     $ 35,533
  Discontinued products                          --        4,806            --           --        4,806
  Machinery and equipment writedowns             --        5,075            --           --        5,075
  Vacated buildings                              --        6,798           600           --        7,398
                                           --------     --------      --------     --------     --------
Total 1997                                 $ 35,533     $ 16,679      $    600     $     --     $ 52,812
                                           ========     ========      ========     ========     ========
1996 
  Employee severance                       $ 37,907     $     --      $     --     $     --     $ 37,907
  Assets to be sold                              --        5,887            --           --        5,887
  Discontinued product inventory                 --          250            --           --          250
  Vacated buildings                              --           --           821           --          821
  Other                                          --           --            --          615          615
  Adjustment to prior year reserves              --       (2,470)           --          561       (1,909)
                                           --------     --------      --------     --------     --------
Total 1996                                 $ 37,907     $  3,667      $    821     $  1,176     $ 43,571
                                           ========     ========      ========     ========     ========
1995 
  Employee severance                       $ 13,200     $     --      $     --     $     --     $ 13,200
  Assets to be sold                              --        5,680            --        1,000        6,680
  Discontinued product inventory                 --        2,600            --           --        2,600
  Vacated buildings                              --           --           620           --          620
  Other                                          --           --            --          800          800
                                           --------     --------      --------     --------     --------
Total 1995                                 $ 13,200     $  8,280      $    620     $  1,800     $ 23,900
                                           ========     ========      ========     ========     ========
</TABLE>


The following table sets forth the company's restructuring reserves as of June
30, 1995, 1996, and 1997:

<TABLE>
<CAPTION>
RESTRUCTURING RESERVES                             EMPLOYEE         ASSET          
(in thousands)                                        COSTS    WRITEDOWNS        LEASES        OTHER         TOTAL
----------------------                             --------    ----------      --------     --------      --------
<S>                                                <C>           <C>           <C>          <C>           <C>     
Balance June 30, 1994                              $  1,338      $    852      $     30     $    452      $  2,672
                                                   --------      --------      --------     --------      --------
  Provision for restructuring and divestitures       13,200         8,280           620        1,800        23,900
  Adjustment to reserves                              1,300        (1,300)           --           --            -- 
  Cash payments                                     (13,676)           --          (650)      (1,237)      (15,563)
  Non-cash items                                         --        (7,832)           --           --        (7,832)
                                                   --------      --------      --------     --------      --------
Balance June 30, 1995                              $  2,162      $     --      $     --     $  1,015      $  3,177
                                                   --------      --------      --------     --------      --------
  Provision for restructuring and divestitures       37,907         3,667           821        1,176        43,571
  Adjustment to reserves                                 (9)           --            75          (66)           -- 
  Cash payments                                     (15,442)           --           (30)      (1,425)      (16,897)
  Non-cash items                                       (885)       (2,621)          (39)          --        (3,545)
                                                   --------      --------      --------     --------      --------
Balance June 30, 1996                              $ 23,733      $  1,046      $    827     $    700      $ 26,306
                                                   --------      --------      --------     --------      --------
  Provision for restructuring and divestitures       35,533        16,679           600           --        52,812
  Adjustment to reserves                                 --          (246)          (21)         267            -- 
  Cash payments                                     (23,432)           --          (372)        (498)      (24,302)
  Non-cash items                                     (3,815)      (15,643)         (363)        (164)      (19,985)
                                                   --------      --------      --------     --------      --------
Balance June 30, 1997                              $ 32,019      $  1,836      $    671     $    305      $ 34,831
                                                   ========      ========      ========     ========      ========
</TABLE>


                                       31



<PAGE>   25
ERICSSON RAYNET
--------------------------------------------------------------------------------

FORMATION OF ERICSSON RAYNET JOINT VENTURE

On November 16, 1994, the company and LM Ericsson (Ericsson), a Swedish
telecommunications company, formed a joint venture for the development,
manufacture, and marketing of fiber-optic communications systems for telephone
access networks worldwide. The joint venture, called "Ericsson Raynet," took
over the operations of the company's Raynet subsidiary. Ericsson Raynet is
organized as a partnership under Delaware law; the company's Raynet subsidiary
holds the company's interest in the joint venture. Ericsson is the managing
general partner of the joint venture.

In forming the joint venture, Raychem sold certain specified assets of its
Raynet subsidiary to Ericsson in exchange for $40 million in cash. Ericsson
contributed the purchased assets to the joint venture, and Raynet contributed
substantially all of its remaining assets and liabilities to the joint venture.
Funding of the joint venture was initially provided by the partners, generally
51% by Ericsson and 49% by Raynet, subject to Ericsson's loss allocation limit
described below.

During the first five to eight years of operation, subject to various
conditions, substantially all of the profits of the joint venture up to $156
million (plus incremental losses borne by Raynet on account of the loss cap)
were to be allocated to Raynet; thereafter, profits of the joint venture were to
be shared 51/49 by Ericsson and Raynet, respectively. Ericsson's share of the
joint venture's losses were capped at $25 million for the fiscal year ended June
30, 1995. In addition, restructuring costs in 1995 were shared 51/49 by Ericsson
and Raynet, respectively, without consideration of Ericsson's previously
mentioned loss allocation cap. During the fiscal year ended June 30, 1996, up to
$19.6 million of losses were allocated to Ericsson and Raynet in a 51/49 ratio;
additional losses of up to $10 million were allocated 100% to Raynet; and
additional losses were allocated to Ericsson and Raynet in a 51/49 ratio.

BellSouth Enterprises Inc. (BSE) had financed a portion of the software
development work at Raynet and held a royalty interest in the software related
revenues of Raynet. The royalty was based on a variable rate subject to meeting
certain annual royalty payment levels. With the creation of the joint venture,
this royalty payment was reconfigured. Raychem paid BSE $10 million in each of
November 1994, 1995, and 1996. Raychem agreed to make other royalty payments to
BSE contingent upon the revenues and earnings performance of the joint venture.

The company's loss resulting from these transactions, a pretax charge of $28
million, was included in the line item "Loss on reorganization/formation of
Ericsson Raynet joint venture and other Raynet items" in 1995. For purposes of
recording its loss, the company discounted its obligations to BSE to their
present value as of November 16, 1994, using a 7.97% discount rate.

AMENDMENT TO ERICSSON RAYNET JOINT VENTURE

During the third quarter of fiscal 1996, Raychem and Ericsson amended their
joint venture agreement. Raychem's equity in net loss of $30 million for the
year ended June 30, 1996, represents its share of Ericsson Raynet losses through
December 31, 1995. Effective January 1, 1996, Raychem no longer shares in
ongoing operating losses of the joint venture (other than potential warranty
claims if they are in excess of reserves that have been previously established).
Through December 31, 2000, Raychem may receive a modest income allocation from
the venture. BSE is entitled to receive a portion of any income or distributions
that Raychem receives. The reorganization of Ericsson Raynet resulted in a $2
million pretax charge that was included in the line item "Loss on
reorganization/formation of Ericsson Raynet joint venture and other Raynet
items" in 1996.

REVOLVING CREDIT AGREEMENT

On January 2, 1995, the company entered into a revolving credit agreement with
Ericsson Raynet. The company committed to make available to the joint venture a
maximum of $50 million, due in full on December 20, 1995, or earlier if the
revolving credit arrangement were terminated at the company's discretion. At
June 30, 1995, Ericsson Raynet had borrowed $4 million from the company under
the revolving credit agreement, which amount was included in "Other current
assets." In 1996, the company made advances to Ericsson Raynet of $23 million
under this credit agreement, increasing the amount due to the company to $27
million. As a result of the reconfiguration of the Ericsson Raynet partnership,
Raychem converted the amount due under the revolving credit agreement to
capital. Raychem subsequently terminated the revolving credit agreement.

INTEREST
--------------------------------------------------------------------------------

Interest expense, net, consisted of the following components: 

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
(in thousands)                                1997           1996           1995 
                                           -------        -------        -------
<S>                                        <C>            <C>            <C>    
Interest expense incurred                  $12,455        $19,216        $20,434
Interest expense capitalized                  (393)          (660)          (724)
Interest income                             (7,411)        (8,925)        (6,664)
                                           -------        -------        -------
Interest expense, net                      $ 4,651        $ 9,631        $13,046
                                           =======        =======        =======
</TABLE>


                                       32
<PAGE>   26

SALE OF ASSETS
--------------------------------------------------------------------------------

In the first quarter of 1997, the company recorded a $23 million pretax gain
arising from the sale of intellectual property relating to the use of nickel
titanium for medical applications to Medtronic, Inc. for $25 million. In the
fourth quarter of 1996, the company sold its shape memory metals components
business to Memry Corporation resulting in a pretax gain of $3 million. In the
fourth quarter of 1995, Johnson & Johnson acquired, in a tax-free
reorganization, all of the outstanding common stock of Menlo Care, Inc., a
company in which Raychem held a minority interest. This transaction resulted in
a pretax gain of $5 million. These gains were included in "Other (income)
expense, net."

As proceeds from the Menlo Care transaction, the company received cash and
shares of Johnson & Johnson common stock valued on the closing date at
approximately $6 million. These shares were subsequently sold in 1996, and
resulted in a $1 million gain which was included in "Other (income) expense,
net." 


EXTRAORDINARY ITEM--LOSS RELATED TO EARLY RETIREMENT OF DEBT 
--------------------------------------------------------------------------------

On November 1, 1994, the company prepaid the holders of its 9.55% privately
placed senior notes. Accordingly, the company recorded an extraordinary loss of
$6 million related to the early retirement of debt. The extraordinary loss
comprised a $7 million prepayment penalty and deferred debt issuance costs, net
of a $1 million deferred gain resulting from the termination of a related
interest rate swap agreement. There was no tax benefit recognized for the
extraordinary item because it increased U.S. losses. 


INCOME TAXES 
--------------------------------------------------------------------------------

Income (loss) before income taxes, extraordinary item, and change in accounting
principle consisted of the following components:

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30 
(in thousands)                                             1997        1996      1995  
                                                         --------   --------   ---------
<S>                                                      <C>        <C>        <C>     
U.S. operations, including Puerto Rico                   $ 95,692   $ 57,203   $(89,868)
Non-U.S. operations                                       132,048     88,927     89,598
                                                         --------   --------   --------
Income (loss) before income taxes, extraordinary item,
  and change in accounting principle                     $227,740   $146,130   $   (270)
                                                         ========   ========   ========

</TABLE>


The (benefit) provision for income taxes included: 

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30 
(in thousands)                                          1997        1996        1995 
                                                      --------    --------    ---------
<S>                                                   <C>         <C>         <C>     
Current provision for income taxes:
  U.S. federal, including Puerto Rico                 $  3,476    $  5,383    $    547
  U.S. state and local                                   4,994       2,990         510
  Non-U.S                                               50,448      35,198      16,656
                                                      ---------   ---------   --------
Total current provision for income taxes                58,918      43,571      17,713
                                                      ---------   ---------   --------
Deferred (benefit) provision for income taxes:
  U.S. federal, including Puerto Rico                  (67,835)    (39,789)        (12)
  U.S. state and local                                  (9,205)     (5,243)         --   
  Non-U.S                                               (7,482)       (321)      3,477
                                                      ---------   ---------   --------
Total deferred (benefit) provision for income taxes    (84,522)    (45,353)      3,465
                                                      ---------   ---------   --------
(Benefit) provision for income taxes                  $(25,604)   $ (1,782)   $ 21,178
                                                      =========   =========   ========

</TABLE>



                                       33

<PAGE>   27

The company has provided for U.S. federal income taxes and foreign withholding
taxes on the portion of the undistributed earnings of non-U.S. subsidiaries
expected to be remitted. Undistributed earnings intended to be reinvested
indefinitely in foreign subsidiaries were approximately $309 million at June 30,
1997. If these earnings were distributed, foreign withholding taxes would be
imposed; however, foreign tax credits would become available to substantially
reduce any resulting U.S. income tax liability.

Income from operations in certain countries is subject to reduced tax rates as a
result of satisfying certain commitments regarding employment and capital
investment. The exemption grants for these operations will expire at various
dates through 2010. The income tax benefits related to the tax status of these
operations are estimated to be $3 million for 1997, $4 million for 1996, and $3
million for 1995.

The company's (benefit) provision for income taxes differed from the amount
computed by applying the statutory U.S. federal income tax rate to income (loss)
before income taxes, extraordinary item, and change in accounting principle as
follows: 

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30 
(in thousands)                                                                 1997       1996        1995 
                                                                             --------   --------    --------
<S>                                                                          <C>        <C>         <C>     
(Benefit) provision for income taxes determined by applying U.S. statutory
  rate to income (loss) before income taxes, extraordinary item, and
  change in accounting principle                                             $ 79,709    $ 51,146   $    (95)
(Benefit) provision for income taxes related to deferred deductions, net
  operating losses, foreign tax credits, minimum tax credits, and changes
  in valuation allowance, net                                                (106,754)    (51,140)     32,994
Tax rate differences                                                           (2,394)     (6,809)    (11,722)
State and local taxes, net of federal income tax benefits                       3,251       1,635         338
Adjustment of prior years' taxes                                                1,570       1,056         230
Other items, net                                                                 (986)      2,330        (567)
                                                                             ---------   ---------   ---------
(Benefit) provision for income taxes                                         $(25,604)   $ (1,782)   $ 21,178)
                                                                             =========   =========   =========

</TABLE>

Future expirations of U.S. federal credit carryforwards, if not utilized, are as
follows: 1998--$0.5 million; 1999--$2.3 million; 2000--$2.0 million; 2001--$0.5
million; 2002--$0.3 million; 2003--$2.0 million; 2004--$6.8 million; 2005--$4.3
million; 2006--$4.3 million; and $8.0 million with no expiration.

U.S. federal tax return examinations have been completed for years through 1993.
The company believes adequate provisions for income tax have been recorded for
all years.

Deferred tax assets (liabilities) comprised the following: 

<TABLE>
<CAPTION>
JUNE 30 
(in thousands)                                                               1997         1996 
                                                                           ---------    ---------
<S>                                                                        <C>          <C>      
Assets:
  Difference between book and tax bases of assets                          $  64,938    $  54,401
  Compensation and benefits accrual                                            7,927        6,205
  Retirement benefits                                                          4,600        4,307
  Asset reserves                                                              11,693       10,558
  Restructuring and divestitures accruals                                     21,344       10,802
  Capitalization of research and experimental costs, net of amortization     121,925      157,381
  Difference between book and tax bases of investments                        14,011       14,477
  Net operating loss carryforwards                                             1,535        7,660
  General business credits                                                    26,005       30,406
  Minimum tax credit                                                           4,902        5,332
  Other                                                                       15,555       12,821
                                                                           ---------    ---------
Gross deferred tax assets                                                    294,435      314,350
Less: valuation allowance                                                   (104,132)    (213,271)
                                                                           ---------    ---------
Net deferred tax assets before tax liabilities                               190,303      101,079
                                                                           ---------    ---------
Liabilities:
  Difference between book and tax bases of assets                            (32,473)     (34,445)
  Compensation and benefits accrual                                           (2,310)      (1,602)
  Retirement benefits                                                        (14,873)      (6,161)
  Other                                                                      (12,227)     (20,628)
                                                                           ---------    ---------
Gross deferred tax (liabilities)                                             (61,883)     (62,836)
                                                                           ---------    ---------
Net deferred tax assets, net of tax liabilities                            $ 128,420    $  38,243
                                                                           =========    =========
</TABLE>



                                       34

<PAGE>   28

Balance sheet classification of the net deferred tax assets is as  follows:

<TABLE>
<CAPTION>
JUNE 30
(in thousands)                                                               1997         1996
                                                                           ---------    ---------
<S>                                                                        <C>          <C>      
Current assets                                                             $  20,187    $  11,000
Noncurrent assets                                                            136,325       56,203
Current liabilities                                                           (2,265)      (5,238)
Noncurrent liabilities                                                       (25,827)     (23,722)
                                                                           ---------    ---------
Net deferred tax assets                                                    $ 128,420    $  38,243
                                                                           =========    =========
</TABLE>

The deferred tax asset valuation allowance is primarily attributed to U.S.
federal and state deferred tax assets. Management believes sufficient
uncertainty exists regarding the realizability of a portion of these assets that
a valuation allowance is required. The decrease in the valuation allowance of
$109 million in 1997 and $80 million in 1996 was due primarily to a reassessment
of the company's likelihood of realizing its net deferred tax assets in the
future. Approximately $49 million of the valuation allowance at June 30, 1997,
relates to tax benefits arising from stock plans, which will be reported as an
increase to additional paid-in-capital when the final portion of the valuation
allowance related to the U.S. deferred tax asset is eliminated. 



                                       35

<PAGE>   29

WORLDWIDE OPERATIONS
--------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                        UNITED                               REST OF                CONSOLIDATED
(in thousands)                                          STATES       EUROPE      ASIA        WORLD    CONSOLIDATION     TOTAL 
--------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>  <C>          <C>         <C>         <C>             <C>       <C>        
Revenues from unaffiliated customers(a)        1997 $   661,208  $   694,722 $   269,228 $   139,548     $   --    $ 1,764,706

                                               1996     612,435      684,661     220,586     153,879         --      1,671,561

                                               1995     539,518      653,221     198,845     138,989         --      1,530,573
--------------------------------------------------------------------------------------------------------------------------------
Revenues between geographic areas(b)           1997     282,545      148,156      18,207       1,392     (450,300)        --   

                                               1996     243,120      130,581      11,677       1,485     (386,863)        --   

                                               1995     220,267      117,188      13,729         138     (351,322)        --   
--------------------------------------------------------------------------------------------------------------------------------
Total revenues                                 1997     943,753      842,878     287,435     140,940     (450,300)   1,764,706

                                               1996     855,555      815,242     232,263     155,364     (386,863)   1,671,561

                                               1995     759,785      770,409     212,574     139,127     (351,322)   1,530,573
--------------------------------------------------------------------------------------------------------------------------------
Operating income before provision for          1997      99,671      139,441      15,595      16,855         --        271,562
  restructuring and divestitures, and loss
  on reorganization/formation of Ericsson      1996      91,964      115,825       9,627       8,450         --        225,866
  Raynet joint venture and other Raynet
  items                                        1995      43,664      103,926       4,809       5,309         --        157,708
--------------------------------------------------------------------------------------------------------------------------------
Operating income including provision for       1997      74,626      112,845      14,552      16,727         --        218,750
  restructuring and divestitures, and
  loss on reorganization/formation of          1996      79,836       83,961       9,138       7,257         --        180,192
  Ericsson Raynet joint venture and other
  Raynet items                                 1995       6,532       85,126       4,809       5,309         --        101,776
--------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes,             1997      95,692      106,441      11,249      14,358         --        227,740
  extraordinary item, and change in
  accounting principle                         1996      57,203       55,186      21,534      12,207         --        146,130

                                               1995     (89,868)      60,983      18,583      10,032         --           (270)
--------------------------------------------------------------------------------------------------------------------------------
Identifiable assets                            1997     439,772      392,707     154,699      52,919         --      1,040,097

                                               1996     380,349      427,527     128,067      57,907         --        993,850

                                               1995     335,609      487,079     150,511      60,492         --      1,033,691
--------------------------------------------------------------------------------------------------------------------------------
Corporate assets                               1997     319,844       89,899      38,723      20,697         --        469,163

                                               1996     373,846      124,590      33,447      24,883         --        556,766

                                               1995     186,911      177,809      40,445      15,889         --        421,054
--------------------------------------------------------------------------------------------------------------------------------
Total assets                                   1997     759,616      482,606     193,422      73,616         --      1,509,260

                                               1996     754,195      552,117     161,514      82,790         --      1,550,616

                                               1995     522,520      664,888     190,956      76,381         --      1,454,745
--------------------------------------------------------------------------------------------------------------------------------

</TABLE>

------------

(a)   Revenues from unaffiliated customers in each geographic area reflect only
      shipments originating locally and exclude direct exports from other
      geographic areas.

(b)   Revenues between geographic areas are recorded on the basis of 
      arm's-length prices established by the company.



                                       36


<PAGE>   30

BUSINESS SEGMENTS
-------------------------------------------------------------------------------

During 1997, the company realigned its segment reporting to more closely reflect
the company's management structure. The company's financial results are now
reported as three business segments, described below, and the corporate group.

ELECTRONICS OEM COMPONENTS

This business segment serves original equipment manufacturers (OEMs) in
transportation, defense, and a wide range of commercial electronics industries.
It was previously reported as the electronics business segment.

TELECOMMUNICATIONS AND ENERGY NETWORKS

This business segment serves telephone operating companies, cable television
providers, electric utilities, and industrial customers. It was previously
reported as the Telecom Division, which was included in the telecommunications
business segment, and as the Electrical Products Division, which was included in
the industrial business segment. 

COMMERCIAL AND INDUSTRIAL INFRASTRUCTURE

This business segment serves customers who build and maintain the world's
commercial and industrial infrastructure, including industrial plants and
pipelines, gas and water utilities, and commercial construction industries. It
was previously reported as the Chemelex Division, which was included in the
industrial business segment.


Certain amounts previously reported as corporate group costs, notably certain
legal and patent and information technology costs, are now being allocated to
the business segments. Accordingly, previously reported amounts for the business
segments have been restated to conform to the fiscal 1997 presentation.


<TABLE>
<CAPTION>
                                                                          TELE-
                                                         ELECTRONICS  COMMUNICATIONS   COMMERCIAL       
                                                             OEM        AND ENERGY   AND INDUSTRIAL CORPORATE  CONSOLIDATED
(in thousands)                                            COMPONENTS     NETWORKS    INFRASTRUCTURE   GROUP       TOTAL 
---------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>      <C>          <C>            <C>          <C>        <C>       
Revenues(a)                                        1997     $757,356     $752,213       $255,137     $   --     $1,764,706

                                                   1996      670,595      757,215        243,751         --      1,671,561

                                                   1995      611,036      689,343        230,194         --      1,530,573
--------------------------------------------------------------------------------------------------------------------------
Operating income (loss) before provision for       1997      153,060      149,931         54,026      (85,455)     271,562
  restructuring and divestitures, and loss on 
  reorganization/formation of Ericsson Raynet      1996      119,963      160,323         36,891      (91,311)     225,866
  joint venture and other Raynet items
                                                   1995       94,506      111,106         27,008      (74,912)     157,708
--------------------------------------------------------------------------------------------------------------------------
Operating income (loss) including provision for    1997      140,590      120,998         51,497      (94,335)     218,750
  restructuring and divestitures, and loss on
  reorganization/formation of Ericsson Raynet      1996      106,400      148,114         21,623      (95,945)     180,192
  joint venture and other Raynet items
                                                   1995       94,506       87,206         27,008     (106,944)     101,776
--------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes,                 1997         --           --             --           --        227,740
  extraordinary item, and change in
  accounting principle                             1996         --           --             --           --        146,130

                                                   1995         --           --             --           --           (270)
--------------------------------------------------------------------------------------------------------------------------
Total assets                                       1997      493,256      433,285        113,556      469,163    1,509,260

                                                   1996      438,926      436,717        118,207      556,766    1,550,616

                                                   1995      448,858      452,436        132,397      421,054    1,454,745
--------------------------------------------------------------------------------------------------------------------------
Capital expenditures                               1997       33,003       32,145          5,556       19,781       90,485

                                                   1996       30,503       25,763          4,685       17,638       78,589

                                                   1995       37,179       33,680          9,637       13,545       94,041
--------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization                      1997       30,474       26,654          4,271       17,158       78,557

                                                   1996       32,326       27,450          5,429       14,222       79,427

                                                   1995       27,020       29,994          6,335       11,449       74,798
--------------------------------------------------------------------------------------------------------------------------

</TABLE>

------------

(a)   Revenues between segments are immaterial.



                                       37

<PAGE>   31
COMMITMENTS
--------------------------------------------------------------------------------

Total rental expense was $29 million in 1997 and $35 million in both 1996 and
1995. The company had commitments at June 30, 1997, to expend approximately $24
million for the construction or acquisition of additional property, plant, and
equipment. Annual future minimum lease payments at June 30, 1997, under
noncancelable operating leases, are as follows: 1998--$23 million; 1999--$17
million; 2000--$12 million; 2001--$9 million; 2002--$5 million; and
thereafter--$30 million.

CONTINGENCIES
--------------------------------------------------------------------------------

The company and its subsidiaries are parties to lawsuits, or may in the future
become parties to lawsuits, involving various types of commercial claims,
including, but not limited to, product liability, unfair competition, antitrust,
breach of contract, and intellectual property matters. Legal proceedings tend to
be unpredictable and costly and may be affected by events outside the control of
the company. The company maintains various levels of insurance to apply to
product liability and certain other claims in excess of deductibles. There is no
assurance that litigation will not have an adverse effect on the company's
financial position or results of operations.

Currently, the company's principal product liability litigation involves a
variety of claims arising from the company's heat-tracing and freeze-protection
products. The company's experience to date is that losses, if any, from such
claims have not had a material effect on the company's financial position or
results of operations. However, the company sells its products into applications
(including, for example, aerospace and automotive) where product liability
issues could be material. Effective March 31, 1996, the company increased its
insurance deductible for heat-tracing products. The company's insurance
deductible for claims arising from events prior to March 31, 1996, remains
unchanged.

The company's major litigation matters as of June 30, 1997, are described below.
These and certain other litigation matters with which the company is involved
are more fully described in the company's annual report on Form 10-K filed with
the Securities and Exchange Commission.

The company is a defendant in a product liability case in the United States
District Court in Seattle, All Alaskan Seafoods, Inc., et al. v. Raychem
Corporation, Minnesota Mining and Manufacturing Corporation and Marine Electric,
Inc., et al. The action arises out of a cargo vessel fire allegedly caused by a
heat-tracing product. Plaintiffs are seeking in excess of $150 million in
damages. The company believes that it has meritorious defenses to the claims
asserted in this case and intends to defend itself vigorously in this matter.

Four separate state actions based on essentially the same facts, alleging
wrongful distributor termination and antitrust claims, have been consolidated in
the Superior Court of San Mateo County, California, Unit Process Company, et al.
v. Raychem Corporation, et al. The dismissal in the United States District
Court, Northern District of California, of an action alleging essentially the
same facts was affirmed by the Ninth Circuit Court of Appeals in 1996. A motion
to dismiss the state claims is pending. The company believes that it has
meritorious defenses to the claims asserted in this case and intends to defend
itself vigorously in this matter.

On December 19, 1994, the company filed a complaint entitled Raychem Corporation
and Thermacon, Inc. v. Steven D. Hogge, Bourns, Inc., et al. in the Superior
Court of the State of California, County of San Mateo, which alleged, among
other claims, misappropriation of trade secrets. On May 2, 1995, a complaint
entitled Bourns, Inc. v. Raychem Corporation was filed in the United States
District Court, Central District of California, alleging antitrust law
violations. Neither complaint specifies the amount of monetary damages claimed,
although Bourns has stated its damage claim in an amount which would be material
to the company. Many of the claims asserted in the company's state action will
be tried with the federal action. The company believes that it has meritorious
claims and defenses in these cases and intends to vigorously litigate this
matter.

Additionally, the company has been named, among others, as a potentially
responsible party in administrative proceedings alleging that it may be liable
for the costs of correcting environmental conditions at certain hazardous waste
sites. At all of these sites, the company is alleged to be a de minimis
generator of hazardous wastes, and the company believes that it has limited or
no liability for cleanup costs at these sites.

SUBSEQUENT EVENT--COMMON STOCK SPLIT (Unaudited)
--------------------------------------------------------------------------------

On August 15, 1997, the company's board of directors approved a two-for-one
split of the company's outstanding Common Stock and an increase in the company's
authorized number of shares of Common Stock to 150 million shares (up from
72,150,000 authorized shares). Subject to shareholder approval, this stock split
and share authorization increase will become effective November 7, 1997. The
following table represents unaudited pro forma EPS data assuming the stock split
is approved:

<TABLE>
<CAPTION>
                                                             AS REPORTED                       PRO FORMA
EARNINGS (LOSS) PER SHARE                            --------------------------        ----------------------------
YEARS ENDED JUNE 30                                  1997        1996      1995        1997       1996       1995
-------------------                                  --------------------------        ----------------------------
<S>                                                  <C>        <C>       <C>          <C>        <C>       <C>    
Earnings (loss) per share before extraordinary
  item and change in accounting principle            $5.54      $3.22     $(0.49)      $2.77      $1.61     $(0.25)
Earnings (loss) per share on extraordinary item         --         --      (0.15)         --         --      (0.07)
Earnings (loss) per share on change in accounting
  principle                                             --         --      (0.03)         --         --      (0.02)
                                                     -----      -----     -------      -----      -----     -------
Earnings (loss) per share                            $5.54      $3.22     $(0.67)      $2.77      $1.61     $(0.34)
                                                     =====      =====     ======       =====      =====     ======   
</TABLE>


                                       38
<PAGE>   32

QUARTERLY FINANCIAL DATA (Unaudited)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
QUARTER ENDED                                                                 
(in thousands except share data)                        SEPTEMBER 30         DECEMBER 31       MARCH 31        JUNE 30
                                                        ------------         -----------       --------        -------
<S>                                                         <C>                 <C>            <C>            <C>     
FISCAL 1997:
  Revenues                                                 $ 430,311           $ 441,047      $ 427,878        $ 465,470
  Gross profit                                               221,235             225,366        208,882          228,295
  Provision for restructuring and divestitures                    --                  --         52,812               --
  Income before income taxes                                  88,683(a)           62,106          8,288           68,663
  Net income                                                  72,720(a)           52,435         68,453(b)        59,736
                                                           ---------       -------------      ---------    -------------
Per share data:
  Earnings per share                                       $    1.58(a)        $    1.14      $    1.49(b)     $    1.34
  Cash dividends per share                                      0.10                0.10           0.14             0.14
  Price range of Common Stock(c)                           59-76 1/2       70 3/8-86 3/8      79-89 1/2    60 1/2-83 3/4
                                                           ---------       -------------      ---------    -------------
FISCAL 1996:
  Revenues                                                 $ 410,515           $ 411,051      $ 417,819        $ 432,176
  Gross profit                                               215,601             214,390        210,242          215,976
  Provision for restructuring and divestitures                    --                  --         43,571               --
  Loss on reorganization of Ericsson Raynet joint 
    venture                                                       --                  --          2,103               --
  Equity in Ericsson Raynet net loss(d)                       11,124              18,694             --               --
  Income before income taxes                                  45,440              35,311         10,946           54,433
  Net income                                                  32,430              25,102         41,708(b)        48,672
                                                           ---------       -------------      ---------    -------------
Per share data:
  Earnings per share                                       $    0.72           $    0.55      $    0.89(b)     $    1.05
  Cash dividends per share                                      0.08                0.08           0.10             0.10
  Price range of Common Stock(c)                           36 1/2-47       43 3/8-59 3/4      52-69 3/4        63-80 1/2
                                                           ---------       -------------      ---------    -------------
</TABLE>

------------

(a)   Includes a $23 million pretax gain in the quarter ended September 30,
      1996, related to the sale of intellectual property.

(b)   Includes a discrete tax benefit of $55 million and $25 million in the
      quarter ended March 31, 1997 and 1996, respectively, related to the
      reassessment of the company's deferred tax asset valuation allowance.

(c)   The price range of Common Stock is as reported on the New York Stock
      Exchange composite tape.

(d)   Ericsson Raynet results are presented on the equity basis of accounting
      through December 31 in fiscal 1996. Following the reorganization of
      Ericsson Raynet, effective January 1, 1996, Raychem's interest in the
      joint venture is accounted for on the cost basis.

Raychem Corporation Common Stock is listed on the New York Stock Exchange. The
number of stockholders as of August 18, 1997, was 6,342. Dividends have been
paid quarterly since the second quarter of fiscal 1978. The closing price of the
company's Common Stock on the New York Stock Exchange composite tape on August
18, 1997, was $94 1/2 per share.



                                       39


<PAGE>   33

TEN-YEAR SUMMARY
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
(dollars in thousands except per share amounts)                               1997          1996           1995 
-------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>            <C>            <C>        
RAYCHEM CORPORATION Consolidated (a)                                                                             
 INCOME DATA                                                                                                   
  Revenues                                                                $ 1,764,706    $ 1,671,561    $ 1,530,573
  Provision for restructuring and divestitures                            $    52,812    $    43,571    $    23,900
  Loss on reorganization/formation of Ericsson Raynet joint venture
    and other Raynet items                                                $        --    $     2,103    $    32,032
  Equity in net loss of Ericsson Raynet                                   $        --    $    29,818    $    85,946
  Income (loss) before income taxes, extraordinary item, and changes
    in accounting principles                                              $   227,740    $   146,130    $      (270)
  Net income (loss)                                                       $   253,344    $   147,912    $   (29,243)
-------------------------------------------------------------------------------------------------------------------
 SHARE DATA
  Earnings (loss) per share                                               $      5.54    $      3.22    $     (0.67)
  Cash dividends per share                                                $      0.48    $      0.36    $      0.32
  Weighted average number of shares outstanding                            45,724,198     45,908,894     43,538,028
-------------------------------------------------------------------------------------------------------------------
 BALANCE SHEET DATA
  Total assets                                                            $ 1,509,260    $ 1,550,616    $ 1,454,745
  Long-term debt                                                          $   164,004    $   148,352    $   263,552
  Total debt                                                              $   223,819    $   302,981    $   293,226
  Stockholders' equity                                                    $   845,019    $   841,206    $   749,658
  Increase (decrease) in debt net of cash                                 $    58,370    $   (96,293)   $   (22,299)
-------------------------------------------------------------------------------------------------------------------
 OTHER SIGNIFICANT MEASURES
  Gross profit as a percent of revenues                                          50.1%          51.2%          50.4%
  Research and development expense as a percent of revenues                       6.8%           7.3%           7.8%
  Selling, general, and administrative expense as a percent of revenues          27.9%          30.4%          32.4%
  Net debt as a percent of stockholders' equity                                  16.2%           9.4%          23.4%
  Number of employees                                                           8,650          8,697          9,496
  Revenues per average number of employees                                $       203    $       184    $       151
-------------------------------------------------------------------------------------------------------------------
RAYNET CORPORATION
  Revenues                                                                $        --    $        --    $        --
  Net (loss) income                                                       $        --    $        --    $        --
-------------------------------------------------------------------------------------------------------------------
</TABLE>

------------
(a)   Raynet Corporation and subsidiaries' results are presented on the equity
      basis of accounting in 1995 and through December 31 in fiscal 1996 versus
      consolidated in prior years. Following the reorganization of Ericsson
      Raynet, effective January 1, 1996, Raychem's interest in the joint venture
      is accounted for on the cost basis.

(b)   Restated to reflect reclassification of royalty and licensing income from
      "Other expense, net" to "Revenues."

(c)   Reflects reclassification of litigation settlement to "Other expense,
      net."

(d)   Cash exceeded debt at June 30.



                                       40
<PAGE>   34

<TABLE>
<CAPTION>

   1994               1993            1992           1991            1990           1989          1988 
----------------------------------------------------------------------------------------------------------
<S>               <C>             <C>            <C>             <C>            <C>           <C>        


$ 1,461,532       $ 1,385,730     $ 1,301,601(b) $ 1,250,772(b)  $ 1,114,713(b) $ 1,083,028    $ 1,094,733 
$        --       $        --     $    43,300    $     3,697     $    90,000    $        --    $        -- 

$        --       $        --     $        --    $        --     $        --    $        --    $        -- 
$        --       $        --     $        --    $        --     $        --    $        --    $        -- 

$    33,745       $    39,584     $    12,585(c) $    (3,109)    $   (86,261)   $    63,767    $   169,304 
$     1,679       $     9,625     $   (24,808)   $   (23,429)    $  (111,398)   $    36,347    $   125,285 
----------------------------------------------------------------------------------------------------------
                                                                                                    
$      0.04       $      0.23     $     (0.64)   $     (0.63)    $     (3.12)   $      1.04    $      3.69 
$      0.32       $      0.32     $      0.32    $      0.32     $      0.32    $      0.30    $      0.22 
 43,290,797        42,232,289      39,030,049     37,134,161      35,708,523     34,928,935     33,979,365
----------------------------------------------------------------------------------------------------------
                                                                                                    
$ 1,399,015       $ 1,332,270     $ 1,392,606    $ 1,234,860     $ 1,270,834    $ 1,172,783    $ 1,148,975 
$   244,681       $   233,853     $   229,768    $   233,347     $    31,087    $    29,029    $    35,458 
$   275,548       $   275,562     $   257,763    $   265,340     $   212,954    $   130,294    $   129,246 
$   732,924       $   689,504     $   715,188    $   651,973     $   690,467    $   734,286    $   722,155 
$    55,842       $    32,715     $   (57,610)   $    90,589     $    98,633    $   (19,132)   $   (80,857)
----------------------------------------------------------------------------------------------------------
                                                                                                    
       46.6%             48.7%           48.4%          48.6%           49.6%          52.8%          54.3% 
        9.3%              9.3%           10.8%          11.2%           11.0%          11.1%           7.7% 
       33.6%             34.6%           33.6%          35.8%           37.5%          36.7%          32.8% 
       26.9%             20.5%           15.2%          25.5%           11.0%           (d)            (d) 
     10,769            10,772          11,187         11,406          11,065         11,451         10,909 
$       136       $       126     $       115    $       111     $        99    $        97    $       105
----------------------------------------------------------------------------------------------------------
                                                                                                    
$    57,784       $     9,671     $    16,594    $    11,500     $     7,625    $     2,960    $    25,160 
$  (102,993)      $   (92,551)    $   (89,334)   $   (73,959)    $   (64,484)   $   (54,307)   $     2,562 
----------------------------------------------------------------------------------------------------------
</TABLE>


                                       41
<PAGE>   35


                                                             Exhibit 13 Appendix

                            OMITTED GRAPHIC MATERIAL

The following graphic material, included in the original paper format, has been
excluded from the electronic filing of the 1997 Annual Report (Exhibit 13 to
this filing). This graph appears in the section entitled "Financial Review" of
the 1997 Annual Report.

              "ONGOING" PRETAX INCOME (excludes Ericsson Raynet and unusual
              items) A bar chart (dollars in millions) depicting: $146 in 1995;
              $230 in 1996 and $263 in 1997.