Exhibit
99.1




Audited
Consolidated Financial Statements
 for the
Fifteen Months Ended December 31, 2004 and the Year Ended September 30,
2003











Consolidated
Financial Statements


(Expressed
in Canadian dollars)







**ROYAL
GROUP**


**TECHNOLOGIES
LIMITED**





Fifteen
months ended December 31, 2004 and


year
ended September 30, 2003




















**KPMG
      LLP**
      **Chartered
      Accountants**
      Suite
      3300 Commerce Court West
      PO
      Box 31 Stn Commerce Court
      Toronto
      ON M5L 1B2
      Canada
    Telephone
      Fax
      Internet
    (416)
      777-8500
      (416)
      777-8818
      www.kpmg.ca









**AUDITORS'
REPORT TO THE SHAREHOLDERS**






We have
audited the consolidated balance sheets of Royal Group Technologies Limited as
at December 31, 2004 and September 30, 2003 and the consolidated statements of
earnings, retained earnings and cash flows for the fifteen months ended December
31, 2004 and year ended September 30, 2003. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.




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




In our
opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2004 and
September 30, 2003 and the results of its operations and its cash flows for the
fifteen months ended December 31, 2004 and year ended September 30, 2003 in
accordance with Canadian generally accepted accounting principles.










Chartered
Accountants







Toronto,
Canada




March
30, 2005






KPMG LLP, a Canadian
limited liability partnership is the Canadian
 member firm of KPMG
International, a Swiss cooperative.










**ROYAL
GROUP TECHNOLOGIES LIMITED**


Consolidated
Balance Sheets


(In
thousands of Canadian dollars)





December
31, 2004 and September 30, 2003







2004
    
    2003AssetsCurrent
      assets:Cash
    
    $
    112,088
    
    $
    -Accounts
      receivable (note 5)
    
    
    257,346
    
    
    342,601Inventories
      (note 6)
    
    
    456,339
    
    
    401,619Prepaid
      expenses
    
    
    13,893
    
    
    20,498839,666
    
    
    764,718Property,
      plant and equipment (note 7)
    
    
    1,330,600
    
    
    1,482,723Future
      income tax assets (note 14)
    
    
    16,561
    
    
    26,600Goodwill
    
    
    213,620
    
    
    218,679Other
      assets (note 8)
    
    
    44,525
    
    
    37,734$
    2,444,972
    
    $
    2,530,454Liabilities
      and Shareholders' EquityCurrent
      liabilities:Bank
      indebtedness (note 10)
    
    $
    -
    
    $
    355,080Accounts
      payable and accrued liabilities (note 9)
    
    
    268,348
    
    
    258,592Term
      bank loan (note 10)
    
    
    324,836
    
    
    -Term
      debt due within one year (note 10)
    
    
    18,303
    
    
    21,266611,487
    
    
    634,938Term
      debt (note 10)
    
    
    303,214
    
    
    383,332Future
      income tax liabilities (note 14)
    
    
    149,049
    
    
    131,169Minority
      interest
    
    
    15,761
    
    
    15,603Shareholders'
      equity:Capital
      stock (note 11)
    
    
    633,754
    
    
    632,711Contributed
      surplus (note 1(j))
    
    
    3,703
    
    
    74Retained
      earnings
    
    
    878,779
    
    
    841,930Currency
      translation adjustment (note 1(h))
    
    
    (150,775
    )
    
    (109,303
    )1,365,461
    
    
    1,365,412Investigations
      (note 2)Subsequent
      event (note 10)Commitments
      and contingencies (notes 18 and 19)$
    2,444,972
    
    $
    2,530,454







See
accompanying notes to consolidated financial statements.




On
behalf of the Board:


"V.
James Sardo"
 Director,
Interim President and
 Chief
Executive Officer
  "Robert
Lamoureux"
 Director,
Interim Chief Financial Officer





1





**ROYAL
GROUP TECHNOLOGIES LIMITED**
Consolidated
Statements of Earnings
(In
thousands of Canadian dollars, except per share amounts)

Fifteen
months ended December 31, 2004 and year ended September 30,
2003


2004
    
    2003Net
      sales
    
    $
    2,335,131
    
    $
    1,885,397Cost
      of sales
    
    
    1,735,389
    
    
    1,497,277Gross
      profit
    
    
    599,742
    
    
    388,120Operating
      expenses
    
    
    472,964
    
    
    402,127Earnings
      (loss) before the undernoted
    
    
    126,778
    
    
    (14,007
    )Interest
      and financing charges (note 13)
    
    
    50,651
    
    
    50,712Earnings
      (loss) before income taxes and minority interest
    
    
    76,127
    
    
    (64,719
    )Income
      taxes (recovery) (note 14)
    
    
    38,960
    
    
    (4,483
    )Earnings
      (loss) before minority interest
    
    
    37,167
    
    
    (60,236
    )Minority
      interest
    
    
    (318
    )
    
    2,025Net
      earnings (loss)
    
    $
    36,849
    
    $
    (58,211
    )Earnings
      (loss) per share (note 12):Basic
    
    $
    0.39
    
    $
    (0.62
    )Diluted
    
    
    0.39
    
    
    (0.62
    )







Consolidated
Statements of Retained Earnings
 (In
thousands of Canadian dollars)
 
 Fifteen
months ended December 31, 2004 and year ended September 30,
2003





2004
    
    2003Retained
      earnings, beginning of period
    
    $
    841,930
    
    $
    900,141Net
      earnings (loss)
    
    
    36,849
    
    
    (58,211
    )Retained
      earnings, end of period
    
    $
    878,779
    
    $
    841,930




See
accompanying notes to consolidated financial statements.





2




**ROYAL
GROUP TECHNOLOGIES LIMITED**
 Consolidated
Statements of Cash Flows
 (In
thousands of Canadian dollars)
 
 Fifteen
months ended December 31, 2004 and year ended September 30,
2003


2004
    
    2003Cash
      provided by (used in):Operating
      activities:Net
      earnings (loss)
    
    $
    36,849
    
    $
    (58,211
    )Items
      not affecting cash (note 16(a))
    
    
    208,377
    
    
    247,188Change
      in non-cash working capital (note 16(b))
    
    
    25,436
    
    
    45,944270,662
    
    
    234,921Financing
      activities:Increase in
      term bank loan (note 10)
    
    
    500,000
    
    
    -Repayment of
      term bank loan (note 10)
    
    
    (175,164
    )
    
    -Repayment of
      term debt
    
    
    (57,456
    )
    
    (101,686
    )Proceeds from
      issuance of shares under stock option plan (note 11)
    
    
    1,043
    
    
    14268,423
    
    
    (101,672
    )Investing
      activities:Acquisition of
      property, plant and equipment
    
    
    (99,725
    )
    
    (93,533
    )Acquisitions of
      other businesses
    
    
    -
    
    
    (4,525
    )Proceeds from
      sale of non-strategic assets
    
    
    31,934
    
    
    -Change
      in investments
    
    
    (2,014
    )
    
    -Change
      in other assets
    
    
    (1,088
    )
    
    820Change
      in minority interest
    
    
    338
    
    
    (5,889
    )(70,555
    )
    
    (103,127
    )Effect
      of foreign exchange rate changes on cash
    
    
    (1,362
    )
    
    (1,417
    )Increase
      in cash
    
    
    467,168
    
    
    28,705Bank
      indebtedness, beginning of period
    
    
    (355,080
    )
    
    (383,785
    )Cash
      (bank indebtedness), end of period
    
    $
    112,088
    
    $
    (355,080
    )Supplemental
      cash flow information:Interest and
      financing charges paid
    
    $
    51,477
    
    $
    47,263Income
      taxes paid
    
    
    8,892
    
    
    -Income
      tax refund received
    
    
    -
    
    
    7,884







See
accompanying notes to consolidated financial statements.












3




**ROYAL GROUP
TECHNOLOGIES LIMITED**


Notes to
Consolidated Financial Statements


(In thousands of
Canadian dollars, except per share amounts)





Fifteen months
ended December 31, 2004 and year ended September 30, 2003




**1.**
    **Significant
      accounting policies:**These
      consolidated financial statements have been prepared by management in
      accordance with Canadian generally accepted accounting principles. The
      more significant accounting principles used by management are outlined
      below. A reconciliation to accounting principles generally accepted in the
      United States is shown in note 21.(a)
    Change
      in year end:Royal
      Group Technologies Limited (the "Company") changed its fiscal year end to
      December 31 from September 30 to coincide with the calendar year. The
      change to a calendar year basis will be more consistent with its sales
      planning and business reporting activities and programs. Accordingly, the
      December 31, 2004 financial statements cover a fifteen month fiscal
      period.(b)
    Principles
      of consolidation:These
      consolidated financial statements include the accounts of the Company, its
      subsidiaries and its proportionate share of the accounts of its joint
      ventures. Investments in joint ventures have been proportionately
      consolidated based on the Company's ownership interest. All significant
      intercompany profits, transactions and balances have been eliminated on
      consolidation.Investments
      over which the Company is able to exercise significant influence are
      accounted for using the equity method and investments where the Company
      does not control or exercise significant influence are accounted for using
      the cost method.(c)
    Use
      of estimates:The
      preparation of the consolidated financial statements requires management
      to make estimates and assumptions that affect the amounts reported in the
      consolidated financial statements and accompanying notes. Those estimates
      and assumptions are based on management's best knowledge of current events
      and actions that the Company may undertake in the future. The most
      significant estimates that the Company is required to make relate to
      allowance for doubtful accounts, inventory obsolescence, income taxes and
      possible losses arising from lawsuits. Actual results could differ from
      those estimates.








4






**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**1.**
    **Significant
      accounting policies (continued):**(d)
    Inventories:Inventories
      are stated at the lower of cost, using the first-in, first-out method, and
      replacement cost for raw materials and work in process, and net realizable
      value for finished goods.(e)
    Property,
      plant and equipment:Property,
      plant and equipment are stated at cost less accumulated amortization.
      Interest costs relating to loans used to fund major capital expenditures
      are capitalized up to the time the capital asset is placed into productive
      use. Amortization is provided on a straight-line basis over the estimated
      useful lives of the assets as follows:





Buildings
    
    20
      - 40 yearsPlant
      equipment
    
    10
      - 15 yearsDies
      and moulds
    
    4
      - 10 yearsOffice
      and computer equipment and computer software
    
    
    3
      - 10 yearsAircraft
      and transport equipment
    
    
    5
      - 20 years





An
      impairment loss is recognized when the carrying value of an asset exceeds
      the total undiscounted cash flows expected from its use and eventual
      disposition. The impairment recognized is measured as the amount by which
      the carrying value of the asset exceeds its fair value.(f)
    Goodwill
      and other assets:Goodwill
      is the residual amount that results when the purchase price of an acquired
      business exceeds the sum of the amounts allocated to the assets acquired,
      less liabilities assumed, based on their fair values. Goodwill is
      allocated as of the date of the business combination to the Company's
      reporting units that are expected to benefit from the synergies of the
      business combination. Goodwill is not amortized and is tested for
      impairment annually, or more frequently if events or changes in
      circumstances indicate that the asset might be impaired. The impairment
      test is carried out in two steps. In the first step, the carrying amount
      of the reporting unit is compared with its fair value. When the fair value
      of a reporting unit exceeds its carrying amount, goodwill of the reporting
      unit is considered not to be impaired and the second step of the
      impairment test is unnecessary.










5





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003




**1.**
    **Significant
      accounting policies (continued):**The
      second step is carried out when the carrying amount of a reporting unit
      exceeds its fair value, in which case the impaired fair value of the
      reporting unit's goodwill is compared with its carrying amount to measure
      the amount of the impairment loss, if any. The implied fair value of
      goodwill is determined in the same manner as the value of goodwill is
      determined in a business combination described above by allocating the
      fair value of the reporting unit in a manner similar to a purchase
      allocation. When the carrying amount of a reporting unit's goodwill
      exceeds the implied fair value of the goodwill, an impairment loss is
      recognized in an amount equal to the excess and is presented as a separate
      line item in the statement of earnings before extraordinary items and
      discontinued operations.The
      Company completed the annual impairment assessment and no impairment loss
      was recorded in the fifteen months ended December 31, 2004 and in the year
      ended September 30, 2003.Intangible
      assets must meet certain criteria to be recognized and reported separately
      from goodwill. The Company has definite life intangible assets which
      consist of patents. These were evaluated, including the estimates of
      remaining useful lives, and they continue to be amortized on a
      straight-line basis over 5 to 17 years.Deferred
      financing costs are amortized over the life of the related debt
      instruments.(g)
    Revenue
      recognition:Revenue
      from product sales is recognized pursuant to sales contracts, when goods
      are shipped, at which time a provision for estimated returns is recorded.
      In addition, the price of the sale must be fixed or determinable, there
      must be no further performance obligations and collection must be
      reasonably assured.








6





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003


**1.****Significant accounting policies (continued):**(h)Foreign currency translation:The accounts of the Company's foreign operations that are considered to be self-sustaining are translated into the functional currency of the entity using the current rate method. Assets and liabilities are translated at the exchange rates in effect at the consolidated balance sheet dates and revenue and expenses are translated at average exchange rates for the period. Gains or losses arising from the translation of the financial statements of self-sustaining foreign operations are deferred in a "Currency Translation Adjustment" account in shareholders' equity until there is a realized reduction in the net investment. The change in the balance of currency translation adjustment is due predominantly to the strengthening of the Canadian dollar against the U.S. dollar.The accounts of the Company's foreign operations that are considered to be integrated are translated into the functional currency of the entity using the temporal method.Gains and losses on the translation of the U.S. dollar-denominated senior notes (note 10) are designated as a hedge of the U.S. dollar net investment in the self-sustaining operations and are offset against the exchange gains or losses arising on translation of the financial statements of the foreign operations and are included in the currency translation adjustment.Monetary assets and liabilities of the Company and its domestic subsidiaries denominated in foreign currencies are translated into the functional currency of the entity at the rate of exchange in effect at the consolidated balance sheet dates. All revenue and expenses denominated in foreign currencies are translated at average rates in effect during the period. Translation gains and losses are included in the consolidated statements of earnings.(i)Research and development:The Company carries on various applied research and development ("R&D") programs, certain of which are partially funded by governments, including investment tax credits. R&D expenditures are charged to earnings in the period in which they are incurred. Funding received is accounted for using the cost reduction approach. Total R&D expenditures net of recoveries from governments were approximately $16,157 (2003 - $14,985), of which $8,416 (2003 - $7,005) was expensed to cost of sales.








7


**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003




**1.**
    **Significant
      accounting policies (continued):**(j)
    Stock-based
      compensation plans:(i)
    Long-term
      incentive plan (formerly the 1994 Stock Option Plan):The
      Company accounts for employee stock options by measuring the compensation
      costs for options granted on or after October 1, 2002 under the fair
      value-based method of accounting, using the Black-Scholes option pricing
      model.(ii)
    Restricted
      stock unit plan:During
      the fifteen months ended December 31, 2004, the Company established a
      Restricted Stock Unit Plan ("RSUP") for the purposes of offering the
      exchange of options granted under the Company's Long-Term Incentive Plan
      (formerly the Company's 1994 Stock Option Plan). Details of the exchange
      are described in note 11.(iii)
    Senior
      management incentive plan:During
      the fifteen months ended December 31, 2004, the Company established a
      Senior Management Incentive Plan ("SMIP"). This plan provides for the
      issuance of a maximum of 1,400,000 restricted stock units ("RSUs").
      Details of this plan are described in note 11.(k)
    Income
      taxes:The
      Company applies the asset and liability method of accounting for income
      taxes, whereby future tax assets and liabilities are recognized for the
      future tax consequences attributable to differences between the financial
      statement carrying amounts of existing assets and liabilities and their
      respective tax bases. Future income tax assets and liabilities are
      measured using enacted or substantively enacted tax rates expected to
      apply to taxable income in the periods in which those temporary
      differences are expected to be recovered or settled. The effect on future
      income tax assets and liabilities of a change in tax laws and tax rates is
      recognized in income in the period that includes the date of enactment or
      substantive enactment.





8





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**1.**
    **Significant
      accounting policies (continued):**In
      assessing the realizability of future income tax assets, management
      considers whether it is more likely than not that some portion or all of
      the future income tax assets will be realized. The ultimate realization of
      future income tax assets is dependent upon the generation of future
      taxable income during the periods in which those temporary differences are
      deductible. Management considers the scheduled reversal of future income
      tax liabilities, projected future taxable income, the character of the tax
      assets and the tax planning strategies in making this assessment. Based
      upon projections of future taxable income over the periods in which the
      future income tax assets are deductible, management believes the Company
      will realize the benefits of these assets.(l)
    Asset
      retirement obligations:Effective
      for the fifteen months ended December 31, 2004, the Company adopted the
      new Canadian Institute of Chartered Accountants ("CICA") accounting
      standard for asset retirement obligations ("Section 3110"). The standard
      addresses the recognition and measurement of legal obligations associated
      with the retirement of property and equipment when those obligations
      result from the acquisition, construction, development or normal operation
      of the asset. The standard requires that the fair value of a liability for
      an asset retirement obligation be recognized in the period in which it is
      incurred if a reasonable estimate of fair value can be made. The fair
      value of the liability is added to the carrying amount of the associated
      asset and is amortized to earnings on the same basis as the associated
      assets. This accretion amount is charged to earnings for the period. The
      impact of the adoption of this new standard in the fifteen months ended
      December 31, 2004 is not significant to the Company's financial
      statements.





9




**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003


**1.**
    **Significant
      accounting policies (continued):**(m)
    Guarantees:Effective
      for the fifteen months ended December 31, 2004, the Company adopted
      Accounting Guideline 14, "Disclosure of Guarantees", issued by the CICA in
      February 2003. This guideline expands on previously issued accounting
      guidance and requires additional disclosure by a guarantor in its
      financial statements. This guideline defines a guarantee to be a contract
      (including indemnity) that contingently requires the Company to make
      payments to the guaranteed party based on: (i) changes in an underlying
      interest rate, foreign exchange rate, equity or commodity instrument,
      index or other variable, that is related to an asset, liability or an
      equity security of the counterparty, (ii) failure of another party to
      perform under an obligating agreement or (iii) failure of a third party to
      pay indebtedness when due. The impact of the adoption of this new
      guideline in the fifteen months ended December 31, 2004 is not significant
      to the Company's financial statements.(n)
    Comparative
      figures:Certain
      comparative figures have been reclassified to conform with the financial
      statement presentation adopted in the current year.**2.**
    **Investigations:**(a)
    Background:The
      Company established a Special Committee in late December 2003 as a result
      of the Company being advised that the Ontario Securities Commission
      ("Commission") was conducting a regulatory investigation of the Company.
      The Special Committee was asked by the board of directors to conduct an
      independent inquiry into the principal subject matter of the investigation
      - being the transactions between the Company and Royal St. Kitts Beach
      Resort Limited (the "Resort"). The Resort ownership included the following
      directors or former directors or executive officers or former executive
      officers and their approximate percentage ownership: Vic De Zen, former
      Chairman, President, Chief Executive Officer and the controlling
      shareholder (59.9%), Douglas Dunsmuir, former President and Chief
      Executive Officer (5%), Ron Goegan, former Chief Financial Officer (0.02%)
      and Angelo Bitondo, President Custom Profiles, Outdoor Products and Royal
      Building Systems (0.01%). The latter two individuals divested of their
      ownership in December 2004. In addition, the following former
      non-executive employees of the Company and their approximate percentage
      ownership in the Resort are as follows: Fortunato Bordin (20%) and Domenic
      D'Amico (15%).










10




**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003




**2.**
    **Investigations
      (continued):**The
      Special Committee consisted solely of three independent directors, at that
      time, who retained independent legal counsel who in turn retained forensic
      accountants to assist in the investigation. At the conclusion of the
      investigation based on information available to them, the Special
      Committee recommended that no further investigative actions be taken as of
      April 21, 2004.On
      October 15, 2004, the Company announced that the Commission provided the
      Company with a copy of a Production Order on October 12, 2004 that was
      issued on October 5, 2004 by a Justice in Ontario addressed to the
      Company's lead bank. The Order, which relates to the time period January
      1, 1996 to July 30, 2004, requires that certain documents be provided by
      such bank to the Royal Canadian Mounted Police ("RCMP") in relation to
      four companies, Royal Building Systems, a subsidiary of the Company, the
      Resort and two other affiliates of the Resort.On
      October 18, 2004, the Company received a letter from the RCMP advising
      that the Company was a target of the RCMP's
  investigation.On
      October 21, 2004, the Company announced that it expanded the Special
      Committee of its board of directors that was established in December 2003.
      The Special Committee was expanded to comprise all five of the independent
      directors of the Company at that time. The mandate of the Special
      Committee was also broadened to include all aspects of the investigations
      and inquiries by securities regulatory authorities and the RCMP and any
      similar or related investigations and inquiries that may be commenced by
      these or other authorities, all news releases and other communications
      with the public and to make a determination with respect to the role
      within the Company of any individuals who are currently involved in the
      regulatory or law enforcement investigations and/or
      proceedings.





11





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**2.**
    **Investigations
      (continued):**On
      October 28, 2004, the Company announced that on October 27, 2004, it was
      provided with a copy of a second Production Order issued on October 25,
      2004 by a Justice in Ontario addressed to the Company's lead bank. The
      second Order, which relates to the time period January 1, 1996 to October
      25, 2004, requires that certain documents be provided by the bank to the
      RCMP in relation to certain individuals and a number of entities,
      including the Company.Both
      Orders include allegations of actions contrary to the Criminal Code and
      include allegations of intent to defraud the shareholders and creditors of
      the Company and deceive the shareholders and others by circulating or
      publishing in a prospectus or statement or account which was known to be
      false and theft. The Orders collectively named the controlling shareholder
      and non-executive chairman of the Company, the president and chief
      executive officer and the chief financial officer at that time, and
      certain non-executive employees of the Company at that time and a former
      officer of the Company.On
      November 8, 2004, the Company announced that the Special Committee of
      independent directors retained independent legal counsel and independent
      forensic accountants to assist it in the broadened
  mandate.On
      November 29, 2004, the Company announced that the Special Committee
      terminated for cause the president and chief executive officer and the
      chief financial officer. In addition, the chairman of the board was
      dismissed. The board of directors appointed an interim president and chief
      executive officer and an interim chief financial officer, who were
      directors of the Company.The
      Company understands that the RCMP continues its previously announced
      investigation. The Commission has also indicated that it is investigating
      the Company with respect to disclosure records, financial affairs and
      trading in the shares of the Company. In addition, the Special Committee
      has been communicating with the Securities and Exchange Commission ("SEC")
      to keep the SEC advised of the progress of the Special Committee's work.
      As part of these investigations, the Company has received various requests
      for information and it has expressed its willingness to cooperate with all
      regulators and law enforcement agencies in their investigations. These
      investigations may produce results that have a material impact on the
      Company and its previously reported financial results.





12





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**2.**
    **Investigations
      (continued):**(b)
    Historical
      related party transactions:In
      the course of the Company's investigation, the following historical
      related party transactions shown at the exchange amount were identified
      that were not previously disclosed in the financial
      statements:(i)
    The
      Company purchased what has been called the "Vaughan West Lands" in 1998
      for approximately $27,400. The Company purchased the Vaughan West Lands,
      approximately 185 acres in Woodbridge, Ontario, by acquiring a numbered
      company owned by the controlling shareholder and other individuals who
      were officers, employees of or associated with the Company. This numbered
      company had acquired the land for $20,900 shortly before it was sold to
      the Company.(ii)
    The
      Company received a warrant for 200,000 shares of another public company,
      Premdor Inc. (now known as Masonite International Corporation)
      ("Masonite"). The Company obtained the warrant as partial consideration
      for the sale of a subsidiary to Masonite in early 2000. In early 2002, the
      Company exercised the warrant when Masonite's shares were trading at
      approximately $21.75, which was $8.50 more than the exercise price
      (resulting in a gain of about $1,700). The Company's exercise of the
      warrant was funded by the then five senior executives of the Company and
      one other individual who was then an employee of the Company. The
      employees deposited a total of $2,650 with the Company which funded the
      Company's payment to Masonite to exercise the warrant. The shares obtained
      were then distributed by the Company to the six individuals. The warrant
      and the transfer of the shares to the individuals were not recorded in the
      accounting records of the Company. If the transaction had been recorded in
      the financial statements in fiscal 2002, a gain would have been realized
      as other income with an equal and offsetting amount recorded as an
      operating expense in the income statement.(iii)
    The
      Company sold products and services to a company related to the controlling
      shareholder, as follows:




1998
    
    $
    1501999
    
    
    3,7502000
    
    
    9,6202001
    
    
    7,5602002
    
    
    11,460








13





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**2.**
    **Investigations
      (continued):**(iv)
    During
      1998 to 2003, the Company facilitated foreign currency exchange
      transactions at exchange rates available to the Company, and utilized
      Company bank accounts to transfer funds internationally on behalf of the
      controlling shareholder, a significant shareholder and certain executives
      in the amount of $95,000 at no cost to the Company.(v)
    During
      1997 to 2002, the Company managed the construction of four real estate
      developments for the controlling shareholder and family members. The
      Company paid invoices associated with these projects aggregating $21,100
      and was reimbursed by these individuals.(vi)
    During
      2000 and 2002, the Company sold assets for $240 and $300, respectively, to
      companies related to the controlling shareholder.(vii)
    From
      1998 to 2002, the Company sold to family members of the controlling
      shareholder, parts and services for $290.(viii)
    In
      1997, the Company acquired Baron Metals Industries Inc., a company that
      the controlling shareholder held a 17.7% interest in, for
      $11,500.(ix)
    In
      1996, the Company acquired three businesses, Jovien Associates Limited,
      Royal King Electric Limited and La Pineta Limited, that the controlling
      shareholder held a minority interest in, for $2,900.(x)
    In
      1999, the Company acquired 75% of Top Gun Electrical Supply Ltd., a
      company that the controlling shareholder held a 40% interest in, for
      $1,870.(xi)
    In
      1995, the Company purchased from the controlling shareholder and others
      their 50% interest in Hanmar Mechanical Services Inc. for
      $180.(xii)
    In
      1998, the Company purchased two parcels of real estate from the
      controlling shareholder for $2,900.(xiii)
    In
      1997, the Company purchased two parcels of real estate from a company
      related to a director for $2,550.








14




**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**2.**
    **Investigations
      (continued):**(xiv)
    The
      Company sold real estate to the controlling shareholders, as
      follows:


1994
    
    $
    2201995
    
    
    8101996
    
    
    902000
    
    
    200





(xv)
    In
      2003, the Company sold real estate for $350 to family members of the
      controlling shareholder, employees and a former
  employee.(xvi)
    The
      Company sold real estate to a significant shareholder, as
      follows:


1995
    
    $
    1101997
    
    
    80





(xvii)
    During
      1999 to 2001, the Company entered into 9 joint land service agreements
      with Companies related to the controlling shareholder and a director of
      the Company.





15





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**2.**
    **Investigations
      (continued):**(c)
    Agreement
      with the controlling shareholder:At
      the conclusion of its investigations, the Special Committee recommended an
      overall settlement with the controlling shareholder involving (i) the
      repayment to the Company by the controlling shareholder personally of the
      full amount of the gain earned by all interested parties ($6.5 million
      plus interest of $2.2 million) on the sale of the Vaughan West Lands to
      the Company. In lieu of a cash repayment, the Company has agreed to the
      conversion of multiple voting shares in the Company owned, directly or
      indirectly, by the controlling shareholder on a one-for-one basis which
      will be structured so that his shares will receive an increase in their
      adjusted cost base for tax purpose (at no cost to the Company or any of
      the shareholders) which will reduce his gain for tax purposes when he
      disposes of his shares, (ii) the repayment to the Company by the
      controlling shareholder of bonuses received in 2002 of $1.13 million,
      (iii) a non-compete covenant of the controlling shareholder that extends
      to December 18, 2006, (iv) a release by the controlling shareholder of all
      known claims against the Company and (v) the resignation of the
      controlling shareholder as a director of the Company (at the time of the
      shareholders' approval of the conversion of his shares from multiple
      voting to single voting shares). In consideration of such settlement
      arrangements, the Company agreed to release the controlling shareholder
      from all known claims that the Company may have against him.The
      conversion transaction and the settlement with the controlling shareholder
      are both subject to shareholder approval at the upcoming Annual and
      Special General Meeting expected to take place on May 25,
      2005.







16




**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**3.**
    **Business
      development:**Acquisitions
      of other businesses:During
      2004, there were no acquisitions of businesses.During
      2003, the Company acquired working capital and property, plant and
      equipment from certain businesses for aggregate consideration of $4,525
      cash. The assets acquired are recorded at fair value and there was no cash
      in the working capital acquired. These acquisitions were accounted for by
      the purchase method and are summarized as
follows:





2004
    
    2003Working
      capital
    
    $
    -
    
    $
    1,600Property,
      plant and equipment
    
    
    -
    
    
    2,925Total
      purchase price
    
    $
    -
    
    $
    4,525





**4.**
    **Interest
      in joint ventures:**The
      Company's proportionate interest in joint ventures includes the
      following:





2004
    
    2003Assets:Current
      assets
    
    $
    9,427
    
    $
    11,650Property, plant
      and equipment
    
    
    11,250
    
    
    12,414Total
      assets
    
    
    20,677
    
    
    24,064Liabilities:Current
      liabilities
    
    
    4,290
    
    
    6,946Future
      income tax liabilities
    
    
    1,419
    
    
    1,384Long-term
      liabilities
    
    
    1,100
    
    
    1,899Total
      liabilities
    
    
    6,809
    
    
    10,229Net
      assets
    
    $
    13,868
    
    $
    13,835Net
      sales
    
    $
    54,014
    
    $
    41,766Net
      earnings
    
    
    3,928
    
    
    3,153Cash
      provided by operating activities
    
    $
    4,655
    
    $
    2,417Acquisition
      of property, plant and equipment
    
    
    1,378
    
    
    705








17




**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003


**4.**
    **Interest
      in joint ventures (continued):**The
      Company is contingently liable for the proportionate share of its Joint
      Ventures partners' liabilities but has recourse to the assets of the Joint
      Ventures.**5.**
    **Accounts
      receivable:**





2004
    
    2003Trade
    
    $
    261,275
    
    $
    335,184Allowance
      for doubtful accounts
    
    
    (19,696
    )
    
    (14,414
    )241,579
    
    
    320,770Taxes
      and other
    
    
    15,767
    
    
    21,831$
    257,346
    
    $
    342,601





**6.**
    **Inventories:**





2004
    
    2003Raw
      materials and work in process
    
    $
    155,760
    
    $
    147,385Finished
      goods
    
    
    300,579
    
    
    254,234$
    456,339
    
    $
    401,619





**7.**
    **Property,
      plant and equipment:**


Accumulated
    
    
    Net
      book2004
    
    
    Cost
    
    
    amortization
    
    
    valueLand
    
    $
    97,121
    
    $
    -
    
    $
    97,121Buildings
    
    
    534,728
    
    
    106,330
    
    
    428,398Plant
      equipment
    
    
    1,075,568
    
    
    457,700
    
    
    617,868Dies
      and moulds
    
    
    273,137
    
    
    165,279
    
    
    107,858Office
      and computer equipment and computer software
    
    
    55,002
    
    
    45,030
    
    
    9,972Aircraft
      and transport equipment
    
    
    38,251
    
    
    28,742
    
    
    9,5092,073,807
    
    
    803,081
    
    
    1,270,726Assets
      under construction
    
    
    53,823
    
    
    -
    
    
    53,823Assets
      held for sale
    
    
    7,647
    
    
    1,596
    
    
    6,051$
    2,135,277
    
    $
    804,677
    
    $
    1,330,600





18




**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**7.**
    **Property,
      plant and equipment (continued):**


Accumulated
    
    
    Net
    book2003
    
    
    Cost
    
    
    amortization
    
    
    valueLand
    
    $
    98,864
    
    $
    -
    
    $
    98,864Buildings
    
    
    549,375
    
    
    92,535
    
    
    456,840Plant
      equipment
    
    
    1,102,082
    
    
    397,106
    
    
    704,976Dies
      and moulds
    
    
    248,971
    
    
    127,956
    
    
    121,015Office
      and computer equipment and computer software
    
    
    54,060
    
    
    41,233
    
    
    12,827Aircraft
      and transport equipment
    
    
    35,980
    
    
    23,312
    
    
    12,6682,089,332
    
    
    682,142
    
    
    1,407,190Assets
      under construction
    
    
    52,334
    
    
    -
    
    
    52,334Assets
      held for sale
    
    
    24,927
    
    
    1,728
    
    
    23,199$
    2,166,593
    
    $
    683,870
    
    $
    1,482,723


Total
      amortization expense for property, plant and equipment was $160,691 (2003
      - $124,013).Assets
      under construction are expected to be placed into productive use during
      fiscal 2005 and consist of land and buildings under construction of $9,933
      (2003 - $15,501) and plant equipment under construction of $43,890 (2003 -
      $36,833). Amortization of these assets begins once they are substantially
      completed and put into use. No interest was capitalized to assets under
      construction in the period ended December 31, 2004 (2003 -
      $2,300).Assets
      held for sale are expected to be disposed of during the next twelve months
      and are measured at their fair value less disposal costs. These assets
      primarily comprise certain real estate and buildings and have a carrying
      value of $6,051 (2003 - $23,199). The loss resulting from the valuation of
      these assets at market value recorded in 2004 is $950 (2003 - $1,500) and
      is included in operating expenses line of the consolidated statements of
      earnings. These assets are included in the Support segment of the
      Company's operations.





19





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**7.**
    **Property,
      plant and equipment (continued):**In
      2003, the Company evaluated its foreign operations and decided to focus
      its efforts on the primary building products that the Company has to
      offer, with the Royal Building Systems being positioned as one product
      within this line-up. Based on further evaluation in 2004, the Company
      determined that the carrying amounts of property, plant and equipment in
      its Mexican operations may not be recoverable and, therefore, recorded an
      impairment loss. The fair value of the impaired assets was determined
      based on a valuation using a present value model as at the date of the
      impairment test. An impairment loss of $17,523 was recorded in 2004 (2003
      - $23,416) and is included in the cost of sales and operating expenses
      line of the consolidated statements of earnings. The impaired long-lived
      assets are included in the Products segment of the Company's
      operations.During
      2003, the Company evaluated certain of its long-lived assets, including
      machinery and equipment and management information systems, with the
      decision to reposition or abandon these assets. As such, the Company wrote
      down these assets to their net realizable value and recorded a charge of
      $33,600. This charge is included in the cost of sales and operating
      expenses line of the consolidated statements of earnings. The long-lived
      assets associated with this charge are included in the Products segment of
      the Company's operations. There is no write-down of assets to their net
      realizable value in the fifteen months ended December 31, 2004.**8.**
    **Other
      assets:**





2004
    
    2003Patents,
      net of accumulated amortization of$6,657 (2003 -
      $7,252)
    
    $
    7,447
    
    $
    10,415Deferred
      financing costs, net of accumulatedamortization of $1,810 (2003 -
      $1,481)
    
    
    1,345
    
    
    1,7358,792
    
    
    12,150Investments
    
    
    35,733
    
    
    25,584$
    44,525
    
    $
    37,734





Amortization
      expense for patents was $3,528 (2003 - $2,350). Amortization expense for
      deferred financing costs was $329 (2003 -
$280).





20





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**8.**
    **Other
      assets (continued):**Investments
      include the Company's holdings in associated companies and other business
      ventures accounted for by the equity and cost methods.The
      equity earnings (loss) of the investments were $(120) (2003 -
      $200).**9.**
    **Accounts
      payable and accrued liabilities:**





2004
    
    2003Trade
    
    $
    197,213
    
    $
    175,530Taxes
      and other
    
    
    71,135
    
    
    83,062$
    268,348
    
    $
    258,592





**10.**
    **Bank
      indebtedness, term bank loan and term debt:**On
      October 29, 2003, the Company converted the debt drawn under its
      revolving, unsecured bank credit facility to a non-revolving,
      non-amortizing term bank loan in the amount of $500,000 with a syndicate
      of banks. During the current fiscal period, the Company repaid $175,164 of
      this term bank loan, leaving $324,836 (2003 - $389,661) drawn at
      December 31, 2004, which is repayable on April 28,
    2005.The
      bank credit facility is for working capital requirements, acquisitions and
      capital expenditures, and bears interest at prime or at 1.50% (2003 -
      0.950%) over Bankers' Acceptance rates or LIBOR, plus a standby fee of nil
      (2003 - 0.175%) on the undrawn portion of the facility, payable quarterly
      in arrears. Additionally, utilization fees are determined quarterly in
      arrears at 0.05% (2003 - 0.05%), if one-third to two-thirds of the
      facility is drawn, and 0.10% (2003 - 0.10%), if greater than two-thirds of
      the facility is drawn. The drawn down fee is subject to variation if the
      Company's term credit rating is adjusted.The
      Company is subject to covenants under its various lending
      agreements.





21




**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003


**10.**
    **Bank
      indebtedness, term bank loan and term debt
      (continued):**The
      Company finalized a credit facility with three banks on March 24, 2005. It
      is a $340,000 revolving credit facility with a secured portion and an
      unsecured portion. The secured portion (which is $300,000 until September
      1, 2005 and increases to $312,500 on September 1, 2005) bears interest at
      prime plus 1% reducing to 0.5% on the conversion of the multiple voting
      shares, or either LIBOR plus 2% or Bankers' Acceptance rate plus 2%, both
      of which reduce to 1.5% on the conversion of the multiple voting shares.
      The standby fee on the secured portion of the credit facility is 0.4% on
      the undrawn portion, reducing to 0.3% on the conversion of the multiple
      voting shares. There are no additional utilization fees. This portion of
      the new credit facility will be secured by substantially all of the
      Company's assets in Canada and the United States, although real property
      charges will only be registered initially against certain properties
      located in Ontario, Canada.Until
      September 1, 2005, the additional $40,000 ($37,500 of which is unsecured)
      is priced at prime plus 2% reducing to 1.5% on the conversion of the
      multiple voting shares, or either LIBOR plus 3% or Bankers' Acceptance
      rate plus 3%, both of which reduce to 2.5% on the conversion of the
      multiple voting shares. The unsecured portion expires on August 31, 2005.
      The standby fee on the unsecured portion of the credit facility is 1.1% on
      the undrawn portion, reducing to 1% on the conversion of the multiple
      voting shares.On
      September 1, 2005, the credit facility reduces to $312,500 and the entire
      amount is secured. The credit facility matures on April 30,
      2006.Under
      the new facility, the Company will be subject to financial covenants
      including:(a)
    Ratio
      of funded debt to funded debt plus minority interest plus the Company's
      shareholders' equity on a consolidated basis, shall not exceed 0.40 to
      1.0;(b)
    Ratio
      of funded debt to adjusted earnings before interest, taxes, depreciation
      and amortization ("EBITDA") on a consolidated basis shall not exceed 3.00
      to 1.0;(c)
    Interest
      coverage ratio shall not be less than 5.0 to 1; and(d)
    Minimum
      tangible net worth shall not be less than
$1,050,000.





22





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**10.**
    **Bank
      indebtedness, term bank loan and term debt
      (continued):**On
      March 23, 2005, the Company signed a letter of intent for a separate
      unsecured facility of up to $30,000 at a higher rate than the bank
      facility. This facility, which expires May 1, 2006, will provide added
      liquidity, although the Company does not expect to draw down on it to any
      significant extent or for more than a short period of
  time.The
      Company has outstanding $116,532 (2003 - $150,000) of medium-term notes.
      These notes are unsecured, ranking pari passu with the existing unsecured
      bank credit facility. On April 13, 2000, the Company issued $150,000 of
      notes bearing a coupon rate of 6.90%, payable semi-annually in arrears and
      maturing April 13, 2010, at which time the notes are due in
      full.The
      Company purchased for cancellation during the current fiscal period a
      total of $33,468 of its medium-term notes outstanding, recognizing a gain
      of $812.The
      Company has private placements of unsecured senior notes outstanding as
      follows:(a)
    US
      $30,000 (Canadian $36,057), bearing interest at 7.17% with equal annual
      principal repayments due from August 2005 to 2006;(b)
    US
      $25,000 (Canadian $30,048), bearing interest at 7.31%, due August 2006;
      and(c)
    US
      $115,000 (Canadian $138,218), bearing interest at 7.10%, due November
      2007.





23





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**10.**
    **Bank
      indebtedness, term bank loan and term debt
      (continued):**The
      Company retired US $15,000 (Canadian $19,800) of its unsecured senior
      notes during the current fiscal year.





2004
    
    2003Bank
      indebtedness:Bankers'
      acceptances advancesrevolving credit
facility
    
    $
    -
    
    $
    318,000LIBOR
      advances (US $53,000)
    
    
    -
    
    
    71,661-
    
    
    389,661Less
      cash
    
    
    -
    
    
    34,581Bank
      indebtedness
    
    $
    -
    
    $
    355,080Term
      bank loan:Non-revolving
      credit facility
    
    $
    302,000
    
    $
    -LIBOR
      advances (US $19,000)
    
    
    22,836
    
    
    -Term
      bank loan
    
    $
    324,836
    
    $
    -Term
      debt:Medium-term
      notes outstanding
    
    $
    116,532
    
    $
    150,000Senior
      notes outstanding (US $170,000;2003 - US
      $185,000)
    
    
    204,323
    
    
    250,139Other
      term debt requiring periodic principalrepayments
    
    
    662
    
    
    4,459321,517
    
    
    404,598Term
      debt due within one year
    
    
    (18,303
    )
    
    (21,266
    )Term
      debt
    
    $
    303,214
    
    $
    383,332





Term
      debt principal repayments, using the year-end exchange rates, for the next
      five fiscal years and thereafter, are as
follows:





2005
    
    $
    18,3032006
    
    
    48,3502007
    
    
    138,3322008
    
    
    -2009
    
    
    -Thereafter
    
    
    116,532$
    321,517








24


**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**11.**
    **Capital
      stock:**Authorized
      capital stock of the Company consists of the following:(a)
    Unlimited
      preference shares:Preference
      shares are issuable in series, with the designation of rights, privileges,
      restrictions and conditions to be determined by the Board of Directors
      prior to the issue of the first shares of a series. None of these shares
      is issued or outstanding.(b)
    Unlimited
      subordinate voting and multiple voting common shares:(i)
    Subordinate
      voting common shares:Each
      share is entitled to one vote per share at all meetings of shareholders
      and shall participate equally as to dividends with each multiple voting
      share.(ii)
    Multiple
      voting common shares:Each
      share is entitled to 20 votes per share at all meetings of shareholders
      and shall participate equally as to dividends with each subordinate voting
      share. Each share may be converted at any time into a fully paid
      subordinate voting share on a one-for-one basis, at the shareholder's
      option.In
      the event that either the subordinate voting shares or the multiple voting
      shares are subdivided or consolidated, the other class shall be similarly
      changed to preserve the relative position of each class. Under certain
      conditions, the sale or transfer of multiple voting shares shall cause
      such shares to be changed to subordinate voting shares.The
      following common shares have been issued:


Subordinate
      voting
    
    Multiple
      voting
    
    TotalShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    AmountBalance,September 30, 2002
    
    
    77,282,173
    
    $
    616,062
    
    
    15,935,444
    
    $
    16,635
    
    
    93,217,617
    
    $
    632,697Issued
      for cash understock option plan
    
    
    3,000
    
    
    14
    
    
    -
    
    
    -
    
    
    3,000
    
    
    14Balance,September 30, 2003
    
    
    77,285,173
    
    
    616,076
    
    
    15,935,444
    
    
    16,635
    
    
    93,220,617
    
    
    632,711Issued
      for cash understock option plan
    
    
    135,553
    
    
    1,043
    
    
    -
    
    
    -
    
    
    135,553
    
    
    1,043Balance,December
      31, 2004
    
    
    77,420,726
    
    $
    617,119
    
    
    15,935,444
    
    $
    16,635
    
    
    93,356,170
    
    $
    633,754








25





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**11.**
    **Capital
      stock (continued):**The
      Company maintains a stock option plan to allow management and key
      operating personnel to purchase subordinate voting shares, substantially
      exercisable as to half on or after three years from the date of issue,
      with the balance after six years from the date of issue. The maximum
      number of subordinate voting shares reserved to be issued for options
      cannot exceed 8,058,039 and all options expire nine years after the date
      of issue.The
      number of stock options has varied as
follows:





2004
    
    2003Weighted
    
    
    
    Weightedaverage
    
    
    
    averageNumber
      of
    
    exercise
    
    Number
      of
    
    exerciseoptions
    
    price
    
    options
    
    priceBalance,
      beginning of period
    
    
    9,107,217
    
    $
    27.10
    
    
    9,663,517
    
    $
    27.45Granted
    
    
    -
    
    
    -
    
    
    60,000
    
    
    17.14Exercised
    
    
    (135,553
    )
    
    7.69
    
    
    (3,000
    )
    
    11.25Cancelled/expired
    
    
    (5,903,711
    )
    
    27.19
    
    
    (613,300
    )
    
    31.62Balance,
      end of period
    
    
    3,067,953
    
    
    27.78
    
    
    9,107,217
    
    
    27.10Options
      exercisable, end of year
    
    
    2,583,453
    
    $
    27.83
    
    
    4,662,469
    
    $
    23.43





Included
      in the above 2004 cancelled/expired options were 3,478,181 options that
      were exchanged for 315,613 RSUs.The
      following table summarizes information about stock options outstanding at
      December 31, 2004:





Options
      outstanding
    
    Options
      exercisableWeightedaverage
    
    Weighted
    
    
    
    Weightedremaining
    
    average
    
    
    
    averageRange
      of exercise
    
    Number
    
    contractual
    
    exercise
    
    Number
    
    exerciseprice
      per share
    
    outstanding
    
    life
      (years)
    
    price
    
    exercisable
    
    price$14.95
      - $24.80
    
    
    877,450
    
    
    2.8
    
    $
    21.76
    
    
    827,450
    
    $
    22.01$25.00
      - $28.00
    
    
    778,500
    
    
    5.1
    
    
    25.74
    
    
    488,000
    
    
    25.52$28.05
      - $32.45
    
    
    773,500
    
    
    2.5
    
    
    29.95
    
    
    687,750
    
    
    29.83$33.00
      - $42.25
    
    
    638,503
    
    
    2.1
    
    
    35.88
    
    
    580,253
    
    
    35.723,067,953
    
    
    
    
    
    27.78
    
    
    2,583,453
    
    
    27.83








26





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**11.**
    **Capital
      stock (continued):**The
      table below shows the assumptions used in determining stock-based
      compensation expense under the Black-Scholes option pricing model. No
      options were granted in 2004.







Assumptions
    
    2003Risk-free
      interest rate
    
    
    3.8
    %Expected
      life
    
    
    5.2
      yearsExpected
      volatility
    
    
    49.7
    %Dividend
      yield
    
    
    -Weighted
      average fair value of options granted
    
    $
    8.26





After-tax
      compensation expense of $45 (2003 - $74) was recorded in the period
      related to stock options issued after October 1, 2002.During
      the fifteen-month period ended December 31, 2004, the Company established
      the RSUP for the purpose of offering an exchange of options granted under
      the Company's Long-Term Incentive Plan (formerly the Company's 1994 Stock
      Option Plan). On July 2, 2004, restricted stock units were granted to
      approximately 600 employees of the Company in exchange for 3,478,181
      options granted under the Company's Long-Term Incentive Plan. Each RSU
      entitles the participant to receive one subordinate voting share or an
      equivalent cash payment on the entitlement date. At the settlement date of
      December 31, 2004, 88,322 RSUs elected to settle in shares. The shares
      were issued subsequent to period end. In addition, 219,310 RSUs elected
      settlement in cash based upon the closing price of the Company's
      subordinate voting shares at December 31, 2004 of $12.59. The cash
      payment was made subsequent to period end. Additionally, 7,981 RSUs were
      cancelled. Total compensation expense recorded in 2004 was $3,873. $1,112
      relating to RSUs, which elected share settlement, was credited to
      contributed surplus.





27





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**11.**
    **Capital
      stock (continued):**During
      the fifteen month period ended December 31, 2004, the Company established
      the SMIP to provide for the issuance of a maximum of 1,400,000 RSUs. Each
      RSU entitles the participant to receive one subordinate voting share or an
      equivalent cash payment on the entitlement date provided that the vesting
      criteria are satisfied, including performance-based criteria established
      in respect of the participant's grant of RSUs. It is the Company's
      intention to settle in shares on the entitlement date. On July 2, 2004,
      1,395,000 RSUs were granted to approximately 60 senior employees and
      members of senior management of the Company. RSUs were valued at their
      fair market value on the grant date and compensation expense related to
      the SMIP is recognized evenly over the vesting period based on the total
      compensation to be paid out at the entitlement date. The counterpart is
      recorded as contributed surplus. 375,000 RSUs were cancelled before period
      end. Based on the market price on the grant date of these RSUs,
      compensation expense of $2,472 was recorded in 2004. Compensation expense
      of $4,944 is expected to be recorded in 2005 and 2006.**12.**
    **Earnings
      (loss) per share:**Basic
      and diluted earnings (loss) per share have been calculated using the
      weighted average and maximum dilutive number of shares, using the treasury
      stock method:


2004
    
    2003Weighted
    
    
    
    Weightedaverage
    
    Per
    
    average
    
    Pernumber
      of
    
    common
    
    number
      of
    
    commoncommon
    
    share
    
    common
    
    shareshares
    
    amount
    
    shares
    
    amountBasic
      net earnings (loss)per common share
    
    
    93,342,490
    
    $
    0.39
    
    
    93,219,925
    
    $
    (0.62
    )Dilutive
      effect of stockoptions
    
    
    -
    
    
    -
    
    
    -
    
    
    -Dilutive
      effect of RSU (RSUP)
    
    
    88,322
    
    
    -
    
    
    -
    
    
    -Dilutive
      effect of RSU (SMIP)
    
    
    1,332,500
    
    
    -
    
    
    -
    
    
    -Diluted
      net earnings (loss) per common share
    
    
    94,763,312
    
    $
    0.39
    
    
    93,219,925
    
    $
    (0.62
    )








28





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**12.**
    **Earnings
      (loss) per share (continued):**In
      the fifteen month period ended December 31, 2004, all options to purchase
      common shares were not included in the computation of diluted earnings per
      share because the options' exercise prices exceeded the average market
      price of the common share for the reporting period.For
      the year ended September 30, 2003, the Company excluded potential share
      equivalents from the loss per share calculation as they were
      anti-dilutive.**13.**
    **Interest
      and financing charges:**





2004
    
    2003Interest
      expense:Operating
    
    $
    1,881
    
    $
    15,343Term
      bank loan
    
    
    13,235
    
    
    -Term
      loan
    
    
    32,386
    
    
    30,172Bank
      and financing charges
    
    
    2,820
    
    
    4,917Amortization
      of deferred financing costs
    
    
    329
    
    
    280$
    50,651
    
    $
    50,712





29


**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**14.**
    **Income
      taxes:**Total
      income tax expense (recovery) for the fifteen month period ended December
      31, 2004 and year ended September 30, 2003 are allocated as
      follows:





2004
    
    2003Earnings
      (loss) before income taxesand minority
    interest:Canadian
      operations
    
    $
    95,962
    
    $
    64,013Foreign
      operations
    
    
    (19,835
    )
    
    (128,732
    )$
    76,127
    
    $
    (64,719
    )Current
      income tax expense:Canadian
      operations
    
    $
    13,474
    
    $
    8,479Foreign
      operations
    
    
    3,653
    
    
    20017,127
    
    
    8,679Future
      income tax expense (recovery):Canadian
      operations
    
    
    18,881
    
    
    4,611Foreign
      operations
    
    
    2,952
    
    
    (17,773
    )21,833
    
    
    (13,162
    )$
    38,960
    
    $
    (4,483
    )





The
      following summarizes the recognition of income tax expense using a
      weighted average income tax rate (as a reference point only in that there
      is no single jurisdiction in which the Company operates that is
      predominant or for which there is a more appropriate rate) compared with
      the Company's actual income tax expense. The weighted average rate has
      been determined based on the proportion of the statutory rate in each
      jurisdiction to the income before tax attributable to each
      jurisdiction.





2004
    
    2003Earnings
      (loss) before income taxes and minority interest
    
    $
    76,127
    
    $
    (64,719
    )Expected
      income taxes based on an effectivemanufacturing and processing
      income tax rate of approximately 34.12% (2003 -
    33.12%)
    
    $
    25,975
    
    $
    (21,435
    )Changes
      in income taxes attributed to:Adjustment to
      future income tax assets and liabilitiesfor enacted changes in tax
      laws and rates
    
    
    13,000
    
    
    (565
    )Increase
      (decrease) in non-deductible expensesincurred in foreign
      jurisdictions
    
    
    (1,816
    )
    
    11,927Refundable
      income taxes and other
    
    
    1,801
    
    
    5,590$
    38,960
    
    $
    (4,483
    )








30





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**14.**
    **Income
      taxes (continued):**In
      accordance with the Canadian income tax accounting standard
      (note 1(k)), the effects of enacted changes in federal or provincial
      income tax rates on future income tax assets and liabilities are included
      in the Company's consolidated financial statements. The effect of the
      enacted changes in the provincial income tax rates is reported as a
      $13,000 increase (2003 - $565 decrease) to future income tax expense
      and liability in fiscal 2004.The
      Company has been granted tax incentives for its Poland and China
      subsidiaries. These incentives are subject to certain conditions with
      which the Company expects to comply.Future
      income tax assets arise from available income tax losses and future income
      tax deductions. The Company's ability to use these income tax losses and
      future income tax deductions is dependent upon the results of the
      operations of the Company in the tax jurisdictions in which such losses or
      deductions arose. The tax effects of temporary differences that give rise
      to significant portions of the future tax assets and liabilities at
      December 31, 2004 and September 30, 2003 are presented
    below:







2004
    
    2003Future
      income tax assets:Share
      issue costs
    
    $
    -
    
    $
    706Non-capital
      loss carryforwards
    
    
    17,561
    
    
    28,206Other,
      including refundable taxes
    
    
    -
    
    
    1,68117,561
    
    
    30,593Less
      valuation allowance
    
    
    1,000
    
    
    3,993Future
      income tax assets
    
    $
    16,561
    
    $
    26,600Future
      income tax liabilities:Capital,
      intangible and other assets
    
    $
    (133,562
    )
    $
    (115,682
    )Other
    
    
    (15,487
    )
    
    (15,487
    )Future
      income tax liabilities
    
    $
    (149,049
    )
    $
    (131,169
    )








31





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**14.**
    **Income
      taxes (continued):**As
      at December 31, 2004, the Company had operating loss carry forwards of
      $110,596. A summary of the operating loss carryforwards by year of expiry
      is as follows:





2021
    
    $
    37,4042022
    
    
    40,0342023
    
    
    1,8382024
    
    
    4,953Indefinite
    
    
    26,367





**15.**
    **Segment
      reporting data:**Operating
      segments are defined as components of an enterprise about which separate
      financial information is available and which are evaluated regularly by
      the chief decision-makers in deciding how to allocate resources and in
      assessing performance.The
      Company's significant operating segments are:(a)
    Products
      segment:This
      segment represents production and sale of products predominately to the
      renovation and retrofit market, which include custom profiles, exterior
      claddings, home furnishings, outdoor products and various applications of
      the building system used to construct a broad array of structures,
      pipe/fittings and other construction products.(b)
    Support
      segment:This
      segment represents materials, machinery and tooling and services provided
      predominately to the products segment. It includes PVC resin and chemical
      additives manufactured and utilized to produce compounds, as well as a
      variety of recycled plastics and materials. Machinery and tooling
      manufacturing, property management, distribution, transportation, research
      and development, as well as various support services, such as strategic
      guidance, sales, operational issues, purchasing, financial and
      administrative support and human resources, are also provided by this
      segment.





32


**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**15.**
    **Segment
      reporting data (continued):**Performance
      is evaluated based on pretax earnings before amortization and interest,
      and return on invested capital. The Company sells to a broad range of
      customers, none of which accounted for more than 6.2% (2003 - 6.5%) of net
      sales.The
      accounting policies for each of the segments are the same as those
      described in note 1. Intersegment transactions are negotiated as if
      the transactions were to third parties, at market
  prices.





2004
    
    Products
    
    Eliminations
    
    Support
    
    Eliminations
    
    ConsolidatedNet
      sales
    
    $
    2,292,521
    
    $
    (48,317
    )
    $
    787,432
    
    $
    (696,505
    )
    $
    2,335,131Earnings
      beforeamortization and interest
    
    
    153,800
    
    
    -
    
    
    137,197
    
    
    -
    
    
    290,997Amortization
      charges
    
    
    117,143
    
    
    -
    
    
    47,076
    
    
    -
    
    
    164,219Acquisition
      of property,plant and equipment and goodwill
    
    
    82,328
    
    
    -
    
    
    17,397
    
    
    -
    
    
    99,725Property,
      plant andequipment
    
    
    650,017
    
    
    -
    
    
    680,583
    
    
    -
    
    
    1,330,600Goodwill
    
    
    177,985
    
    
    -
    
    
    35,635
    
    
    -
    
    
    213,620Total
      assets
    
    
    1,490,004
    
    
    -
    
    
    954,968
    
    
    -
    
    
    2,444,972





2003
    
    Products
    
    Eliminations
    
    Support
    
    Eliminations
    
    ConsolidatedNet
      sales
    
    $
    1,850,057
    
    $
    (27,486
    )
    $
    599,650
    
    $
    (536,824
    )
    $
    1,885,397Earnings
      beforeamortization and interest
    
    
    17,380
    
    
    -
    
    
    94,976
    
    
    -
    
    
    112,356Amortization
      charges
    
    
    89,827
    
    
    -
    
    
    36,536
    
    
    -
    
    
    126,363Acquisition
      of property,plant and equipment and goodwill
    
    
    67,945
    
    
    -
    
    
    28,513
    
    
    -
    
    
    96,458Property,
      plant andequipment
    
    
    761,347
    
    
    -
    
    
    721,376
    
    
    -
    
    
    1,482,723Goodwill
    
    
    183,038
    
    
    -
    
    
    35,641
    
    
    -
    
    
    218,679Total
      assets
    
    
    1,641,720
    
    
    -
    
    
    888,734
    
    
    -
    
    
    2,530,454








33





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**15.**
    **Segment
      reporting data (continued):**Certain
      information with respect to geographic regions is presented
      below:





2004
    
    Canada
    
    U.S.
    
    Other
    
    TotalSalesManufactured
      by:Canadian
      operations
    
    $
    798,664
    
    $
    601,402
    
    $
    14,953
    
    $
    1,415,019
    
    
    61
    %U.S.
      operations
    
    
    10,337
    
    
    745,178
    
    
    6,511
    
    
    762,026
    
    
    33
    %Other
      operations
    
    
    8,089
    
    
    2,006
    
    
    147,991
    
    
    158,086
    
    
    6
    %$
    817,090
    
    $
    1,348,586
    
    $
    169,455
    
    $
    2,335,13135
    %
    
    58
    %
    
    7
    %
    
    
    
    
    100
    %





2004
    
    Canada
    
    U.S.
    
    Other
    
    TotalProperty,
      plant and equipment
    
    $
    994,854
    
    $
    233,027
    
    $
    102,719
    
    $
    1,330,600Goodwill
    
    
    84,470
    
    
    118,637
    
    
    10,513
    
    
    213,620





2003
    
    Canada
    
    U.S.
    
    Other
    
    TotalSalesManufactured
      by:Canadian
      operations
    
    $
    616,060
    
    $
    483,883
    
    $
    5,877
    
    $
    1,105,820
    
    
    59
    %U.S.
      operations
    
    
    202
    
    
    647,845
    
    
    6,199
    
    
    654,246
    
    
    35
    %Other
      operations
    
    
    4
    
    
    1,186
    
    
    124,141
    
    
    125,331
    
    
    6
    %$
    616,266
    
    $
    1,132,914
    
    $
    136,217
    
    $
    1,885,39733
    %
    
    60
    %
    
    7
    %
    
    
    
    
    100
    %





2003
    
    Canada
    
    U.S.
    
    Other
    
    TotalProperty,
      plant and equipment
    
    $
    1,080,997
    
    $
    276,568
    
    $
    125,158
    
    $
    1,482,723Goodwill
    
    
    84,620
    
    
    123,546
    
    
    10,513
    
    
    218,679





34





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**16.**
    **Supplemental
      cash flow information:**(a)
    Items
      not affecting cash:





2004
    
    2003Amortization
      charges
    
    $
    164,219
    
    $
    126,363Amortization
      of deferred financing costs
    
    
    329
    
    
    280Future
      income taxes
    
    
    28,378
    
    
    (13,498
    )Asset
      write-downs
    
    
    17,523
    
    
    158,200Other
    
    
    (2,072
    )
    
    (24,157
    )Cash
      provided
    
    $
    208,377
    
    $
    247,188





(b)
    Change
      in non-cash working capital:





2004
    
    2003Accounts
      receivable
    
    $
    67,762
    
    $
    16,329Inventories
    
    
    (78,475
    )
    
    39,347Prepaid
      expenses
    
    
    9,727
    
    
    (4,285
    )Accounts
      payable and accrued liabilities
    
    
    26,422
    
    
    (5,447
    )Cash
      provided
    
    $
    25,436
    
    $
    45,944





The
      changes noted above are exclusive of non-cash working capital acquired
      through acquisitions.**17.**
    **Financial
      instruments and risk management:**(a)
    Derivative
      financial instruments:The
      Company does not hold or issue financial instruments for trading purposes
      and does not hold any derivative instruments.(b)
    Concentration
      of credit risk:Concentration
      of credit risk in accounts receivable is limited due to the large number
      of customers comprising the Company's customer base throughout the world.
      The Company performs ongoing credit evaluations of its customers and
      establishes an allowance for doubtful accounts based on credit risk
      applicable to particular customers, historical trends and other relevant
      information.









35





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**17.**
    **Financial
      instruments and risk management (continued):**(c)
    Fair
      values of financial instruments:The
      fair values of cash, accounts receivable, bank indebtedness, accounts
      payable and accrued liabilities and term bank loan, as recorded in the
      consolidated balance sheets, approximate their carrying amounts due to the
      short-term maturities of these instruments.Fair
      value estimates are made at a specific point in time, based on relevant
      market information and information about the financial instrument. These
      estimates are subjective in nature and involve uncertainties and matters
      of significant judgment and, therefore, cannot be determined with
      precision. Changes in assumptions could significantly affect the
      estimates.Fair
      value estimates of term debt are determined by references to current
      market prices for debt with similar terms and risks. As at December 31,
      2004, the fair value of the Company's senior notes exceeded the carrying
      value of these obligations by $15,709 (2003 - $40,492) using
      year end exchange rates and discount rates ranging from 2.2% to 3.0%. As
      at December 31, 2004, the fair value of the Company's medium-term notes
      exceeded the carrying value of these obligations by $14,990 (2003 -
      $27,881), using a discount rate of 4.13%.**18.**
    **Commitments:**The
      Company is committed to minimum annual payments under operating leases for
      the rental of buildings as follows:





2005
    
    $
    9,1752006
    
    
    7,3772007
    
    
    5,3812008
    
    
    4,4032009
    
    
    3,236Thereafter
    
    
    841$
    30,413


The
      Company has a long-term agreement for the annual purchase of up to 400
      million pounds of vinyl chloride monomer from a North American supplier.
      The contract is at market prices reflecting the volume and term
      commitments. The commitment extends until December 31, 2011. The
      parties can renew the agreement for two two-year terms upon mutual
      agreement.





36





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**18.**
    **Commitments
      (continued):**The
      Company has contingent liabilities under standby letters of credit
      amounting to approximately $6,773 (2003 - $13,740) and U.S. $3,925 (2003 -
      U.S. $4,125).**19.**
    **Contingencies:**The
      Company and certain of its former officers and directors have been named
      as defendants in two class action shareholder lawsuits filed in the United
      States District Court for the Southern District of New York. The first
      complaint, filed on December 14, 2004 and thereafter, amended on January
      4, 2005, purports to be brought on behalf of all purchasers of the
      Company's common stock between February 9, 2000 and October 13, 2004. The
      second complaint, filed on December 17, 2004, purports to be brought on
      behalf of all purchasers of the Company's publicly-traded securities
      between February 11, 1999 and October 13, 2004. Both actions purport to
      assert U.S. federal securities law violations, principally alleging that
      the Company misrepresented its business performance and engaged in various
      improprieties. The complaints each seek certification of the putative
      class, unspecified damages, reasonable costs and attorneys' fees, and
      other relief.On
      February 14, 2005, two putative class members separately moved for
      consolidation of the two related actions, appointment as Lead Plaintiff,
      and approval of their respective counsel as Lead Counsel. By order dated
      March 10, 2005, the court consolidated the two cases within a single
      action and appointed lead plaintiffs and their lead counsel. By order
      dated March 17, 2005, the court set a schedule for the filing of a
      consolidated amended complaint and subsequent motions to dismiss.The
      Company is presently unable to determine whether this action will have a
      material adverse effect on the business, results of operations, financial
      condition and liquidity of the Company, and intends to defend itself
      vigorously in these actions.The
      Company is the subject of a pending criminal investigation being conducted
      by the Antitrust Division of the United States Department of Justice. The
      investigation focuses on alleged price fixing in the window coverings
      industry. The Company is cooperating with the Department of Justice and is
      attempting to negotiate a resolution of the matter.The
      ongoing investigations described in note 2(a) may produce results that
      have a material impact on the Company and its previously reported
      financial results.





37





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**19.**
    **Contingencies
      (continued):**The
      Company is also involved in various claims, legal proceedings,
      investigations and complaints arising in the course of business. Where the
      Company expects to incur a loss as a result of a claim, an estimate of the
      loss has been recorded as an expense. In all other cases, the Company
      cannot determine whether these claims, legal proceedings, investigations
      and complaints will, individually or collectively, have a material adverse
      effect on the business, results of operations and financial condition and
      liquidity of the Company.**20.**
    **Related
      party transactions:**During
      the fifteen months ended December 31, 2004, related party transactions
      with companies related to the controlling shareholder totalled $870 (2003
      - $1,650). Related party transactions principally between a non-wholly
      owned subsidiary and minority shareholders of this subsidiary totalled
      $12,107.At
      December 31, 2004, there are accounts receivable from companies related to
      the controlling shareholder of $100 and an accounts receivable from the
      controlling shareholder of $1,130. At December 31, 2004, there are
      accounts receivable of $148 and accounts payable of $2,452 relating to
      other related parties.These
      related party transactions were in the normal course of the Company's
      business relating either to products typically manufactured by it and sold
      at prices and terms consistent with those to third parties, the recovery
      of costs incurred in respect of certain shared services and the purchase
      of other goods and services such as rent for
premises.





38





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**21.**
    **Significant
      differences between Canadian and United States generally accepted
      accounting principles:**These
      consolidated financial statements have been prepared in accordance with
      Canadian generally accepted accounting principles ("Canadian GAAP"). In
      certain respects, accounting principles generally accepted in the United
      States of America ("U.S. GAAP") differ from Canadian GAAP. The following
      is a summary of the effect of significant differences in GAAP on the
      consolidated financial statements:(a)
    Description
      of GAAP differences:(i)
    Substantively
      enacted tax laws and rates:Canadian
      GAAP permits the recognition of the impact of substantively enacted
      changes in tax laws and rates on the measurement of future income tax
      assets and liabilities in the period those tax laws and rates have been
      substantively enacted. There are no substantively enacted rates in the
      periods presented.U.S.
      GAAP does not recognize the concept of substantively enacted tax laws and
      rates and only allows recognition of the impact of a tax rate reduction on
      future income tax assets and liabilities once it is passed into a
      law.(ii)
    Comprehensive
      income:The
      FASB in the United States issued SFAS 130, which establishes
      standards for reporting and display of comprehensive income and its
      components (revenue, expenses, gains and losses) in a full set of general
      purpose financial statements. SFAS 130 requires that all items that are
      required to be recognized under accounting standards as components of
      comprehensive income be reported in a financial statement that is
      displayed with the same prominence as other financial
      statements.(iii)
    Incorporated
      joint ventures:U.S.
      GAAP requires investments in incorporated joint ventures to be accounted
      for under the equity method, while under Canadian GAAP, the accounts of
      incorporated joint ventures are proportionately consolidated. However,
      under rules promulgated by the Securities and Exchange Commission, a
      foreign registrant may, subject to the provision of additional
      information, continue to follow proportional consolidation for purposes of
      registration and other filings notwithstanding the departure from U.S.
      GAAP. Consequently, the additional information regarding the Company's
      interest in joint ventures is presented in
note 4.







39





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**21.**
    **Significant
      differences between Canadian and United States generally accepted
      accounting principles (continued):**(b)
    Net
      earnings in accordance with U.S. and Canadian GAAP and comprehensive
      income:There
      are no differences in the determination of net income between U.S. and
      Canadian GAAP. Comprehensive income for U.S. GAAP purposes is determined
      as follows:





2004
    
    2003Net
      earnings (loss) in accordance with Canadian and U.S. GAAP
    
    $
    36,849
    
    $
    (58,211
    )Foreign
      currency translation adjustment
    
    
    (41,472
    )
    
    (73,139
    )Comprehensive
      loss based on U.S. GAAP
    
    $
    (4,623
    )
    $
    (131,350
    )





(c)
    Shareholders'
      equity in accordance with U.S. GAAP:





2004
    
    2003Shareholders'
      equity in accordance with Canadian GAAP
    
    $
    1,365,461
    
    $
    1,365,412Substantively
      enacted tax laws and rates (note 21(a)(i))
    
    
    -
    
    
    -Shareholders'
      equity in accordance with U.S. GAAP
    
    $
    1,365,461
    
    $
    1,365,412





(d)
    Effect
      on consolidated balance sheets and consolidated statements of
      earnings:The
      application of U.S. GAAP would result in the following presentation of
      these captions on the consolidated balance sheets and consolidated
      statements of earnings:





2004
    
    2003Term
      debt
    
    $
    321,517
    
    $
    404,548Net
      future income tax liabilities
    
    
    132,488
    
    
    104,569Tax
      provision
    
    
    38,960
    
    
    (4,483
    )Interest
      and financing charges
    
    
    50,651
    
    
    50,712








40





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**21.**
    **Significant
      differences between Canadian and United States generally accepted
      accounting principles (continued):**(e)
    Other
      disclosures:(i)
    Accounting
      for employee stock options:Prior
      to fiscal 2003, the Company, as permitted under SFAS No. 123 ("SFAS 123"),
      Accounting for Stock-Based Compensation, accounted for stock options using
      the intrinsic value method and was required to disclose pro forma earnings
      and earnings per share information as if the Company had accounted for its
      employee stock options issued in 1995 and subsequent years under the fair
      value method.The
      fair value of each option granted is estimated on the grant date using the
      Black-Scholes option pricing model with the following weighted average
      assumptions by period:There
      were no options granted in the fifteen months ended December 31,
      2004.





Assumptions
    
    2003Risk-free
      interest rate
    
    
    3.8
    %Expected
      life
    
    
    5.2
      yearsExpected
      volatility
    
    
    49.7
    %Weighted
      average fair value of options granted
    
    $
    8.26





In
      December 2002, the FASB issued SFAS No. 148 ("SFAS 148"), Accounting for
      Stock-Based Compensation - Transition and Disclosure. An amendment of FASB
      Statement 123, SFAS 148 amended the transitional provisions of
      SFAS 123 for entities choosing to recognize stock-based compensation
      under the fair value-based method of SFAS 123, rather than electing to
      continue to follow the intrinsic value method. Under SFAS 148, the Company
      could have adopted the recommendations of SFAS 123 either (a)
      prospectively to awards granted or modified after the beginning of the
      year of adoption, (b) retroactively with restatement for awards granted or
      modified since January 1, 1995, or (c) prospectively to awards
      granted or modified since January 1, 1995. Effective October 1,
      2002, the Company elected to expense employee stock-based compensation
      using the fair value method prospectively for all awards granted after
      October 1, 2002. The effect of adoption of SFAS 148 was that
      after-tax stock compensation expense of $45 was recorded in 2004 (2003 -
      $74).







41





**ROYAL GROUP
TECHNOLOGIES LIMITED**
Notes to
Consolidated Financial Statements
(In thousands of
Canadian dollars, except per share amounts)

Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**21.**
    **Significant
      differences between Canadian and United States generally accepted
      accounting principles (continued):**Had
      the Company applied the fair value-based method to all stock options
      outstanding at the date of adoption, the Company's net earnings (loss) and
      earnings (loss) per share would have been reduced to the pro forma amounts
      indicated below:







2004
    
    2003Net
      earnings (loss), as reported
    
    $
    36,849
    
    $
    (58,211
    )Pro
      forma stock compensation expense
    
    
    (1,155
    )
    
    (3,822
    )Net
      pro forma earnings (loss)
    
    $
    35,694
    
    $
    (62,033
    )Basic
      earnings (loss) per share:As
      reported
    
    $
    0.39
    
    $
    (0.62
    )Pro
      forma
    
    
    0.38
    
    
    (0.67
    )Diluted
      earnings (loss) per share:As
      reported
    
    
    0.39
    
    
    (0.62
    )Pro
      forma
    
    
    0.38
    
    
    (0.67
    )





(ii)
    In
      January 2003, the Financial Accounting Standards Board ("FASB") issued
      Interpretation No. 46 ("FIN 46") - Consolidation of Variable Interest
      Entities, which requires the consolidation of entities defined as
      "Variable Interest Entities" (more commonly referred to as special purpose
      entities) in which equity investors do not have the characteristics of a
      "controlling financial interest" or do not have sufficient equity at risk
      for the entity to finance its activities without additional financial
      support from other parties. This interpretation applies to all variable
      interest entities created after January 31, 2003, and by the
      beginning of the first interim and annual reporting period commencing
      after September 2003 for variable entities created prior to February 1,
      2003.In
      December 2003, the FASB issued a revision to FIN 46 ("FIN 46R"), which
      replaces the interpretation released in January 2003. FIN 46R clarifies
      certain provisions of FIN 46 and provides guidance with respect to
      the consolidation of variable interest entities. FIN 46R requires the
      primary beneficiary of a variable interest entity's activities to
      consolidate the variable interest entity. The primary beneficiary is the
      party that absorbs a majority of the expected losses and/or receives a
      majority of the expected residual returns of the variable interest
      entity's activities. FIN 46R was effective December 31,
    2003.










42


**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**21.**
    **Significant
      differences between Canadian and United States generally accepted
      accounting principles (continued):**The
      Company has not identified any variable interest entities created, or
      interest in variable interest entities obtained which would require
      consolidation or disclosure under FIN 46R.(iii)
    In
      June 2003, the Accounting Standards Board ("AcSB") issued new CICA
      Accounting Guideline, Consolidation of Variable Interest Entities
      ("AcG-15"). This Guideline addresses the consolidation of variable
      interest entities, which are entities that have insufficient equity or
      their equity investors lack one or more of the specified essential
      characteristics of a controlling financial interest. AcG-15 also provides
      guidance for determining who should consolidate the variable interest
      entity. This Guideline was initially to be effective for the first interim
      and annual period beginning on or after November 1, 2004, with earlier
      application encouraged.With
      the release in December 2003 by FASB of revised FIN 46R, the AcSB revised
      the effective date for AcG-15 to November 1, 2004. The Company has not
      identified any variable interest entities created, or interest in variable
      interest entities obtained which would require consolidation or disclosure
      under AcG-15.(iv)
    In
      December 2004, FASB issued SFAS No. 123R (Revised) ("SFAS 123R"),
      Share-Based Payment, which is a revision of SFAS No. 123, Accounting for
      Stock-Based Compensation.Statement
      SFAS 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to
      Employees. This statement requires all share-based payments to employees,
      including grants of employee stock options, to be recognized in the
      financial statements based on their fair values. The Company, effective
      October 1, 2002, adopted SFAS 123R, as amended by SFAS 148 Accounting for
      Stock-Based Compensation - Transition and Disclosure. The Canadian and
      U.S. GAAP difference relating to share-based payments was eliminated for
      such payments after the adoption of these standards. However, disclosure
      is made in note 21(c)(i) for the impact had the Company applied the fair
      value-based method to all stock options outstanding at the date of
      adoption.





43





**ROYAL GROUP
TECHNOLOGIES LIMITED**
 Notes to
Consolidated Financial Statements
 (In thousands of
Canadian dollars, except per share amounts)
 
 Fifteen months
ended December 31, 2004 and year ended September 30, 2003





**21.**
    **Significant
      differences between Canadian and United States generally accepted
      accounting principles (continued):**(v)
    In
      November 2004, FASB issued SFAS No. 151 ("SFAS 151"), Inventory Costs - An
      Amendment to ARB No. 42, Chapter 4. This statement clarifies the
      accounting for abnormal amounts of idle facility expense, freight,
      handling costs and wasted material. Additionally, allocation of fixed
      overheads to the cost of conversion should be based on the normal capacity
      of production facilities. The requirements of SFAS 151 do not have an
      effect on the Company's consolidated financial
  statements.(vi)
    In
      December 2004, FSAB issued SFAS No. 153 ("SFAS 153"), Exchange of Monetary
      Assets - An Amendment to APB Opinion No. 29. This statement eliminates the
      exception to fair value for exchange of similar productive assets and
      replaces it with a general exception for exchange transactions that do not
      have commercial substance. This would include transactions that are not
      expected to result in significant changes in the cash flows of the
      Company. The requirements of SFAS 153 do not have an effect on the
      Company's consolidated financial
statements.






44