---



TEMBEC INDUSTRIES INC.



ANNUAL REPORT

December 15, 2005

For the fiscal year ended September 24, 2005

---

Table of Contents
SECTION 1 - MANAGEMENT DISCUSSION & ANALYSIS

|ACCOUNTING CHANGES                                                  | 2 
|------------------------------------------------------------------- | --
|IMPACT OF ACCOUNTING PRONOUNCEMENTS ON FUTURE
    REPORTING PERIODS | 2 
|CRITICAL ACCOUNTING POLICIES AND ESTIMATES                          | 2 
|USE OF NON-GAAP FINANCIAL MEASURES                                  | 4 
|FINANCIAL SUMMARY                                                   | 4 
|UNUSUAL ITEMS                                                       | 6 
|INCOME TAXES                                                        | 10
|NET EARNINGS (LOSS)                                                 | 10
|ACQUISITIONS AND INVESTMENTS                                        | 20
|FINANCING ACTIVITIES                                                | 20
|FISCAL 2004                                                         | 23
|FOURTH QUARTER ANALYSIS                                             | 24
|RISKS AND UNCERTAINTIES                                             | 27
|OUTLOOK                                                             | 30
|ADDITIONAL INFORMATION                                              | 31

SECTION 2  CONSOLIDATED ANNUAL AUDITED
FINANCIAL STATEMENTS

|AUDITORS' REPORT                             | 34
|-------------------------------------------- | --
|CONSOLIDATED BALANCE SHEETS                  | 36
|CONSOLIDATED STATEMENTS OF OPERATIONS        | 36
|CONSOLIDATED STATEMENTS OF RETAINED EARNINGS | 36
|CONSOLIDATED STATEMENTS OF CASH FLOWS        | 37
|CONSOLIDATED BUSINESS SEGMENT INFORMATION    | 38
|CONSOLIDATED GEOGRAPHIC SEGMENT INFORMATION  | 39
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   | 40

---

SECTION 1

---

TEMBEC INDUSTRIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS December 15, 2005The Management's Discussion and Analysis (MD&A) section
provides a review of the significant developments and issues that influenced
Tembec Industries Inc.'s financial performance during the fiscal year ended
September 24, 2005 as compared to the fiscal year ended September 25, 2004. The
MD&A should be read in conjunction with the audited consolidated financial
statements for the fiscal year ended September 24, 2005. All references to
quarterly or Corporation information relate to Tembec Industries Inc.'s fiscal
quarters. "EBITDA" refers to earnings before unusual items, interest, income
taxes, depreciation and amortization and other non-operating expenses.
The MD&A contains statements that are forward-looking in
nature. Such statements involve known and unknown risks and uncertainties that
may cause the actual results of the Corporation to be materially different from
those expressed or implied by such forward-looking statements. Such items
include, among others: general economic and business conditions; product selling
prices; raw material and operating costs; changes in foreign currency exchange
rates and other factors referenced herein and in the Corporation's continuous
disclosure filings.
Throughout the MD&A, "Tembec" or "Corporation" means Tembec
Industries Inc. and its consolidated subsidiaries and investments. "AV Cell"
refers to the Corporation's 50% participation in AV Cell Inc. which operates a
dissolving pulp mill located in Atholville, New Brunswick. "Marathon" refers to
its 50% participation in Marathon Pulp Inc., which operates a northern bleached
softwood kraft (NBSK) pulp mill in Marathon, Ontario. "Temlam" refers to the
Corporation's 50% participation in Temlam Inc., which operates laminated veneer
lumber (LVL) plants in Ville Marie and Amos, Quebec and wood I-beam
manufacturing plants in Calgary, Alberta, Bolton, Ontario and Blainville,
Quebec. "Temrex" refers to the Corporation's 50% participation in Produits
Forestiers Temrex, Limited Partnership, which operates two sawmills in the Gaspe
region of Quebec. These investments are accounted for by the proportionate
consolidation method.
Prior to fiscal 2005, Tembec's operations consisted of five
reportable business segments: Forest Products, Pulp, Paper, Paperboard and
Chemicals. Due to organizational and reporting changes, the Paper and Paperboard
segments have been regrouped under Paper. Prior year comparable segment data has
been restated to conform to the new segment reporting. On September 24, 2005
Tembec had approximately 10,000 employees and operated manufacturing facilities
in New Brunswick, Quebec, Ontario, Manitoba, Alberta, British Columbia, the
states of Louisiana and Ohio as well as in Southern France. Principal facilities
are described in the Corporation's Annual Information Form dated December 15,
2005 ("AIF").
On October 28, 2003, the Corporation acquired the assets of a
spray-dried resin manufacturer located in Toledo, Ohio. The financial results
have been fully consolidated in the Corporation's financial statements for the
last 11 months of fiscal 2004 and all of fiscal 2005.
On November 3, 2003, the Corporation acquired the assets of
two sawmills located in La Sarre and Senneterre, Quebec. The financial results
have been fully consolidated in the Corporation's financial statements for the
last 11 months of fiscal 2004 and all of fiscal 2005.
On December 15, 2003, the Corporation acquired the assets of
a sawmill located in Chapleau, Ontario. The financial results have been fully
consolidated in the Corporation's financial statements for the last 9 1/2 months
of fiscal 2004 and all of fiscal 2005.
On August 4, 2004, the Corporation exercised its option to
purchase the remaining 50% interest in Excel Forest Products, a sawmill located
in Opasatika, Ontario. The initial 50% interest had been purchased in March
2001. As the Corporation had effective control, the financial results have been
fully consolidated since March 2001. Earnings or losses attributable to minority
shareholders were previously reflected in "minority interest". Since August
2004, this is no longer required.
Details of these transactions are outlined in the "Acquisitions and
Investments" section of the MD&A.
1
ACCOUNTING CHANGESEffective September 2003, the Corporation applied the
accounting treatment prescribed by EIC-128 of the Canadian Institute of
Chartered Accountants (CICA) with respect to derivative financial instruments
that do not qualify for hedge accounting. Prior to the implementation of this
guideline, the Corporation was applying hedge accounting and gains and losses
related to financial instruments, primarily foreign exchange contracts, were
recognized on the maturity dates of the instruments. As well, when derivative
financial instruments were sold or traded prior to their stated maturity dates,
the gains or losses were deferred and recognized on the statement of operations
as per the original maturity dates, which corresponded to the hedge relationship
date. The previous rules required disclosure of outstanding derivative financial
instruments and their mark to market value in the notes to the financial
statements, but the positions were not shown on the Corporation's balance sheet.
The Corporation applied EIC-128 and the accounting guideline for discontinuing
hedge accounting at the beginning of fiscal 2004. As a result, the Corporation
recognized a deferred gain of $223.4 million relating to derivative financial
instruments that were outstanding at the beginning of fiscal 2004. The same
amount was also recognized as an asset on the balance sheet.
Effective September 2003, the Corporation adopted the new
recommendations of Section 3063 of the CICA with respect to the impairment of
long-lived assets. These recommendations provide accounting guidance for the
determination of long-lived asset impairment as well as recognition, measurement
and disclosure of the impairment. The work conducted in fiscal 2004 did not
indicate impairment of long-lived assets. The work conducted at the end of
fiscal 2005 indicated an impairment of $3.6 million relating to a specialty wood
sawmill.
Effective October 2003, the CICA introduced new
recommendations under section 1100 for the application of Generally Accepted
Accounting Principles (GAAP), which, among other things, provides guidance on
alternate sources to consult when an issue is not specifically addressed by
Canadian GAAP. Previously, the Corporation presented sales net of shipping,
handling costs and lumber export duties. As a result of applying this new
standard, effective September 28, 2003, the Corporation has removed references
to gross and net sales.
Effective June 2004, the Corporation adopted the new
recommendations of Section 3461 of the CICA with regards to employee future
benefits. Section 3461 requires disclosure of additional information concerning
defined benefit pension plans and other employee future benefit plans. The
disclosure is included in notes 20 and 21 of the audited consolidated financial
statements.
Effective September 2004, the Corporation adopted
retroactively with restatement the new recommendations of Section 3110 of the
CICA with respect to asset retirement obligations. These recommendations require
entities to record a liability at fair value, in the period in which a legal
obligation associated with the retirement of an asset is incurred. The
associated costs are capitalized as part of the carrying value of the related
asset and depreciated over its remaining useful life. The liability is accreted
using a credit adjusted risk free interest rate. For such assets, a liability
will be initially recognized in the period in which sufficient information
exists to estimate a range of possible settlement dates. For the Company, asset
retirement obligations in connection with the adoption of Section 3110 were
primarily related to landfill capping obligations. The adoption of Section 3110
reduced the prior year reported net earnings by $0.4 million.

|IMPACT OF ACCOUNTING PRONOUNCEMENTS ON FUTURE
    REPORTING PERIODS
|-------------------------------------------------------------------

As at the date of the MD&A, there were no anticipated accounting changes that
would materially impact the financial reporting of future periods.

|CRITICAL ACCOUNTING POLICIES AND ESTIMATES
|------------------------------------------

Fixed asset depreciation

2

---



The Corporation records its fixed assets, primarily
production buildings and equipment, at cost. Interest costs are capitalized for
projects in excess of $1 million that have a duration in excess of one year.
Investment tax credits or capital assistance received reduce the cost of the
related assets. Fixed assets acquired as a result of a business acquisition are
recorded at their estimated fair value. Depreciation of fixed assets is provided
over their estimated useful lives, generally on a straight-line basis. Forest
access roads are depreciated on the basis of harvested volumes and certain
equipment is depreciated using the unit of production method. The estimated
useful lives of fixed assets are based on judgment and the best currently
available information. Changes in circumstances can result in the actual useful
lives differing from our estimates. Revisions to the estimated useful lives of
fixed assets constitute a change in accounting estimate and are dealt with
prospectively by amending the amount of depreciation expense. There were no
significant adjustments to depreciation rates in fiscal 2004 and 2005. As noted
previously, the work conducted at the end of fiscal 2005 indicated an impairment
of $3.6 million relating to a specialty wood sawmill. In addition, an amount of
$37.5 million was included in unusual items relating to additional fixed asset
depreciation resulting from the permanent closure of the pressurized groundwood
pulping line and one of the four paper machines at the St. Francisville,
Louisiana papermill.

Impairment of goodwill

Accounting standards require that goodwill no longer be
amortized to earnings, but be periodically tested for impairment. The
Corporation uses certain operating and financial assumptions to conduct its
impairment test, principally those contained in its most recent multi-year
operating plan. This ensures that assumptions are supported, where available, by
relevant independent information. The fiscal 2005 impairment test did find
impairment of goodwill in relation to the hardwood flooring and newsprint
operations. The carrying value of goodwill was reduced by $25.6 million. The
charge to income is included in unusual items.

Impairment of long-lived assets

According to recently implemented guidelines, the Corporation
must now review the carrying value of long-lived assets when events or changes
in circumstances indicate that the value may have been impaired and is not
recoverable through future operations and cash flows. To estimate future cash
flows, the Corporation uses operating and financial assumptions, primarily those
contained in its most recent multi-year operating plan. This ensures that the
assumptions are supported, where available, by relevant independent information.
The work conducted in fiscal 2004 did not indicate impairment of long-lived
assets. The work conducted in fiscal 2005 indicated an impairment of $3.6
million relating to a specialty wood sawmill. The charge to income is included
in depreciation and amortization expense.

Employee future benefits

Tembec contributes to several defined benefit pension plans,
primarily related to employees covered by collective bargaining agreements. The
Corporation also provides post-retirement benefits to certain retirees,
primarily health-care related. For post-retirement benefits, funding of
disbursements is done on a "pay as you go" basis. The Corporation uses
independent actuarial firms to quantify the amount of pension and
post-retirement obligations. The Company, based on its own experience and
recommendations from its actuarial firms, evaluates the underlying assumptions
on an annual basis. Changes in estimates or assumptions can have a substantial
impact on the amount of pension and post-retirement benefit expense, the
carrying values on the balance sheet, and, in the case of defined benefit plans,
the amount of plan surplus or deficit. At June 30, 2005, ("the measurement
date"), the fair value of defined benefit plan assets was $637.5 million, an
amount equal to 70% of the estimated accrued benefit obligation of $911.7
million, generating a deficit of $274.2 million. The plan deficit was $138.8
million at the prior measurement date, June 30, 2004. The deficit increase of
$135.4 million that occurred over the 12 month period was caused primarily by
three items. The deficit was reduced by $16.9 million as plan assets generated
returns that exceeded the interest cost on the accrued benefit obligation. The
deficit was reduced by a further $18.0 million as employer contributions of
$33.9 million, exceeding the current service cost of benefit accruals of $15.9
million. Finally and most significantly, an actuarial loss of $169.7 million
increased the accrued benefit obligation at the measurement date. This last item
was caused primarily by the decrease from 6.38% to 4.98% of the weighted average
discount rate applied to the accrued benefit obligation. The discount rate is
tied to the rates applicable to high-quality corporate bonds (AA or higher) in
effect as at the measurement date. Pension expense in fiscal 2005 was $27.7
million, as compared to $34.8 million in the prior year. Based on current
assumptions, employer contributions and pension expense in

3

---



fiscal 2006 are expected to be approximately $49.7 million
and $35.6 million respectively. A description of the Corporation's defined
benefit pension plans and assumptions used in the calculations are presented in
note 20 of the audited consolidated financial statements.

With regard to other employee future benefit plans, the
accrued benefit obligation at the measurement date was $75.4 million, an
increase from $64.1 million in the prior year. The increase was also due to a
decrease in the discount rate, from 6.30% to 4.99%. Employer contributions were
$2.9 million as compared to $2.5 million in the prior year. The expense
recognized for other employee benefit plans was $7.8 million, up from $7.4
million in the prior year. Based on current assumptions, the amount of employer
contributions and the amount of expense to be recognized in fiscal 2006 are
expected to be approximately $2.9 million and $7.3 million respectively. A
description of the Corporation's other employee future benefit plans and
assumptions used in the calculations are presented in note 21 of the audited
consolidated financial statements.

Future income taxes

Future income tax is provided for using the asset and
liability method and recognizes temporary differences between the tax values and
the financial statement values of balance sheet items as well as certain
carry-forward items. The Corporation only recognizes a future income tax asset
to the extent that, in its opinion, it is more likely than not that the future
income tax asset will be realized. This opinion is based on estimates and
assumptions as to the future financial performance of the various taxable legal
entities in the various tax jurisdictions. The Corporation periodically reviews
the carrying value of its future income tax assets. Additional details are
provided in note 19 of the audited consolidated financial statements.

|USE OF NON-GAAP FINANCIAL MEASURES
|----------------------------------

EBITDA is defined as earnings before unusual items, interest,
income taxes, depreciation and amortization and other non-operating expenses. On
a consolidated basis, the Corporation believes that it is a useful indicator of
its ability to generate funds to meet debt service and capital expenditure
requirements. EBITDA is not intended as an alternative measure of cash flows
from operating activities as determined in accordance with GAAP. The Corporation
also uses EBITDA internally to evaluate the financial and operating performance
of its reportable business segments and individual business units. The
Corporation believes it is a useful indicator of the profitability of its
business segments and individual business units. Because EBITDA may not be
calculated identically by all companies, the presentation in the Corporation's
financial statements may not be directly comparable to similarly titled measures
used by other companies. A reconciliation of cash flow from operating activities
as determined in accordance with Canadian GAAP to EBITDA is summarized in note
15 of the audited consolidated financial statements.

|OVERVIEW                          
|----------------------------------
|FINANCIAL SUMMARY                 
|$ millions, unless otherwise noted
|Sales                             
|                                  
|Freight and sales
    deductions  
|Lumber duties                     
|Cost of sales                     
|SG&A                              
|EBITDA                            
|                                  
|Depreciation &
    amortization   
|Unusual items                     

4

---



|Operating earnings (loss)                    | 270.5   | 26.1    | (171.3) | (70.7)  | (467.7)
|-------------------------------------------- | ------- | ------- | ------- | ------- | -------
|Interest, foreign exchange & other           | 161.1   | 214.4   | 122.6   | (94.4)  | 20.1   
|Loss (gain) on
    translation of foreign    |         |         |         |         |        
|debt                                         | 69.2    | (3.7)   | (263.9) | (93.5)  | (124.8)
|                                             |         |         |         |         |        
|                                             |         |         |         |         |        
|Pre-tax earnings (loss)                      | 40.2    | (184.6) | (30.0)  | 117.2   | (363.0)
|Income taxes
    (recovery)                  | 14.6    | (67.8)  | (39.1)  | 41.3    | (54.2) 
|Minority interests                           | (0.5)   | 0.4     | (1.7)   | 0.4     | -      
|                                             |         |         |         |         |        
|Net earnings (loss)                          | 26.1    | (117.2) | 10.8    | 75.5    | (308.8)
|Total assets (at end of year)                | 4,097.3 | 3,991.4 | 3,787.1 | 3,899.1 | 3,408.5
|Total long-term debt( 1)(at end of
    year) | 2,019.1 | 2,029.3 | 1,794.9 | 1,659.3 | 1,557.6
|(1) Includes current portion                 |         |         |         |         |        



|SALES                    |         |         |          |          |             
|------------------------ | ------- | ------- | -------- | -------- | ------------
|                         |         |         | Total    | Price    | Volume & Mix
|$ millions               | 2004    | 2005    | Variance | Variance | Variance    
|                         |         |         |          |          |             
|Forest Products          | 1,422.8 | 1,353.5 | (69.3)   | (61.3)   | (8.0)       
|Pulp                     | 1,417.6 | 1,372.6 | (45.0)   | (83.3)   | 38.3        
|Paper                    | 953.5   | 942.8   | (10.7)   | 29.4     | (40.1)      
|Chemical & other         | 180.6   | 208.9   | 28.3     | 29.3     | (1.0)       
|                         | 3,974.5 | 3,877.8 | (96.7)   | (85.9)   | (10.8)      
|Less: intersegment sales | (309.7) | (292.8) | 16.9     |          |             
|Sales                    | 3,664.8 | 3,585.0 | (79.8)   |          |             

Sales decreased by $79.8 million over the same
period a year ago. The decrease occurred primarily in the Forest Products and
Pulp segments. The Pulp segment price decrease was partially offset by higher
volumes. The opposite occurred in Paper with lower volumes offsetting higher
prices. Canadian $ selling prices were negatively impacted by the stronger
Canadian $, which averaged US $0.817, an increase of 8% over US $0.754 in the
prior year. In terms of geographical distribution the US remained the
Corporation's principal market with 48% of sales in fiscal 2005, the same
percentage as in the prior year. Canadian sales represented 20% of sales, also
the same percentage as the prior year. Sales outside of the US and Canada
represented the remaining 32% in fiscal 2005, the same as in the prior year.

Forest Products segment sales decreased by 5%
because of lower prices of SPF lumber and OSB. The Pulp segment saw its sales
decrease by 3%. Lower selling prices for pulp were only partially offset by
higher shipments. Sales for the Paper segment decreased by 1%. Lower shipments
of newsprint and specialty papers were partially offset by higher newsprint and
coated paper prices.

5

---



|EBITDA           |        |        |          |          |         
|---------------- | ------ | ------ | -------- | -------- | --------
|                 |        |        | Total    | Price    | Cost &  
|                 | 2004   | 2005   | Variance | Variance | Volume  
|$ millions       |        |        |          |          | Variance
|                 |        |        |          |          |         
|Forest Products  | 129.7  | 55.0   | (74.7)   | (61.3)   | (13.4)  
|Pulp             | 61.4   | (24.7) | (86.1)   | (83.3)   | (2.8)   
|Paper            | (29.8) | (13.1) | 16.7     | 29.4     | (12.7)  
|Chemical & other | 10.1   | 10.9   | 0.8      | 29.3     | (28.5)  
|                 | 171.4  | 28.1   | (143.3)  | (85.9)   | (57.4)  

The $143.3 million decrease in EBITDA was driven primarily by
the lower profitability of the Forest Products and Pulp segments. All businesses
were negatively impacted by higher manufacturing costs. Total EBITDA of $28.1
million represented a margin of 0.8% of sales as compared to a five-year average
of 6%. Forest Products EBITDA declined by $74.7 million, primarily as a result
of lower selling prices for SPF lumber and OSB. The EBITDA margin was 4.7%
versus a five-year average of 5.2%. Pulp EBITDA declined by $86.1 million. While
US $ reference prices increased, the 8% strengthening of the Canadian $ versus
the US $ led to a $83.3 million negative price variance. The EBITDA margin was
negative 1.9% as compared to a five-year positive average margin of 6.5%. Paper
EBITDA increased by $16.7 million as a result of higher newsprint and coated
paper prices which more than offset the increase in manufacturing costs. The
EBITDA margin was negative 1.4% versus a five-year positive average margin of
5.9%. Chemical segment prices and costs increased by similar amounts and
profitability remained relatively unchanged. This is to be expected for this
segment as raw material prices are linked to selling prices.

A more detailed review of items having impacted sales and
EBITDA of each business segment is outlined in a subsequent section of the MD&A.
The following sections review the impact of non-EBITDA items on the financial
performance of the Company.

|DEPRECIATION AND AMORTIZATION            |       |      
|---------------------------------------- | ----- | -----
|$ millions                               | 2004  | 2005 
|Fixed asset depreciation                 | 226.6 | 234.0
|Deferred development and other
    costs | 5.7   | 3.7  
|Asset impairment                         | -     | 3.6  
|                                         |       |      
|                                         | 232.3 | 241.3

During the September 2005 quarter, the Corporation recognized an impairment
charge of $3.6 million relating to the Mattawa, Ontario specialty sawmill.

|UNUSUAL ITEMS
|-------------

Fiscal 2004

During fiscal 2004, the Corporation recorded a non-cash
charge of $9.8 million relating to the write-down of a newsprint machine at the
Kapuskasing, Ontario paper mill. The machine has been idle since February 2004
and based on the relatively difficult market conditions it was deemed unlikely
that the newsprint machine would be restarted. The charge includes the complete
write-down of the machine's net book value and related spare parts. The
after-tax impact of the unusual charge was $6.6 million.

6

---



Fiscal 2005

During fiscal 2005, the Corporation recorded an unusual
charge of $20.3 million relating to the restructuring of its Ontario sawmill
operations. The amount included a non-cash charge of $15.5 million relating to
the reduction of the carrying value of the Kirkland Lake and Opasatika sawmills.
Employee severance and other closure costs amounting to $4.8 million were also
recorded. The after-tax effect of the unusual charge was $14.2 million.

During fiscal 2005, the Corporation recorded an unusual
charge of $136.1 million relating to the closure of several facilities. These
included an SPF lumber sawmill in La Sarre, Quebec; a hardwood and pine sawmill
in Davidson, Quebec; a hardwood sawmill in Temiscaming, Quebec; a lumber
remanufacturing facility in Brantford, Ontario and the St. Raymond, Quebec
papermill. The after-tax impact was $91.7 million. The following table
summarized the impact by facility:

|$ millions            | Reduction of | Severance &   | Total   | Tax      | Net After-
|--------------------- | ------------ | ------------- | ------- | -------- | ----------
|                      | Carrying     | Other Closure | Pre-Tax | Recovery | tax       
|                      | Values       | Costs         |         |          |           
|La Sarre sawmill      | 15.2         | 6.1           | 21.3    | (7.2)    | 14.1      
|Davidson sawmill      | 5.7          | 4.0           | 9.7     | (3.3)    | 6.4       
|Temiscaming sawmill   | -            | 0.3           | 0.3     | (0.1)    | 0.2       
|Brantford reman       | 3.2          | 0.9           | 4.1     | (1.4)    | 2.7       
|St. Raymond papermill | 90.6         | 10.1          | 100.7   | (32.4)   | 68.3      
|                      |              |               |         |          |           
|                      | 114.7        | 21.4          | 136.1   | (44.4)   | 91.7      

During fiscal 2005, as a result of the permanent closure of
the pressurized groundwood pulping line and one of the four paper machines at
the St. Francisville, Louisiana papermill, the Corporation recorded a non-cash
charge of $37.5 million relating to the reduction of the carrying value of fixed
assets and a charge of $2.3 million relating to the reduction of the carrying
value of other related assets. Employee severance and other closure costs
amounting to $5.2 million were also recorded. The restructuring of operations at
St. Francisville is expected to improve profitability by approximately US $17
million per year, based on fiscal 2005 costs. Also during 2005, the Corporation
recorded a non-cash charge of $30.0 million relating to the reduction of the
carrying value of a dismantled pulp machine and a dismantled paper machine. The
machines had been acquired to be possibly installed at the Corporation's
existing facilities. However, the relatively poor markets of the last several
years combined with the Corporation's requirement to limit capital expenditures
has led to uncertainty regarding the ultimate disposition of this equipment.
Finally, the Corporation performed the required annual impairment test of
goodwill and found that impairment did exist in relation to its hardwood
flooring and its newsprint businesses. As a result, a goodwill impairment charge
of $1.5 million and $21.6 million respectively was recorded. The after-tax
effect of these charges was $87.5 million. The following summarizes the impact
of each item:

|$ millions                 | Reduction of | Severance &   | Total   | Tax      | Net After-
|-------------------------- | ------------ | ------------- | ------- | -------- | ----------
|                           | Carrying     | Other Closure | Pre-Tax | Recovery | tax       
|                           | Values       | Costs         |         |          |           
|St. Francisville papermill | 39.8         | 5.2           | 45.0    | -        | 45.0      
|Dismantled machines        | 30.0         | -             | 30.0    | (10.2)   | 19.8      
|Goodwill impairment        | 23.1         | -             | 23.1    | (0.4)    | 22.7      
|                           |              |               |         |          |           
|                           | 92.9         | 5.2           | 98.1    | (10.6)   | 87.5      

At the end of fiscal 2005, the Corporation had disbursed
$12.6 million in relation to severance and other closure costs. A balance of
$18.8 million remains and is expected to be disbursed in the next fiscal year.
Additional details are shown in note 18 of the audited consolidated financial
statements.

7

---



|INTEREST, FOREIGN EXCHANGE AND
    OTHER                        |         |        
|--------------------------------------------------------------- | ------- | -------
|$ millions                                                      | 20      | 2005   
|Interest on indebtedness                                        | 141.7   | 134.4  
|                                                                |         |        
|Amortization of deferred gain on
    foreign exchange contracts | (149.3) | (117.9)
|                                                                |         |        
|Derivative financial instruments
    gain                       | (84.6)  | (30.3) 
|                                                                |         |        
|Investment loss (income)                                        | (22.7)  | 3.9    
|                                                                |         |        
|Other foreign exchange items                                    | 16.6    | 17.1   
|                                                                |         |        
|Loss on consolidation of foreign
    integrated subsidiaries    | 2.0     | 6.0    
|                                                                |         |        
|Other items                                                     | 1.9     | 6.9    
|                                                                | (94.4)  | 20.1   

Interest on indebtedness declined by $7.3 million primarily
as a result of the stronger Canadian $. Approximately 94% of the Corporation's
term debt relates to US $ senior notes with fixed rates of interest. As such,
the only item affecting interest on indebtedness is a change in the relative
value of the Canadian $ versus the US $.

Effective September 28, 2003, the Corporation applied the
accounting treatment prescribed by EIC-128 of the CICA with respect to the
accounting treatment for derivative financial instruments that do not qualify
for hedge accounting. Prior to the implementation of this guideline, gains and
losses related to financial instruments, primarily foreign exchange contracts,
were recognized on the maturity dates of the instruments. If derivative
financial instruments were sold or traded prior to their stated maturity dates,
the gains or losses were deferred and recognized on the statement of operations
as per the original maturity dates. The previous rules required disclosure of
outstanding derivative financial instruments and their mark to market value in
the notes to the financial statements, but the positions were not shown on the
Corporation's balance sheet. The Corporation applied EIC-128 and the accounting
guideline for discontinuing hedge accounting at the beginning of fiscal 2004.

The following table summarizes the change in the unamortized deferred gain on
foreign exchange contracts during the years ended September 2004 and 2005:

|                          | $ millions
|------------------------- | ----------
|                          | Opening   
|                          | Balance   
|Year ended September 2004 | 305.6     
|Year ended September 2005 | 156.3     

The remaining deferred gain will be amortized in quarterly amounts as per the
following:

|Quarter Ending | $ millions
|-------------- | ----------
|December 2005  | 20.5      
|March 2006     | 17.8      
|Thereafter     | 0.1       
|               | 38.4      

Since the beginning of fiscal 2004, the Corporation has shown the market
value of its derivative financial instruments on its balance sheet and the
resulting gain or loss for the period has been reflected in its statement

8

---



of operations. Derivative financial instruments relate primarily to foreign
exchange contracts but also include commodity related instruments such as lumber
futures and hedges for purchased waste fibre and energy.

The following tables summarize the change in the market value of derivative
financial instruments during fiscal 2004 and fiscal 2005:

|                                                 | $ millions
|------------------------------------------------ | ----------
|                                                 | Opening   
|Year ended September 2004                        | Balance   
|                                                 |           
|Market value of outstanding
    foreign exchange |           
|contracts                                        | 223.4     
|Market value of commodity
    related derivative |           
|financial instruments                            | -         
|                                                 | 223.4     
|                                                 |           
|                                                 |           
|                                                 | $ millions
|                                                 | Opening   
|Year ended September 2005                        | Balance   
|                                                 |           
|Market value of outstanding
    foreign exchange |           
|contracts                                        | 104.9     
|Market value of commodity
    related derivative |           
|financial instruments                            | 9.4       
|                                                 | 114.3     

During fiscal 2005, the Corporation recorded a gain of $22.7
million on its outstanding foreign exchange contracts as the relative value of
the Canadian $ increased from US $0.784 to US $0.854. In the prior year, the
Canadian $ had increased from US $0.739 to US $0.784 and the Corporation had
recorded a gain of $86.5 million. The Corporation received proceeds of $127.4
million relating to foreign exchange contracts during fiscal 2005 as compared to
$205.0 million in the comparable period a year ago. In the prior year, the
Corporation had disposed of a substantial portion of its US $ currency contracts
to fund the acquisition of three sawmills.

At the September 24, 2005, the Corporation held lumber
futures equal to approximately 0.5% of its annual SPF lumber capacity, down from
7% at the end of the prior year. The fair value of these instruments was nil as
compared to $5.8 million at the end of fiscal 2004. The Corporation had natural
gas hedges covering approximately 7% of its anticipated requirements for the
next year. This compared to the end of the prior year when the Corporation had
natural gas hedges covering approximately 25% of its anticipated requirements
for the next two years. The fair value of these instruments was $5.7 million at
the end of 2005 compared to $3.2 million at the end of 2004. Finally, the
Corporation held hedges relating to purchased old newspapers (ONP) representing
approximately 3% of its annual recycled fibre purchases, with a fair market
value of nil. At the end of the prior year, the Corporation held hedges relating
to ONP representing approximately 21% of its annual recycled fibre purchases,
with a fair value of $0.4 million.

During fiscal 2004, the Corporation realized a gain of $22.7
million on the sale of shares of a Canadian publicly traded company, Slocan
Forest Products. The shares had been acquired in 2002 and subsequently
appreciated in value as the result of Slocan's acquisition by a third party.

|GAIN ON TRANSLATION OF FOREIGN DEBT
|-----------------------------------

During fiscal 2005, the Corporation recorded a gain of $124.8
million on the translation of its US $ denominated debt as the relative value of
the Canadian $ increased from US $0.784 to US $0.854. In the prior fiscal year,
the Canadian $ had increased from US $0.739 to US $0.784 and the Corporation had
recorded a gain

9

---

of $93.5 million. The after-tax impact of the gain on translation of foreign
denominated debt was $104.2 million as compared to the prior year after-tax gain
of $78.4 million.
INCOME TAXESIn fiscal 2004, the Corporation recorded an income tax
provision of $41.3 million on pre-tax earnings of $117.2 million. The income tax
provision was $0.9 million higher than the projected provision of $40.4 million
based on the Corporation's combined Canadian federal and provincial income tax
rate of 34.5%. Favorable items reduced this provision by $31.6 million. These
included $16.1 million relating to the non-taxable portion of the exchange gain
on US $ denominated debt, which currently receives capital gains treatment in
Canada and is taxed at 50% of regular business income. Lower corporate income
tax rates in the Corporation's non-canadian operations decreased the provision
by $14.6 million. Finally, the Corporation benefited by $0.9 million from the
manufacturing and processing deduction on its Canadian operations. This tax
benefit was phased out by Canadian tax authorities and no longer existed in
2005. However, the loss of this benefit was offset by lower effective tax rates.
The above favorable items were more than offset by several items which increased
the income tax provision by $32.5 million. The non-recognition of period losses
in certain operations increased the provision by $ 21.7 million. The provision
was increased by $6.0 million to reflect higher income tax rates in the province
of Ontario. The Canadian large corporations tax added a further $5.5 million.
Finally, the nondeductible loss on consolidation of foreign subsidiaries
increased the provision by $ 3.2 million. Non-deductible expenses decreased the
provision by $3.9 million.
In fiscal 2005, the Corporation recorded an income tax
recovery of $54.2 million on a pre-tax loss of $363.0 million. The income tax
recovery was $66.7 million lower than the projected recovery of $120.9 million
based on the Corporation's combined Canadian federal and provincial income tax
rate of 33.3%. There was a favourable item which increased the recovery by $19.5
million relating to the non-taxable portion of the exchange on US $ denominated
debt, which currently receives capital gains treatment in Canada and is taxed at
50% of regular business income. Lower corporate income tax rates in the
Corporation's non-Canadian operations increased the recovery by $9.1 million.
The above favourable items were more than offset by several items which reduced
the income tax recovery by $95.3 million. The non-recognition of period losses,
primarily related to our US operations in St. Francisville, Louisiana, reduced
the recovery by $32.9 million. As well, the reduction in carrying value of a
previously recognized income tax asset relating to the St. Francisville
operations further reduced the income tax recovery by $32.2 million.
Non-deductible expenses, primarily related to goodwill impairment, decreased the
recovery by $23.1 million. The non-deductible loss on consolidation of foreign
subsidiaries decreased the recovery by $4.1 million. Finally, the Canadian large
corporation tax reduced the recovery by $3.0 million.
Details regarding the Corporation's tax position are outlined in note 19 of
the audited consolidated financial statements.
NET EARNINGS (LOSS)The Corporation generated a net loss of $308.8 million
compared to net earnings of $75.5 million in the prior year. As noted
previously, the Corporation's financial results were impacted by certain
specific items. The following table summarizes the impact of these items on the
reported financial results. The Corporation believes it is useful supplemental
information as it provides an indication of results excluding the specific
items. This supplemental information is not intended as an alternative measure
for net earnings (loss) as determined by Canadian GAAP.
10

---



|                                          | Year ended     | Year ended    
|----------------------------------------- | -------------- | --------------
|                                          | September 2004 | September 2005
|                                          | $ millions     | $ millions    
|                                          |                |               
|Net earnings (loss) as reported           |                |               
|- in accordance with GAAP                 | 75.5           | (308.8)       
|Specific items (after-tax):               |                |               
|Gain on translation
    of foreign debt   | (78.4)         | (104.2)       
|Derivative
    financial instruments gain | (57.1)         | (20.4)        
|Amortization of
    deferred gain on      |                |               
|foreign exchange contracts                | (100.8)        | (79.6)        
|Asset impairment                          | -              | 2.4           
|Unusual items                             | 6.6            | 193.4         
|Net loss excluding specific items         |                |               
|- not in accordance with GAAP             | (154.2)        | (317.2)       



|FOREST PRODUCTS                      |       |         |         |         |        
|------------------------------------ | ----- | ------- | ------- | ------- | -------
|$ millions                           | 2001  | 2002    | 2003    | 2004    | 2005   
|                                     |       |         |         |         |        
|Total sales                          | 951.1 | 1,139.3 | 1,082.5 | 1,422.8 | 1,353.5
|                                     |       |         |         |         |        
|Consolidated sales                   | 795.3 | 966.5   | 909.0   | 1,209.6 | 1,158.0
|                                     |       |         |         |         |        
|Lumber duties                        | 10.8  | 17.5    | 81.2    | 111.4   | 89.4   
|                                     |       |         |         |         |        
|EBITDA                               | 46.2  | 70.8    | (37.5)  | 129.7   | 55.0   
|                                     |       |         |         |         |        
|EBITDA margin on consolidated sales  | 5.8%  | 7.3%    | (4.1)%  | 10.7%   | 4.7%   
|                                     |       |         |         |         |        
|Identifiable assets (excluding cash) | 735.3 | 752.4   | 717.2   | 846.5   | 813.8  

The Forest Products segment is divided into two main areas of activity:
forest resource management and manufacturing operations.

The Forest Resource Management group is responsible for
managing all of the Corporation's Canadian forestry operations. This includes
the harvesting of timber, either directly or by contractual agreements, and all
silviculture and regeneration work required to ensure a sustainable supply for
all of the manufacturing units. The group is also responsible for third party
timber purchases, which are needed to supplement total requirements. The group's
main objective is the optimization of the flow of timber into various
manufacturing units. As the Corporation's forest activity in Canada is conducted
primarily on Crown Lands, the Forest Resource Management group works closely
with provincial governments to ensure harvesting plans and operations comply
with established regulations and that stumpage charged by the provinces is
reasonable and reflects the fair value of the timber being harvested. During
fiscal 2005, the Corporation's operations harvested and delivered 8.0 million
cubic meters of timber versus 7.6 million cubic meters in 2004. Additional
supply of approximately 1.3 million cubic meters was secured mainly through
purchases and exchanges with third parties, down from 1.6 million cubic meters
in the prior year.

The Forest Products group includes operations located in
Quebec, Ontario, Alberta, British Columbia and France. The group focuses on
three main product areas: SPF Lumber and Panels, Specialty Wood and Engineered
Wood. The SPF Lumber and Panels operations can produce approximately 1.7 billion
board feet of lumber and 1.7 million square feet (1/16" basis) of OSB per year.
The Specialty Wood operations annually produce 171 million board feet of pine
lumber, hardwood lumber and hardwood flooring. The Engineered Wood operations
produce laminated veneer lumber (LVL), finger joint lumber, wood I-Beams, rim
joists, metal

11

---



plates and webs. The normal annual capacities of the Forest Product's
manufacturing sites are outlined in the Corporation's AIF.

The segment is dominated by SPF lumber, which represented 68%
of building material sales in fiscal 2005, as compared to 65% in the prior year.
The average selling price of SPF lumber was $22 per mfbm (thousand foot board
measure) lower than in the prior year. Average OSB selling prices decreased by
$21 per msf (thousand square feet), 28% lower than in the prior year. The lower
prices were the result of lower US $ reference prices for random length lumber
and a Canadian $ that averaged 8% higher versus the US $. Specialty and
Engineered Wood prices and revenues were also negatively impacted by the
stronger Canadian $. Overall, Specialty Wood represented 15% of building
material sales in fiscal 2005, down from 16% in fiscal 2004. Engineered Wood
sales in the year were at 8%, up from 7% in the prior year.

In addition to the above, the Forest Products group produced
and shipped approximately 2.0 million tonnes of wood chips in fiscal 2005, 85%
of which were directed to the Corporation's pulp and paper operations. In 2004,
the group produced 2.3 million tonnes and shipped 79% of this volume to the pulp
and paper mills. The internal transfer price of woodchips is based on current
and expected market transaction prices.

Total sales for this segment reached $1,353.5 million, a
decrease of $69.3 million over the prior year. Lower selling prices for SPF
lumber and OSB accounted for most of the decline in sales. Overall, the Forest
Products segment generated 32% of Corporation consolidated sales, down from 33%
in the prior year. The group's main market is North America, which represented
94% of consolidated sales in fiscal 2005, as compared to 95% in the prior year.

|                                                                                                           | Sales            | Shipments   | Selling Prices
|---------------------------------------------------------------------------------------------------------- | ---------------- | ----------- | --------------
|                                                                                                           | ($
    millions) | (000 units) | ($
    / unit)
|                                                                                                           | 2004             | 2005        | 2004          
|SPF Lumber & Panels                                                                                        |                  |             |               
|SPF Lumber (mfbm)
    (1) (2)                                                                              | 703.0            | 681.1       | 1,443.6       
|OSB (msf  1/16")                                                                                          | 109.6            | 80.0        | 1,452.5       
|Remanufactured Lumber (mfbm)                                                                               | 17.4             | 14.7        | 37.7          
|                                                                                                           | 830.0            | 775.8       |               
|Specialty Wood                                                                                             |                  |             |               
|Pine and Hardwood (mfbm)                                                                                   | 90.8             | 85.8        | 108.5         
|Hardwood Flooring (mfbm)                                                                                   | 80.6             | 67.8        | 17.8          
|                                                                                                           | 171.4            | 153.6       |               
|Engineered Wood                                                                                            |                  |             |               
|LVL (cubic feet)                                                                                           | 15.6             | 16.8        | 658.8         
|Eng. Finger Joint
    Lumber (mfbm)                                                                        | 9.1              | 2.2         | 15.2          
|Wood I-Beams and
    Rim Joists (linear ft)                                                                | 39.9             | 49.7        | 27,239        
|Metal Plates & Webs ('000 lbs)                                                                             | 10.0             | 9.9         | 9,795         
|                                                                                                           | 74.6             | 78.6        |               
|                                                                                                           |                  |             |               
|Total Building Materials                                                                                   | 1,076.0          | 1,008.0     |               
|                                                                                                           |                  |             |               
|Wood chip & other
    sales                                                                                | 346.8            | 345.5       |               
|                                                                                                           |                  |             |               
|Total Sales                                                                                                | 1,422.8          | 1,353.5     |               
|                                                                                                           |                  |             |               
|Internal wood chip & other sales                                                                           | (213.2)          | (195.5)     |               
|                                                                                                           |                  |             |               
|Consolidated Sales                                                                                         | 1,209.6          | 1,158.0     |               
|(1) Includes La
    Sarre and Senneterre for the last 11 months of fiscal 2004 and all of fiscal
    2005. |                 
|(2) Includes
    Chapleau for the last 9 1/2 months of fiscal 2004 and all of fiscal 2005.                 |                  |            

12

---



Markets

The benchmark random length Western SPF lumber net price
averaged US $348 per mfbm in 2005, a decrease from US $376 per mfbm in 2004. In
the East, the random length Eastern SPF average lumber price (delivered Great
Lakes) decreased from US $448 per mfbm to US $422 per mfbm in 2005. The
Corporation considers these to be relatively high levels, approximately US $30
to US $40 above normal trendline prices for random lumber. The reference price
for stud lumber did increase, with the Eastern average lumber price (delivered
Great Lakes) up from US $395 per mfbm to US $421 per mfbm, a level approximately
US $30 to US $40 per mfbm above trendline prices. This relatively good pricing
correlated with a favourable interest rate environment and strong lumber demand
as evidenced by US annual housing starts in excess of 2.0 million units.

It has now been approximately 41⁄2 years since the five-year
Canada / US Softwood Lumber Agreement (SLA) expired on April 1, 2001. On April
2, 2001, petitions for the imposition of antidumping and countervailing duties
on softwood lumber to the US were filed with the US Department of Commerce (USDOC)
and the US International Trade Commission (USITC) by certain US industry and
trade groups. In August 2001, the USDOC made a preliminary countervailing duty
determination, imposing a bonding rate of 19.31% on Canadian softwood lumber
shipped to the US after August 16, 2001.

The preliminary countervailing duty continued in fiscal 2002
as the Corporation accrued $11.0 million on lumber shipments to the US from
September 30 to December 15, 2001. Preliminary countervailing duty effectively
expired on the latter date. In addition, on October 31, 2001, the USDOC made a
preliminary antidumping determination imposing a bonding requirement at the rate
of 10.76% on the Corporation's shipments of Canadian softwood lumber to the US.

The aforementioned average rate was assigned specifically to
the Corporation based on the USDOC review of our actual historical shipments to
the US. During the first half of fiscal 2002, the Corporation accrued a total of
$9.7 million relating to shipments to the US between November 6, 2001 and March
30, 2002.

On May 16, 2002, the USITC announced it had found no current
injury, but a threat of injury, to the US lumber industry, effectively removing
the requirement to remit the $21.8 million of accrued preliminary countervailing
duty and the $9.7 million of accrued preliminary antidumping duty. The finding
of threat of injury by USITC resulted in the USDOC issuing an order to collect
cash deposits of estimated countervailing and antidumping duties on a going
forward basis. Effective May 22, 2002, the Corporation's softwood lumber exports
to the US were subject to a countervailing duty cash deposit rate of 18.79% and
an antidumping cash deposit rate of 10.21%. During fiscal 2003, the Corporation
incurred a charge of $49.7 million relating to countervailing duty and a charge
of $31.5 million for antidumping duty for lumber shipped to the US. During
fiscal 2004, the Corporation incurred a charge of $68.3 million relating to
countervailing duty and a charge of $43.1 million for antidumping duty. On
December 20, 2004, the USDOC reduced the countervailing duty deposit rate to
17.18% and increased the antidumping rate to 10.59%. On February 17, 2005, the
countervailing duty rate was further corrected to 16.37% and the antidumping
rate to 9.1%. During fiscal 2005, the Corporation incurred a charge of $57.0
million relating to countervailing duty and a charge of $32.4 million for
antidumping duty. The Corporation continues to remit cash deposits to cover the
applicable estimated duties based on the revised February 17, 2005 rates.

Overall, the net impact of duties in fiscal 2005 was a charge
of $89.4 million, down from $111.4 million in the prior year. Lower prices
combined with the lower rates for the last 3 quarters of fiscal 2005 generated
the decrease. To the end of September 2005, the Corporation had expensed a total
of $310.3 million in duties since May 22, 2002. The following table summarizes
duty expensed and remitted over that period. Additional details are outlined in
note 14 of the audited consolidated financial statements.

13

---



|            | $ millions     
|----------- | ---------------
|            | Duties Expensed
|            | C$             
|Fiscal 2002 | 28.3           
|Fiscal 2003 | 81.2           
|Fiscal 2004 | 111.4          
|Fiscal 2005 | 89.4           
|            | 310.3          

Operations

While the volume of SPF lumber sold in fiscal 2005 was
similar to the shipments of the prior year, there were significant changes to
the Corporation's Eastern Canadian SPF operations. In response to lower
allowable harvesting levels of timber on crown lands, the Corporation
permanently idled three stud lumber sawmills: Kirkland Lake, Ontario; Opasatika,
Ontario; and La Sarre, Quebec. The net impact is estimated to be a reduction of
production capacity of approximately 100 million FBM. However, the remaining
Eastern Canadian sawmills will be approximately 21% larger, in terms of normal
production capacity. While the restructuring will yield benefits in future
periods, the Corporation did incur transition costs associated with the
shutdowns. As well, higher fuel prices led to increased costs for delivered
timber. Overall, timber costs increased by $23.6 million and sawmill processing
costs increased by $8.7 million.

Overall, lower selling prices for SPF lumber and OSB were the
primary cause of the EBITDA decrease of $74.7 million. The EBITDA margin was
4.7%, compared to a five-year average of 5.2%. In fiscal 2005, the Forest
Products segment generated more EBITDA than the consolidated EBITDA of the
entire Company, as the Pulp and Paper segments generated negative EBITDA. In
fiscal 2004, the segment generated 77% of consolidated EBITDA.

|PULP                                 |         |         |         |         |        
|------------------------------------ | ------- | ------- | ------- | ------- | -------
|$ millions                           | 2001    | 2002    | 2003    | 2004    | 2005   
|                                     |         |         |         |         |        
|Total sales                          | 1,276.3 | 1,301.7 | 1,380.4 | 1,417.6 | 1,372.6
|                                     |         |         |         |         |        
|Consolidated sales                   | 1,202.9 | 1,228.2 | 1,290.6 | 1,334.3 | 1,290.1
|                                     |         |         |         |         |        
|EBITDA                               | 209.8   | 96.4    | 72.7    | 61.4    | (24.7) 
|                                     |         |         |         |         |        
|EBITDA margin on consolidated sales  | 17.4%   | 7.8%    | 5.6%    | 4.6%    | (1.9)% 
|                                     |         |         |         |         |        
|Identifiable assets (excluding cash) | 1,599.8 | 1,600.7 | 1,490.1 | 1,522.7 | 1,490.1

The Pulp group consists of eleven market pulp manufacturing
facilities operating at ten sites. The facilities are divided into two main
types. Paper pulp mills produce softwood kraft, hardwood kraft and high yield
pulps. Specialty pulp mills produce specialty cellulose, fluff and dissolving
pulps. Nine of the pulp mills are wholly owned and the Corporation has a 50%
joint venture position in the Marathon, Ontario softwood kraft pulp mill and in
the Atholville, New Brunswick dissolving pulp mill. All of the Corporation's
financial and statistical data include only its 50% proportionate share of these
two mills. The Corporation does however have responsibility for marketing the
entire output of the two joint ventures. The Corporation's partner in the AV
Cell joint venture is the Aditya Birla Group of India, which effectively
purchases the entire output of the mill at market prices. The paper pulp mills
can produce approximately 1,860,000 tonnes per year after adjusting for
proportionate joint ventures. The specialty pulp mills can produce approximately
380,000 tonnes per year. The annual capacities of the pulp manufacturing sites
are outlined in the Corporation's AIF.

Total sales for the Pulp group reached $1,372.6 million, a decrease of $45.0
million from the all-time high of the prior year. While the segment benefited
from higher US $ reference prices and shipments, it was not

14

---



sufficient to offset the impact of a stronger Canadian $,
which averaged 8% higher versus the US $. The Group benefited from higher
softwood paper pulp selling prices and set a new record for shipments. The
Corporation sold an additional 59,100 tonnes of pulp in fiscal 2005, up 3% from
the prior year. After eliminating internal sales, the Pulp group generated 36%
of consolidated sales, the same percentage as in the prior year.

Markets

The Pulp segment is more "global" than the other business
groups within Tembec. In 2005, 80% of consolidated sales were generated outside
of Canada and the US, unchanged from the prior year. The Corporation markets its
pulp on a world-wide basis, primarily through its own sales force. The Pulp
Group maintains sales or representative offices in Toronto, Canada, Signy/Nyon,
Switzerland, San Sebastian, Spain, Beijing, China. The Corporation's sales force
also markets pulp and paperboard produced by third parties. In fiscal 2005,
agency pulp sales totalled 4,400 tonnes compared to 12,100 tonnes in 2004.

Year over year, average selling prices of pulp decreased by
$41 per tonne. In fiscal 2004, the benchmark NBSK pulp price (delivered US)
increased from US $550 per tonne to US $610 per tonne, and averaged US $626 per
tonne. In fiscal 2005, price increases for NBSK continued during the first half
of the year, eventually reaching US $645 by March 2005, before falling back to
US $585 by September 2005. The average selling price for the year was US $644
per tonne, an increase of US $18 per tonne over the prior year. In last year's
MD&A, we had expressed a view that prices would increase in 2005. Although our
view on US $ prices turned out to be relatively accurate, we had not anticipated
the impact of the declining US $, as the Canadian $ averaged 8% higher and
mitigated much of the positive impact of the higher pulp prices. The only
positive area was Specialty Pulps, where a reasonably good market resulted in
price increases that effectively outpaced the stronger Canadian $. Average
selling prices increased by $16 per tonne.

Although, the Corporation did attain record shipments in
fiscal 2005, the market weakness experienced in the months of August and
September 2005 led to increased inventories of 16,500 tonnes over the prior
year. The Corporation views this as a temporary correction and expects to reduce
its inventories in fiscal 2006.

|                    | Sales        | Shipments    | Selling Prices
|------------------- | ------------ | ------------ | --------------
|                    | ($ millions) | (000 tonnes) | ($ / tonne)   
|                    | 2004         | 2005         | 2004          
|Paper pulps         |              |              |               
|Softwood kraft      | 508.6        | 495.4        | 702.2         
|Hardwood kraft      | 184.0        | 173.4        | 292.0         
|Hardwood high yield | 391.0        | 372.9        | 658.0         
|Specialty pulps     | 309.9        | 308.0        | 344.8         
|                    |              |              |               
|Total pulp sales    | 1,393.5      | 1,349.7      | 1,997.0       
|                    |              |              |               
|Other sales         | 24.1         | 22.9         |               
|                    |              |              |               
|Total sales         | 1,417.6      | 1,372.6      |               
|                    |              |              |               
|Internal sales      | (83.3)       | (82.5)       | (100.7)       
|                    |              |              |               
|Consolidated sales  | 1,334.3      | 1,290.1      | 1,896.3       

Operations

While total shipments in fiscal 2005 increased by 59,100 tonnes over the
prior year, establishing a new record, the total amount of pulp produced
declined by 17,900 tonnes. During 2004, the Pulp group took 73,900 tonnes

15

---



of total downtime, including 23,100 tonnes lost due to the
flooding of the Tarascon pulp mill located next to the Rhone River in southern
France. This compares to 101,600 tonnes of downtime taken in fiscal 2005, which
included 46,800 tonnes of market related downtime, primarily in high-yield pulp.
There had been no market related downtime in fiscal 2004.

Despite the increased production curtailments, year over year
manufacturing costs remained relatively unchanged with higher chemical, energy,
freight and supply costs offset by lower labour costs and a more favourable
exchange rate on the French pulp mills' Euro costs.

As noted previously, the Corporation remains mindful of
allowing its inventories to increase beyond normal levels. Total consolidated
pulp inventories at September 24, 2005, represented approximately 42 days of
production. This was higher than in 2004 when we ended the year with 40 days of
production in inventory. The Corporation considers 40 days to be a maximum
level.

Total 2005 shipments of 2,056,100 tonnes include 56,500
tonnes of high yield pulp and 34,900 tonnes of softwood kraft pulp consumed by
the Corporation's paperboard operations as compared to 55,700 tonnes and 32,500
tonnes respectively in the prior year. As well, 12,000 tonnes of pulp were
consumed internally by various other pulp and paper operations, as compared to
12,500 tonnes in 2004. In all, internal pulp consumption represented
approximately 5% of total shipments, unchanged from the prior year.

The eight North American pulp mills purchased approximately
2.3 million bone dry tonnes of woodchips in fiscal 2005, compared to 2.6 million
tonnes in the prior year. Of this amount, approximately 49% were supplied by the
Forest Products Group, the same percentage as in the prior year. The remaining
requirements were purchased from third parties under contracts and agreements of
various duration. The three pulp mills located in Southern France purchased 1.4
million bone dry tonnes of woodchips in fiscal 2005, unchanged from the prior
year. The fibre is mainly sourced from many private landowners.

Overall, improved US $ reference pricing was not able to
offset the stronger Canadian $ and margins dropped from 4.6% to negative 1.9%.
This compares with a five-year positive average margin of 6.5%. As margins were
negative, the Pulp Group did not contribute to total Corporation EBITDA in
fiscal 2005. The Pulp Group EBITDA represented 37% of total Corporation EBITDA
in 2004.

|PAPER                                |         |         |         |         |       
|------------------------------------ | ------- | ------- | ------- | ------- | ------
|$ millions                           | 2001    | 2002    | 2003    | 2004    | 2005  
|                                     |         |         |         |         |       
|Consolidated sales                   | 894.9   | 1,077.8 | 1,010.3 | 953.5   | 942.8 
|                                     |         |         |         |         |       
|EBITDA                               | 206.7   | 93.6    | 31.4    | (29.8)  | (13.1)
|                                     |         |         |         |         |       
|EBITDA margin                        | 23.1%   | 8.7%    | 3.1%    | (3.1)%  | (1.4)%
|                                     |         |         |         |         |       
|                                     |         |         |         |         |       
|Identifiable assets (excluding cash) | 1,304.6 | 1,272.6 | 1,240.0 | 1,168.6 | 913.7 

Prior to fiscal 2005, the Paper and Paperboard operations
were divided into two reportable segments. Due to organizational and reporting
changes, these operations have been regrouped under the Paper segment. Prior
year comparable segment data has been restated to conform to the new segment
reporting.

The Paper segment includes five paper manufacturing
facilities with a total of 13 paper machines. The mills located in Kapuskasing,
Ontario and Pine Falls, Manitoba produce newsprint. The facility located in
Témiscaming, Quebec produces multi-ply bleached coated paperboard. The
paperboard mill is partially integrated with the high yield pulp mill and also
consumes pulp manufactured by the Corporation at other sites. The facility
located in Saint-Raymond, Quebec produced specialty papers and was permanently
shut down in May 2005. The St. Francisville, Louisiana mill produces coated and
specialty papers. The total capacity of the Paper Group is 1,140,000 tonnes. The
annual capacities of the paper manufacturing sites are outlined in the
Corporation's AIF.

16

---

The $10.7 million decline in sales resulted, primarily from
lower shipments of newsprint and specialty papers, partially offset by higher
newsprint and coated paper prices. In February 2004, the Corporation idled No.1
paper machine (70,000 tonnes of annual capacity) at the Kapuskasing, Ontario
newsprint mill as a result of weak demand for newsprint. No.1 produced
approximately 25,000 tonnes in fiscal 2004 compared to no production in fiscal
2005. The decline in specialty paper shipments relates primarily to the
permanent closure of the St. Raymond, Quebec papermill (68,000 tonnes of annual
capacity) which occurred in May 2005. The mill produced 57,100 tonnes in fiscal
2004 compared to 36,600 tonnes in fiscal 2005. In last year's MD&A, we had
commented on an initiative to convert the St. Raymond mill's production to 100%
specialty papers from a combination of coated and specialty papers. This
initiative was not successful, primarily as a result of lower demand and prices
for the targeted specialty grade, and the mill was closed. The costs of closure
was reviewed earlier in the MD&A under "Unusual Items". Overall, the Paper group
generated 26% of consolidated sales in fiscal 2005, unchanged from the prior
year.
Markets
The focus of the Paper business is North America, which
accounted for 98% of sales in 2005, compared to 96% in 2004. The US alone
accounted for 87% of sales. In fiscal 2004, the benchmark price for newsprint
(48.8 gram East Coast) increased from US $500 per tonne to US $550 per tonne,
and averaged US $530 per tonne. In fiscal 2005, the price increases continued
ending the year at US $615 per tonne. The average selling price for the year was
US $585 per tonne, an increase of US $55 per tonne over the prior year. After
giving effect to the stronger Canadian $, the Corporation's average selling
price for newsprint increased by $15 per tonne.
The anticipated recovery in pricing of coated papers finally
occurred in fiscal 2005. In the prior year, the benchmark price for coated
papers (No 5-40 lb) increased from US $695 per short ton to US $740 per short
ton and averaged US $706 per short ton. In fiscal 2005, the price increases
continued, ending the year at US $880 per short ton. The average selling price
for the year was US $821 per short ton, an increase of US $115 per short ton
over the prior year. This increase was partially offset by the stronger Canadian
$ and effective prices increased by $93 per short ton or $102 per tonne.
The benchmark for coated bleached boxboard (15 point)
averaged US $937 per short ton in fiscal 2005, a US $78 per short ton increase
over the prior year. Here again, the improved US $ reference prices were not
enough to offset the stronger Canadian $ and lower prices reduced sales by $18
per tonne. The reduction was partially offset by a higher percentage of more
expensive sheeted board which reached 35% of paperboard sales in fiscal 2005,
compared to 31% in the prior year. The net result was that averaged coated
paperboard prices declined by $3 per tonne.

|                   | Total sales      | Shipments    | Selling Price
|------------------ | ---------------- | ------------ | -------------
|                   | ($
    millions) | (000 tonnes) | ($/tonne)    
|                   | 2004             | 2005         | 2004         
|Newsprint          | 352.1            | 335.3        | 525.7        
|Coated papers      | 277.0            | 291.4        | 275.3        
|Coated paperboard  | 165.1            | 176.8        | 139.0        
|Specialty papers   | 159.3            | 137.2        | 158.4        
|Total paper sales  | 953.5            | 940.7        | 1,098.4      
|Other sales        | -                | 2.1          |              
|Consolidated sales | 953.5            | 942.8        |              

Although the above table shows all shipments in "metric" tonnes, coated
papers and certain specialty papers are sold primarily in short tons.

17

---



Operations

In addition to the previously noted production curtailments
at Kapuskasing and St. Raymond, the Paper Group also undertook approximately
30,000 tonnes of market related downtime in fiscal 2005, compared to only 1,000
tonnes in the prior year. Weak demand in newsprint and coated paperboard
accounted for the bulk of the increased market downtime. Total cash costs at the
four Canadian mills increased by $10.8 million, primarily as a result of higher
cost for chemicals, energy and freight. Higher fiber, chemical and energy costs
also negatively impacted the St. Francisville, Louisiana papermill, but were
largely offset by a more favourable exchange rate. The offset was due to the
relative increase in the value of the Canadian $ versus the US $. The St.
Francisville facility is the Paper Group's largest operation and provides a
significant natural hedge against the negative impact of a weaker US $. In
fiscal 2005, the St. Francisville mill cash cost of manufacturing, including SG&A,
represented approximately 43% of the Group's total costs.

The Paper Group's mills are large users of virgin fibre,
primarily in the form of wood chips. During fiscal 2005, the operations
purchased 1.0 million bone dry tonnes of virgin fibre, of which approximately
36% was internally sourced, unchanged from the prior year. The operations in
Kapuskasing and Pine Falls both produce newsprint that contains recycled fibre.
In 2005, these two facilities consumed 92,800 tonnes of wastepaper, down from
103,500 tonnes in 2004.

Overall, fiscal 2005 was another difficult year. Improving US
$ prices were largely negated by a stronger Canadian $. Although, the US $ cost
base of the St. Francisville mill provided a partial currency offset, the
Group's EBITDA margin remained negative 1.4% versus a five-year positive average
of 5.9%. The Paper segment reduced total consolidated EBITDA in fiscal 2005 and
fiscal 2004.

|CHEMICALS                            |       |       |       |       |      
|------------------------------------ | ----- | ----- | ----- | ----- | -----
|$ millions                           | 2001  | 2002  | 2003  | 2004  | 2005 
|                                     |       |       |       |       |      
|Consolidated sales                   | 97.6  | 118.0 | 133.5 | 167.3 | 194.1
|                                     |       |       |       |       |      
|EBITDA                               | 10.6  | 14.9  | 8.4   | 7.7   | 8.2  
|                                     |       |       |       |       |      
|EBITDA margin                        | 10.9% | 12.6% | 6.3%  | 4.6%  | 4.2% 
|                                     |       |       |       |       |      
|Identifiable assets (excluding cash) | 68.7  | 68.5  | 69.9  | 77.3  | 79.8 

The Chemical segment operates in three main areas of activity: resins, lignin
and alcohol.

The resin business produces powder and liquid phenolic resins
at three operating sites in Quebec: Temiscaming; Longueuil and Trois-Pistoles.
In October 2003, the Corporation acquired a fourth manufacturing operation
located in Toledo, Ohio which manufactures powder and liquid amino based resins
as well as melamine. The Longueuil operation also produces formaldehyde, both
for internal resin production and external sales. In addition to its
manufactured products the resin binders also markets third party resin binders
to complement its customer offering. Sales of third party products totalled
$58.1 million in fiscal 2005, compared to $50.9 million in the prior year.

The lignin and alcohol businesses uses waste sulphite liquor
produced by the specialty pulp mills located in Temiscaming, Quebec and Tartas,
France. Lignin products are sold in liquid form and are also converted into
powder by utilizing the two spray dryers. As well, the group operates an ethyl
alcohol plant located in Temiscaming, Quebec. The lignin and alcohol businesses
effectively convert pulp mill waste into value added products.

18

---



|                                                                                                 | Total Sales      | Shipments   | Selling Price   
|------------------------------------------------------------------------------------------------ | ---------------- | ----------- | ----------------
|                                                                                                 | ($
    millions) | (000 units) | ($
    per unit)
|                                                                                                 | 2004             | 2005        | 2004            
|                                                                                                 |                  |             |                 
|Resin and related products (tonnes)(1)                                                           | 130.0            | 160.1       | 111.5           
|                                                                                                 |                  |             |                 
|Lignin (tonnes)                                                                                  | 38.5             | 35.3        | 175.0           
|                                                                                                 |                  |             |                 
|Alcohol (000 litres)                                                                             | 6.2              | 7.7         | 9.7             
|                                                                                                 |                  |             |                 
|Total sales                                                                                      | 174.7            | 203.1       |                 
|                                                                                                 |                  |             |                 
|Internal sales                                                                                   | (7.4)            | (9.0)       |                 
|                                                                                                 |                  |             |                 
|Consolidated sales                                                                               | 167.3            | 194.1       |                 
|(1)
    Includes 100% of BTLSR for the last 11 months of fiscal 2004 and all of
    fiscal 2005. |                  |            

Markets

Chemical products are sold primarily in North America with
sales representing 86% of the total consolidated sales in 2005, compared to 82%
in 2004. Resin products, which accounted for 79% of chemical sales, are designed
for the OSB industry and other specialty applications. Lignin is sold as a
binder and surfactant for industrial markets such as animal feed, concrete
admixture and carbon black. Ethyl alcohol is sold into the Canadian vinegar and
cosmetics markets. Chemical Group sales represented 5% of consolidated sales in
2005, unchanged from the prior year.

The increase in sales of $26.8 million is due primarily to
higher prices for resins and related products. The increase in the selling price
of resins is due to a higher average value for the mix of products sold as well
as higher individual product prices. Despite the higher prices, the EBITDA
margin of 4.2% remained relatively unchanged from the prior year. This is to be
expected for the Resin business as raw material prices are linked to selling
prices. As a result of the poor performance of the Pulp and Paper segments, the
Chemical Group generated 33% of total Corporation EBITDA in fiscal 2005, up from
5% in the prior year.

|FREE CASH FLOW                     |         |        |         |         |        
|---------------------------------- | ------- | ------ | ------- | ------- | -------
|$ millions                         | 2001    | 2002   | 2003    | 2004    | 2005   
|Cash flow from operations          |         |        |         |         |        
|before working capital
    changes | 277.4   | 52.3   | 37.7    | 234.0   | (17.7) 
|Net fixed asset additions          | (230.8) | (98.9) | (131.8) | (142.7) | (145.0)
|                                   | 46.6    | (46.6) | (94.1)  | 91.3    | (162.7)

Cash flow from operations before working capital changes for
the fiscal 2005 was negative $18.6 million, a $252.6 million decline from the
comparable period a year ago. The reduced cash flow is due primarily to a $55.0
million decline in proceeds from derivative financial instruments and a $143.3
million decline in EBITDA. Cash components of unusual items, primarily employee
severance, reduced cash flow from operations by a further $31.4 million. In the
year ago period, the Corporation had disposed of a substantial portion of its US
$ currency contracts to fund the acquisition of three sawmills. For the year
ended September 2005, non-cash working capital items used $19.4 million, as
compared to $5.4 million used by the same items in the prior year. After
allowing for net fixed asset additions of $145.0 million, "free cash flow" for
fiscal 2005 was negative $162.7 million versus a positive amount of $91.3
million a year ago. The Corporation defines free cash flow as "cash provided by
operating activities before changes in non-cash working capital balances less
net fixed asset additions".

The Corporation had set a free cash flow target of $200 million for fiscal
2005. A shortfall in planned EBITDA of approximately $460 million was partially
offset by higher than planned proceeds on derivative financial

19

---

instruments, principally currency contracts. The EBITDA
target was based on a resolution of the lumber dispute with the United States
and a refund of duties previously deposited. This did not occur in fiscal 2005.
The net result was the Corporation missed its target by $362.7 million. Based on
the approved fiscal 2006 budget, the Corporation's free cash flow will be
negative $65 million.

|CAPITAL SPENDING                   |       |      |       |       |      
|---------------------------------- | ----- | ---- | ----- | ----- | -----
|$ millions                         | 2001  | 2002 | 2003  | 2004  | 2005 
|Forest Products                    | 30.1  | 41.1 | 30.3  | 38.8  | 70.2 
|Pulp                               | 94.2  | 40.6 | 74.3  | 88.1  | 62.5 
|Paper                              | 104.4 | 10.4 | 18.5  | 13.1  | 11.1 
|Chemicals and other                | 2.1   | 6.8  | 8.7   | 2.7   | 1.2  
|                                   |       |      |       |       |      
|Net fixed asset additions          | 230.8 | 98.9 | 131.8 | 142.7 | 145.0
|As a % of sales                    | 8%    | 3%   | 4%    | 4%    | 4%   
|As a % of fixed asset depreciation | 118%  | 45%  | 59%   | 63%   | 63%  

In response to relatively low EBITDA margins brought on by
challenging market conditions, the stronger Canadian $ and continuing export
duties on lumber shipped to the US, the Corporation has limited capital
expenditures to mandatory projects and those with high rates of return. In
fiscal 2005, net fixed asset additions totalled $145.0 million compared to
$142.7 million a year ago. The amount spent was equal to 63% of fixed asset
depreciation and 4% of sales, unchanged from the prior year. Significant items
in fiscal 2005 include $25.4 million representing the Corporation's 50% share of
capital expenditures relating to the completion of a laminated veneer lumber (LVL)
facility in Amos, Quebec. The plant, owned and operated by the Temlam joint
venture, is now complete and in start-up. Capital expenditures of $15.4 million
were incurred to modernize the Elko, British Columbia sawmill. Project is now
complete and benefits will be realized in fiscal 2006. Finally, an amount of
$12.1 was spent on the construction of an anaerobic effluent treatment plant in
Témiscaming, Quebec. There remains an amount of $10.0 million to be spent in
fiscal 2006. The plant is expected to be operational by the spring of 2006,
reducing the sites energy and effluent treatment costs.

|ACQUISITIONS AND INVESTMENTS
|----------------------------

On October 28, 2003, the Corporation acquired all of the
assets of BTLSR Toledo Inc., a custom manufacturer of spray-dried resins located
in Toledo, Ohio. The total price paid for the manufacturing assets and the net
working capital was $8.5 million in cash. Depending on the financial results of
the operation over the five year period following the purchase, the seller may
be entitled to additional payments of up to US $3 million. Based on its
performance to the end of September 2005, no additional payments to the seller
would be required.

On November 3, 2003, the Corporation acquired the assets and net working
capital related to two sawmills located in La Sarre and Senneterre, Quebec from
Nexfor Inc. The purchase price was $59.1 million paid in cash.

On December 15, 2003, the Corporation acquired the assets and net working
capital related to a sawmill located in Chapleau, Ontario from Weyerhaueser
Corporation Limited. The purchase price was $25.4 million in cash.

On August 4, 2004, the Corporation exercised its option to
acquire the remaining 50% interest in Excel Forest Products, which owns and
operated a sawmill located in Opasatika, Ontario, for cash consideration of $6.7
million. The initial 50% interest had been purchased in March 2001.

There were no acquisitions in fiscal 2005.

|FINANCING ACTIVITIES
|--------------------

The Corporation's total debt decreased from $1,659.3 million to $1,557.6
million. The decrease was due primarily to the revaluation of the Corporation's
US $ denominated debt, the Canadian $ ended the 2005 fiscal

20

---

year at US $0.854, compared to US $0.784 a year ago. The
currency change reduced the Corporation's US $ denominated debt by $124.8
million in fiscal 2005. The Corporation's inability to generate positive free
cash flow under the current pricing environment and lumber duties limited its
ability to reduce net debt.
As part of its long term strategy, the Corporation has resolved to maintain
its percentage of net debt to total capitalization to 40% or less. The objective
of the plan is to keep a strong balance sheet and maintain the ability of the
Corporation to access capital markets at favourable rates. The Corporation
remains committed to this program. As the Corporation's leverage at September
2005 exceeds its stated goal, the emphasis in the near term will be to maintain
relatively high liquidity and limit capital expenditures. Improvement in the
pricing levels and EBITDA margins of the Corporation's main business segments or
a satisfactory resolution of the lumber trade dispute, including refund of
deposits, will be required before any reduction in financial leverage can be
achieved. Current credit ratings of various agencies on the Corporation and its
significant long term debt instruments are outlined in the table below.

|Dominion    | Moody's   | Standard
|----------- | --------- | --------
|Bond Rating | Investors | & Poor's
|Service     | Service   |         
|B (low)     | B3        | CCC+    

The Corporation's ratings were reduced during 2005 as the continued low
selling prices combined with a stronger Canadian $ and lumber export duties
reduced EBITDA margins to very low levels.

|LONG-TERM DEBT                                                        |         |        
|--------------------------------------------------------------------- | ------- | -------
|$ millions                                                            | 2004    | 2005   
|                                                                      |         |        
|Tembec Industries  advance from ultimate
    parent company          | 67.3    | 67.3   
|                                                                      |         |        
|Tembec Industries  US $500 million 8.5%
    unsecured senior notes   | 637.6   | 585.6  
|                                                                      |         |        
|Tembec Industries  US $350 million 7.75%
    unsecured senior notes  | 446.3   | 409.9  
|                                                                      |         |        
|Tembec Industries  US $350 million 8.625%
    unsecured senior notes | 446.3   | 409.9  
|                                                                      |         |        
|Tembec SAS debt                                                       | 21.1    | 23.6   
|                                                                      |         |        
|Proportionate share of Marathon debt (50%)                            | 15.5    | 12.9   
|                                                                      |         |        
|Proportionate share of Temlam debt (50%)                              | 7.5     | 32.5   
|                                                                      |         |        
|Other debt                                                            | 17.7    | 15.9   
|                                                                      |         |        
|                                                                      | 1,659.3 | 1,557.6
|Current portion included in above                                     | 9.4     | 21.3   

During the year, the Corporation's French operations increased its
non-interest bearings loans by $4.9 million (Euro 4.0 million) to assist with
the financing of certain capital expenditures being undertaken at the pulp
mills.

The Marathon joint venture does not currently meet certain
financial covenants on its operating line and its term loan with a syndicate of
banks. Discussions with lenders are ongoing and the Corporation believes it will
reach a satisfactory agreement to maintain and extend the credit agreement.
There is no recourse to the shareholders on either of these loan facilities.

At the end of September 2005, Tembec had cash, temporary
investments and derivative financial instruments of $21.7 million plus unused
operating lines of $211.6 million. At the date of the previous audited financial
statements, the Corporation had cash, temporary investments and derivative
financial instruments of $184.2 million and unused operating lines of $253.8
million. The Corporation defines "operating lines" to include loans of various
duration which are secured by charges on accounts receivable and/or inventories.
Operating lines are used to fund short-term requirements associated with both
seasonal and cyclical inventory increases which can

21

---

occur in the Corporation's business segments. The Corporation
would not normally draw on the operating lines to fund capital expenditures or
normal average working capital requirements. The operating lines are established
across multiple entities and jurisdictions to ensure they meet the needs of the
various operating units.
The following table summarizes the unused operating lines by major area at
the end of the last two fiscal years.

|OPERATING LINES - UNUSED                  |       |      
|----------------------------------------- | ----- | -----
|$ millions                                | 2004  | 2005 
|                                          |       |      
|Canadian operations                       | 177.7 | 161.4
|                                          |       |      
|US operations                             | 21.6  | 6.2  
|French operations                         | 44.6  | 34.1 
|Proportionate share of joint
    ventures | 9.9   | 9.9  
|                                          |       |      
|                                          | 253.8 | 211.6

The availability in Canadian operations relates primarily to
two separate operating lines. The Corporation had in place a $140.0 million
committed 364-day facility which expired in March 2005. It was replaced by a new
three-year committed facility of $150 million. The new facility is secured by
receivables and inventory. As at September 2005, the amount available on this
facility (borrowing base) was $123.4 million. This availability reduction is
normal as inventories are at low levels in September, but increase until
March/April due to timber purchases for the Forest Products segment. A second
364-day facility of $100 million expired in June 2005. The facility was replaced
with a new three-year committed facility of $200 million. This facility is also
secured by receivables and inventory. This amount was fully available at
September 2005.

The US operations are supported by a US $20 million 3-year
operating facility renewable in May 2006. This facility does have maintenance
covenants. They are not unduly onerous and were also met despite relatively poor
financial performance of the recent years.

The French operations are supported by several mill specific
operating lines totalling approximately Euro 38.2 million. These are essentially
"demand" type credits with no specific maturity, subject to periodic reviews.
There are no maintenance covenants associated with these operating lines, and
unlike the Corporation's other credits, they are secured by receivables only.

The Corporation has a stated objective of maintaining at
least $400 million of liquidity, comprising cash on hand, temporary investments
and unused operating lines. As can be seen, liquidity at year-end was $233.3
million, well below our stated objective. As well, the fiscal 2006 budget shows
a negative free cash flow projection of $65 million, which will further reduce
liquidity. In response to this situation, the Corporation has set an objective
of generating between $100 million and $150 million of additional liquidity
during fiscal 2006. These funds will be raised through several initiatives,
including but not limited to, selective asset divestitures and the monetization
of a portion of the lumber duties currently held on deposit.

The joint ventures maintain their own various operating lines, without
recourse to the Company, to meet working capital and liquidity requirements.

22

---



|                               |         |          |             |             |        
|------------------------------ | ------- | -------- | ----------- | ----------- | -------
|CONTRACTUAL OBLIGATIONS        | Total   | Within 1 | 2  3 years | 4  5 years | After 5
|$ millions                     |         | year     |             |             | years  
|                               |         |          |             |             |        
|FISCAL 2004                    |         |          |             |             |        
|Long-term debt                 | 1,659.3 | 9.4      | 29.4        | 458.2       | 1,162.3
|Interest on long-term debt     | 806.3   | 129.4    | 257.3       | 255.8       | 163.8  
|Operating leases               | 25.8    | 9.3      | 8.2         | 3.3         | 5.0    
|Purchase obligations           | 258.2   | 124.3    | 85.5        | 38.4        | 10.0   
|Balance of price - acquisition | 8.9     | 1.2      | 2.6         | 3.4         | 1.7    
|                               |         |          |             |             |        
|                               | 2,758.5 | 273.6    | 383.0       | 759.1       | 1,342.8
|                               |         |          |             |             |        
|CONTRACTUAL OBLIGATIONS        | Total   | Within 1 | 2  3 years | 4  5 years | After 5
|$ millions                     |         | year     |             |             | years  
|                               |         |          |             |             |        
|FISCAL 2005                    |         |          |             |             |        
|Long-term debt                 | 1,557.6 | 21.3     | 14.0        | 456.2       | 1,066.1
|Interest on long-term debt     | 636.3   | 121.2    | 240.7       | 203.4       | 71.0   
|Operating leases               | 27.5    | 8.6      | 8.1         | 4.6         | 6.2    
|Purchase obligations           | 292.1   | 114.4    | 83.3        | 55.6        | 38.8   
|Balance of price - acquisition | 7.7     | 1.4      | 3.4         | 2.9         | -      
|                               | 2,521.2 | 266.9    | 349.5       | 722.7       | 1,182.1

The table shows the Corporation's contractual obligations as
at September 2004 and 2005. The Corporation has long-term debt with contractual
maturities and applicable interest as described in note 9 of the audited
consolidated financial statements. The operating lease obligations relate
primarily to property and equipment rentals entered into in the normal course of
business. Purchase obligations relate to ongoing normal commercial commitments
to purchase timber, wood chips, energy, chemicals and other operating inputs.
They also include outstanding obligations relating to capital expenditures.
Finally, the balance of price obligation represents the Corporation's
proportionate (50%) share of the balance payable by the Temlam joint venture to
the previous owners of Jager Building Systems pursuant to its acquisition by
Temlam in August 2001.

|QUARTERLY FINANCIAL INFORMATION |        |         |         |       |        |        
|------------------------------- | ------ | ------- | ------- | ----- | ------ | -------
|$ millions                      |        |         |         |       |        |        
|                                |        | 2004    |         |       |        | 2005   
|                                | Dec.   | Mar. 27 | June    | Sept. | Dec.   | Mar. 26
|                                | 27     |         | 26      | 25    | 26     |        
|                                |        |         |         |       |        |        
|Sales                           | 766.3  | 887.2   | 1,030.0 | 981.3 | 888.8  | 904.1  
|                                |        |         |         |       |        |        
|EBITDA                          | (9.6)  | 0.6     | 91.3    | 89.1  | (13.3) | 16.9   
|Operating earnings (loss)       | (66.7) | (59.4)  | 33.3    | 22.1  | (92.7) | (45.5) 
|Net earnings (loss)             | 52.0   | (58.5)  | (12.4)  | 94.4  | (4.6)  | (25.0) 

23

---

FOURTH QUARTER ANALYSIS
The Corporation reported a net loss of $136.9 million in the fourth quarter
ended September 24, 2005 compared to net earnings of $94.4 million in the same
quarter of fiscal 2004.
The Corporation generated negative EBITDA of $3.4 million on
sales of $834.2 million compared to EBITDA of $89.1 million on sales of $981.3
million in September 2004 quarter. The decrease in sales of $147.1 million was
due primarily to lower selling prices and volumes in Forest Products and lower
selling prices in Pulp. Effective Canadian $ prices were also negatively
impacted by a stronger Canadian $, which averaged US $0.831, an increase of 9%
over US $0.763 in the same quarter of the prior year. The $92.5 million decline
in EBITDA was driven by the lower selling prices for Forest Products and Pulp.
During the September 2005 quarter, the Corporation recognized
an impairment charge of $3.6 million relating to the Mattawa, Ontario specialty
sawmill. The charge to income was included in depreciation and amortization
expense.
During the September 2004 quarter, the Corporation recorded a
non-cash charge of $9.8 million relating to the write-down of a newsprint
machine at the Kapuskasing, Ontario paper mill. The machine has been idle since
February 2004 and based on the relatively difficult market conditions it was
deemed unlikely that the newsprint machine would be restarted. The charge
includes the complete write-down of the machine's net book value and related
spare parts. The after-tax impact was $6.6 million.
During the September 2005 quarter, as a result of the
permanent closure of the pressurized groundwood pulping line and one of the four
paper machines at the St. Francisville, Louisiana papermill, the Corporation
recorded a non-cash charge of $37.5 million relating to the reduction of the
carrying value of fixed assets and a charge of $2.3 million relating to the
reduction of the carrying value of other related assets. Employee severance and
other closure costs amounting to $5.2 million were also recorded. The
restructuring of operations at St. Francisville is expected to improve
profitability by approximately US $17 million per year, based on fiscal 2005
costs. Also during the September 2005 quarter, the Corporation recorded a
non-cash charge of $30.0 million relating to the reduction of the carrying value
of a dismantled pulp machine and a dismantled paper machine. The machines had
been acquired to possibly be installed at the Corporation's existing facilities.
However, the relatively poor markets of the last several years combined with the
Corporation's requirement to limit capital expenditures has led to uncertainty
regarding the ultimate disposition of this equipment. Finally, the Corporation
performed the required annual impairment test of goodwill and found that
impairment did exist in relation to its hardwood flooring and its newsprint
business. As a result, a goodwill impairment charge of $1.5 and $21.6 million
respectively was recorded. The after-tax effect of these charges was $87.5
million. The following summarizes the impact of each item:

|$ millions                 | Reduction of | Severance &   | Total   | Tax      | Net After-
|-------------------------- | ------------ | ------------- | ------- | -------- | ----------
|                           | Carrying     | Other Closure | Pre-Tax | Recovery | tax       
|                           | Values       | Costs         |         |          |           
|St. Francisville papermill | 39.8         | 5.2           | 45.0    | -        | 45.0      
|Dismantled machines        | 30.0         | -             | 30.0    | (10.2)   | 19.8      
|Goodwill impairment        | 23.1         | -             | 23.1    | (0.4)    | 22.7      
|                           |              |               |         |          |           
|                           | 92.9         | 5.2           | 98.1    | (10.6)   | 87.5      

At the end of fiscal 2005, the Corporation had disbursed $12.6 million in
relation to severance and other closure costs. A balance of $18.8 million
remains and is expected to be disbursed in the next fiscal year.

During the September 2005 quarter, the Corporation recorded a
gain of $73.6 million on the translation of its US $ denominated debt as the
relative value of the Canadian $ increased from US $0.811 to US $0.854. In the
comparable period a year ago, the Canadian $ had increased from US $0.741 to US
$0.784, and the Corporation had recorded a gain of $90.4 million. The after-tax
impact of the gain on translation of foreign denominated debt was $61.3 million
as compared to the prior year after-tax gain of $75.8 million.

24

---

SUMMARY OF QUARTERLY RESULTSOn a quarterly basis, sales have benefited from improvements
in US $ reference prices for lumber, pulp and paper over the last two years.
However, much of the benefit was offset by a strengthening Canadian $ compared
to the US $, increasing from an average of US $0.759 in the first quarter of
fiscal 2004 to US $0.831 in the fourth quarter of fiscal 2005, a 9% increase. As
a result, except for the last two quarters of fiscal 2004, the Corporation has
generated marginal levels of EBITDA.
The Corporation's financial performance and that of its
Forest Products segment for the last eight quarters were negatively impacted by
substantial export duties on lumber shipped to the US. Total amount incurred
over the last two years was $200.8 million, an amount greater than the total
reported EBITDA of $193.6 million.
During the September 2004 quarter, the Corporation recorded a
non-cash charge of $9.8 million relating to the write-down of a newsprint
machine at the Kapuskasing, Ontario paper mill. The machine has been idle since
February 2004 and based on the relatively difficult market conditions it was
deemed unlikely that the newsprint machine would be restarted. The charge
includes the complete write-down of the machine's net book value and related
spare parts. The after-tax impact of the unusual charge was $6.6 million.
During the December 2004 quarter, the Corporation recorded an
unusual charge of $20.3 million relating to the restructuring of its Ontario
sawmill operations. The amount included a non-cash charge of $15.5 million
relating to the reduction of the carrying value of the Kirkland Lake and
Opasatika sawmills. Employee severance and other closure costs amounting to $4.8
million were also recorded. The after-tax effect of the unusual charge was $14.2
million.
During the June 2005 quarter, the Corporation recorded an
unusual charge of $136.1 million relating to the closure of several facilities.
These included an SPF lumber sawmill in La Sarre, Quebec; a hardwood and pine
sawmill in Davidson, Quebec; a hardwood sawmill in Temiscaming, Quebec; a lumber
remanufacturing facility in Brantford, Ontario and the St. Raymond, Quebec
papermill. The after-tax impact was $91.7 million. The following table
summarizes the impact by facility:

|$ millions            | Reduction of | Severance &   | Total   | Tax      | Net After-
|--------------------- | ------------ | ------------- | ------- | -------- | ----------
|                      | Carrying     | Other Closure | Pre-Tax | Recovery | tax       
|                      | Values       | Costs         |         |          |           
|La Sarre samwill      | 15.2         | 6.1           | 21.3    | (7.2)    | 14.1      
|Davidson sawmill      | 5.7          | 4.0           | 9.7     | (3.3)    | 6.4       
|Temiscaming sawmill   | -            | 0.3           | 0.3     | (0.1)    | 0.2       
|Brantford reman       | 3.2          | 0.9           | 4.1     | (1.4)    | 2.7       
|St. Raymond papermill | 90.6         | 10.1          | 100.7   | (32.4)   | 68.3      
|                      |              |               |         |          |           
|                      | 114.7        | 21.4          | 136.1   | (44.4)   | 91.7      

During the September 2005 quarter, as a result of the
permanent closure of the pressurized groundwood pulping line and one of the four
paper machines at the St. Francisville, Louisiana papermill, the Corporation
recorded a non-cash charge of $37.5 million relating to the reduction of the
carrying value of fixed assets and a charge of $2.3 million relating to the
reduction of the carrying value of other related assets. Employee severance and
other closure costs amounting to $5.2 million were also recorded. The
restructuring of operations at St. Francisville is expected to improve
profitability by approximately US $17 million per year, based on fiscal 2005
costs. Also during the September 2005 quarter, the Corporation recorded a
non-cash charge of $30.0 million relating to the reduction of the carrying value
of a dismantled pulp machine and a dismantled paper machine. The machines had
been acquired to be possibly installed at the Corporation's existing facilities.
However, the relatively poor markets of the last several years combined with the
Corporation's requirement to limit CAPEX has led to uncertainty regarding the
ultimate disposition of this equipment. Finally, the Corporation performed the
required annual impairment test of goodwill and found that impairment did exist
in relation to its hardwood flooring and its newsprint business. As a result, a
goodwill impairment charge of $1.5 and $21.6 million

25

---

respectively was recorded. The after-tax effect of these charges was $87.5
million. The following summarizes the impact of each item:

|$ millions                 | Reduction of | Severance &   | Total   | Tax      | Net After-
|-------------------------- | ------------ | ------------- | ------- | -------- | ----------
|                           | Carrying     | Other Closure | Pre-Tax | Recovery | tax       
|                           | Values       | Costs         |         |          |           
|St. Francisville papermill | 39.8         | 5.2           | 45.0    | -        | 45.0      
|Dismantled machines        | 30.0         | -             | 30.0    | (10.2)   | 19.8      
|Goodwill impairment        | 23.1         | -             | 23.1    | (0.4)    | 22.7      
|                           |              |               |         |          |           
|                           | 92.9         | 5.2           | 98.1    | (10.6)   | 87.5      

While the stronger Canadian $ reduced EBITDA, the Corporation
realized significant gains on its derivative financial instruments, primarily US
$ foreign exchange contracts. Over the last 8 quarters, the Corporation has
recorded $382.1 million of realized and amortized gains on derivative financial
instruments, an amount greater than the $276.1 million of interest on
indebtedness incurred during the same period.

The Corporation also recorded a gain of $218.3 million on the
translation of its US $ denominated debt over the last 2 years. However, the
impact of the quarterly translation gains and losses added considerable
volatility to the results, with the impact ranging from a gain of $90.4 million
in the September 2004 quarter to a loss of $38.5 million in the June 2004
quarter.

|FISCAL 2004 COMPARED TO FISCAL 2003          |         |        
|-------------------------------------------- | ------- | -------
|$ million, unless otherwise noted            | 2003    | 2004   
|                                             |         |        
|Sales                                        | 3,346.1 | 3,664.8
|EBITDA                                       | 74.9    | 171.4  
|Operating loss                               | (171.3) | (70.7) 
|Net earning (loss)                           | 10.8    | 75.5   
|Total assets (at end of year)                | 3,787.1 | 3,899.1
|Total long-term debt (1)(at end of
    year) | 1,794.9 | 1,659.3
|(1) Includes current portion                 |         |        

The increase in consolidated gross sales of $318.7 million in 2004 was due
primarily to higher selling prices and shipment in the Forest Products segment.

In fiscal 2003, the Corporation absorbed unusual item charges
of $18.4 million relating to reduced fixed asset carrying values and goodwill
impairment. The after-tax impact was $17.5 million. In fiscal 2004, the
Corporation absorbed unusual item charges of $9.8 million relating to reduced
fixed asset carrying values. The after-tax impact was $6.6 million.

Interest, foreign exchange and other items totalled to a
credit amount of $94.4 million in fiscal 2004 as compared to a charge of $122.6
million in fiscal 2003. In fiscal 2004, the Corporation had realized and
amortized derivative financial instrument gains of $233.9 million, an increase
of $170.6 million over gains of $63.3 million recorded in the prior year. The
Corporation also realized an investment gain of $22.7 million or the sale of an
investment in shares of a Canadian publicly-traded forest products company.

During fiscal 2004, the Corporation recorded a gain of $93.5
million on the translation of its US $ denominated debt as the relative value of
the Canadian $ increased from US $0.739 to US $0.784. In the prior fiscal year,
the Canadian $ had increased from US $0.634 to US $0.739 and the Corporation had
recorded a gain of $263.9

26

---

million. The after-tax impact of the gain on translation of
foreign-denominated debt was $78.4 million as compared to the prior year
after-tax gain of $221.0 million.
For the year ended September 25, 2004, the Corporation generated net earnings
of $75.5 million compares to net earnings of $10.8 million in fiscal 2003.
RISKS AND UNCERTAINTIESProduct Prices
Our financial performance is dependent on the selling prices
of our products. The markets for most lumber, pulp and paper products are
cyclical and are influenced by a variety of factors. These factors include
periods of excess product supply due to industry capacity additions, periods of
decreased demand due to weak general economic activity, inventory de-stocking by
customers, and fluctuations in currency exchange rates. During periods of low
prices, the Corporation is subject to reduced revenues and margins, resulting in
substantial declines in profitability and possibly net losses.
Based on 2006 planned sales volumes, the following table illustrates the
approximate annual impact of changes to average Canadian dollar selling prices
on after-tax earnings.

|Selling price sensitivity | Impact on          | Average           
|------------------------- | ------------------ | ------------------
|                          | after-tax earnings | selling prices ($)
|                          | ($ millions)       | 4th Quarter  2005
|Pulp - $25/tonne          | 35.8               | 650               
|Papers - $25/tonne        | 17.4               | 927               
|SPF lumber - $10/mfbm     | 10.5               | 436               

The Corporation's strategy is to mitigate price volatility by
maintaining operations in three core sectors, namely wood products, pulp and
paper; maintaining low cost, high quality flexible production facilities;
establishing and developing long-term relationships with its customers;
developing specialty niche products where possible. In addition, the Corporation
may periodically purchase lumber, pulp and newsprint price hedges to mitigate
the impact of price volatility. At September 24, 2005 the Corporation held
lumber futures equal to approximately 0.5% of its annual SPF lumber capacity.
The fair value of the contracts was nil. At September 25, 2004, the Corporation
held lumber futures equal to approximately 7% of its capacity, the fair value of
which was $5.8 million.

Foreign Exchange

Our revenues for most of our products are affected by
fluctuations in the relative exchange rates of the Canadian $, the US $ and the
Euro. The prices for many of our products, including those we sell in Canada and
Europe are generally driven by US $ reference prices of similar products. We
generate approximately US $2.2 billion of US $ denominated sales annually from
our Canadian and European operations. As a result, any decrease in the value of
the US $ relative to the Canadian $ and the Euro reduces the amount of revenues
we realize on our sales in local currency. In addition, since business units
purchase the majority of their production inputs in local currency, fluctuations
in foreign exchange can significantly affect the unit's relative cost position
when compared to competing manufacturing sites in other currency jurisdictions.
This could result in the unit's inability to maintain its operations during
periods of low prices and/or demand.

Based on 2006, planned sales volumes and prices, the
following table illustrates the impact of a 1% change in the value of the US $
versus the Canadian $ and the Euro. For illustrative purposes, we have assumed
an increase of 1% in the value of the US $. A decrease would have the opposite
effects of those shown below.

27

---



|Foreign exchange sensitivity  |       
|----------------------------- | ------
|$ millions                    |       
|                              |       
|Increase EBITDA               | 27.1  
|Increase interest expense     | (1.2) 
|                              |       
|Increase cash flow            | 25.9  
|Loss on US $ debt translation | (14.8)
|                              |       
|Pre-tax earnings              | 11.1  
|Tax provision                 | (6.0) 
|                              |       
|Net earnings                  | 5.1   

As can be seen, interest expense on the Corporation's US $
denominated debt provides only a small offset to its total US $ exposure. To
further reduce the impact of fluctuations in the value of the US $, the
Corporation has adopted a policy of hedging up to 50% of its anticipated US $
receipts for up to 36 months in duration. At September 24, 2005, the Corporation
held US $ foreign exchange contracts totalling US $10.8 million with a fair
value of $0.2 million. This compares to September 25, 2004 when the Corporation
held US $ foreign exchange contracts totalling US $348.9 million with a fair
value of $104.9 million. The Corporation's derivative financial holdings at the
end of fiscal 2005 are disclosed in note 22 of the audited consolidated
financial statements.

Operational Risks

The manufacturing activities conducted by our operations are
subject to a number of risks including availability and price of fibre,
competitive prices for purchased energy, a productive and reliable workforce,
compliance with environmental regulations, maintenance and replacement/upgrade
of process equipment to manufacture competitive quality products and the
requirement to operate the manufacturing facilities at high rates of utilization
and efficiency to maintain a competitive cost structure.

Fibre represents the Corporation's major raw material in the
production of wood products, pulp and paper. In Canada, virgin fibre or timber
is sourced primarily by agreements with provincial governments. The agreements
are granted for various terms from 5 to 25 years and are generally subject to
regular renewals every 5 years. The agreements incorporate commitments with
respect to sustainable forest management, silvicultural work, forest and soil
renewal, as well as cooperation with other forest users. In addition, the
Corporation has undertaken, on a voluntary basis, to have its timber harvesting
certified by the Forest Stewardship Council (FSC). The Corporation expects the
agreements to be extended as they come up for renewal. Aboriginal groups have
claimed substantial portions of land in various provinces over which they claim
aboriginal title or in which they have a traditional interest and for which they
are seeking compensation from various levels of government. The Corporation has
taken a proactive approach to enhance the economic participation of the First
Nations in its operations wherever feasible. The Corporation's operations in the
United States and France source their fibre requirements from various private
sources, primarily through long-term supply arrangements. The Corporation also
purchases approximately 105,000 tonnes per year of recycled waste fibre. To
mitigate the impact of price fluctuations, the Corporation periodically
purchases ONP hedges. At September 24, 2005, the Corporation held hedges
relating to ONP representing approximately 3% of its annual recycled fibre
purchases. The fair value of these instruments was nil. At the end of the prior
year, the Corporation held hedges relating to ONP representing approximately 21%
of its annual recycled fibre purchases, with a fair value of $0.4 million.

Energy is an important component of mill costs, especially
for high yield pulp mills, newsprint and paper mills. In 2005, we purchased
approximately $319 million of energy, 60% of which was electricity. Electrical
purchases are made primarily from large public utilities, at rates set by
regulating bodies. In certain jurisdictions, electricity is deregulated which
can lead to greater price volatility. To mitigate the effect of price
fluctuations on its financial performance, the Corporation employs several
tactics, including the securing of

28

---



longer term supply agreements, the purchase of
derivative financial instruments and operational curtailments in periods of high
prices (load shedding). At September 24, 2005, the Corporation did not hold any
derivative financial instruments relating to purchased electricity. Fossil
fuels, primarily natural gas, are purchased at market rates. The Corporation
purchases derivative financial instruments to hedge its exposure. At September
24, 2005 the Corporation had natural gas hedges covering approximately 7% of its
anticipated requirements for the next year. The fair value of these instruments
was $5.6 million. This compared to the end of the prior year when the
Corporation had natural gas hedges covering approximately 25% of its anticipated
requirements for the next two years. The fair value of these instruments was
$3.2 million.

Nearly all the Corporation's manufacturing
units have a unionized workforce. Over the past 30 years, the Corporation has
successfully negotiated new collective agreements in nearly all instances, with
very few work stoppages. At many of the Corporation's facilities, as well as
those of the North American industry as a whole, we have seen reductions in
employment levels resulting from technological and process improvements
resulting in a workforce with more years of service. This increases the relative
costs of pensions and benefits. At September 2005, the Corporation had
approximately 6,600 hourly paid employees, nearly all of which are covered by
collective bargaining agreements. At the end of September 24, 2005, there were 7
agreements covering 1,388 employees that had expired and were under active
negotiations. During fiscal 2006, a total of 17 agreements covering 2,053
employees will expire. The remaining contracts expire at various dates to August
2011. The Corporation anticipates it will reach satisfactory agreements on
contracts currently under active negotiations and those expiring in the future.

The Corporation's operations are subject to
industry specific environmental regulations relating to air emissions,
wastewater (effluent) discharges, solid waste, landfill operations, forestry
practices, and site remediation. The Corporation has made significant progress
in reducing the environmental impact of its operations over the last 15 years.
This has occurred as a result of changes in manufacturing processes, the
installation of specialized equipment to treat/eliminate the materials being
discharged and the implementation of standardized practices such as ISO 14001.

The production of pulp and paper products is capital
intensive. The Corporation estimates it must spend approximately $100 million
per year on capital expenditures to avoid degradation of its current operations.

Because of the relatively high fixed cost
component of certain manufacturing processes, especially in pulp and paper, the
operations are 24/7 with target efficiency in the 80-85% range. Failure to
operate at these levels jeopardizes the continued existence of a mill. Producers
are forced to operate the facilities at "full" rate even when demand is not
sufficient to absorb all of the output. This can lead to over supply and lower
prices, further increasing the inherent cyclicality of the industry.

Trade Restrictions /Lumber Export Duties

The Corporation's manufacturing operations are
located primarily in Canada. However sales into the Canadian market represented
only 20% of consolidated sales in 2005. As such, the Corporation's financial
results are highly dependant on its ability to sell its products into the
"export" markets. Tariffs and trade barriers that reduce or prohibit the
movement of our products across international borders constitute an ongoing
risk. The current dispute between Canada and the United States over softwood
lumber is a case in point. The United States Department of Commerce initially
assessed the Corporation with aggregate countervailing and antidumping duties at
an average rate of 29%. The combined rate was subsequently reduced to 25.47% in
February 2005. The Corporation has made the required cash deposits on its
exports of softwood lumber to the US. The final outcome of the dispute is not
known at this time.

Financial Risks/Debt Service

The Corporation currently has a non-investment
grade rating of CCC+/B3/B (low). The ratings reflect the relatively high use of
debt combined with periods of reduced operating earning due to the cyclicality
of its three principal business segments. Of the total long-term debt of $1.5
billion, 94% relates to US $ denominated high yield "Senior Notes". The annual
interest coupon on the high yield debt ranges between 7.75% and 8.625%,
generating an annual expense of US $100 million. The Senior Notes do not require
periodic payments for principal amortization. Since the entire principal amount
becomes due on the maturity dates of the Senior Notes,

29

---



it is unlikely that the Corporation will have the required
funds to repay the principal due. The Corporation will require access to the
public or private debt markets to issue new notes or debt instruments to replace
or partially replace the Senior Notes prior to their stated maturity dates. The
nearest maturity relates to the 8.625% US $350 million Senior Notes maturing in
June 2009. The Corporation's objective is to reduce its leverage and improve its
credit ratings prior to the refinancing of the aforementioned Senior Notes.

Growth Strategy/Acquisition

The Corporation has a publicly stated objective of growing
its operations. Based on past experience, a significant portion of this growth
will likely occur through acquisitions and other forms of business combinations.
The ability to properly evaluate the fair value of acquisitions, to successfully
integrate them into our current business operations and to realize the projected
profits and returns are inherent risks related to acquisitions. The Corporation
has gained significant expertise in evaluating businesses, performing due
diligence and integrating new businesses. We believe the industry consolidation
of the recent years will continue and that "size" will be required to
effectively compete in the global forest products industry.

|OUTLOOK
|-------

FOREST PRODUCTS

In last year's MD&A, we indicated that we expected a refund
of lumber duties deposited and a satisfactory resolution to the long running
dispute. This did not occur in fiscal 2005. While Canadian lumber producers made
significant progress in improving their relative position via various legal
challenges, it has not been possible to convince US authorities to respect their
legal obligations as set out by the North American Free Trade Agreement (NAFTA).
The $310.3 million of duties charged since May 22, 2002, including $89.4 million
in fiscal 2005, have negatively impacted the Corporation's reported financial
results. Although we remain cautiously optimistic that a solution could occur in
fiscal 2006, we will manage our business on the basis that the duties will
continue to be paid throughout the year, albeit on a reduced basis due to a
lower antidumping rate expected to be effective in December 2005. As for lumber
markets, we were correct in our view that pricing in fiscal 2005 would not be as
strong as in the prior year. The weaker US $ also negatively impacted Canadian
producers by increasing their relative cost position. In response to this
challenging environment and anticipated reductions in future allowable timber
harvesting levels, the Corporation restructured its Eastern Canadian SPF sawmill
operations. This resulted in the permanent closure of three sawmills. Although
total production was reduced by approximately 100 million FBM, the remaining
sawmills will be 21% larger on average. The restructuring is expected to yield
annual cost savings of approximately $30 million beginning in fiscal 2006. Our
view on lumber markets is relatively cautious. Housing starts in North America
are currently running at a record pace and we would expect a reduction to more
normal levels at some point in the future. As well, the beetle infestation in
British Columbia is leading to increased harvesting and production, which in
turn will generate an ample supply of lumber in the near and medium term.

PULP

Twelve months ago, we expressed a view that US $ reference
prices would exceed US $700 per tonne (NBSK  North America) by early calendar
2005. Although we did see a gradual improvement, prices actually peaked at US
$680 per tonne in the February  April 2005 period. We had identified a few
risks associated with our outlook, including the requirement for a stronger
printing and writing paper business to support the market pulp business. This
did not occur in fiscal 2005. As well, for the third consecutive year, we saw
the benefit of higher US$ reference prices for pulp largely offset by a stronger
Canadian $ and Euro. As at September 2005, the benchmark price for NBSK stood at
US $620 per tonne. Given the current weakness of the US $ versus the Canadian $
and the Euro, we view this as an unsustainable price for many producers,
particularly those in Eastern Canada where fibre availability and cost remain
challenging. Going forward, we anticipate prices to increase to the US $675-700
range in fiscal 2006. If demand is not sufficient to increase prices, we believe
a combination of permanent and temporary curtailments will occur, ultimately
yielding the same result. On a longer-term basis, the reduced softwood fibre
availability in Eastern Canada will require that a few pulp mills be permanently
shut. The Corporation is confident that past and planned future improvements at
the

30

---



Témiscaming, Smooth Rock Falls and Marathon pulp mills will ensure their
continued operation. However, their fibre costs and margins will continue to be
under pressure until the rationalization occurs.

PAPER

Our view of the newsprint market in fiscal 2005 turned out to
be absolutely correct. Price increases, from US $550 per tonne in September 2004
to US $615 per tonne in September 2005, were driven primarily by the stronger
Canadian $ and its negative impact on the relative cost position of Canadian
newsprint producers. Faced with a continued decline in demand, producers
continued to reduce production capacity. In February 2004, the Corporation
reduced its capacity by 70,000 tonnes or approximately 12% when it idled No 1 PM
at the Kapuskasing newsprint mill. Our view on newsprint is one of modest
improvement. At some point, the decline in North American demand should cease,
allowing producers to take a pause on capacity reduction. As well, the
relatively strong Canadian dollar will continue to put upward pressure on
prices. The Corporation has an opportunity to greatly improve its financial
performance if satisfactory electricity pricing in Ontario can be achieved. The
Kapuskasing newsprint operation, which remains EBITDA positive because of higher
efficiencies in all areas except purchased energy, continues to pay $20 million
to $30 million more per year for electricity than would be charged in other
Canadian provinces. Industry in Ontario effectively subsidizes individual
consumers. At some point, economics will prevail over politics, although there
is no assurance this will occur in the near term.

Our view of coated papers in fiscal 2005 was also correct.
The benchmark price (No 5  40 lbs) increased by US $140 per short ton reaching
US $880 per short ton. This actually represented a return to more historical
levels after a very low pricing period in 2003 and 2004. Unlike our other
businesses, which are primarily based in Canada and Europe, our coated paper
manufacturing is based in the US. As such, the weaker US $ improves our relative
cost position versus non-US producers, which normally leads to better pricing.
At current levels, we would not expect any significant price increases in fiscal
2006. The US $ has appreciated versus the Euro in the last 6 months, which will
allow imports to be more competitive versus domestic producers. However, higher
fossil fuel costs, which are a global phenomenon, will help harden the resolve
of producers to maintain or improve pricing. Our efforts in 2006 will be
directed at improving the St. Francisville operation by reducing its costs and
increasing coated paper production by 10%.

SUMMARY

In summary, the financial results of 2005 fell short of our
expectations. Our view of pricing was reasonably accurate but we had not
foreseen the weakness of the US $. We had also expected that the softwood lumber
dispute would have been resolved by now, leading to a substantial refund of
previous deposits and significantly improved cash flow going forward. The
Company, like its competitors, is facing higher costs for energy. The
pass-through of these costs has proven challenging in light of relatively weak
demand in certain areas. The Corporation remains focused on generating between
$100 million and $150 million of liquidity via several initiatives in fiscal
2006 and is confident it will achieve this goal. The potential resolution of the
softwood lumber battle and the refund of deposits will be a key determinant of
financial performance in fiscal 2006.

|ADDITIONAL INFORMATION
|----------------------

Additional information relating to Tembec Industries, including the AIF, can
be found on SEDAR at www.sedar.com.

31

---



SECTION 2



32

---



> Consolidated Financial Statements of

TEMBEC INDUSTRIES INC.

Years ended September 24, 2005 and September 25, 2004

- 33-

---





| | KPMG LLP                   |                         
| | -------------------------- | ------------------------
| | Chartered Accountants      |                         
| | 2000 McGill College Avenue | Telephone (514) 840-2100
| | Suite 1900                 | Telefax (514) 840-2187  
| | Montréal (Québec) H3A 3H8  | www.kpmg.ca             

AUDITORS' REPORT

To the Shareholder of Tembec Industries Inc.

We have audited the consolidated balance sheets of Tembec Industries Inc. as
at September 24, 2005 and September 25, 2004, and the consolidated statements of
operations, retained earnings and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 September 24,
2005 and September 25, 2004, and the results of its operations and its cash
flows for the years then ended in accordance with Canadian generally accepted
accounting principles.



Chartered Accountants

Montréal, Canada 
November 8, 2005

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

- 34 -

---



TEMBEC INDUSTRIES INC. Consolidated Balance Sheets

September 24, 2005 and September 25, 2004 
(in millions of dollars)

|                                                                             |   | 2005    |            | 2004   
|---------------------------------------------------------------------------- | - | ------- | ---------- | -------
|                                                                             |   |         | (Restated)
|                                                                             |   |         |            |        
|Assets                                                                       |   |         |            |        
|                                                                             |   |         |            |        
|Current assets:                                                              |   |         |            |        
|Cash and cash equivalents                                                    | $ |        | $          | 69.8   
|Temporary investments                                                        |   | 15.7    |            |       
|Derivative financial
    instruments (note 22)                               |   | 5.9     |            | 82.2   
|Accounts receivable (note
    8)                                             |   | 428.1   |            | 464.5  
|Due from parent company,
    Tembec Inc.                                     |   | -       |            | 18.0   
|Inventories (notes 3 and
    8)                                              |   | 579.4   |            | 569.4  
|Prepaid expenses                                                             |   | 24.2    |            | 21.5   
|                                                                             |   | 1,053.3 |            | 1,225.4
|                                                                             |   |         |            |        
|Derivative financial instruments (note 22)                                   |   |        |            | 32.1   
|Investments                                                                  |   | 4.9     |            | 5.1    
|Fixed assets (note 5)                                                        |   | 2,130.8 |            | 2,401.6
|Other assets (note 6)                                                        |   | 122.8   |            | 119.1  
|Future income taxes (note 19)                                                |   | 93.4    |            | 86.9   
|Goodwill (notes 2, 7 and 17)                                                 |   | 3.3     |            | 28.9   
|                                                                             |   |         |            |        
|                                                                             | $ | 3,408.5 | $          | 3,899.1
|                                                                             |   |         |            |        
|Liabilities and Shareholder's Equity                                         |   |         |            |        
|                                                                             |   |         |            |        
|Current liabilities:                                                         |   |         |            |        
|Operating bank loans (note
    8)                                            | $ | 187.7   | $          | 73.9   
|Accounts payable and
    accrued charges                                     |   | 502.8   |            | 520.4  
|Due to parent company,
    Tembec Inc.                                       |   | 9.1     |            | -      
|Current portion of
    deferred gain on foreign exchange contracts (note 22) |   | 38.4    |            | 117.9  
|Current portion of long-term debt (note 9)                                   |   | 21.3    |            | 9.4    
|                                                                             |   | 759.3   |            | 721.6  
|                                                                             |   |         |            |        
|Long-term debt (note 9)                                                      |   | 1,536.3 |            | 1,649.9
|Deferred gain on foreign exchange contracts
    (note 22)                    |   |        |            | 38.4   
|Other long-term liabilities and credits (note
    10)                        |   | 139.5   |            | 136.2  
|Future income taxes (note 19)                                                |   | 116.2   |            | 187.1  
|Minority interests (note 11)                                                 |   | 5.4     |            | 5.3    
|Redeemable preferred shares (notes 12 and 13)                                |   | 25.7    |            | 25.7   
|                                                                             |   |         |            |        
|Commitments and contingencies (note 14)                                      |   |         |            |        
|                                                                             |   |         |            |        
|Shareholder's equity:                                                        |   |         |            |        
|Share capital (note 13)                                                      |   | 732.3   |            | 732.3  
|Contributed surplus (note
    13)                                            |   | 2.9     |            | 2.9    
|Cumulative exchange
    translation of foreign subsidiaries                  |   | (3.0)   |            | (3.0)  
|Retained earnings                                                            |   | 93.9    |            | 402.7  
|                                                                             |   | 826.1   |            | 1,134.9
|                                                                             | $ | 3,408.5 | $          | 3,899.1

See accompanying notes to consolidated financial statements.

On behalf of the Board:

__________(S)____________ Chairman

__________(S)___________ President and Chief Executive Officer

- 35 -

---



TEMBEC INDUSTRIES INC. Consolidated Statements of Operations

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted)

|                                                                       |   | 2005    |            | 2004   
|---------------------------------------------------------------------- | - | ------- | ---------- | -------
|                                                                       |   |         | (Restated)
|                                                                       |   |         |            |        
|Sales                                                                  | $ | 3,585.0 | $          | 3,664.8
|                                                                       |   |         |            |        
|Freight and sales deductions                                           |   | 413.3   |            | 422.2  
|Countervailing and antidumping duties (note
    14)                    |   | 89.4    |            | 111.4  
|Cost of sales                                                          |   | 2,885.6 |            | 2,784.1
|Selling, general and administrative                                    |   | 168.6   |            | 175.7  
|                                                                       |   |         |            |        
|Earnings before unusual items, interest,
    income taxes,             |   |         |            |        
|depreciation and
    amortization, and other non-operating             |   |         |            |        
|expenses (EBITDA) (note
    15)                                        |   | 28.1    |            | 171.4  
|                                                                       |   |         |            |        
|Depreciation and amortization (note 16)                                |   | 241.3   |            | 232.3  
|Unusual items (note 17)                                                |   | 254.5   |            | 9.8    
|                                                                       |   |         |            |        
|Operating loss                                                         |   | (467.7) |            | (70.7) 
|                                                                       |   |         |            |        
|Interest, foreign exchange and other (note
    18)                     |   | 20.1    |            | (94.4) 
|Exchange gain on long-term debt                                        |   | (124.8) |            | (93.5) 
|                                                                       |   |         |            |        
|(Loss) earnings before income taxes and minority interests             |   | (363.0) |            | 117.2  
|                                                                       |   |         |            |        
|Income taxes (recovery) (note 19)                                      |   | (54.2)  |            | 41.3   
|Minority interests                                                     |   |        |            | 0.4    
|                                                                       |   |         |            |        
|Net (loss) earnings                                                    | $ | (308.8) | $          | 75.5   
|                                                                       |   |         |            |        
|                                                                       |   |         |            |        
|Consolidated Statements of Retained
    Earnings                       |   |         |            |        
|                                                                       |   |         |            |        
|Years ended September 24, 2005 and September
    25, 2004              |   |         |            |        
|(in millions of dollars)                                               |   |         |            |        
|                                                                       |   |         |            |        
|                                                                       |   | 2005    |            | 2004   
|                                                                       |   |         |            |        
|Retained earnings, beginning of year                                   | $ | 404.1   | $          | 328.2  
|Adjustment resulting from a change in accounting policies
    (note 1) |   | (1.4)   |            | (1.0)  
|                                                                       |   |         |            |        
|Restated retained earnings, beginning of year                          |   | 402.7   |            | 327.2  
|                                                                       |   |         |            |        
|Net (loss) earnings                                                    |   | (308.8) |            | 75.5   
|                                                                       |   |         |            |        
|Retained earnings, end of year                                         | $ | 93.9    | $          | 402.7  

See accompanying notes to consolidated financial statements.

- 36 -

---



TEMBEC INDUSTRIES INC. Consolidated Statements of Cash Flows

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars)

|                                                                      |         | 2005    |            | 2004   
|--------------------------------------------------------------------- | ------- | ------- | ---------- | -------
|                                                                      |         |         | (Restated)
|                                                                      |         |         |            |        
|Cash flows from operating activities:                                 |         |         |            |        
|Net earnings (loss)                                                   | $       | (308.8) | $          | 75.5   
|Adjustments for:                                                      |         |         |            |        
|Depreciation and amortization (note 16)                               |         | 241.3   |            | 232.3  
|Amortization of deferred financing costs                              |         | 5.4     |            | 5.3    
|Exchange gain on long-term debt                                       |         | (124.8) |            | (93.5) 
|Amortization of deferred gain on foreign exchange contracts (note 22) | (117.9) |         | (149.3)   
|Derivative financial instruments gain (note 22)                       |         | (30.3)  |            | (84.6) 
|Proceeds on sale of derivative financial instruments (note 22)        |         | 138.7   |            | 193.7  
|Loss on consolidation of foreign integrated subsidiaries              |         | 6.0     |            | 2.0    
|Future income taxes (note 19)                                         |         | (60.0)  |            | 34.7   
|Unusual items (note 17)                                               |         | 223.1   |            | 9.8    
|Other                                                                 |         | 9.6     |            | 8.1    
|                                                                      |         | (17.7)  |            | 234.0  
|Changes in non-cash working capital:                                  |         |         |            |        
|Temporary investments                                                 |         | (15.7)  |            | 26.7   
|Accounts receivable                                                   |         | 20.5    |            | (24.7) 
|Inventories                                                           |         | (28.4)  |            | (59.0) 
|Prepaid expenses                                                      |         | (3.6)   |            | (6.5)  
|Accounts payable
    and accrued charges                              |         | 6.9     |            | 58.0   
|                                                                      |         | (20.3)  |            | (5.5)  
|                                                                      |         | (38.0)  |            | 228.5  
|Cash flows from investing activities:                                 |         |         |            |        
|Acquisition of companies
    (note 2)                                 |         |        |            | (99.7) 
|Additions to fixed assets                                             |         | (150.4) |            | (144.7)
|Proceeds from disposal of
    fixed assets                            |         | 5.4     |            | 2.0    
|Acquisition of
    investments, net of disposals                      |         | 0.2     |            | (1.0)  
|Other                                                                 |         | (19.1)  |            | (15.7) 
|                                                                      |         | (163.9) |            | (259.1)
|Cash flows from financing activities:                                 |         |         |            |        
|Change in operating bank
    loans                                    |         | 113.8   |            | 73.9   
|Increase in long-term debt                                            |         | 33.7    |            | 11.4   
|Repayments of long-term
    debt                                      |         | (10.6)  |            | (52.4) 
|Increase in other
    long-term liabilities                           |         | 4.4     |            | 11.6   
|Repayments of other
    long-term liabilities                         |         | (3.8)   |            | (7.2)  
|Other                                                                 |         | (4.2)   |            | 6.2    
|                                                                      |         | 133.3   |            | 43.5   
|Foreign exchange loss on cash and cash
    equivalents held in        |         |         |            |        
|foreign currencies                                                    |         | (1.2)   |            | (0.3)  
|                                                                      |         |         |            |        
|Net increase (decrease) in cash and cash
    equivalents              |         | (69.8)  |            | 12.6   
|                                                                      |         |         |            |        
|Cash and cash equivalents, beginning of year                          |         | 69.8    |            | 57.2   
|                                                                      |         |         |            |        
|Cash and cash equivalents, end of year                                | $       |        | $          | 69.8   

Interest paid in 2005 totalled $135.7 million (2004 - $143.3 million) and
income taxes paid amounted to $7.9 million (2004 - $7.5 million).

See accompanying notes to consolidated financial statements.

- 37 -

---



TEMBEC INDUSTRIES INC. Consolidated Business Segment Information

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars)

|                                        |             |             |           |           | 2005        
|--------------------------------------- | ----------- | ----------- | --------- | --------- | ------------
|                                        |             |             |           |           |             
|                                        |             |             |           | Chemical  |             
|                                        | Forest      |             |           | & other   |             
|                                        | products    | Pulp        | Paper     | products  | Consolidated
|Sales:                                  |             |             |           |           |             
|External                                | $   1,158.0 | $   1,290.1 | $   942.8 | $   194.1 | 3,585.0     
|Internal                                | 195.5       | 82.5        |          | 14.8      | 292.8       
|                                        | 1,353.5     | 1,372.6     | 942.8     | 208.9     | 3,877.8     
|EBITDA                                  | 55.0        | (24.7)      | (13.1)    | 10.9      | 28.1        
|Depreciation and amortization (note 16) | 61.9        | 114.0       | 60.5      | 4.9       | 241.3       
|Unusual items (note 17)                 | 57.1        | 3.8         | 193.6     |          | 254.5       
|Operating earnings (loss)               | (64.0)      | (142.5)     | (267.2)   | 6.0       | (467.7)     
|Net fixed asset additions:              |             |             |           |           |             
|Gross fixed asset
    additions         | 74.7        | 63.0        | 11.1      | 1.6       | 150.4       
|Proceeds from disposals                 | (4.5)       | (0.5)       |          | (0.4)     | (5.4)       
|                                        | 70.2        | 62.5        | 11.1      | 1.2       | 145.0       
|Goodwill                                | 2.4         |            |          | 0.9       | 3.3         
|Identifiable assets - excluding cash    |             |             |           |           |             
|and cash equivalents                    | 813.8       | 1,490.1     | 913.7     | 190.9     | 3,408.5     
|Cash and cash equivalents               |             |             |           |           |            
|Total assets                            |             |             |           |           | $ 3,408.5   
|                                        |             |             |           |           |             
|                                        |             |             |           |           |             
|                                        |             |             |           |           | 2004        
|                                        |             |             |           |           | (Restated)  
|                                        |             |             |           |           |             
|                                        |             |             |           | Chemical  |             
|                                        | Forest      |             |           | & other   |             
|                                        | products    | Pulp        | Paper     | products  | Consolidated
|Sales:                                  |             |             |           |           |             
|External                                | $   1,209.6 | $   1,334.3 | $   953.5 | $   167.4 | $   3,664.8 
|Internal                                | 213.2       | 83.3        | -         | 13.2      | 309.7       
|                                        | 1,422.8     | 1,417.6     | 953.5     | 180.6     | 3,974.5     
|EBITDA                                  | 129.7       | 61.4        | (29.8)    | 10.1      | 171.4       
|Depreciation and amortization (note 16) | 51.7        | 108.3       | 66.6      | 5.7       | 232.3       
|Unusual items (note 17)                 |            |            | 9.8       | -         | 9.8         
|Operating earnings (loss)               | 78.0        | (46.9)      | (106.2)   | 4.4       | (70.7)      
|Net fixed asset additions:              |             |             |           |           |             
|Gross fixed asset
    additions         | 40.6        | 88.2        | 13.1      | 2.8       | 144.7       
|Proceeds from disposals                 | (1.8)       | (0.1)       |          | (0.1)     | (2.0)       
|                                        | 38.8        | 88.1        | 13.1      | 2.7       | 142.7       
|Goodwill                                | 6.4         |            | 21.6      | 0.9       | 28.9        
|Identifiable assets - excluding cash    |             |             |           |           |             
|and cash equivalents                    | 846.5       | 1,522.7     | 1,168.6   |           | 3,829.3     
|Cash and cash equivalents               |             |             |           |           | 69.8        
|                                        |             |             |           |           |             
|Total assets                            |             |             |           |           | $   3,899.1 

-38-

---



TEMBEC INDUSTRIES INC. Consolidated Geographic Segment Information

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars)

|                                 |   |          |   |         |   |       |   |          |              |        
|-------------------------------- | - | -------- | - | ------- | - | ----- | - | -------- | ------------ | -------
|                                 |   |          |   |         |   |       |   |          |              | 2005   
|                                 |   |          |   |         |   |       |   |          |              |        
|                                 |   |          |   |         |   |       |   | Chemical |              |        
|                                 |   | Forest   |   |         |   |       |   | & other  |              |        
|                                 |   | products |   | Pulp    |   | Paper |   | products | Consolidated
|                                 |   |          |   |         |   |       |   |          |              |        
|Sales (by final destination):    |   |          |   |         |   |       |   |          |              |        
|Canada                           | $ | 443.4    | $ | 53.0    | $ | 99.6  | $ | 115.2    | $            | 711.2  
|United States                    |   | 648.8    |   | 204.7   |   | 822.5 |   | 51.7     |              | 1,727.7
|Pacific Rim and India            |   | 13.2     |   | 392.7   |   | 3.5   |   | 5.2      |              | 414.6  
|United Kingdom, Europe and other |   | 52.6     |   | 639.7   |   | 17.2  |   | 22.0     |              | 731.5  
|                                 |   |          |   |         |   |       |   |          |              |        
|                                 | $ | 1,158.0  | $ | 1,290.1 | $ | 942.8 | $ | 194.1    | $            | 3,585.0
|                                 |   |          |   |         |   |       |   |          |              |        
|                                 |   |          |   |         |   |       |   |          |              |        
|                                 |   |          |   |         |   |       |   |          |              |        
|                                 |   |          |   |         |   |       |   |          |              | 2004   
|                                 |   |          |   |         |   |       |   |          |              |        
|                                 |   |          |   |         |   |       |   | Chemical |              |        
|                                 |   | Forest   |   |         |   |       |   | & other  |              |        
|                                 |   | products |   | Pulp    |   | Paper |   | products | Consolidated
|                                 |   |          |   |         |   |       |   |          |              |        
|Sales (by final destination):    |   |          |   |         |   |       |   |          |              |        
|Canada                           | $ | 445.1    | $ | 68.1    | $ | 110.7 | $ | 98.2     | $            | 722.1  
|United States                    |   | 707.9    |   | 197.9   |   | 805.8 |   | 37.6     |              | 1,749.2
|Pacific Rim and India            |   | 14.2     |   | 445.5   |   | 13.0  |   | 6.7      |              | 479.4  
|United Kingdom, Europe and other |   | 42.4     |   | 622.8   |   | 24.0  |   | 24.9     |              | 714.1  
|                                 |   |          |   |         |   |       |   |          |              |        
|                                 | $ | 1,209.6  | $ | 1,334.3 | $ | 953.5 | $ | 167.4    | $            | 3,664.8
|                                 |   |          |   |         |   |       |   |          |              |        
|                                 |   |          |   |         |   |       |   |          |              |        
|                                 |   |          |   |         |   |       |   |          |              |        
|                                 |   |          |   |         |   |       |   |          |              |        
|                                 |   |          |   |         |   |       |   | 2005     |              | 2004   
|                                 |   |          |   |         |   |       |   |          | (Restated)  
|                                 |   |          |   |         |   |       |   |          |              |        
|Fixed assets and goodwill:       |   |          |   |         |   |       |   |          |              |        
|Canada                           |   |          |   |         |   |       | $ | 1,782.6  | $            | 2,014.6
|United States                    |   |          |   |         |   |       |   | 175.1    |              | 226.8  
|United Kingdom, Europe and other |   |          |   |         |   |       |   | 176.4    |              | 189.1  
|                                 |   |          |   |         |   |       |   |          |              |        
|                                 |   |          |   |         |   |       | $ | 2,134.1  | $            | 2,430.5

- 39 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Significant accounting policies:

> Changes in accounting policies
>   Effective September 26, 2004, the Company adopted retroactively with
>   restatement the new recommendations of the Canadian Institute of Chartered
>   Accountants (CICA) under CICA Handbook Section 3110 with respect to asset
>   retirement obligations. These recommendations require entities to record a
>   liability at fair value, in the period in which a legal obligation associated
>   with the retirement of an asset is incurred. The associated costs are
>   capitalized as part of the carrying value of the related asset and depreciated
>   over its remaining useful life. The liability is accreted using a credit
>   adjusted risk free interest rate. For such assets, a liability will be
>   initially recognized in the period in which sufficient information exists to
>   estimate a range of possible settlement dates. For the Company, asset
>   retirement obligations in connection with the adoption of CICA Handbook
>   Section 3110 were primarily related to landfill capping obligations. The
>   adoption of CICA Handbook Section 3110 has decreased the September 25, 2004
>   retained earnings by $1.4 million, increased net fixed assets by $1.1 million,
>   decreased future income taxes by $0.7 million and increased liabilities by
>   $3.2 million. The restatement resulted in a decrease in net earnings of $0.4
>   million ($0.01 per share) for the year ended September 25, 2004.
>   Effective October 1st, 2003, the CICA introduced new
>   recommendations under CICA Handbook Section 1100 for the application of
>   Generally Accepted Accounting Principles (GAAP), which, among other things,
>   provides guidance on alternate sources to consult with when an issue is not
>   specifically addressed by Canadian GAAP. Previously, the Company, along with
>   others in the Forest Industry, presented sales net of shipping, handling costs
>   and countervailing and anti-dumping duties. As a result of applying this new
>   standard, the Company has removed its reference to gross and net sales.
>   Effective September 28, 2003, the Company adopted the new recommendations
>   of CICA Handbook Section 3063 with respect to the impairment of long-lived
>   assets. These recommendations provide accounting guidance for the
>   determination of long-lived asset impairment as well as recognition,
>   measurement and disclosure of the impairment.
>   Effective September 28, 2003, the Company applied the accounting treatment
>   prescribed by Emerging Issues Committee ("EIC") EIC-128 of the CICA Handbook
>   with respect to the accounting for trading, speculative or non-hedging
>   derivative financial instruments. The abstract addresses the accounting
>   treatment for derivative financial instruments that do not qualify for hedge
>   accounting. The financial statements prospectively account for derivative
>   financial instruments on a market value basis and the deferred gain recognized
>   at the beginning of the fiscal year is being amortized into earnings based on
>   the original maturity dates of the derivative financial instruments. As a
>   result of applying EIC-128 of the CICA Handbook, the Company recognized a
>   deferred gain of $223.4 million relating to derivative financial instruments
>   that were outstanding at the beginning of fiscal 2004 and the same amount was
>   also recognized as an asset on the balance sheet.

- 40 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Significant accounting policies (continued):
  Basis of consolidation

> The consolidated financial statements include the accounts
>   of Tembec Industries Inc. (the ''Corporation'') and all its subsidiaries and
>   joint ventures (collectively ''Tembec'' or the ''Company''). Investments over
>   which the Corporation has effective control are fully consolidated.
>   Investments over which the Corporation exercises significant influence are
>   accounted for by the equity method. The Corporation's interest in joint
>   ventures is accounted for by the proportionate consolidation method.
>   Business of the Company
>   The Company operates an integrated forest products
>   business. Prior to the December 2004 quarter, the Company consisted of five
>   reportable business segments: Forest products, Pulp, Paper, Paperboard and
>   Chemicals. Due to recent organizational and reporting changes, the Paper and
>   Paperboard segments have been regrouped under Paper. Comparative figures for
>   prior periods have been reclassified to conform with the new segment
>   presentation. The performance of each segment is evaluated by the management
>   of the Company against short-term and long-term financial objectives as well
>   as environmental and other key criteria. The Forest products segment consists
>   primarily of forest and sawmill operations, which produce lumber and building
>   materials. The Pulp segment includes the manufacturing and marketing
>   activities of a number of different types of pulps. The Paper segment consists
>   primarily of production and sales of newsprint, coated papers and bleached
>   board. The Chemical and other products segment consists primarily of the
>   transformation and sale of resins and pulp byproducts. Intersegment transfers
>   of wood chips, pulp, chemicals and other services are recorded at transfer
>   prices agreed to by the parties, which are intended to approximate fair market
>   value. The accounting policies used in these business segments are the same as
>   those described in this note.
>   Use of estimates
>   The preparation of financial statements in conformity with
>   generally accepted accounting principles requires management to make estimates
>   and assumptions that affect the reported amounts of assets and liabilities and
>   disclosure of contingent assets and liabilities at the date of the financial
>   statements and the reported amounts of revenues and expenses during the
>   period. Significant areas requiring the use of management estimates are:
>   useful lives of plant and equipment, impairment of long-lived assets and
>   goodwill, employee future benefits and income taxes. Actual results could
>   differ from those estimates.

- 41 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Significant accounting policies (continued): Revenue

> The Company recognizes revenue when persuasive evidence of
>   an arrangement exists, goods have been delivered, there are no uncertainties
>   surrounding product acceptance, the related revenue is fixed and determinable
>   and collection is reasonably assured.
>   Cash and cash equivalents
>   Cash and cash equivalents include cash on hand, demand
>   deposits, banker's acceptances and commercial paper with maturities of three
>   months or less and are recorded at cost, which approximates market value.
>   Inventories
>   Finished goods are valued at the lower of cost, on a first
>   in, first out or average cost basis, and net realizable value. Other
>   inventories are valued at the lower of cost, on a first in, first out or
>   average cost basis, and replacement cost.
>   Investments
>   Investments in affiliated companies in which Tembec has no
>   significant influence are carried at cost. Investments over which the Company
>   exercises significant influence are accounted for by the equity method.

- 42 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Significant
  accounting policies (continued):

> Fixed assets and government assistance
>   Fixed assets are recorded at cost after deducting investment
>   tax credits and government assistance. Depreciation and amortization are
>   provided over their estimated useful lives, generally on a straight-line
>   basis, as follows:

| | Asset                                                             | Period       
| | ----------------------------------------------------------------- | -------------
| |                                                                   |              
| | Buildings, Pulp, Newsprint and Papermill
    production equipment | 20 - 30 years
| | Sawmill production equipment                                      | 10 - 15 years
| | Boardmill production equipment                                    | 25 - 30 years

> Certain forest access roads are depreciated in relation to the volume of
>   wood cut and certain machinery and equipment are depreciated using units of
>   production. Capitalized interest is based on the average cost of construction
>   of major projects in progress during the year, using interest rates actually
>   paid on long-term debt.
>   Impairment of long-lived assets
>   Long-lived assets are reviewed for impairment upon the
>   occurrence of events or changes in circumstances indicating that the carrying
>   value of the assets may not be recoverable, as measured by comparing their net
>   book value to the estimated undiscounted future cash flows generated by their
>   use. Impaired assets are recorded at fair value, determined principally by
>   using discounted future cash flows expected from their use and eventual
>   disposition.
>   Goodwill
>   Goodwill is subject to an annual impairment test or more
>   frequently if events or changes in circumstances indicate that goodwill might
>   be impaired. Testing for impairment is accomplished mainly by determining
>   whether the fair value of a reporting unit, based on discounted cash flows,
>   exceeds the net carrying amount of the net assets of that reporting unit as at
>   the assessment date. If the fair value is greater than the carrying amount, no
>   impairment is necessary. In the event that the carrying amount exceeds the
>   fair value, a second test must be performed whereby the fair value of the
>   reporting unit's goodwill must be estimated to determine if it is less than
>   its carrying amount. Fair value of goodwill is estimated in the same manner as
>   goodwill is determined in an acquisition, that is, the excess of the fair
>   value of the reporting unit's over the fair value of the identifiable net
>   assets of the reporting unit. In the case where the carrying value of the
>   reporting unit exceeds its fair value, the carrying value of goodwill will be
>   reduced and an impairment loss recognized and charged to operating results.

- 43 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Significant accounting policies (continued):

> Other assets
>   (i) Development and pre-operating expenses are amortized on
>   a straight-line basis over a period not exceeding 5 years.
>   (ii) Financing costs are amortized on a straight-line basis
>   over the expected term of the related debt.
>   (iii) Timber rights are amortized on a straight-line basis
>   over a period not exceeding 40 years.
>   (iv) Assets held for resale are valued at the lower of cost
>   and net realizable value.
>   Environmental costs
>   The Company is subject to environmental laws and
>   regulations enacted by federal, provincial, state and local authorities.
>   Environmental expenditures that will benefit the Company in future years are
>   recorded at cost and capitalized as part of fixed assets. Depreciation is
>   charged to income over the estimated future benefit period of the assets.
>   Environmental expenditures, that are not expected to provide a benefit to the
>   Company in future periods, are accrued and expensed to earnings, on a
>   site-by-site basis, when a requirement to remedy an environmental exposure is
>   probable and a cost can be reasonably estimated.
>   Asset retirement obligations
>   Asset retirement obligations are recognized, at fair value,
>   in the period in which the Company incurs a legal obligation associated to the
>   retirement of an asset. The associated costs are capitalized as part of the
>   carrying value of the related asset and depreciated over its remaining useful
>   life. The liability is accreted using a credit adjusted risk-free interest
>   rate.
>   Employee future benefits
>   Pension benefit plans
>   The Company accrues the cost of defined benefit plans as
>   determined by independent actuaries based on assumptions determined by the
>   Company. The net periodic benefit cost includes:
>   - the cost of
>   pension benefits provided in exchange for employees' services rendered during
>   the year;
>   - the interest
>   cost of pension obligations;
>   - the expected
>   return on pension fund assets based on the fair value of plan assets;
>   - gains or losses
>   on settlements or curtailments, where, when the restructuring of a benefit
>   plan gives rise to both a curtailment and a settlement of obligations, the
>   curtailment is accounted for prior to the settlement;
>   - the
>   straight-line amortization of past service costs and plan amendments over the
>   average remaining service period of the active employee group covered by the
>   plans; and

- 44 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Significant accounting
  policies (continued):

> Employee future benefits (continued)
>   Pension benefit plans (continued)
>   - the
>   amortization of cumulative unrecognized net actuarial gains and losses in
>   excess of 10% of the greater of the accrued benefit obligation or
>   market-related value of plan assets at the beginning of year over the average
>   remaining service period of the active employee group covered by the plans.
>   The pension plan obligations are determined in accordance
>   with the projected benefit method prorated on services.
>   Other employee future benefit plans
>   The Company accrues the cost of post-retirement benefits
>   other than pensions as determined by independent actuaries based on
>   assumptions determined by the Company. These benefits, which are funded by the
>   Company as they become due, include life insurance programs as well as medical
>   and dental benefits. The Company amortizes the cumulative unrecognized net
>   actuarial gains and losses in excess of 10% of the accrued benefit obligation
>   at the beginning of the year, over the average remaining service period of the
>   active employee group covered by the plans.
>   Translation of foreign currencies
>   Monetary assets and liabilities of domestic and integrated
>   foreign operations denominated in foreign currencies are translated at
>   year-end exchange rates. Non-monetary assets and liabilities of integrated
>   foreign operations are translated at the historical rate relevant for the
>   particular asset or liability. The exchange gains or losses resulting from the
>   translations are included in "Interest, foreign exchange and other" expenses.
>   Revenues and expenses are translated at prevailing market rates in the
>   recognition year.
>   Income taxes
>   The Company accounts for income taxes using the asset and liability method.
>   Under this method, future income tax assets and liabilities are determined
>   based on the temporary differences between the accounting basis and the tax
>   basis of assets and liabilities. These temporary differences are measured
>   using the current tax rates and laws expected to apply when these differences
>   reverse. Future tax benefits are recognized to the extent that realization of
>   such benefits is considered more likely than not. The effect on future tax
>   assets and liabilities of a change in income tax rates is recognized in
>   earnings in the period that includes the substantive enactment date.
>   Investment tax credits related to research and development are recognized
>   in earnings as a reduction of such expenses when the Company has made the
>   qualifying expenditures and there is reasonable assurance that the credits
>   will be realized.

- 45 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Significant accounting
  policies (continued): Derivative financial instruments

> The Company manages its foreign exchange exposure on anticipated net cash
>   inflows, principally U.S. dollars and Euros, through the use of options and
>   forward contracts.
>   The Company may, from time to time, manage its exposure to commodity price
>   risk associated with sales of lumber, pulp and newsprint through the use of
>   cash-settled hedge (swap) contracts. The Company does not hold or issue
>   derivative financial instruments for trading or speculative purposes.
>   The Company does not currently apply hedge accounting for
>   these derivative financial instruments. These are measured at fair value, with
>   changes in fair value after September 27, 2003, recognized in income. The
>   unrealized gain as of September 27, 2003 is being amortized into earnings
>   based on the original maturity date of the contracts.

1. Acquisitions:

> 2005 - None
>   2004
>   On October 28, 2003, the Company acquired all of the assets of BTLSR Toledo
>   Inc. ("BTLSR"), a custom manufacturer of spray-dried powdered resins located
>   in Toledo, Ohio (USA). Depending on the financial results of BTLSR, the seller
>   is entitled to a maximum Contingent Value Right (CVR) payment, over the
>   five-year period following the sale, of U.S. $3.0 million (Canadian $3.9
>   million).
>   On November 3, 2003, the Company acquired the assets of two sawmills
>   located in La Sarre and Senneterre ("La Sarre Senneterre"), Quebec from Nexfor
>   Inc.
>   On December 15, 2003, the Company acquired the assets of a sawmill located
>   in Chapleau ("Chapleau"), Ontario from Weyerhaeuser Company Limited.
>   On August 4, 2004, the Company acquired the remaining 50% interest in Excel
>   Forest Products ("Excel"), a sawmill located in Opasatika, Ontario.

- 46 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Acquisitions (continued):

> Details of the acquisitions are as follows:

| |                                          |   |       |            |          |          |      |       |       |       | 2004 
| | ---------------------------------------- | - | ----- | ---------- | -------- | -------- | ---- | ----- | ----- | ----- | -----
| |                                          |   |       |            |          |          |      |       |       |       |      
| |                                          |   |       |            | La Sarre |          |      |       |       |       |      
| |                                          |   | BTLSR | Senneterre |          | Chapleau |      | Excel |       | Total
| |                                          |   |       |            |          |          |      |       |       |       |      
| | Net assets acquired:                     |   |       |            |          |          |      |       |       |       |      
| |                                          |   |       |            |          |          |      |       |       |       |      
| | Working capital:                         |   |       |            |          |          |      |       |       |       |      
| | Non-cash working capital                 | $ | 2.6   | $          | 9.4      | $        | 3.5  | $     |      | $     | 15.5 
| |                                          |   | 2.6   |            | 9.4      |          | 3.5  |       |      |       | 15.5 
| |                                          |   |       |            |          |          |      |       |       |       |      
| | Non-working capital:                     |   |       |            |          |          |      |       |       |       |      
| | Investments                              |   |      |            | 1.0      |          |     |       |      |       | 1.0  
| | Fixed assets                             |   | 5.9   |            | 51.3     |          | 21.9 |       |      |       | 79.1 
| | Other assets                             |   |      |            |         |          |     |       | 2.1   |       | 2.1  
| | Goodwill                                 |   |      |            |         |          |     |       | 2.5   |       | 2.5  
| | Long-term debt and other
    liabilities |   |      |            | (2.6)    |          |     |       | -     |       | (2.6)
| | Future income taxes                      |   |      |            |         |          |     |       | (0.7) |       | (0.7)
| | Minority interests                       |   |      |            |         |          |     |       | 2.8   |       | 2.8  
| |                                          |   | 5.9   |            | 49.7     |          | 21.9 |       | 6.7   |       | 84.2 
| |                                          |   |       |            |          |          |      |       |       |       |      
| |                                          | $ | 8.5   | $          | 59.1     | $        | 25.4 | $     | 6.7   | $     | 99.7 
| |                                          |   |       |            |          |          |      |       |       |       |      
| | Consideration paid in cash               | $ | 8.5   | $          | 59.1     | $        | 25.4 | $     | 6.7   | $     | 99.7 

-

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Inventories:

| |                        |   | 2005  |   | 2004 
| | ---------------------- | - | ----- | - | -----
| |                        |   |       |   |      
| | Finished goods         | $ | 279.3 | $ | 277.5
| | Logs and wood chips    |   | 156.4 |   | 157.0
| | Supplies and materials |   | 143.7 |   | 134.9
| |                        |   |       |   |      
| |                        | $ | 579.4 | $ | 569.4

1. Investments in joint ventures:

> The consolidated financial statements include the Company's
>   proportionate share of the revenues, expenses, assets and liabilities of AV
>   Cell Inc., 1387332 Ontario Limited (Marathon Pulp joint venture), Temlam Inc.,
>   and Temrex Forest Products Limited Partnership at 50%, as follows:

| |                                                             |   | 2005   |   | 2004  
| | ----------------------------------------------------------- | - | ------ | - | ------
| |                                                             |   |        |   |       
| | Assets:                                                     |   |        |   |       
| | Current assets                                              | $ | 76.2   | $ | 72.2  
| | Fixed assets and other                                      |   | 161.8  |   | 136.9 
| |                                                             | $ | 238.0  | $ | 209.1 
| |                                                             |   |        |   |       
| | Liabilities and equity:                                     |   |        |   |       
| | Current liabilities                                         | $ | 60.7   | $ | 46.3  
| | Long-term debt                                              |   | 50.7   |   | 39.2  
| | Other long-term
    liabilities                             |   | 9.1    |   | 10.1  
| | Equity                                                      |   | 117.5  |   | 113.5 
| |                                                             | $ | 238.0  | $ | 209.1 
| |                                                             |   |        |   |       
| | Sales                                                       | $ | 226.8  | $ | 220.5 
| | Expenses                                                    |   | 227.3  |   | 215.3 
| | Earnings (loss) before income taxes, interest, and minority |   |        |   |       
| | interests                                                   | $ | (0.5)  | $ | 5.2   
| |                                                             |   |        |   |       
| | Cash provided by (used in):                                 |   |        |   |       
| | Operating                                                   | $ | 2.2    | $ | 8.4   
| | Investing                                                   |   | 33.5   |   | (16.5)
| | Financing                                                   |   | (32.5) |   | 7.4   
| |                                                             | $ | 3.2    | $ | (0.7) 

- 48 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Fixed assets:

| |                               |   |         |              |         |       | 2005    |         |              |   |         |   | 2004   
| | ----------------------------- | - | ------- | ------------ | ------- | ----- | ------- | ------- | ------------ | - | ------- | - | -------
| |                               |   |         |              |         |       |         |         |              |   |         |   |        
| |                               |   |         | Accumulated  |         |       |         |         | Accumulated  |   |        
| |                               |   | Cost    | depreciation |         | Net   |         | Cost    | depreciation |   | Net    
| |                               |   |         |              |         |       |         |         |              |   |         |   |        
| | Land                          | $ | 20.2    | $            |        | $     | 20.2    | $       | 23.0         | $ |        | $ | 23.0   
| | Production buildings          |   |         |              |         |       |         |         |              |   |         |   |        
| | and equipment:                |   |         |              |         |       |         |         |              |   |         |   |        
| | Pulp mills                    |   | 1,785.4 | 845.6        |         | 939.8 |         | 1,739.4 | 761.0        |   | 978.4  
| | Newsprint and Paper mills     |   | 860.6   |              | 367.1   |       | 493.5   |         | 988.2        |   | 325.9   |   | 662.3  
| | Sawmills                      |   | 543.9   |              | 278.2   |       | 265.7   |         | 573.3        |   | 247.5   |   | 325.8  
| | Boardmill                     |   | 295.7   |              | 127.0   |       | 168.7   |         | 295.2        |   | 116.5   |   | 178.7  
| | Roads and timber holdings     |   | 151.6   |              | 65.2    |       | 86.4    |         | 142.3        |   | 57.6    |   | 84.7   
| | Other buildings and equipment |   | 89.2    |              | 42.7    |       | 46.5    |         | 93.5         |   | 39.8    |   | 53.7   
| | Assets under construction     |   | 110.0   |              |        |       | 110.0   |         | 95.0         |   |        |   | 95.0   
| |                               |   |         |              |         |       |         |         |              |   |         |   |        
| |                               | $ | 3,856.6 | $            | 1,725.8 | $     | 2,130.8 | $       | 3,949.9      | $ | 1,548.3 | $ | 2,401.6

1. Other assets:

| |                                                |   | 2005  |   | 2004 
| | ---------------------------------------------- | - | ----- | - | -----
| |                                                |   |       |   |      
| | Deferred costs, at amortized value:            |   |       |   |      
| | Development, pre-operating
    costs and other | $ | 10.0  | $ | 11.6 
| | Financing costs                                |   | 11.3  |   | 13.6 
| | Assets held for resale                         |   | 1.0   |   | 4.8  
| | Long-term loans to employees                   |   | 8.3   |   | 9.5  
| | Timber rights                                  |   | 26.1  |   | 27.7 
| | Deferred pension costs                         |   | 66.1  |   | 51.9 
| |                                                |   |       |   |      
| |                                                | $ | 122.8 | $ | 119.1

> Long-term loans to employees:
>   Included in long-term loans to employees is $5.6 million
>   (2004 - $6.3 million) of share purchase loans with respect to shares of Tembec
>   Inc., the ultimate parent company. At September 24, 2005, there were 489,575
>   (2004 - 552,625) shares held in trust in respect of the employee loans for
>   which the market value was $2.38 (2004 - $8.45) per share. These shares are
>   held in trust as security for the loans, which are non-interest bearing, and
>   with defined repayment terms not exceeding 10 years.

- 49 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Goodwill

| |                             |          |       |       |          | Chemicals    |     |  
| | --------------------------- | -------- | ----- | ----- | -------- | ------------ | --- | -
| |                             | Forest   |       |       | & other  |              |    
| |                             | products |       | Paper | products | Consolidated
| |                             |          |       |       |          |              |     |  
| | 2004                        |          |       |       |          |              |     |  
| |                             |          |       |       |          |              |     |  
| | Goodwill, beginning of year | $        | 3.9   | $     | 21.6     | $            | 0.9 | $
| | Acquisition (note 2)        |          | 2.5   |       |         |              | -   |  
| |                             |          |       |       |          |              |     |  
| | Goodwill, end of year       | $        | 6.4   | $     | 21.6     | $            | 0.9 | $
| |                             |          |       |       |          |              |     |  
| | 2005                        |          |       |       |          |              |     |  
| |                             |          |       |       |          |              |     |  
| | Goodwill, beginning of year | $        | 6.4   | $     | 21.6     | $            | 0.9 | $
| | Goodwill impairment         |          | (4.0) |       | (21.6)   |              | -   |  
| |                             |          |       |       |          |              |     |  
| | Goodwill, end of year       | $        | 2.4   | $     | -        | $            | 0.9 | $

1. Operating bank
  loans:

The Company had approximately $428.4 million (2004 - $353.3
  million) of revolving operating credit facilities for which accounts
  receivable and inventories are pledged as collateral. Interest rates range
  between prime and prime plus 2.25%. At September 24, 2005, $187.7 million
  (2004 - $73.9 million) were drawn on the above facilities and $29.1 million
  (2004 - $25.6 million) were reserved for letters of credit.

- 50 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Long-term debt:

| |                                                           |   | 2005    |   | 2004   
| | --------------------------------------------------------- | - | ------- | - | -------
| |                                                           |   |         |   |        
| | Tembec Industries Inc.:                                   |   |         |   |        
| |                                                           |   |         |   |        
| | 8.625% Unsecured Senior Notes
    (US$350.0 million)      |   |         |   |        
| | redeemable at
    the option of the Company on or after   |   |         |   |        
| | June 30, 2004
    at specified redemption prices, due     |   |         |   |        
| | June 30, 2009
    with semi-annual interest payments due  |   |         |   |        
| | June 30 and
    December 30 of each year                  | $ | 409.9   | $ | 446.3  
| |                                                           |   |         |   |        
| | 8.50% Unsecured Senior Notes
    (US$500.0 million)       |   |         |   |        
| | redeemable at
    any time at the option of the Company,  |   |         |   |        
| | at a price
    that includes a make-whole payment, due    |   |         |   |        
| | February 1,
    2011 with semi-annual interest payments   |   |         |   |        
| | due February 1
    and August 1 of each year              |   | 585.6   |   | 637.6  
| |                                                           |   |         |   |        
| | 7.75% Unsecured Senior Notes
    (US$350.0 million)       |   |         |   |        
| | redeemable at
    any time at the option of the Company,  |   |         |   |        
| | at a price
    that includes a make-whole payment, due    |   |         |   |        
| | March 15, 2012
    with semi-annual interest payments     |   |         |   |        
| | due March 15
    and September 15 of each year            |   | 409.9   |   | 446.3  
| |                                                           |   |         |   |        
| | Advances from the ultimate
    parent company, Tembec     |   |         |   |        
| | Inc., with
    interest at cost to Tembec Inc., with no   |   |         |   |        
| | specific terms
    of repayment                           |   | 67.3    |   | 67.3   
| |                                                           |   |         |   |        
| | Tembec SAS:                                               |   |         |   |        
| |                                                           |   |         |   |        
| | Unsecured term loans (Euro 2.7
    million in 2005 - Euro |   |         |   |        
| | 3.3 million in
    2004), bearing interest at rates up to |   |         |   |        
| | 1.5%,
    repayable and maturing at various dates to      |   |         |   |        
| | December 2013                                             |   | 3.9     |   | 5.1    
| |                                                           |   |         |   |        
| | Advances from related company,
    Tembec Envirofinance   |   |         |   |        
| | SAS,
    non-interest bearing, repayable and maturing at  |   |         |   |        
| | various dates
    from June 2014 to June 2017             |   | 12.6    |   | 7.7    
| |                                                           |   |         |   |        
| | Other Tembec SAS obligations                              |   | 7.1     |   | 8.3    
| |                                                           |   |         |   |        
| | Balance carried forward                                   |   | 1,496.3 |   | 1,618.6

- 51 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Long-term debt
  (continued):

| |                                                            |   | 2005    |   | 2004   
| | ---------------------------------------------------------- | - | ------- | - | -------
| |                                                            |   |         |   |        
| | Balance brought forward                                    | $ | 1,496.3 | $ | 1,618.6
| |                                                            |   |         |   |        
| | 1387332 Ontario Limited (Marathon Pulp joint
    venture)  |   |         |   |        
| | (50% proportionate
    consolidation):                     |   |         |   |        
| |                                                            |   |         |   |        
| | Term loan bearing interest at
    prime rate plus 2.75%,   |   |         |   |        
| | maturing March
    31, 2006                                |   | 12.9    |   | 15.5   
| |                                                            |   |         |   |        
| | Temlam Inc. (50% proportionate
    consolidation):         |   |         |   |        
| | Term loans bearing interest at
    6.75% and between prime |   |         |   |        
| | rate plus 3⁄4%
    and 11⁄2%, maturing on various dates to     |   |         |   |        
| | June 2015,
    repayable in monthly instalments of         |   |         |   |        
| | varying
    amounts                                        |   | 32.5    |   | 7.5    
| |                                                            |   |         |   |        
| | Other long-term obligations                                |   | 15.9    |   | 17.7   
| |                                                            |   | 1,557.6 |   | 1,659.3
| |                                                            |   |         |   |        
| | Less current portion                                       |   | 21.3    |   | 9.4    
| |                                                            |   |         |   |        
| |                                                            | $ | 1,536.3 | $ | 1,649.9

> Certain covenants:
>   The indentures of agreements for Tembec's borrowings contain restrictive
>   covenants, including restrictions on the incurrence of additional
>   indebtedness, the investments in other persons, the creation of liens, sale
>   and leaseback transactions, certain amalgamations, mergers, consolidations and
>   sales of assets and certain transactions with affiliates.
>   The Marathon joint venture does not meet certain financial covenants on its
>   revolving operating line and its term loan with a syndicate of banks. As a
>   result, the operating line, which expired in March 2005, has not been renewed
>   pending the outcome of ongoing discussions with the syndicate. There is no
>   recourse to the shareholder on either of these loan facilities.
>   Instalments on consolidated long-term debt for the four years following
>   September 30, 2006 are as follows:

| | 2007 | $ | 6.7  
| | ---- | - | -----
| | 2008 |   | 7.3  
| | 2009 |   | 419.8
| | 2010 |   | 36.4 

- 52 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

|10. | Other long-term liabilities and credits:                          |   |       |   |      
|--- | ----------------------------------------------------------------- | - | ----- | - | -----
|    |                                                                   |   | 2005  |   | 2004 
|    |                                                                   |   |       |   |      
|    | Accrued benefit liability - pension benefit
    plans             | $ | 54.3  | $ | 48.6 
|    | Accrued benefit liability - other benefit
    plans               |   | 56.3  |   | 53.4 
|    | Balance payable on acquisition of Jager
    Building Systems Inc. |   | 7.0   |   | 6.7  
|    | Reforestation - BC operations                                     |   | 6.1   |   | 6.6  
|    | Environment and other asset retirement
    obligations            |   | 7.7   |   | 8.3  
|    | Deferred government assistance                                    |   |      |   | 1.0  
|    | Deferred gain on sale of assets                                   |   | 5.1   |   | 5.6  
|    | Other                                                             |   | 3.0   |   | 6.0  
|    |                                                                   |   |       |   |      
|    |                                                                   | $ | 139.5 | $ | 136.2
|    |                                                                   |   |       |   |      
|11. | Minority interests:                                               |   |       |   |      
|    |                                                                   |   |       |   |      
|    |                                                                   |   | 2005  |   | 2004 
|    |                                                                   |   |       |   |      
|    | AV Cell Inc.                                                      | $ | 5.0   | $ | 5.0  
|    | Brassac SAS                                                       |   | 0.4   |   | 0.3  
|    |                                                                   |   |       |   |      
|    |                                                                   | $ | 5.4   | $ | 5.3  
|    |                                                                   |   |       |   |      
|12. | Redeemable preferred shares:                                      |   |       |   |      
|    |                                                                   |   |       |   |      
|    |                                                                   |   | 2005  |   | 2004 
|    |                                                                   |   |       |   |      
|    | 16,627,500 Series 2 Class B preferred shares                      | $ | 16.6  | $ | 16.6 
|    | 9,103,710 Series 4 Class B preferred shares                       |   | 9.1   |   | 9.1  
|    |                                                                   |   |       |   |      
|    |                                                                   | $ | 25.7  | $ | 25.7 

-

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Share capital:

> Authorized:
>   Unlimited number of common voting shares, without par value.
>     Unlimited number of non-voting Class B preferred shares
>     issuable in series without par value, with other attributes to be determined
>     at time of issuance:
>     Unlimited number of Series 2 Class B shares redeemable
>       at any time by the Company and, commencing on June 26, 2011, at the option
>       of the holder, the redemption price being equal to the issue price plus
>       declared and unpaid dividends. The Series 2 Class B shares are entitled to
>       a preferential and non-cumulative dividend equal to the dividend yield
>       percentage paid on the common shares.
>       9,103,710 0.5% per month non-cumulative Series 4 Class
>       B shares redeemable at any time by the Company and after September 30,
>       2009, at the option of the holder, the redemption price being equal to the
>       issue price plus declared and unpaid dividends. The Series 4 Class B
>       shares can be redeemed in cash or in common shares at the option of the
>       Company.
>     Unlimited number of Class C shares, non-voting,
>     participating and redeemable at the issue price plus the increase in the
>     book value per share since the issue date.
>     Unlimited number of non-voting Class D shares, redeemable
>     at the option of the Company and the holders at the fair market value of the
>     consideration received by the Company upon issue of such share; entitled to
>     a preferential and non-cumulative annual dividend at the rate of 6% of the
>     redemption price.
>     Unlimited number of non-voting Class E shares, redeemable
>     at the option of the Company and the holders at the fair market value of the
>     consideration received by the Company upon issue of such share; entitled to
>     a preferential and non-cumulative annual dividend at the rate of 6% of the
>     redemption price.

| |                                                 |   | 2005  |   | 2004 
| | ----------------------------------------------- | - | ----- | - | -----
| |                                                 |   |       |   |      
| | Issued and fully paid:                          |   |       |   |      
| | 536,807,704 Class A shares                      | $ | 732.3 | $ | 732.3
| | Series 2 Class B preferred
    shares (note 12) |   |      |   |     
| | Series 4 Class B preferred
    shares (note 12) |   |      |   |     
| |                                                 |   |       |   |      
| |                                                 | $ | 732.3 | $ | 732.3

- 54 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Commitments and contingencies:

> Countervailing and antidumping duties:
>   In response to the expiration of the Softwood Lumber
>   Agreement, a number of industry groups in the United States filed petitions
>   with the U.S. Department of Commerce ("USDOC") and the U.S. International
>   Trade Commission ("USITC") alleging unfair trade practices by the Canadian
>   softwood lumber industry. These petitions proposed that certain softwood
>   lumber exports from Canada to the United States be charged with countervailing
>   and antidumping duties.
>   Countervailing duty
>   On August 9, 2001, the USDOC imposed a preliminary
>   countervailing duty of 19.31% on Canadian softwood lumber shipped to the U.S.
>   The Company subsequently accrued $21.8 million of countervailing duty covering
>   shipments of lumber to the U.S. between August 17, 2001 and December 15, 2001.
>   On March 22, 2002, the USDOC issued its final determination in the
>   countervailing duty investigations, adjusting the rate from 19.31% to 19.34%
>   and subsequently corrected for ministerial errors to 18.79%. The USDOC also
>   determined that no critical circumstances existed, and accordingly, the duty
>   would not apply retroactively to May 19, 2001. On May 16, 2002, the USITC
>   announced it had found no current injury, but a threat of injury, to the U.S.
>   lumber industry, effectively removing the requirement to remit any funds
>   relating to lumber shipped to the U.S. prior to December 15, 2001. The finding
>   of threat of injury resulted in the USDOC issuing an order to collect
>   countervailing duties on a going forward basis. During the June 2002 quarter,
>   the Company reversed the $21.8 million it had accrued from August 2001 to
>   December 2001. The bonds posted to cover the liability were also cancelled.
>   Effective May 22, 2002, the Company has been subject to a
>   countervailing duty of 18.79%. A charge of $18.2 million was incurred during
>   Fiscal 2002 relating to lumber shipments to the U.S. between May 22 and
>   September 28, 2002. A charge of $49.7 million was incurred during Fiscal 2003
>   relating to lumber shipments to the U.S. between September 29, 2002 and
>   September 27, 2003. A charge of $68.3 million was incurred during fiscal 2004
>   relating to lumber shipments to the U.S. between September 28, 2003 and
>   September 25, 2004. On December 20, 2004, the USDOC reduced the countervailing
>   duty deposit rate to 17.18%. On February 17, 2005, the rate was further
>   corrected to 16.37%. For Fiscal 2005, a charge of $57.0 million was incurred
>   relating to lumber shipments to the U.S. between September 26, 2004 and
>   September 24, 2005. The Company is currently remitting cash deposits to cover
>   the applicable duty.

- 55 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Commitments and contingencies (continued):

> Countervailing and antidumping duties (continued):
>   Antidumping duty
>   On October 31, 2001, the USDOC imposed a preliminary antidumping duty
>   averaging 10.76% on all of the Company's softwood lumber shipments to the U.S.
>   beginning on November 6, 2001. The aforementioned average rate was assigned
>   specifically to the Company based on the USDOC's review of the Company's
>   actual historical shipments to the U.S. On March 22, 2002, the USDOC issued
>   its final determination in the antidumping investigation, increasing the
>   Company's average rate from 10.76% to 12.04% and subsequently corrected to
>   10.21% for ministerial errors. As at March 30, 2002, the Company had accrued
>   $9.7 million of antidumping duty covering shipments of lumber to the U.S.
>   between November 6, 2001 and March 30, 2002. On May 16, 2002, the USITC
>   announced it had found no current injury to the U.S. lumber industry, but a
>   threat of injury, effectively removing the requirement to remit any funds
>   relating to lumber shipped to the U.S. prior to May 5, 2002. The USITC finding
>   of threat of injury allowed the USDOC to place an antidumping order on
>   softwood lumber. During the June 2002 quarter, the Company reversed the $9.7
>   million it had accrued from November 2001 to March 2002. The bonds posted to
>   cover the liability were also cancelled.
>   Effective May 22, 2002, the Company has been subject to an average
>   antidumping duty of 10.21%. A charge of $10.1 million was incurred during
>   Fiscal 2002 relating to lumber shipments to the U.S. between May 22 and
>   September 28, 2002. A charge of $31.5 million was incurred during Fiscal 2003
>   relating to lumber shipments to the U.S. between September 29, 2002 and
>   September 27, 2003. A charge of $43.1 million was incurred during fiscal 2004
>   relating to lumber shipments to the U.S. between September 28, 2003 and
>   September 25, 2004. On December 20, 2004, the USDOC increased the antidumping
>   duty deposit to 10.59%. On February 17, 2005, the rate was further corrected
>   to 9.1%. For fiscal 2005, a charge of $32.4 million was incurred relating to
>   lumber shipments to the U.S. between September 26, 2004 and September 24,
>   2005. The Company is currently remitting cash deposits to cover the applicable
>   duty.
>   The final amount of countervailing and antidumping duties that may be
>   assessed on Canadian softwood lumber exports to the U.S. cannot be determined
>   at this time.

- 56 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Commitments and
  contingencies (continued):

> Commitments:
>   The Company has entered into operating leases for property,
>   plant and equipment. The Company also has commitments to purchase property,
>   plant and equipment, roundwood, wood chips, gas, electricity and certain
>   chemicals. The Company also has interest payment commitments on long-term
>   debt. All commitments in foreign currencies were measured using the year-end
>   exchange rates. Minimum future payments under these operating leases and other
>   commercial commitments, determined as at September 24, 2005 were as follows:

| |                             |   |       | Less than |        | 2-3 |       | 4-5 | More than
| | --------------------------- | - | ----- | --------- | ------ | --- | ----- | --- | ---------
| |                             |   | Total |           | 1 year |     | years |     | years    
| |                             |   |       |           |        |     |       |     |          
| | Operating lease obligations | $ | 27.5  | $         | 8.6    | $   | 8.1   | $   | 4.6      
| | Purchase obligations        |   | 292.1 |           | 114.4  |     | 83.3  |     | 55.6     
| | Interest payments           |   | 636.3 |           | 121.2  |     | 240.7 |     | 203.4    

> Other:
>   Tembec is party to claims and lawsuits, which are being
>   contested. Management believes that the resolution of these claims and
>   lawsuits will not have a material adverse effect on Tembec's financial
>   condition, earnings or liquidity.

- 57 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. EBITDA:

> EBITDA is defined as earnings before unusual items,
>   interest, income taxes, depreciation and amortization and other non-operating
>   expenses. On a consolidated basis, the Company believes that it is a useful
>   indicator of its ability to generate funds to meet debt service and capital
>   expenditure requirements. EBITDA is not intended as an alternative measure of
>   cash flows from operating activities as determined in accordance with Canadian
>   GAAP. Because EBITDA may not be calculated identically by all companies, the
>   presentation in the Company's financial statements may not be directly
>   comparable to similarly titled measures of other companies. The reconciliation
>   of cash flows from operating activities as determined in accordance with
>   Canadian GAAP to EBITDA is summarized as follows:

| |                                                            |   | 2005    |   | 2004   
| | ---------------------------------------------------------- | - | ------- | - | -------
| |                                                            |   |         |   |        
| | Cash flows from operating activities                       | $ | (38.0)  | $ | 228.5  
| | Interest on long-term debt                                 |   | 128.7   |   | 139.7  
| | Interest on short-term debt                                |   | 5.7     |   | 2.0    
| | Interest income                                            |   | (2.5)   |   | (3.9)  
| | Investment income (loss)                                   |   | 3.9     |   | (22.7) 
| | Interest capitalized on construction projects              |   | (2.8)   |   | (5.2)  
| | Proceeds from sale of derivative financial
    instruments |   | (138.7) |   | (193.7)
| | Other foreign exchange items                               |   | 17.1    |   | 16.6   
| | Bank charges and other financing expenses                  |   | 6.8     |   | 5.7    
| | Current income taxes                                       |   | 5.8     |   | 6.6    
| | Minority interests                                         |   |        |   | 0.4    
| | Unusual items - cash portion                               |   | 31.4    |   |       
| | Change in non-cash working capital                         |   | 20.3    |   | 5.5    
| | Other                                                      |   | (9.6)   |   | (8.1)  
| |                                                            |   |         |   |        
| | EBITDA                                                     | $ | 28.1    | $ | 171.4  

> In addition, the Company also uses EBITDA internally to
>   evaluate the financial and operating performance of its reportable segments
>   and individual business units. The Company believes that it is a useful
>   indicator of profitability of its business segments and individual business
>   units. Segmented EBITDA is equivalent to operating earnings (loss) prior to
>   unusual items and the deduction of depreciation and amortization expense. The
>   various components are outlined in the consolidated business segment
>   information.

- 58 -

---



TEMBEC INDUSTRIES INC.Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Depreciation and
  amortization:

| |                                                         |   | 2005  |   | 2004 
| | ------------------------------------------------------- | - | ----- | - | -----
| |                                                         |   |       |   |      
| | Fixed assets                                            | $ | 234.0 | $ | 226.6
| | Deferred development, pre-operating costs
    and other |   | 3.7   |   | 5.7  
| | Impairment charge                                       |   | 3.6   |   |     
| |                                                         |   |       |   |      
| |                                                         | $ | 241.3 | $ | 232.3

> During the fourth quarter of 2005, the Company recognized
>   an impairment charge of $3.6 million ($2.4 million after-tax) related to an
>   Eastern Ontario sawmill. These assets are included in the Forest products
>   segment.

1. Unusual items: 2005

> During the December 2004 quarter, as a result of a major restructuring of
>   its sawmills in North Eastern Ontario, the Company recorded a non-cash charge
>   of $15.5 million, including $2.5 million for goodwill relating to the
>   reduction of the carrying value of the fixed and other assets of two sawmills
>   that were permanently closed. Employee severance and other closure costs
>   amounting to $4.8 million were also recorded. The after-tax effect of these
>   charges was $14.2 million.
>   During the June 2005 quarter, the Company recorded a non-cash charge of
>   $114.7 million relating to the reduction of the carrying value of the fixed
>   and other assets of three sawmills, a papermill and a remanufacturing facility
>   that were permanently or indefinitely closed. Employee severance and other
>   closure costs amounting to $21.4 million were also recorded. The after-tax
>   effect of these charges was $91.7 million.
>   During the September 2005 quarter, as a result of the permanent closure of
>   the pressurized groundwood pulping line and one of the four paper machines at
>   the St. Francisville, Louisiana papermill, the Company recorded a non-cash
>   charge of $39.8 million relating to the reduction of the carrying value of the
>   fixed and other related assets. Employee severance and other closure costs
>   amounting to $5.2 million were also recorded. Also during the September 2005
>   quarter, the Company recorded a non-cash charge of $30.0 million relating to
>   the reduction of the carrying value of a dismantled pulp machine and a
>   dismantled paper machine. During the September 2005 quarter, the Company
>   performed the required annual impairment test of goodwill and found that
>   impairment did exist in relation to its hardwood flooring and its newsprint
>   business. As a result, goodwill impairment charges of $1.5 million and $21.6
>   million, respectively, were recorded. The after-tax effect of these charges
>   was $87.5 million.

- 59 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Unusual items
  (continued):

> 2004
>   During the September 2004 quarter, the Company recorded a
>   non-cash charge of $9.8 million relating to the write-down of a paper machine
>   removed from service at a newsprint facility. The after-tax impact of this
>   item was $6.6 million.
>   The following table provides the components of the unusual
>   items by reportable segment:

| |                                                        |          |        |       |              |   | 2005 
| | ------------------------------------------------------ | -------- | ------ | ----- | ------------ | - | -----
| |                                                        |          |        |       |              |   |      
| |                                                        |          | Forest |       |              |   |      
| |                                                        | products |        | Paper | Consolidated
| |                                                        |          |        |       |              |   |      
| | Fixed assets write-down                                | $        | 34.0   | $     | 109.9        | $ | 143.9
| | Fixed assets depreciation                              |          |       |       | 37.5         |   | 37.5 
| | Goodwill impairment                                    |          | 4.0    |       | 21.6         |   | 25.6 
| | Other assets (a)                                       |          |       |       | 6.6          |   | 6.6  
| | Write-down of investments                              |          | 0.2    |       |             |   | 0.2  
| | Obsolescence of inventory and other current
    assets |          | 2.8    |       | 6.5          |   | 9.3  
| | Severance and other labour related costs               |          | 12.8   |       | 10.6         |   | 23.4 
| | Idling and other costs                                 |          | 3.3    |       | 4.7          |   | 8.0  
| |                                                        |          |        |       |              |   |      
| |                                                        | $        | 57.1   | $     | 197.4        | $ | 254.5

> (a) Includes $3.8 million of other assets related to pulp segment.

| |                         |   | 2004 
| | ----------------------- | - | -----
| |                         |   |      
| |                         |   | Paper
| |                         |   |      
| | Fixed assets write-down | $ | 9.8  

-

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Unusual items
  (continued):

> During the year, as a result of its restructuring activities, the Company
>   reduced its salaried and hourly workforce at certain locations and recorded
>   approximately $23.4 million for termination costs including severance and
>   other labour-related costs. Idling and other costs of $8.0 million were also
>   recorded.
>   The following table provides the reconciliation components of the mill
>   closure provisions by reportable segment. No charges were incurred in 2004.

|    |                                                                 |          |        |       |              |   | 2005   
|--- | --------------------------------------------------------------- | -------- | ------ | ----- | ------------ | - | -------
|    |                                                                 |          |        |       |              |   |        
|    |                                                                 |          | Forest |       |              |   |        
|    |                                                                 | products |        | Paper | Consolidated
|    |                                                                 |          |        |       |              |   |        
|    | Opening balance                                                 | $        |       | $     |             | $ |       
|    | Additions: Severance and other labour-related
    costs         |          | 12.8   |       | 10.6         |   | 23.4   
|    | Idling and other costs                                          |          | 3.3    |       | 4.7          |   | 8.0    
|    | Payments: Severance and other labour-related
    costs          |          | (6.6)  |       | (3.4)        |   | (10.0) 
|    | Idling and other costs                                          |          | (1.4)  |       | (1.2)        |   | (2.6)  
|    |                                                                 |          |        |       |              |   |        
|    | Ending balance                                                  | $        | 8.1    | $     | 10.7         | $ | 18.8   
|    |                                                                 |          |        |       |              |   |        
|18. | Interest, foreign exchange and other:                           |          |        |       |              |   |        
|    |                                                                 |          |        |       |              |   |        
|    |                                                                 |          |        |       | 2005         |   | 2004   
|    |                                                                 |          |        |       |              |   |        
|    | Interest on long-term debt                                      |          |        | $     | 128.7        | $ | 139.7  
|    | Interest on short-term debt                                     |          |        |       | 5.7          |   | 2.0    
|    | Interest income                                                 |          |        |       | (2.5)        |   | (3.9)  
|    | Investment income                                               |          |        |       | 3.9          |   | (22.7) 
|    | Interest capitalized on construction projects                   |          |        |       | (2.8)        |   | (5.2)  
|    |                                                                 |          |        |       | 133.0        |   | 109.9  
|    |                                                                 |          |        |       |              |   |        
|    | Amortization of deferred financing costs                        |          |        |       | 5.4          |   | 5.3    
|    | Amortization of deferred gain on foreign
    exchange contracts |          |        |       | (117.9)      |   | (149.3)
|    | Derivative financial instruments gain                           |          |        |       | (30.3)       |   | (84.6) 
|    | Other foreign exchange items                                    |          |        |       | 17.1         |   | 16.6   
|    | Loss on consolidation of foreign                                |          |        |       |              |   |        
|    | integrated subsidiaries                                         |          |        |       | 6.0          |   | 2.0    
|    | Bank charges and other financing expenses                       |          |        |       | 6.8          |   | 5.7    
|    |                                                                 |          |        |       | (112.9)      |   | (204.3)
|    |                                                                 |          |        |       |              |   |        
|    |                                                                 |          |        | $     | 20.1         | $ | (94.4) 

- 61 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Income taxes:

> The tax effects of the significant components of temporary
>   differences that give rise to future income tax assets and liabilities are as
>   follows:

| |                                                           |   | 2005    |   | 2004   
| | --------------------------------------------------------- | - | ------- | - | -------
| |                                                           |   |         |   |        
| | Future income tax assets:                                 |   |         |   |        
| | Non-capital loss
    carryforwards and pool of deductible |   |         |   |        
| | scientific research and development expenditures          | $ | 374.8   | $ | 299.4  
| | Investment tax credits                                    |   | 66.7    |   | 55.9   
| | Employee future benefits                                  |   | 13.0    |   | 11.8   
| | Foreign exchange contract                                 |   |        |   | 16.4   
| | Corporate minimum taxes
    paid                          |   | 5.6     |   | 5.6    
| | Capital loss carryforwards                                |   | 6.0     |   | 6.0    
| | Other                                                     |   | 13.8    |   | 19.5   
| | Valuation allowance                                       |   | (146.3) |   | (64.9) 
| |                                                           |   | 333.6   |   | 349.7  
| |                                                           |   |         |   |        
| | Future income tax liabilities:                            |   |         |   |        
| | Fixed assets                                              |   | (251.3) |   | (356.3)
| | Exchange gain on long-term
    debt                       |   | (79.7)  |   | (57.1) 
| | Timber rights                                             |   | (5.9)   |   | (6.5)  
| | Other                                                     |   | (19.5)  |   | (30.0) 
| |                                                           |   | (356.4) |   | (449.9)
| |                                                           |   |         |   |        
| | Net future income tax liabilities                         | $ | (22.8)  | $ | (100.2)
| |                                                           |   |         |   |        
| | As reported in the consolidated balance
    sheet:        |   |         |   |        
| | Future income tax assets                                  | $ | 93.4    | $ | 86.9   
| | Future income tax
    liabilities                         |   | (116.2) |   | (187.1)
| |                                                           |   |         |   |        
| | Net future income tax liabilities                         | $ | (22.8)  | $ | (100.2)

- 62 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Income taxes
  (continued):

> Certain subsidiaries have accumulated the following losses and credits for
>   income tax purposes, which may be carried forward to reduce taxable income and
>   taxes payable in future years.

| |                                                                                                                        |   |         |                  | Expiring 
| | ---------------------------------------------------------------------------------------------------------------------- | - | ------- | ---------------- | ---------
| |                                                                                                                        |   | Amounts |                  | dates    
| |                                                                                                                        |   |         |                  |          
| | Non-capital loss carried forward
    for Canadian subsidiaries                                                         | $ | 504.0   | 2006 to
    2015
| | Non-capital loss carried forward
    for foreign subsidiaries                                                          |   | 338.1   | 2020 to
    2025
| |                                                                                                                        |   |         |                  |          
| | Pool of deductible scientific
    research and experimental                                                            |   |         |                  |          
| | development                                                                                                            |   | 289.8   |                  | Unlimited
| |                                                                                                                        |   |         |                  |          
| | Investment tax credits and corporate minimum tax                                                                       |   | 73.0    | 2007 to 2014    
| |                                                                                                                        |   |         |                  |          
| |                                                                                                                        |   |         |                  |          
| | The reconciliation
    of income taxes calculated at the statutory rate to the actual tax provision
    is as follows: |  
| |                                                                                                                        |   |         |                  |          
| |                                                                                                                        |   | 2005    |                  | 2004     
| |                                                                                                                        |   |         |                  |          
| | Earnings (loss) before income taxes and minority interest                                                              | $ | (363.0) | $                | 117.2    
| |                                                                                                                        |   |         |                  |          
| | Income taxes based on combined
    federal and provincial                                                              |   |         |                  |          
| | income tax
    rates of 33.3% (2004 - 34.5%)                                                                           | $ | (120.9) | $                | 40.4     
| |                                                                                                                        |   |         |                  |          
| | Increase (decrease) resulting
    from:                                                                                |   |         |                  |          
| | Manufacturing
    and processing deduction                                                                             |   |        |                  | (0.9)    
| | Future income
    taxes adjustment due to rate enactments                                                              |   |        |                  | 6.0      
| | Net losses not
    recognized                                                                                          |   | 32.9    |                  | 21.7     
| | Change in
    valuation allowance                                                                                      |   | 32.2    |                  |         
| | Rate
    differential between jurisdictions                                                                            |   | (9.1)   |                  | (14.6)   
| | Permanent
    differences:                                                                                             |   |         |                  |          
| | Non-taxable portion of exchange gain on long-term debt                                                                 |   | (19.5)  |                  | (16.1)   
| | Non-deductible loss on consolidation of foreign                                                                        |   |         |                  |          
| | integrated subsidiaries                                                                                                |   | 4.1     |                  | 3.2      
| | Other permanent differences                                                                                            |   | 23.1    |                  | (3.9)    
| | Large corporations tax                                                                                                 |   | 3.0     |                  | 5.5      
| |                                                                                                                        |   | 66.7    |                  | 0.9      
| |                                                                                                                        |   |         |                  |          
| | Income taxes (recovery)                                                                                                | $ | (54.2)  | $                | 41.3     
| |                                                                                                                        |   |         |                  |          
| | Income taxes:                                                                                                          |   |         |                  |          
| | Current                                                                                                                | $ | 5.8     | $                | 6.6      
| | Future                                                                                                                 |   | (60.0)  |                  | 34.7     
| |                                                                                                                        |   |         |                  |          
| | Income taxes (recovery)                                                                                                | $ | (54.2)  | $                | 41.3     

- 63 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Pension plans:

> Defined contribution plans
>   The Company contributes to defined contribution plans,
>   provincial and labour sponsored pension plans, group registered retirement
>   savings plans, deferred profit sharing plans, and 401(k) plans. The pension
>   expense under these plans is equal to the Company's contribution. The 2005
>   pension expense was $14.8 million ($14.6 million in 2004.)
>   Defined benefit plans
>   The Company has several defined benefit pension plans. Non-unionized
>   employees in Canada joining the Company after January 1, 2000 participate in
>   defined contribution plans. Some of the defined benefit plans are
>   contributory. The pension expense and the obligation related to the defined
>   benefit plans are actuarially determined using management's most probable
>   assumptions.
>   Components of net periodic benefit cost for defined benefit plans:

| |                                                                            |   | 2005    |   | 2004  
| | -------------------------------------------------------------------------- | - | ------- | - | ------
| |                                                                            |   |         |   |       
| | Current service cost                                                       | $ | 15.9    | $ | 17.6  
| | Interest cost                                                              |   | 45.7    |   | 43.8  
| | Actual return on plan assets                                               |   | (62.6)  |   | (69.9)
| | Actuarial loss (gain)                                                      |   | 169.7   |   | (46.6)
| | Plan amendments and other                                                  |   | 0.7     |   |      
| |                                                                            |   |         |   |       
| | Net expense (income) before adjustments to
    recognize the long-term     |   |         |   |       
| | nature on the plans                                                        |   | 169.4   |   | (55.1)
| |                                                                            |   |         |   |       
| | Difference between expected and actual return
    on plan assets           |   | 18.7    |   | 31.2  
| | Difference between net actuarial loss (gain)
    and actuarial loss (gain) |   | (164.6) |   | 58.6  
| | Difference between amortization of past
    service costs for              |   |         |   |       
| | the year and actual plan
    amendment for the year                        |   | (0.5)   |   | 0.2   
| | Other adjustments                                                          |   | 4.7     |   | (0.1) 
| |                                                                            |   |         |   |       
| | Net periodic benefit cost                                                  | $ | 27.7    | $ | 34.8  

> The Company's funding policy is to contribute annually the
>   amount required to provide for benefits earned in the year and to fund past
>   service obligations over periods not exceeding those permitted by the
>   applicable regulatory authorities. Past service obligations arise from
>   improvements to plan benefits. The Company measures its accrued benefit
>   obligation and the fair value of plan assets for accounting purposes as at
>   June 30 of each year. Actuarial valuations for funding purposes are conducted
>   on a triennial basis, unless required earlier by pension legislation. The
>   latest actuarial valuations were conducted for 15 plans on December 31, 2004,
>   3 on December 31, 2003, and 3 on December 31, 2002.

- 64 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Pension plans
  (continued):

Change in accrued benefit obligation:

| |                                                                    |   | 2005   |   | 2004  
| | ------------------------------------------------------------------ | - | ------ | - | ------
| |                                                                    |   |        |   |       
| | Accrued benefit obligation at beginning of
    year                | $ | 716.7  | $ | 719.7 
| | Current service cost                                               |   | 15.9   |   | 17.6  
| | Interest cost                                                      |   | 45.7   |   | 43.8  
| | Employee contributions                                             |   | 4.9    |   | 4.8   
| | Benefits paid                                                      |   | (32.8) |   | (30.9)
| | Plan amendments                                                    |   | 0.7    |   |      
| | Actuarial loss (gain)                                              |   | 169.7  |   | (46.6)
| | Foreign exchange rate changes and other
    adjustments            |   | (9.1)  |   | (7.5) 
| | Acquisitions                                                       |   |       |   | 15.8  
| |                                                                    |   |        |   |       
| | Accrued benefit obligation at end of year                          | $ | 911.7  | $ | 716.7 
| |                                                                    |   |        |   |       
| | Change in fair value of defined benefit plan
    assets:           |   |        |   |       
| |                                                                    |   |        |   |       
| |                                                                    |   | 2005   |   | 2004  
| |                                                                    |   |        |   |       
| | Fair value of defined benefit plan assets at
    beginning of year | $ | 577.9  | $ | 483.7 
| | Actual return on plan assets                                       |   | 62.6   |   | 69.9  
| | Employer contributions                                             |   | 33.9   |   | 42.2  
| | Employee contributions                                             |   | 4.9    |   | 4.8   
| | Benefits paid                                                      |   | (32.8) |   | (30.9)
| | Foreign exchange rate changes                                      |   | (9.0)  |   | (5.0) 
| | Acquisitions                                                       |   |       |   | 13.2  
| |                                                                    |   |        |   |       
| | Fair value of defined benefit plan assets at end of year           | $ | 637.5  | $ | 577.9 

The assets of the pension plans are held by an independent
  trustee and accounted for separately in the Company's pension funds. Based on
  the fair value of assets held at June 30, 2005, the plan assets were comprised
  of 1% (2% in 2004) in cash and short-term investments, 4% (5% in 2004) in real
  estate, 44% (43% in 2004) in bonds and 51% (50% in 2004) in Canadian, U.S. and
  foreign equities.

Equity securities include Tembec Inc.'s common shares, the
  ultimate parent company, in the amount of $0.3 million (0.05% of total plan
  assets held at CIBC Mellon) and $0.7 million (0.17% of total plan assets held
  at CIBC Mellon) at June 30, 2005 and June 30, 2004, respectively.

- 65 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Pension plans
  (continued):

> The following table presents the difference between the fair value of the
>   defined benefit pension plan assets and the actuarially determined accrued
>   benefit obligation as at September 24, 2005 and September 25, 2004. This
>   difference is also referred to as either the deficit or surplus, as the case
>   may be, or the funded status of the plans.
>   The table further reconciles the amount of the surplus or deficit (funded
>   status) to the net amount recognized in the Consolidated Balance Sheets. The
>   difference between the funded status and the net amount recognized in the
>   Consolidated Balance Sheets, in accordance with Canadian GAAP, represents the
>   portion of the surplus or deficit not yet recognized for accounting purposes.
>   This approach allows for a gradual recognition of changes in accrued benefit
>   obligations and plan performance over the expected average remaining life of
>   the employee group covered by the plans.
>   Reconciliation of funded status:

| |                                                             |   | 2005    |   | 2004   
| | ----------------------------------------------------------- | - | ------- | - | -------
| |                                                             |   |         |   |        
| | Fair value of defined benefit plan assets                   | $ | 637.5   | $ | 577.9  
| | Accrued benefit obligation                                  |   | (911.7) |   | (716.7)
| |                                                             |   |         |   |        
| | Plan deficit                                                |   | (274.2) |   | (138.8)
| |                                                             |   |         |   |        
| | Employer contributions after measurement date
    (June 30) |   | 10.8    |   | 9.2    
| | Unamortized past service costs                              |   | 3.2     |   | 2.7    
| | Unamortized net actuarial loss                              |   | 272.0   |   | 130.2  
| |                                                             |   |         |   |        
| | Net benefit asset                                           | $ | 11.8    | $ | 3.3    

- 66 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Pension plans
  (continued):

> Amounts recognized in the Consolidated Balance Sheets:

| |                                                                                                                                                                            |   | 2005    |   | 2004   
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------- | - | -------
| |                                                                                                                                                                            |   |         |   |        
| | Deferred pension costs                                                                                                                                                     | $ | 66.1    | $ | 51.9   
| | Accrued benefit liability                                                                                                                                                  |   | (54.3)  |   | (48.6) 
| |                                                                                                                                                                            |   |         |   |        
| | Net benefit asset                                                                                                                                                          | $ | 11.8    | $ | 3.3    
| |                                                                                                                                                                            |   |         |   |        
| | The accrued benefit obligations
    in excess of fair value of plan assets at year-end with respect to pension
    benefit plans that are not fully funded are as follows:
| |                                                                                                                                                                            |   |         |   |        
| |                                                                                                                                                                            |   | 2005    |   | 2004   
| |                                                                                                                                                                            |   |         |   |        
| | Fair value of plan assets                                                                                                                                                  | $ | 637.5   | $ | 499.6  
| | Accrued benefit obligations                                                                                                                                                |   | (911.7) |   | (645.4)
| |                                                                                                                                                                            |   |         |   |        
| | Plan deficit                                                                                                                                                               | $ | (274.2) | $ | (145.8)
| |                                                                                                                                                                            |   |         |   |        
| | Weighted-average significant assumptions:                                                                                                                                  |   |         |   |        
| |                                                                                                                                                                            |   |         |   |        
| |                                                                                                                                                                            |   | 2005    |   | 2004   
| |                                                                                                                                                                            |   |         |   |        
| | Accrued benefit obligation at end of year:                                                                                                                                 |   |         |   |        
| | Discount rate                                                                                                                                                              |   | 4.98%   |   | 6.38%  
| | Rate of compensation
    increase                                                                                                                                          |   | 3.45%   |   | 3.39%  
| |                                                                                                                                                                            |   |         |   |        
| | Net periodic benefit cost for the year:                                                                                                                                    |   |         |   |        
| | Discount rate                                                                                                                                                              |   | 6.38%   |   | 5.93%  
| | Rate of compensation
    increase                                                                                                                                          |   | 3.39%   |   | 3.01%  
| | Expected long-term return on assets                                                                                                                                        |   | 7.48%   |   | 7.78%  

- 67 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Other employee future benefit plans:

> The Company offers post-retirement life insurance, health care and dental
>   care plans to some of its retirees. The Company offers post-employment health
>   care and dental care plans to disabled employees.
>   The post-retirement and post-employment plans are unfunded.
>   The Company measures its accrued benefit obligation for accounting purposes
>   as at June 30 of each year.
>   Components of net periodic benefit cost for other employee future benefit
>   plans:

| |                                                                            |   | 2005  |   | 2004 
| | -------------------------------------------------------------------------- | - | ----- | - | -----
| |                                                                            |   |       |   |      
| | Current service cost                                                       | $ | 1.3   | $ | 1.4  
| | Interest cost                                                              |   | 3.9   |   | 4.0  
| | Post-employment                                                            |   | 0.9   |   | 0.9  
| | Actuarial loss (gain)                                                      |   | 8.9   |   | (4.7)
| | Past service costs                                                         |   |      |   | 1.0  
| | Difference between amortization of past
    service costs for the          |   |       |   |      
| | year and actual plan amendment
    for the year                            |   | 0.1   |   | (1.0)
| | Difference between net actuarial loss (gain)
    and actuarial loss (gain) |   | (8.4) |   | 5.9  
| | Other adjustments                                                          |   | 1.1   |   | (0.1)
| |                                                                            |   |       |   |      
| | Periodic benefit cost                                                      | $ | 7.8   | $ | 7.4  
| |                                                                            |   |       |   |      
| | Change in accrued benefit obligation:                                      |   |       |   |      
| |                                                                            |   |       |   |      
| |                                                                            |   | 2005  |   | 2004 
| |                                                                            |   |       |   |      
| | Accrued benefit obligation at beginning of
    year                        | $ | 64.1  | $ | 68.2 
| |                                                                            |   |       |   |      
| | Current service cost                                                       |   | 1.3   |   | 1.4  
| | Interest cost                                                              |   | 3.9   |   | 4.0  
| | Employee contributions                                                     |   | 0.3   |   | 0.1  
| | Benefits paid                                                              |   | (3.2) |   | (2.6)
| | Actuarial loss (gain)                                                      |   | 8.9   |   | (4.7)
| | Past service costs                                                         |   |      |   | 1.0  
| | Foreign exchange rate changes                                              |   | (1.2) |   | (1.6)
| | Post-employment                                                            |   | 1.3   |   | (0.2)
| | Government prescription drug subsidy                                       |   |      |   | (1.5)
| |                                                                            |   |       |   |      
| | Accrued benefit obligation at end of year                                  | $ | 75.4  | $ | 64.1 

- 68 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Other employee future benefit plans (continued):

> Change in fair value of other employee future benefit plan assets:

| |                                               |   | 2005  |   | 2004 
| | --------------------------------------------- | - | ----- | - | -----
| |                                               |   |       |   |      
| | Fair value of assets of other employee future |   |       |   |      
| | benefit plans at beginning of
    year        | $ |      | $ |     
| | Employer contributions                        |   | 2.9   |   | 2.5  
| | Employee contributions                        |   | 0.3   |   | 0.1  
| | Benefits paid                                 |   | (3.2) |   | (2.6)
| |                                               |   |       |   |      
| | Fair value of assets of other employee future |   |       |   |      
| | benefit plans at end of year                  | $ |      | $ |     

> The table further reconciles the amount of the surplus or deficit (funded
>   status) to the net amount recognized in the Consolidated Balance Sheets. The
>   difference between the funded status and the net amount recognized in the
>   Consolidated Balance Sheets, in accordance with Canadian GAAP, represents the
>   portion of the surplus or deficit not yet recognized for accounting purposes.
>   This approach allows for a gradual recognition of changes in accrued benefit
>   obligations and plan performance over the expected average remaining life of
>   the employee group covered by the plans.
>   Reconciliation of funded status:

| |                                                             |   | 2005   |   | 2004  
| | ----------------------------------------------------------- | - | ------ | - | ------
| |                                                             |   |        |   |       
| | Plan deficit                                                | $ | (75.4) | $ | (64.1)
| |                                                             |   |        |   |       
| | Employer contributions after measurement date
    (June 30) |   | 0.7    |   | 0.8   
| | Unamortized past service costs                              |   | 0.9    |   | 1.0   
| | Unamortized net actuarial loss                              |   | 17.5   |   | 8.9   
| |                                                             |   |        |   |       
| | Net benefit liability                                       | $ | (56.3) | $ | (53.4)

- 69 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Other employee
  future benefit plans (continued):

> Weighted-average significant assumptions:

| |                                                                    |             | 2005        |   | 2004  
| | ------------------------------------------------------------------ | ----------- | ----------- | - | ------
| |                                                                    |             |             |   |       
| | Accrued benefit obligation at end of year:                         |             |             |   |       
| | Discount rate (weighted)                                           |             | 4.99%       |   | 6.30% 
| | Rate of compensation
    increase                                  |             | 3.50%       |   | 3.50% 
| |                                                                    |             |             |   |       
| | Benefit cost for year:                                             |             |             |   |       
| | Discount rate (weighted)                                           |             | 6.30%       |   | 5.90% 
| | Rate of compensation
    increase                                  |             | 3.50%       |   | 3.50% 
| |                                                                    |             |             |   |       
| | Assumed health care cost trend rate at end of
    year (weighted): |             |             |   |       
| | Initial health care cost
    trend                                 |             | 10.00%      |   | 10.00%
| | Annual rate of decline in
    trend rate                           |             | 1.00%       |   | 1.00% 
| | Ultimate health care cost
    trend rate                           |             | 5.00%       |   | 5.00% 
| |                                                                    |             |             |   |       
| | Effect of change in health care cost trend
    rate                | 1% increase | 1% increase
| | Total of service cost and
    interest cost                        | $           | 0.5         | $ | 0.5   
| | Accrued benefit obligation                                         | $           | 6.0         | $ | 5.1   
| |                                                                    |             |             |   |       
| | Effect of change in health care cost trend
    rate                | 1% decrease | 1% decrease
| | Total of service cost and
    interest cost                        | $           | (0.4)       | $ | (0.4) 
| | Accrued benefit obligation                                         | $           | (5.4)       | $ | (4.6) 

- 70 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Financial
  instruments:

> (a) Derivative financial instruments:
>   The following tables summarize the changes in the market value of
>   derivative financial instruments and in the deferred gain on foreign exchange
>   contracts:
>   (i) Derivative financial instruments:

| |                      |   | Opening |   | Gain   | Disbursements |         | Ending 
| | -------------------- | - | ------- | - | ------ | ------------- | ------- | -------
| | 2005                 |   | balance |   | (loss) | (proceeds)    |         | balance
| |                      |   |         |   |        |               |         |        
| | Market value of      |   |         |   |        |               |         |        
| | outstanding foreign  |   |         |   |        |               |         |        
| | exchange contracts   | $ | 104.9   | $ | 22.7   | $             | (127.4) | $      
| |                      |   |         |   |        |               |         |        
| | Market value of      |   |         |   |        |               |         |        
| | commodity-related    |   |         |   |        |               |         |        
| | derivative financial |   |         |   |        |               |         |        
| | instruments          |   | 9.4     |   | 7.6    |               | (11.3)  |        
| |                      |   | 114.3   | $ | 30.3   | $             | (138.7) |        
| |                      |   |         |   |        |               |         |        
| | Less current portion |   | 82.2    |   |        |               |         |        
| |                      |   |         |   |        |               |         |        
| |                      | $ | 32.1    |   |        |               |         | $      
| |                      |   |         |   |        |               |         |        
| |                      |   |         |   |        |               |         |        
| |                      |   | Opening |   | Gain   | Disbursements |         | Ending 
| | 2004                 |   | balance |   | (loss) | (proceeds)    |         | balance
| |                      |   |         |   |        |               |         |        
| | Market value of      |   |         |   |        |               |         |        
| | outstanding foreign  |   |         |   |        |               |         |        
| | exchange contracts   | $ | 223.4   | $ | 86.5   | $             | (205.0) | $      
| |                      |   |         |   |        |               |         |        
| | Market value of      |   |         |   |        |               |         |        
| | commodity-related    |   |         |   |        |               |         |        
| | derivative financial |   |         |   |        |               |         |        
| | instruments          |   |        |   | (1.9)  |               | 11.3    |        
| |                      |   | 223.4   | $ | 84.6   | $             | (193.7) |        
| |                      |   |         |   |        |               |         |        
| | Less current portion |   | 92.9    |   |        |               |         |        
| |                      |   |         |   |        |               |         |        
| |                      | $ | 130.5   |   |        |               |         | $      

- 71 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Financial
  instruments (continued):

> (a) Derivative financial instruments (continued):
>   (ii) Unamortized deferred gain on foreign exchange contracts:

| |                                  |   | Opening |              |         |         | Ending
| | -------------------------------- | - | ------- | ------------ | ------- | ------- | ------
| | 2005                             |   | balance | Amortization |         | balance
| |                                  |   |         |              |         |         |       
| | Foreign exchange contracts       |   |         |              |         |         |       
| | sold prior to fiscal 2004        | $ | 25.8    | $            | (25.8)  | $       |      
| |                                  |   |         |              |         |         |       
| | Foreign exchange contracts       |   |         |              |         |         |       
| | outstanding at the
    beginning |   |         |              |         |         |       
| | of fiscal 2004                   |   | 130.5   |              | (92.1)  |         | 38.4  
| |                                  |   | 156.3   | $            | (117.9) |         | 38.4  
| |                                  |   |         |              |         |         |       
| | Less current portion             |   | 117.9   |              |         |         | 38.4  
| |                                  |   |         |              |         |         |       
| |                                  | $ | 38.4    |              |         | $       |      
| |                                  |   |         |              |         |         |       
| |                                  |   |         |              |         |         |       
| |                                  |   | Opening |              |         |         | Ending
| | 2004                             |   | balance | Amortization |         | balance
| |                                  |   |         |              |         |         |       
| | Foreign exchange contracts       |   |         |              |         |         |       
| | sold prior to fiscal 2004        | $ | 82.2    | $            | (56.4)  | $       | 25.8  
| |                                  |   |         |              |         |         |       
| | Foreign exchange contracts       |   |         |              |         |         |       
| | outstanding at the
    beginning |   |         |              |         |         |       
| | of fiscal 2004                   |   | 223.4   |              | (92.9)  |         | 130.5 
| |                                  |   | 305.6   | $            | (149.3) |         | 156.3 
| |                                  |   |         |              |         |         |       
| | Less current portion             |   | 149.3   |              |         |         | 117.9 
| |                                  |   |         |              |         |         |       
| |                                  | $ | 156.3   |              |         | $       | 38.4  

- 72 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Financial
  instruments (continued):

(b) Foreign currency rate risk:

> The Company realizes a significant portion of its sales in foreign
>   currencies, principally US$ and Euros, and enters into various types of
>   foreign exchange contracts in managing its foreign exchange risk. In addition,
>   this risk is partially covered by US$ purchases and debt service. The Company
>   does not hold or issue financial instruments for trading purposes.
>   The Company had the following US$ foreign exchange contracts convertible
>   into Canadian $ at September 24, 2005 and September 25, 2004:

| |                      |              | 2005         |              | 2004        
| | -------------------- | ------------ | ------------ | ------------ | ------------
| |                      |              |              |              |             
| | Maturity per quarter | Average rate | US$ millions | Average rate | US$ millions
| |                      |              |              |              |             
| | 2005 - December 2004 |             |             | 1.5965       | 61.7        
| | - March 2005         |             |             | 1.5883       | 60.6        
| | - June 2005          |             |             | 1.5792       | 55.2        
| | - September 2005     |             |             | 1.6029       | 55.0        
| |                      |              |              |              |             
| | 2006 - December 2005 |             |             | 1.6112       | 45.0        
| | - March 2006         |             |             | 1.5617       | 55.0        
| |                      |              |              |              |             
| |                      |             |             | 1.5894       | 332.5       

- 73 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Financial instruments (continued):

> (b) Foreign currency rate risk (continued):
>   The Company had the following US$ foreign exchange contracts
>   convertible into Euros at September 24, 2005 and September 25, 2004:

2005
      
      2004Maturity per quarter
      Average rate
      US$ millions
      Average rate
      US$ millions2005 - December 2004
      
      
      1.0012
      2.2- March 2005
      
      
      1.0953
      2.2- June 2005
      
      
      1.0911
      2.2- September 2005
      
      
      1.0744
      1.92006 - December 2005
      1.2050
      1.7
      1.1145
      0.9- March 2006
      1.1671
      1.9
      1.1461
      1.6- June 2006
      1.1480
      1.4
      1.1480
      1.4- September 2006
      1.1479
      1.7
      1.1479
      1.72007 - December 2006
      1.2752
      1.4
      1.2075
      0.7- March 2007
      1.2280
      1.0
      1.2006
      0.7- June 2007
      1.2092
      0.7
      1.2092
      0.7- September 2007
      1.3052
      0.7
      1.2125
      0.22008 - December 2007
      1.3498
      0.3
      
      1.2033
      10.8
      1.1124
      16.4


- 74 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Financial instruments (continued):

> (c) Commodity price risk:
>   Markets for the Company's principal products are highly
>   competitive and cyclical in nature. To mitigate the impact of commodity price
>   volatility of earnings, the Company may periodically purchase commodity price
>   hedges (lumber, pulp and newsprint). The Company does not hold or acquire
>   commodity price instruments for trading purposes. However, due to the nature
>   of lumber futures contracts, they are not normally held to maturity. At
>   September 24, 2005 and September 25, 2004, the Company did not hold any
>   significant commodity price hedges.
>   (d) Credit risk:
>   The Company does not have a significant exposure to any
>   individual customer or counterparty. The Company reviews a new customer's
>   credit history before extending credit and conducts regular reviews of its
>   existing customers' credit performance. The Company may require payment
>   guarantees, such as letters of credit, or obtains credit insurance coverage.
>   The allowance for doubtful accounts as at September 24, 2005 and September 25,
>   2004 was $5.8 million and $6.2 million, respectively.
>   (e) Fair value of financial instruments:
>   The carrying amount of cash and cash equivalents, accounts
>   receivable, operating bank loans and accounts payable and accrued charges
>   approximates their fair values because of the near-term maturity of those
>   instruments.
>   The carrying value and the fair value of long-term debt,
>   balance payable on acquisition of companies and redeemable preferred shares at
>   September 24, 2005 were $1,590.4 million (2004 - $1,691.8 million) and
>   $1,114.9 million (2004 - $1,731.1 million), respectively. The fair value of
>   long-term debt that is actively traded is based on the closing trading value
>   at the respective year-end dates.
>   The fair value of the long-term debt that is not actively
>   traded, balance payable on acquisition of companies and redeemable preferred
>   shares debt has been determined based on management's best estimate of the
>   fair value to renegotiate these financial instruments with similar terms at
>   the respective year-end dates.

- 75 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Summary of material
  differences between generally accepted accounting principles (GAAP) in Canada
  and the United States:

The consolidated financial statements of the Company have been prepared in
  accordance with Generally Accepted Accounting Principles (GAAP) in Canada. The
  following adjustments would be required to reconcile the financial statements
  to U.S. GAAP and with practices prescribed by the United States Securities and
  Exchange Commission (SEC) for the two years ended September 24, 2005 and
  September 25, 2004.

If U.S. GAAP were employed, the net earnings (loss) for the year would be
  adjusted as follows:

| |                                                                     |   | 2005    |   | 2004   
| | ------------------------------------------------------------------- | - | ------- | - | -------
| |                                                                     |   |         |   |        
| | Net earnings (loss) under Canadian GAAP                             | $ | (308.8) | $ | 75.5   
| |                                                                     |   |         |   |        
| | Adjustments:                                                        |   |         |   |        
| | Amortization of deferred
    gain on foreign exchange contracts (a) |   | (115.8) |   | (145.1)
| | Income taxes (b), (c)                                               |   | 39.0    |   | 46.5   
| | Share in loss of
    affiliated companies (a), (d)                  |   | (2.2)   |   | (4.0)  
| | Goodwill impairment charge
    (c)                                  |   | (9.1)   |   |       
| | Depreciation of fixed
    assets (c)                                |   | 0.3     |   | 0.3    
| | Amortization of
    pre-operating costs (d)                         |   | 2.0     |   | 1.4    
| | Development and
    pre-operating costs (d)                         |   | (1.3)   |   | (3.5)  
| | Pension                                                             |   | 0.9     |   | (0.3)  
| |                                                                     |   |         |   |        
| | Net loss under U.S. GAAP                                            | $ | (395.0) | $ | (29.2) 

- 76 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Summary of material
  differences between generally accepted accounting principles (GAAP) in Canada
  and the United States (continued):

The cumulative effect of the adjustments on the consolidated assets,
  liabilities and shareholder's equity is as follows:

| |                                                     |   | 2005    |   | 2004   
| | --------------------------------------------------- | - | ------- | - | -------
| |                                                     |   |         |   |        
| | Total assets under Canadian GAAP                    | $ | 3,408.5 | $ | 3,899.1
| | Adjustments:                                        |   |         |   |        
| | Goodwill (c)                                        |   |        |   | 9.1    
| | Fixed assets (c)                                    |   | (7.0)   |   | (7.3)  
| | Investments (a), (d), (e)                           |   | 109.4   |   | 116.5  
| | Proportionate
    consolidation (e)                 |   | (229.1) |   | (209.1)
| | Other assets:                                       |   |         |   |        
| | Deferred development and pre-operating costs (d)    |   | (9.2)   |   | (9.9)  
| | Deferred pension costs (f)                          |   | 3.1     |   | (1.2)  
| | Future income
    taxes (b), (c)                    |   | 26.0    |   | 14.6   
| |                                                     |   | (106.8) |   | (87.3) 
| |                                                     |   |         |   |        
| | Total assets under U.S. GAAP                        | $ | 3,301.7 | $ | 3,811.8
| |                                                     |   |         |   |        
| |                                                     |   |         |   |        
| |                                                     |   | 2005    |   | 2004   
| |                                                     |   |         |   |        
| | Total liabilities under Canadian GAAP               | $ | 2,582.4 | $ | 2,764.2
| | Adjustments:                                        |   |         |   |        
| | Deferred gain on foreign
    exchange contracts (a) |   | (37.6)  |   | (153.3)
| | Proportionate
    consolidation (e)                 |   | (120.5) |   | (95.6) 
| | Future income taxes (b),
    (c)                    |   | (10.7)  |   | 40.4   
| | Pension liabilities (f)                             |   | 174.0   |   | 61.7   
| |                                                     |   | 5.2     |   | (146.8)
| |                                                     |   |         |   |        
| | Total liabilities under U.S. GAAP                   | $ | 2,587.6 | $ | 2,617.4
| |                                                     |   |         |   |        
| | Total shareholder's equity under Canadian
    GAAP  | $ | 826.1   | $ | 1,134.9
| |                                                     |   |         |   |        
| | Total asset adjustments                             |   | (106.8) |   | (87.3) 
| |                                                     |   |         |   |        
| | Total liability adjustments                         |   | (5.2)   |   | 146.8  
| |                                                     |   |         |   |        
| | Total shareholder's equity under U.S. GAAP          | $ | 714.1   | $ | 1,194.4
| |                                                     |   |         |   |        

- 77 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Summary of material differences between generally accepted
  accounting principles (GAAP) in Canada and the United States (continued):

> (a) Derivative financial instruments:
>   Prior to September 28, 2003, under Canadian GAAP, the Company
>   applied hedge accounting for derivative financial instruments, which mainly
>   consist of foreign exchange contracts, which were used to hedge future revenue
>   stream.
>   Effective September 28, 2003, as a result of the adoption in
>   Canada of the Accounting guideline AcG-13 of the CICA Handbook, the Company
>   started accounting for derivative financial instruments on a market value
>   basis. As a result, a deferred gain was recognized at the beginning of the
>   fiscal year 2004 and is being amortized into earnings based on the original
>   maturity dates of the then outstanding foreign exchange contracts.
>   Under U.S. GAAP, such derivative financial instruments were
>   never accounted for using hedge accounting and, consequently, periodic changes
>   in unrealized gains and losses on these derivative financial instruments are
>   included in earnings based on the change in their current market value.
>   Accordingly, the only difference remaining between Canadian and U.S. GAAP in
>   respect of these derivative financial instruments is the amount of the
>   deferred gain either recognized in each year or not yet recognized in earnings
>   under Canadian GAAP. The outstanding balance of the deferred gain and the
>   amount recognized in earnings during the year on such derivative financial
>   instruments are reversed out of earnings and shareholder's equity under U.S.
>   GAAP.
>   (b) Income taxes:
>   On October 1, 2000, Tembec adopted the Canadian accounting
>   recommendations for income taxes (CICA Handbook Section 3465). The Canadian
>   accounting recommendations essentially harmonize the principles of Canadian
>   GAAP with those of U.S. GAAP. For Canadian GAAP, the new standard was applied
>   prospectively. For U.S. GAAP, the statement has been applied since 1992. Prior
>   to 2000, under Canadian GAAP, Tembec accounted for income taxes using the
>   deferral method. Under U.S. GAAP, income taxes are being provided for by the
>   liability method. The deferred tax impact of other reconciling items is also
>   included in this caption.
>   (c) Income taxes related to purchase accounting and goodwill:
>   (i) Prior to adoption of CICA
>     Handbook Section 3465, deferred tax assets or liabilities resulting from
>     temporary differences between the recorded costs of acquired fixed assets
>     and the tax bases of such assets were not recorded under Canadian GAAP.
>     Consequently, purchase price allocation under U.S. GAAP related to
>     acquisitions before October 1, 2000 was different and this results in
>     continued differences because Tembec has adopted CICA Handbook Section 3465
>     prospectively.

- 78 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Summary of material differences between generally accepted
  accounting principles (GAAP) in Canada and the United States (continued):

> (c) Income taxes related to purchase accounting and goodwill
>   (continued):
>   (ii) Furthermore, under US GAAP,
>     goodwill resulted from purchase price allocation, which did not exist under
>     Canadian GAAP and was found to be impaired as a result of the annual
>     impairment test and was subsequently written off.
>   (d) Deferred development and pre-operating costs:
>   Under U.S. GAAP, certain development and pre-operating costs,
>   capitalized under Canadian GAAP, would have been charged against earnings.
>   (e) Joint ventures:
>   Interest in joint ventures is recognized using the
>   proportionate consolidation method under Canadian GAAP. Under U.S. GAAP, joint
>   ventures are accounted for using the equity method. Earnings recognized by
>   each of the two methods are the same. However, a reconciliation of U.S. GAAP
>   of the financial statements of the joint venture may result in adjustments.
>   (f) Pension liabilities:
>   At September 24, 2005, $170.9 million (2004 - $62.1 million)
>   was recognized as an additional minimum pension liability on the balance sheet
>   and in other comprehensive income. The amount was recognized under SFAS No. 87
>   due to an actuarially valued minimum accumulated benefit obligation in excess
>   of the fair value of the Plans' assets.
>   (g) Comprehensive income:
>   Under U.S. GAAP, the Company is required to disclose certain
>   information about comprehensive income. This information would be as follows
>   for the years ended September 24, 2005 and September 25, 2004:

| |                                                          |   | 2005    |   | 2004  
| | -------------------------------------------------------- | - | ------- | - | ------
| |                                                          |   |         |   |       
| | Loss under U.S. GAAP                                     | $ | (395.0) | $ | (29.2)
| |                                                          |   |         |   |       
| | Other comprehensive (loss)
    income:                   |   |         |   |       
| | Minimum
    pension liabilities, net of income taxes (f) |   | (85.2)  |   | 61.6  
| |                                                          |   |         |   |       
| | Comprehensive loss                                       | $ | (480.2) | $ | 32.4  

- 79 -

---



TEMBEC INDUSTRIES INC. 
Notes to Consolidated Financial Statements

Years ended September 24, 2005 and September 25, 2004 
(in millions of dollars, unless otherwise noted) 
_________________________________________________________

1. Summary of material
  differences between generally accepted accounting principles (GAAP) in Canada
  and the United States (continued):

(g) Comprehensive income (continued):

> At September 24, 2005 and September 25, 2004, accumulated other
>   comprehensive loss amounts to $129.6 million and $44.4 million, respectively.

1. Comparative figures:

Certain 2004 comparative figures have been reclassified to conform with the
  financial statement presentation adopted for 2005.

- 80 -

---