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Tembec Industries Inc.

Annual Information Form

December 18, 2006 
For the fiscal year ended September 30, 2006

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TABLE OF CONTENTS

|                                                                    |                                                                      |                                                                                                        |   
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|DOCUMENTS INCORPORATED BY
    REFERENCE                             | 4                                                                   
|GLOSSARY                                                            |                                                                      |                                                                                                        | 4 
|SPECIAL NOTE REGARDING
    FORWARD-LOOKING STATEMENTS               | 4                                                                   
|ITEM 1 -                                                            | DATE OF ANNUAL INFORMATION FORM                                      | 5                                                                                                     
|ITEM 2 -                                                            | CORPORATE STRUCTURE                                                  | 5                                                                                                     
|ITEM 3 -                                                            | GENERAL DEVELOPMENT OF THE
    BUSINESS                              | 7                                                                                                     
|                                                                    | 3.1                                                                  | BUSINESS OVERVIEW                                                                                      | 7 
|                                                                    | 3.2                                                                  | THREE YEAR HISTORY                                                                                     | 8 
|                                                                    | 3.3                                                                  | TRENDS                                                                                                 | 9 
|ITEM 4 -                                                            | NARRATIVE DESCRIPTION OF THE
    BUSINESS                            | 10                                                                                                    
|                                                                    | 4.1                                                                  | PRINCIPAL OPERATIONS                                                                                   | 10
|                                                                    |                                                                      | 4.1.1      Forest Products Group                                                                       | 10
|                                                                    |                                                                      | 4.1.2      Pulp Group                                                                                  | 14
|                                                                    |                                                                      | 4.1.3      Paper Group                                                                                 | 16
|                                                                    | 4.2                                                                  | ENVIRONMENTAL AND SOCIAL POLICIES                                                                      | 17
|                                                                    | 4.3                                                                  | RESEARCH AND DEVELOPMENT                                                                               | 19
|                                                                    | 4.4                                                                  | COMPETITION                                                                                            | 19
|                                                                    | 4.5                                                                  | RISK FACTORS                                                                                           | 19
|ITEM 5 -                                                            | DIVIDEND POLICY                                                      | 23                                                                                                    
|ITEM 6 -                                                            | GENERAL DESCRIPTION OF CAPITAL
    STRUCTURE                         | 23                                                                                                    
|                                                                    | 6.1                                                                  | GENERAL DESCRIPTION OF CAPITAL STRUCTURE                                                               | 23
|                                                                    | 6.2                                                                  | RATINGS                                                                                                | 24
|ITEM 7 -                                                            | DIRECTORS AND OFFICERS                                               | 25                                                                                                    
|                                                                    | 7.1                                                                  | INFORMATION CONCERNING DIRECTORS                                                                       | 25
|ATTENDANCE RECORD OF DIRECTORS FOR BOARD AND
    COMMITTEE MEETINGS | 28                                                                  
|                                                                    |                                                                      | 7.1.1      Other Directorships                                                                         | 29
|                                                                    |                                                                      | 7.1.2      Independence                                                                                | 29
|                                                                    |                                                                      | 7.1.3      Mandate of the Board                                                                        | 29
|                                                                    |                                                                      | 7.1.4      Selection of Candidates to the Board of
    Directors, Orientation and Continuing Education | 30
|                                                                    |                                                                      | 7.1.5      Assessments                                                                                 | 31
|                                                                    |                                                                      | 7.1.6      Committees of the Board of Directors                                                        | 31
|                                                                    | 7.2                                                                  | COMPENSATION OF DIRECTORS                                                                              | 33
|                                                                    | 7.3                                                                  | LIABILITY PROTECTION FOR DIRECTORS AND
    OFFICERS                                                    | 35
|                                                                    | 7.4                                                                  | CODE OF ETHICS                                                                                         | 35
|ITEM 8 -                                                            | EXECUTIVE AND OTHER COMPENSATION                                     | 36                                                                                                    
|                                                                    | COMPENSATION  UNIONIZED
    EMPLOYEES                               | 36                                                                                                    
|                                                                    | COMPENSATION 
    NON-UNIONIZED/MANAGEMENT EMPLOYEES AND EXECUTIVES | 36                                                                                                    
|EXECUTIVE COMPENSATION                                              | 39                                                                  
|RETIREMENT PLANS                                                    | 42                                                                  
|RETIREMENT PLANS  UNIONIZED
    EMPLOYEES                          | 42                                                                  
|RETIREMENT PLANS  MANAGEMENT
    EMPLOYEES AND EXECUTIVES          | 42                                                                  
|SUPPLEMENTARY PENSION PLAN                                          | 43                                                                  
|ITEM 9 -                                                            | INDEBTEDNESS                                                         | 44                                                                                                    
|                                                                    | 9.1                                                                  | INFORMATION CONCERNING NON-DIRECTOR OFFICERS                                                           | 46
|                                                                    | 9.2                                                                  | CEASE TRADE ORDERS, BANKRUPTCIES, PENALTIES
    AND SANCTIONS                                          | 47

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|ITEM 10 -   | AUDITORS                                                       | 48                                                                            
|----------- | -------------------------------------------------------------- | ------------------------------------------------------------------------------
|            |                                                                | Policies and Procedures for the Engagement of
    Audit and Non-Audit Services
|ITEM 11 -   | LEGAL PROCEEDINGS                                              | 48                                                                            
|            | 11.1                                                           | COUNTERVAILING AND ANTIDUMPING DUTIES                                         
|            | 11.2                                                           | GENERAL                                                                       
|ITEM 12 -   | INTEREST OF MANAGEMENT AND OTHERS
    IN MATERIAL TRANSACTIONS | 50                                                                            
|ITEM 13 -   | MATERIAL CONTRACTS                                             | 50                                                                            
|ITEM 14 -   | INTERESTS OF EXPERTS                                           | 50                                                                            
|ITEM 15 -   | ADDITIONAL INFORMATION                                         | 50                                                                            
|DEFINITIONS | 51                                                            
|SCHEDULE A  | 53                                                            
|SCHEDULE B  | 58                                                            





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DOCUMENTS INCORPORATED BY REFERENCE

Certain specifically identified pages of the
audited consolidated financial statements for the fiscal year ended September
30, 2006 (the "2006 Financial Statements"), the report of the auditors
thereon dated November 15, 2006, except as to note 22(b) which is as of December
5, 2006, the management's discussion and analysis dated December 5, 2006 (the "2006
MD&A"), (collectively the "2006 Annual Report") filed with the
securities commission or similar authority in each of the provinces of Canada
are incorporated by reference into and form an integral part of this Annual
Information Form.

GLOSSARY

Unless otherwise noted or the context
otherwise indicates, references to the "Corporation" in this Annual
Information Form are to Tembec Industries Inc. References to "Tembec" are
to, as the context may require, either the Corporation or the Corporation
together with one or more of its subsidiaries (the "Subsidiaries"),
affiliates and its interests in joint ventures and other entities. In addition,
unless otherwise defined herein, certain terms are defined in the Definitions
section included on page    51 of this Annual Information Form. All dollar
figures are in Canadian dollars unless stated otherwise.

SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

Certain statements contained in this Annual
Information Form, including statements which may contain words such as "anticipate",
"could", "expect", "seek", "may", "likely", "intend",
"will", "believe" and similar expressions, statements that are
based on current expectations and estimates about the markets in which Tembec
operates and statements of Tembec's belief, intentions and expectations about
developments, results and events which will or may occur in the future,
statements relating to trends, expected operating cost savings and expected
capital expenditures, constitute "forward-looking statements". These
statements are based on certain assumptions and analyses made by Tembec derived
from its experience and perceptions. Unless otherwise indicated, forward-looking
statements in this Annual Information Form describe Tembec's expectations as at
December 18, 2006. In addition, other written or oral statements that would
constitute forward-looking statements may be made from time to time by or on
behalf of Tembec.

The accuracy of such statements is subject to a number of
risks, uncertainties and assumptions that may cause actual results to differ
materially from those projected, including, but not limited to:

- 

In addition, other risks could adversely
affect Tembec and it is not possible to predict or assess all risks. Tembec's
actual results, performance or achievement could differ materially from those
expressed in, or implied by, these forward-looking statements and, accordingly,
no assurance can be given that any of the events anticipated by the
forward-looking statements will transpire or occur, or if any of them do so,
what benefits, including the amount of proceeds, Tembec will derive from them.
Except as otherwise indicated, forward-looking statements do not take into
account the effect that transactions or non-recurring or other special items
announced or occurring after the statements are made may have on Tembec's
business. Such statements do not, unless otherwise specified by Tembec, reflect
the impact of dispositions, sales of assets, monetizations, mergers,
acquisitions, combinations or transactions, asset write-downs or other charges

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Annual Information Formannounced or occurring after forward-looking statements are
made. The financial impact of these transactions and nonrecurring and other
special items can be complex and depends on the facts particular to each of
them, and cannot be expressed in a meaningful way or in the same way Tembec
presents known risks affecting its business. Tembec disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.TEMBEC INDUSTRIES INC. 
ANNUAL INFORMATION FORM
ITEM 1 - DATE OF ANNUAL INFORMATION FORMThis Annual Information Form (the "AIF") is dated as
of December 18, 2006. Except as otherwise indicated, the information contained
in this AIF is stated as at September 30, 2006.ITEM 2 - CORPORATE STRUCTUREThe Corporation was formed under the Business Corporations
Act (Ontario) on August 29, 1995, by the amalgamation of Malette Inc. and Tembec
Finance Corp. and continued under the Canada Business Corporations Act on
February 18, 1999, under the name of "Tembec Industries Inc.". On October 1,
2000, it amalgamated with Crestbrook Forest Industries Ltd, on September 30,
2001, with Pine Falls Paper Company Limited, and subsequently, on September 26,
2004, with 4189931 Canada Inc.
There are 536,807,704 Class A shares of the Corporation,
16,627,500 Series 2 Class B shares of the Corporation and 9,103,710 Series 4
Class B shares of the Corporation, all of which are held by Tembec Investments
Inc., a wholly-owned subsidiary of Tembec Inc. The Class A shares of the
Corporation are the only voting securities of the Corporation. The Corporation's
head office is located at Suite 1050, 800 René-Lévesque Blvd. West, Montreal,
Québec, H3B 1X9, telephone: 514-871-0137. Its website address is www.tembec.com.
The chart below depicts the Corporation's principal operating
facilities by industry segment as at the date of this AIF and, where
appropriate, the subsidiaries or affiliates that operate them. Where the
percentage of ownership is less than 100%, it is indicated.
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CORPORATE ORGANIZATION CHART



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Investments

> SPF Lumber

The Corporation holds a 50% interest in Temrex Forest Products, Limited
Partnership, which owns and operates two sawmills in the Gaspé region of the
province of Québec, respectively located in Nouvelle and St-Alphonse, Québec.

> Engineered Wood

The Corporation holds a 50% interest in Temlam Inc. ("Temlam"),
which owns and operates an engineered wood products business comprised of
laminated veneer lumber ("LVL") plants in Ville Marie and in Amos,
Québec, and 3 wood I-beam plants located in Blainville, Québec, Bolton, Ontario
and Calgary, Alberta.

> Specialty Cellulose

The Corporation holds a 50% interest in AV Cell Inc. which owns and operates
a dissolving pulp mill located in Atholville, New Brunswick.

> Northern Bleached Softwood Kraft

Tembec holds a 50% interest in Marathon Pulp Inc. which owns and operates a
softwood kraft pulp mill in Marathon, Ontario.

ITEM 3 - GENERAL DEVELOPMENT OF THE BUSINESS

3.1     BUSINESS OVERVIEW

Tembec is a large, diversified and integrated forest products
corporation with operations principally located in North America and in France.
Its business segments are forest products, pulp, paper and chemicals. As the
chemical business represents less than 10% of the Corporation's consolidated
sales and consolidated assets, it is not discussed in this AIF.

Tembec produces approximately 1.7 billion board feet of
lumber, 2.2 million tonnes of pulp and 1.1 million tonnes of paper. A breakdown
of production capacities by operating facility is included in the Segment Review
section of the 2006 MD&A. For the fiscal year ended September 30, 2006, Tembec
had sales of $3.3 billion, EBITDA of $25 million, an operating loss of $369
million and a net loss of $300 million. Tembec's total assets at that date were
$3 billion and it employed approximately 9000 people. The segmented results and
the breakdown of sales of the Corporation's products by geographic areas are
shown on pages 4 to 5 of the Corporation's 2006 Financial Statements.

Tembec's strategy is to (i) diversify its business among the
forest products, pulp products and paper products sectors; (ii) strive to
maintain low cost, efficient operations; and (iii) utilize its technical and
operating expertise to develop niche products and markets within its business
segments.

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3.2     THREE YEAR HISTORY

The following summarizes major events that have occurred over the past three
years:

Forest Products Group

As part of its strategy to contribute to much needed
consolidation in the softwood lumber industry in North America, and to further
secure its long-term fibre base for its pulp and paper manufacturing operations
in Ontario and Québec, in fiscal year 2004 Tembec acquired two sawmills located
in La Sarre and Senneterre, Québec for $49 million plus working capital of $15
million as well as a sawmill from Weyerhaeuser located at Chapleau, Ontario for
$26 million, including working capital. The three sawmills increased the
Corporation's SPF lumber capacity by 350 million board feet or 24%.

In August 2004, the Corporation also exercised its option to
acquire the remaining 50% interest in Excel Forest Products Inc., which owned
and operated an SPF sawmill located in Opasatika, Ontario, for cash
consideration of $7 million. The initial 50% interest had been acquired in March
2001. The purchase increased the Corporation's lumber capacity by 47.5 million
board feet or 3%.

In January 2005, Tembec announced the permanent closure of its Opasatika,
Ontario SPF sawmill. The Corporation was able to mitigate the loss of capacity
by reallocating timber to its other regional sawmills.

In June 2005, the Corporation idled several facilities. These
included an SPF sawmill in LaSarre, Québec: a specialty hardwood and pine
sawmill in Davidson, Québec: a specialty hardwood sawmill in Temiscaming, Québec
and a lumber remanufacturing facility in Brantford, Ontario. The SPF sawmill had
a capacity of 100 million board feet, representing 6% of the Corporation's total
capacity. The Corporation was able to mitigate the loss of capacity by
reallocating timber to its other regional sawmills. The two specialty sawmills
had a capacity of 70 million board feet, representing 38% of the Corporation's
annual capacity. The closure of the lumber remanufacturing facility represented
an exit from this particular activity, as the Corporation did not own any other
similar facility.

In 2005, Temlam completed the construction of a 4.6 million cubic feet LVL
plant at Amos, Québec at a cost of $130 million. The plant was started in early
calendar 2006 and reached acceptable operating levels in September 2006.

In September 2005, Tembec was awarded Forest Stewardship
Council ("FSC") certification for its forest resource management
practices related to four Forest Management Units in the Abitibi-Témiscamingue
region of Québec. Tembec now has 8.5 million hectares of Canadian forest that is
FSC certified.

In February 2006, the Corporation completed the sale of its
oriented strandboard ("OSB") business located in
Saint-Georges-de-Champlain, Québec to Jolina Capital Inc. for a total
consideration of $98 million, of which $88 million were payable at closing, and
the balance payable in the form of a $10 million interest-bearing note,
repayable in equal annual installments over a five-year period. As a result of
this transaction, the financial results of the OSB operation have been
reclassified as discontinued operations. Comparative figures shown in the AIF
have also been reclassified to exclude the OSB mill's results.

In fiscal 2006,Tembec announced a series of temporary
shutdowns, ranging from a few weeks to indefinite periods of time, at various
sawmills located in Ontario and Québec. These shutdowns were due to several
factors including overall market conditions, product pricing and the high value
of the Canadian dollar. In October 2006, three sawmills located in Québec were
shut down for an indefinite period of time.

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Pulp Group

The Temiscaming specialty cellulose mill modernization was
completed during the 2004 fiscal year. The $140 million project involved
upgrading the pulp screening and washing, bleach stock washing and screening,
dry machine and finishing, chip screening and digester areas of the mill.

InApril, 2006, the Corporation announced that its
market pulp mill in Smooth Rock Falls, Ontario would be idled indefinitely,
effective July 31, 2006, affecting 230 employees. The Smooth Rock Falls mill
produced 200,000 tonnes of Northern Bleached Softwood Kraft ("NBSK") pulp
annually, representing 9% of the Corporation's total annual capacity. On
December 5, 2006, the Corporation announced the permanent closure of the pulp
mill. This closure was necessary in light of the high value of the Canadian
dollar and high manufacturing costs at this site relative to global competition.

Paper Group

In the September 2004 quarter, the Corporation recorded a
charge of $10 million relating to the write-down of a newsprint machine at the
Kapuskasing, Ontario papermill. The machine had been idle since February 2004
and based on relatively difficult market conditions it was deemed unlikely to
restart. The 70,000 tonnes per year newsprint machine remains idle. The closure
reduced the Corporation's total newsprint capacity by 12%.

In May 2005, Tembec announced the closure of the Saint
Raymond, Québec paper mill. The facility had the capacity to produce 65,000
tonnes of coated and uncoated groundwood papers. The closure reduced the
Corporation's total paper capacity by 6%.

In the March 2006 quarter, Tembec permanently idled a
pressurized groundwood pulp line and an unbleached board machine at the
St.Francisville, Louisiana paper mill. The unbleached board machine had a
capacity of 80,000 tonnes, representing 7% of Tembec's paper capacity.

Governmental Activity

During the last fiscal year,Tembec received a
compensation payment of $5 million from the Province of British Columbia
associated with reductions in Tembec's allowable annual cut ("AAC")
related to its operations in Southeastern British Columbia. This AAC reduction
was part of the government's province-wide timber reallocation process. There
was also an additional payment in recognition of road and other infrastructure
investments in areas affected by the reduction

In February, 2006, the Province of Ontario confirmed it would
commence funding 100% of the cost of primary road building and 50% of the cost
of building secondary roads. This was in addition to support for maintenance
costs on primary roads announced during fiscal year 2005. The combined effect of
the foregoing road building and maintenance funding measures and those announced
last summer should result in a cost reduction in the range of $2.90 per cubic
meter on volumes harvested in Ontario.

Financing

In the spring of 2005, Tembec put in place a three-year
committed revolving line of $150 million with CIT Business Credit Canada Inc.,
and a three-year committed revolving line of $190 million with a syndicate of
banks, subsequently increased to $200 million, both of which replaced existing
operating facilities. In June 2006, the lenders declined the extension of the
operating line of credit. It became a non-revolving line of $136 million
expiring in June 2008.

3.3     TRENDS

Reference is made to the Segment Review section of the 2006 MD&A.

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ITEM 4 - NARRATIVE DESCRIPTION OF THE BUSINESS

4.1     PRINCIPAL OPERATIONS

Tembec's business is centered around the production and sale
of forest, pulp and paper products. The manufacturing assets of the Corporation
are located primarily in Canada, with a fairly large presence in the eastern
part of the country, namely, Northeastern Ontario and Northwestern Québec.

Tembec has approximately 9,000 employees of which
approximately 6,000 are covered by collective bargaining agreements. At the end
of September 2006, there were 17 agreements covering 1,300 employees that had
expired. During fiscal 2007, a total of 4 agreements covering 450 employees will
expire.

The birthplace of the Corporation is the town of Temiscaming,
Québec. It is one of the more significant production sites owned by Tembec,
representing approximately 18% of consolidated sales. The Temiscaming complex,
as the site is referred to, includes 3 pulp lines which produce specialty
cellulose and high-yield pulps, a 3-ply coated paperboard machine, an ethyl
alcohol production facility, a liquid resin plant, a lignosulfonate spray drying
operation, a biomass boiler which generates steam and electricity, burns wood
waste and sludge as well as primary and secondary effluent treatment facilities.

The lumber and paper businesses are more North American in
nature and the Corporation's assets in these segments are located in this
market. The pulp business is global in nature, with Europe and China being the
largest consumers. Three of the eleven pulp mills, which represent 30% of Tembec's paper pulp production and 41% of its specialty pulp production, are
located in Europe. The other eight pulp mills are located in Canada. The
following sections provide specifics in relation to each of the Corporation's
principal business segments.

4.1.1     Forest Products Group

The Forest Products Group produces an extensive range of
commodity and value-added forest products focusing on three main product groups:
(i) Spruce, Pine, Fir Lumber ("SPF"), (ii) Specialty Wood products and
(iii) Engineered Wood products. For the fiscal year ended September 30, 2006,
the Forest Products Group generated external sales of $905 million, EBITDA of
$22 million and an operating loss of $31 million. The Forest Products Group's
annual sales accounted for approximately 27% of Tembec's total consolidated
sales in fiscal 2006.

The following table summarizes the annual operating levels of each operating
facility by product group:

SPRUCE, PINE, FIR LUMBERLocation and Product
      MFBMStud LumberTaschereau/La Sarre, QC(1)
      200,000Senneterre, QC
      150,000Cochrane, ON
      170,000Kapuskasing, ON
      105,000Random LumberElko, BC (2)
      270,000Canal Flats, BC (2)
      180,000Hearst, ON
      160,000Timmins, ON
      100,000Chapleau, ON
      135,000


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Bearn, QC
      110,000Nouvelle/St-Alphonse, QC(3)
      75,000Finger Joint LumberCranbrook, BC
      25,0001,680,000SPECIALTY WOODLocation and Product
      MFBMDavidson, QC(4)  Pine and Hardwood
      Lumber
      55,000Mattawa, ON - Pine and Hardwood Lumber
      30,000Huntsville, ON  Hardwood Lumber
      30,000Huntsville, ON  Hardwood Flooring
      18,000Toronto, ON - Pre-Finished Hardwood Flooring
      10,000Brassac, France  Pine Lumber
      15,000158,000ENGINEERED WOODLocation and Product
      Thousand ft. 3Ville-Marie, QC(5) Laminated
      Veneer Lumber
      475Amos, QC (5)(6) Laminated Veneer
      Lumber
      2,3002,775MFBMLa Sarre, QC - Engineered Finger Joint Lumber
      60,000Thousand linear ft.Bolton, ON(5)  Wood I-Beams
      40,000Calgary, AB(5)  Wood I-Beams
      18,000Blainville, QC(5) Wood I-Beams
      5,00063,000Million lbsBolton, ON(5)(7) - Metal Plates and
      Webs
      10.0


(1) Sites are operated as a combined entity. 
(2) The Elko and Canal Flats Sawmills rely on Cranbrook Planing Mill to dry and
dress 80,000 mfbm of lumber. 
(3) Volumes reflect 50% of the actual capacity as the units are part of the
Temrex joint venture. 
(4) The Davidson facility was shut down temporarily for an indefinite period in
the September 2005 quarter. 
(5) Volumes reflect 50% of the actual plant capacity as the units are part of
the Temlam joint venture. 
(6) Projected capacity as mill is in start-up phase. 
(7) The Temlam joint venture sold its metal plates and webs business in the June
2006 quarter.

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Products and Markets

The SPF lumber sawmills produce various types, species and
grades of lumber which are used primarily for residential and commercial
construction. Higher value SPF lumber products include J-Grade, TemPlusTM and
TemSelectTM and machine stress rated ("MSR") grades.

Pine and hardwood lumber are used in a wide variety of applications,
including furniture, flooring and specialty residential and commercial
applications.

Hardwood flooring products are targeted for residential, commercial and
recreational applications.

The engineered wood products business manufactures LVL and I-beams which are
used in specialized residential and commercial construction applications such as
roof and floor truss systems as well as beam and header applications.

In addition, the Forest Products Group produces and ships approximately 1.9
million tonnes of wood chips, approximately 86% of which are directed to
Tembec's pulp and paper facilities.

The SPF lumber industry is subject to both cyclical and
seasonal fluctuations in demand, which can lead to volatility in prices. North
American solid wood products demand is influenced by the general level of
economic activity, consumer confidence and interest rates. All of the above
impact on housing construction starts, which is generally regarded as the best
indicator of lumber demand. The total North American lumber demand is
approximately 73 billion board feet, with U.S. demand of approximately 63
billion board feet and the balance being consumed in Canada. U.S. producers
currently supply 38 billion board feet, leaving a U.S. domestic shortfall of
approximately 25 billion board feet. Canadian producers annually sell a total of
35 billion board feet, shipping 22 billion board feet to the U.S. and exporting
2 billion board feet outside North America. The remaining 11 billion board feet
is consumed domestically in Canada. Tembec's production capacity represents
approximately 2% of the North American SPF lumber capacity.

In fiscal 2006, 43% of Tembec's consolidated sales occurred
in Canada and 52% in the United States of America. As a result of the
significant dependence on the U.S. market, Tembec's forest products
competitiveness is heavily influenced by the relative strength of the Canadian
dollar versus the U.S. dollar. The Forest Products Group business fosters a
highly diversified customer base. Products are sold by Tembec's own internal
sales force directly to large retailers, industrial end-users and distributors.
Tembec markets most of its solid wood products in North America. The Corporation
competes directly with other Canadian and U.S. producers of SPF lumber. While
selling prices, product quality and customer service are important factors
affecting competition, other factors such as fibre costs, foreign exchange rates
and the recently signed Canada/USA Softwood Lumber Agreement (the "2006
Softwood Lumber Agreement") also have an impact on the Corporation's
competitive position. The new agreement, which came into force on October 12,
2006, requires Canadian exporters to the U.S to pay an export tax which varies
inversely with the price of lumber. Beginning on January 1, 2007, Tembec's
Québec and Ontario sawmills will also be subject to an export quota, but the
export tax rate in effect since October 12, 2006 will be reduced. Prior to the
settling of the softwood lumber dispute, Canadian lumber producers were forced
to pay in excess of $US 5 billion of countervailing and antidumping duties to
U.S. Customs since May 2002. On October 30, 2006, Tembec received payment of US
$242 million pertaining to softwood lumber duty deposits made by Tembec to US
Customs since May 2002. The funds were advanced by Export Development
Corporation ("EDC") as part of a financing transaction made possible by
the 2006 Softwood Lumber Agreement. The Agreement provides for the return of
approximately 82% of the US$ value of duties deposited by the Corporation,
including accrued interest. The $242 million received represented substantially
all of the moneys that Tembec expects to recover.

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Fibre Supply

Tembec's Canadian forestry operations are managed by the
Forest Resources Management Group. This includes the harvesting of timber,
either directly or through contractors, and all silviculture and regeneration
work required to ensure a sustainable supply of wood fibre to the manufacturing
units. The Forest Resources Management Group is also responsible for third-party
timber purchases and wood chip production from whole log chippers which are
required to supplement total requirements. Its main objective is the
optimization of the flow of timber to the various manufacturing units.

Tembec seeks to maximize the utilization of timberlands for
which it is responsible through efficient management and by following
sustainable forest management practices so that the timberlands provide a
continuous supply of wood for future needs. Site preparation, planting and
harvesting techniques are continually improved through a variety of methods,
including genetic research and computerization.

As Tembec's forestry activity in Canada is conducted
primarily on Crown land, the Forest Resources Management Group works closely
with provincial governments to ensure harvesting plans and operations comply
with established regulations.

Québec

Tembec has timber supply and forest management agreements
(commonly known as "CAAFs") with the Ministry of Natural Resources
(Québec) for the supply of its Québec sawmills. Each CAAF has a term of 25 years
and is subject to review and renewal every five years. Renewal at the end of
each five-year period remains at the discretion of the Ministry of Natural
Resources (Québec) and is subject to its determination that Tembec has satisfied
the obligations specified under the relevant CAAF.

The Coulombe Commission, appointed by the Québec government
to study and report on the management of Crown land on its territory, made its
report public on December 14, 2004. It recommended that the Québec government
reduce timber cutting rights by 20% for fir, spruce, jack pine and tamarack
(SPF). During the spring of 2005, the Québec government announced a 20%
reduction in annual allowable cut for SPF, and 5% on other species. Cutting
rights for Tembec were reduced by 19.2% in SPF, for a total reduction of 11.6%
all species combined.

Ontario

Tembec's cutting rights are provided principally through
several Sustainable Forest Licenses on Crown land issued by the Ministry of
Natural Resources (Ontario). These licenses expire at different dates and have
20 year terms and are renewable every five years. Their renewal is based on
satisfactory performance determined by independent audits and approval of the
Ministry of Natural Resources (Ontario).

Manitoba

In Manitoba, Forest Management License Agreements ("FMLs")
enable holders to harvest to sustainable levels. The FMLs are for 20 year terms
and are renewable every 10 years upon approval of a ten year forest management
plan ("FMP"). An environmental licensing process accompanies the
submission of the long-term forest management plan resulting in the issuing of a
ten-year environmental license. Tembec's 20 year FMP expired on January 1, 1998.
Due to extenuating circumstances, a new FMP was not produced and Tembec
operations have been approved based upon annual operating plans since that time.
The Province of Manitoba has notified Tembec that a new twenty-year FMP must be
submitted for Tembec's FML by January 1, 2008. The Province has also provided
Tembec notice that the current FML will not be extended when the new FMP is
approved and that a new FML will be required by December 31, 2008. Discussions
regarding the new FML between the Province of Manitoba and Tembec should
commence in 2007 in order to be fully prepared with a new agreement prior to the
expiry date of the current FML on December 31, 2008.

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British Columbia

Approximately 95% of all timberlands in the Province of
British Columbia are Crown lands. Rights to harvest Crown timber may be granted
on behalf of the Crown in the form of forest tenures regulated under the British
Columbia Forest Act, the Forest Practices Code of British Columbia Act and the
Forest and Range Practices Act and associated regulations.

The forms of forest tenures held by Tembec are one tree farm
license (25-year term replaced every 5 to 10 years) and three forest licenses
(15-year term also replaced every 5 to 10 years). Such licenses typically confer
to their holder the right to harvest a specific volume of timber on Crown lands.
In harvesting these tenures, the Corporation is required to satisfy specific
government objectives which include forest management, protection of non-timber
resources, harvesting, reforestation and protection of archaeology and cultural
heritage sites.

As a result of the Forest Revitalization Act, license holders
across the province were required to surrender a certain portion of existing
harvesting rights (roughly 20% for tenure with annual allowable cuts greater
than 200,000 m3). This surrendered volume was reallocated to the
British Columbia Timber Sales Program, First Nations and small tenures (for
example woodlots). While some volume of harvesting rights was lost from forest
tenures (in Tembec's case: 189,310 m3, by March 1, 2006), it remains
available on the open market through a competitive purchase program.

Stumpage and Other Charges

Provincial authorities impose stumpage fees on volumes of
wood cut on Crown land. These fees are determined under specific mechanisms in
each province. Part of the mandate of the Forest Resources Management Group is
to ensure that stumpage charged by the provincial governments reflects the fair
value of the timber being harvested.

Due to the mountain pine beetle infestation in British
Columbia and the resultant deterioration in log quality, provincial authorities
have committed to changing the method of scaling and pricing logs in the
province. These legislative changes came into effect in spring 2006. More
particularly, on April 1, 2006 new log grades were established for the interior
of the province and on July 1, 2006 a market based pricing system for the
interior of the province also came into force.

4.1.2     Pulp Group

The Pulp Group currently consists of eleven manufacturing
facilities operating at ten sites. The facilities are divided into two main
categories: paper pulps (softwood kraft, hardwood kraft and high-yield pulps)
and specialty pulps (specialty cellulose, fluff and dissolving pulps). Nine of
the pulp mills are wholly-owned and Tembec has a 50% joint venture position in
the Marathon, Ontario, softwood kraft pulp mill and in the Atholville, New
Brunswick, dissolving pulp mill. In the fiscal year ended September 30, 2006,
the Pulp Group generated external sales of $1.4 billion, EBITDA of $6 million,
and an operating loss of $269 million.

The following table summarizes the products and operating levels of each
facility by main type:

Location and ProductPaper Pulps
      TonnesSoftwood KraftSkookumchuck, BC
      270,000Tarascon, France
      260,000Smooth Rock Falls, ON(1)
      200,000Marathon, ON(2)
      95,000825,000


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Location and ProductPaper Pulps
      TonnesSoftwood KraftHardwood KraftSaint-Gaudens, France
      305,000Hardwood High-YieldTemiscaming, QC
      300,000Matane, QC
      230,000Chetwynd, BC
      200,000730,000Specialty PulpsTemiscaming, QC  Specialty Cellulose
      165,000Tartas, France  Fluff
      155,000Atholville, NB(2)  Dissolving
      60,000380,000Total
      2,240,000


(1)

Products and Markets

Most paper grade market pulps, primarily kraft, are produced
by chemical processes, although high-yield pulps are made by mechanical methods.
Kraft paper pulps are used to produce a variety of high-quality paper products
with specific brightness and strength characteristics. Softwood kraft normally
sells for a premium over hardwood kraft as its longer fibres provide required
strength properties for paper producers. High-yield market pulps have been
produced in North America since the mid 1980's. Initially, most high-yield pulps
were manufactured with softwood and utilized in tissue and towel applications,
where their superior bulk and absorbency are desired characteristics. However, Tembec had always maintained a strategy of targeting the use of high-yield pulps
in paper production. The strategy led to the development of hardwood high-yield
grades made from birch, aspen and maple. Although high-yield pulps are lower
than kraft pulps in tensile and tear strength, they offer advantages in bulk and
opacity.

Specialty pulps are used in a wide variety of applications.
The specialty cellulose pulp mill in Temiscaming, Québec, produces high purity
cellulose, which is used in textiles, pharmaceuticals, food additives and
industrial chemicals. The pulp mill in Tartas, France, also produces fluff pulp
using the sulphite process and it is sold to manufacturers of disposable
sanitary products who then break down the pulp rolls into individual fibres to
give their products bulk, softness and absorbency. Disposable baby diapers
account for a large percentage of fluff pulp consumption. Feminine napkins,
adult incontinence diapers and nursery pads are other important end-uses. The
dissolving pulp grades produced in Atholville, New Brunswick, are also highly
purified grades of cellulose pulp. They are used in the manufacture of rayon
staple textile fibre by affiliates of the Aditya Birla Group, Tembec's joint
venture partner in AV Cell Inc.

The pulp market is international in nature, with large
volumes of pulp moving duty-free between net-producing regions and net-consuming
regions. Global market pulp demand is approximately 49 million tonnes. Western
Europe, including Nordic countries, is the largest producing region of market
pulp at 12 million tonnes per year followed by Canada at 11 million tonnes and
South America at 9 million tonnes. Europe is the largest consuming region at 19
million tonnes per year, followed by North America at 9 million tonnes and China
at 7 million tonnes.

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Tembec markets its pulp on a world-wide basis, primarily
through its own sales force, with a network of offices in Canada, Switzerland,
China, Taiwan, Japan, South Korea and Spain. This is consistent with Tembec's
strategy of selling directly to customers and establishing long-term strategic
relationships. Tembec's sales force also markets pulp and paperboard produced by
third parties. In fiscal 2006, agency pulp sales totaled 2,000 tonnes compared
to 4,400 tonnes in fiscal 2005. Sales from the Pulp Group represented
approximately 41% of Tembec's total consolidated sales in fiscal 2006.

Fibre Supply

Tembec's North American pulp mills consumed approximately 2.3
million bone dry tonnes of wood chips in fiscal 2006. Of this amount,
approximately 47% was supplied by the Forest Products Group. The remainder is
purchased from third parties under contracts and agreements of various
durations. The three pulp mills located in southern France purchase their fibre
requirements from many private landowners.

4.1.3     Paper Group

The Paper Group currently consists of four facilities with a
total of nine operating paper machines producing newsprint, coated paper, coated
board and specialty paper products. For the fiscal year ended September 30,
2006, the Paper Group generated sales of $874 million, negative EBITDA of $11
million, and an operating loss of $72 million.

The following table summarizes the products and operating levels of each
facility by main type:

Location and ProductNewsprint
      Tonnes(1)Kapuskasing, ON  Newsprint330,000Pine Falls, MB  Newsprint
      185,000515,000Coated PaperSt. Francisville, LA  Coated
      280,000Specialty PaperSt. Francisville, LA  Uncoated Bleached Board(2)
      80,000St. Francisville, LA  Specialty Kraft Paper
      30,000Temiscaming, QC  Coated Paperboard
      180,000290,000Total
      1,085,000


(1)

Products and Markets

Newsprint is used primarily for the publication of daily
newspapers. It is generally considered to be a commodity product, having a
uniform definition and few distinct differences. Newsprint demand is driven
primarily by the requirements of daily newspapers. Canadian manufacturers of
newsprint are very dependent on export markets, particularly the U.S. market. In
calendar year 2005, the total North American newsprint demand was
approximately 10.5 million tonnes with the U.S. market consuming 9.4 million
tonnes. U.S. producers currently supply 4.3 million tonnes of this requirement.
Canadian newsprint producers annually sell a total of 7.8 million tonnes,
shipping 4.8 million

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tonnes to the U.S. and exporting 2.0 million tonnes outside
of North America. As a result of this large dependence on the U.S. market,
Tembec's newsprint competitiveness is heavily influenced by the relative
strength of the Canadian dollar versus the U.S. dollar. Tembec's newsprint
capacity represents approximately 4% of total North American production capacity.

The St. Francisville, Louisiana, paper facility produces
coated and specialty papers. The end-use markets are magazines and catalogs.
Demand factors for magazines and catalogs are related to advertising and retail
sales. The general economy strongly influences both. The coated paper capacity
of Tembec represents approximately 3% of the North American market. The
specialty paper products segment encompasses the food and medical papers markets
and typical end uses are coffee filters, medical papers, and pharmacy bags. The
specialty market is made up of small non-pulp integrated producers. Tembec is
the leading producer of paper for the coffee filter market and also benefits
from being fully integrated with its pulp supply with respect to this segment of
the market.

The paperboard markets targeted by Tembec are the coated
lightweight, bleached linerboard and folding carton board packaging markets for
food, pharmaceuticals, cosmetics and cigarettes. Graphic printing applications
include postcards, calendars, greeting cards, book covers and report covers. In
addition, the mill produces bleached liner board for high-quality packaging and
display applications. The paperboard group's major market is in the U.S. with
the balance split between Canada and offshore markets.

The focus of the Paper Group is the North American market which accounted for
98% of sales in fiscal 2006, with the U.S. representing 87% of total sales. For
fiscal year 2006, the Paper Group represented 26% of consolidated sales.

Fiber Supply

The Paper Group receives approximately 40% of its virgin
fibre requirements through internal sources with the remainder purchased from
sawmills and third-party suppliers. The paper mills consumed 0.9 million tonnes
of wood chips and round wood in the last fiscal year. All of the wood fibre
required by the St. Francisville facility is purchased from industrial and
privately owned land.

The pulp group provides the high yield pulps and a portion of the NBSK pulp
required by the Temiscaming paperboard operation. Other purchases of kraft pulp
are made on the open market.

The Kapuskasing and Pine Falls mills both produce newsprint
that contains recycled fibre. They utilize de-inked recycled pulp produced from
old newspapers ("ONP") and old magazines ("OMG"). Their
consumption of ONP and OMG was 86,600 tonnes in the last fiscal year. ONP and
OMG are purchased from various merchants and collection groups.

4.2     ENVIRONMENTAL AND SOCIAL POLICIES

Tembec shares with the community important responsibilities
towards the environment in which we live and work. The Corporation supports the
responsible stewardship of resources, including forest, fish and aquatic
habitat, wildlife, air, land and water. Responsible stewardship, combined with a
continuous improvement process, makes possible sustained economic development
and an improved quality of life.

Environmental Management

Tembec maintains two Environmental Management Programs ("EMPs")
Forever Green® and Impact Zero® targeting the forestry and manufacturing
sectors. The objectives of the EMPs are to (i) maintain compliance with Tembec's
corporate principles and environmental policy, (ii) integrate sustainable
development, (iii) respond effectively to environmental issues, (iv) obtain
appropriate certification and (v) continually improve environmental performance.

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Pulp and Paper

Impact Zero® provides for the development of environmental
objectives, targets and action plans that are based on specific performance
criteria. It also includes the implementation and maintenance of an
environmental management system ("EMS"), in compliance with the ISO
14001-2004 standard.

Impact Zero® objectives and targets are established in six
key areas at each Tembec manufacturing site. The sites are responsible for
establishing and maintaining programs and action plans required to achieve the
environmental objectives and targets within scheduled timeframes, as well as for
allocating the human, technical and financial resources required for their
implementation. All but one of Tembec's pulp and paper operations are currently
certified to the ISO-14001 standard. The Chetwynd plant, a zero-effluent mill,
is expected to obtain its certification in early 2007.

Environmental Infractions

In the last fiscal year, Tembec reached settlements with the
Governments of Québec and Canada relating to exceedences of allowable limits of
effluents from Tembec's industrial site located in Temiscaming, Québec. Such
settlements resulted in the payment by Tembec of a fine of $1 million to the
Government of Québec, a fine of $250,000 to the Government of Canada and a
contribution of $500,000 to the Environmental Damages Fund. The infractions
occurred between 2001 and 2004 when Tembec was reviewing options for additional
capital expenditures focused on effluent treatment facilities and process
modifications that would have a further positive environmental effect with the
goal being to ensure that the Temiscaming Complex would meet the environmental
standards. A capital plan providing for expenditures in excess of $50 million
has been fully executed and commissioned since early calendar 2006. These
investments will ensure that, barring unforeseen events, the Temiscaming Complex
site operates in full compliance with all applicable environmental regulations.

Forest Resource Management

The Forever Green® Program includes the implementation and
maintenance of an EMS, in compliance with the ISO 14001-2004 standard, which
aims to promote environmental protection, sustainable forest management and
conformance with Tembec's environmental policy for forest operations. Tembec has
developed the "Forever Green® Guiding Principles" to direct forest managers in
the establishment of environmental objectives and targets which are reviewed
annually. As part of the Forever Green® Program, Tembec has also made a
commitment to certify all of its forest operations to the Forest Stewardship
Council ("FSC") standards.

Certification

In the past fiscal year, Tembec was awarded FSC certification
at 6 new locations representing an unprecedented growth in FSC certification for
Tembec. New certificates were granted for Tembec operations in Chapleau,
Ontario, Bearn, Rouyn and Nouvelle, Québec and Cranbrook and Invermere, British
Columbia. These recent certifications bring the total area of FSC certified
forest under license to Tembec to 8.5 million hectares of Canadian forest. As of
September 2006, one forest that is 900,000 hectares in size has been audited and
is scheduled to be certified prior to the end of the 2006 calendar year. Tembec
has a total of 12 FSC forest management certificates representing the largest
area of any FSC certified corporation in the world.

In keeping with its philosophy to promote environmental
protection, Tembec entered into an agreement in December 2004 with Nature
Conservancy of Canada ("NCC ) to protect over 400 square kilometers
(40,213 hectares) of important wildlife habitat in southeastern British
Columbia. It is the largest agreement of its kind ever negotiated by NCC, and
one of the biggest private conservation agreements in North American history.
The agreement commits Tembec to a 10-year no-development moratorium on 370
square kilometers (36,991 hectares) of its land. The Rain Forest Alliance, a
leading international conservation organization, recognized Tembec as a
corporate sustainable standards setter to highlight its significant contribution
to environmental conservation and sustainability.

First Nations Policy

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In protecting and enhancing the resources in its care, Tembec
is also cognizant of and recognizes its presence in territories on which
aboriginal people assert rights and interests. The Corporation has adopted a
First Nations policy, the purpose of which is to build relationships with
Aboriginal People located in the vicinity of the Corporation's operations. Tembec's policy covers areas such as capacity building, employment
opportunities, information-sharing, business relations and measures to harmonize
traditional land use and forestry operations.

Tembec has agreements in place with the Ktunaxa Nation Tribal
Council representing 5 communities in southeastern British Columbia and with 3
communities in northeastern British Columbia in the vicinity of Chetwynd. Tembec
has entered into these agreements to promote a positive long-term working
relationship between the parties, and to identify the means to accommodate
community interests.

Tembec has agreements in place with Missanabie Cree First
Nation, Wahgoshig First Nation, Nipissing First Nation, Taykwa Tagamou Nation in
Ontario to recognize the interest of the community in participating in forest
management activities, creation of economic opportunities and consultation
initiatives.

In Québec, Tembec has agreements in place with six First
Nations communities, the most recent of which was finalized in early 2006 with
Long Point First Nation. With Timiskaming First Nation, Wolf Lake First Nation,
Eagle Village First Nation, Pikogan First Nation, Listuguj First Nation
agreements are in place to accommodate the traditional activities of the
community during forestry planning through the identification of areas of
concern and development of measures to harmonize. Financial support to assist
the community in engaging in resource management is also provided.

4.3     RESEARCH AND DEVELOPMENT

Tembec considers research and development ("R&D")
essential to its growth and to its long-term ability to compete successfully on
world markets. Tembec's mission of minimizing costs and encouraging innovation
while protecting the environment is backed by its objective to invest the
equivalent of a minimum of 5% of sales in R&D each year. Some R&D is carried out
with specialized research centres, Canadian and foreign universities and
strategic equipment and technology suppliers. The R&D thrust is a crucial aspect
of Tembec's activities, enabling Tembec to continue meeting its customers'
ever-growing expectations and to develop new customer relationships. Research
projects target environmentally sound forest operations, lower cost fibre
transformation processes and new higher value-added product development.

Tembec's research and development expenditures have averaged nearly 100
million annually over the last 3 years.

4.4     COMPETITION

The lumber, pulp and paper industries are essentially
commodity markets in which producers compete primarily on the basis of price. In
addition, since the majority of Tembec's lumber, pulp and paper production is
directed to export markets, it competes on a worldwide basis against many
producers of approximately the same or larger capacity. In export markets,
Tembec generally competes with U.S., Latin American, Asian and Scandinavian
producers, some of whom have greater financial resources and operate mills which
may have lower production costs than the mills operated by Tembec.

4.5     RISK FACTORS

The following information is a summary of certain risk factors relating to
the business of Tembec and is qualified in its entirety by reference to, and
must be read in conjunction with, information appearing elsewhere in this AIF.

Product Prices

Tembec's financial performance is dependent on the selling
prices of its 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

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Corporation is subject to reduced revenues and margins, resulting in
substantial declines in profitability and possibly net losses.

Tembec is not able to predict with certainty market
conditions and selling prices for its products. There can be no assurance that
prices for Tembec's products will not decline from current levels, or when such
prices may increase. Tembec has, in the past, and may, in the future, decide to
schedule market-related production downtime as a result. Any prolonged or severe
market weakness for any of Tembec's principal products may adversely affect
Tembec's revenues, results of operations, cash flow and its ability to satisfy
its obligations under its indebtedness and its capital expenditure requirements.

Foreign Exchange

Revenues for most of Tembec's products are affected by
fluctuations in the relative exchange rates of the Canadian dollar, the US
dollar and the Euro. The prices for many of Tembec's products, including those
Tembec sells in Canada and Europe, are generally driven by US dollar reference
prices. As a result, any decrease in the value of the US dollar relative to the
Canadian dollar and the Euro reduces the amount of revenues Tembec realizes on
its sales. In addition, since Tembec's business units purchase the majority of
their production inputs in local currency, fluctuations in foreign exchange
rates can significantly affect a unit's relative profitability when compared to
competing manufacturing sites in other currency jurisdictions. This could result
in a business unit's inability to maintain its operations during periods of low
prices or demand.

Availability and Price of Fibre

Fibre represents Tembec'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
grant timber tenure for terms varying from 5 to 25 years and are generally
subject to regular renewals every 5 years. 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. Tembec cannot
predict the extent to which aboriginal land claims or other rights will affect
Tembec's existing Crown tenures or Tembec's private timberlands or its ability
to harvest timber from these sources in the future, or its ability to renew or
secure other sources in the future.

The Province of Québec adopted new legislation, which became
effective April 1, 2005, that reduced allowable wood-harvesting volumes by an
average of 20% on public lands and 25% on territories covered by an agreement
between the Government of Québec and the Cree First Nation. As a result, the
amount of fibre we are permitted to harvest annually, under our existing
licenses from the Québec government, were reduced by approximately 19.2% in SPF,
for a total reduction of 11.6% of all species combined.

There can also be no assurance that Tembec's agreements with
provincial governments will continue to be renewed or extended by the provincial
governments on acceptable terms or that the amount of timber that is allowed to
be harvested will not be further decreased. Further changes in legislation or
regulatory regimes in provinces in which Tembec operates may change fee
structures payable in relation to the harvesting of timber, may reduce the
availability of fibre and may increase the costs through the imposition of
additional and more stringent harvesting, rehabilitation and silvicultural
standards. These changes could have a material adverse effect on Tembec's
business, financial condition and results of operations.

Natural Events

The forest products industry is periodically subject to
natural events such as forest fires, adverse weather conditions, insect
infestation, tree disease, prolonged drought and other natural disasters. The
occurrence of any of these events could have a material adverse effect on
Tembec's business, financial condition and results of operations. The Mountain
Pine Beetle continues to pose a significant threat to the lodge pole pine forest
in the interior regions of British Columbia. While impacts in the southeastern
region of the interior, where Tembec operates two sawmills, are less than in the
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region, infestation levels continue to be significant in
Tembec's operating areas. Lodge pole pine accounts for more than 70% of the
total timber volume harvested in British Columbia and more than 80% of the total
timber volume harvested by Tembec in the province. If the outbreak continues to
spread, the potential implications for Tembec include reduced fibre supply
availability, a change in lumber product mix, increased costs and a decrease in
the qualityof lumber produced.

Energy Costs

Energy is an important component of mill costs, especially
for high-yield pulp mills, newsprint and paper mills. The majority of the energy
purchased is in the form of electricity. Higher fossil fuel prices, mainly
natural gas, impact on Tembec's energy costs. In 2002, the power market in the
province of Ontario was deregulated. The impact of deregulation has meant more
volatile electricity costs for Tembec's Ontario operations.

Labor

The maintenance of a productive and efficient labour
environment cannot be assured. Approximately 67% of Tembec's workforce is
unionized. Collective agreements governing approximately 29% of Tembec's
unionized employees will be under negotiation in the next fiscal year. Tembec
may not be able to negotiate acceptable new collective agreements upon
expiration of the existing agreements. This could result in a strike or work
stoppage by the affected workers. Renewal of agreements could result in higher
wages or benefits paid to union members. Therefore, Tembec could experience a
disruption of its operations or higher ongoing labor costs, which could have a
material adverse effect on its business, financial condition, results of
operations and cash flow.

Furthermore, at many of Tembec's facilities, as well as those
of the North American industry as a whole, reductions in employment levels due
to technological and process improvements have resulted in a workforce with
longer average years of service. This increases the cost of pensions and
benefits.

Environmental Regulations

Tembec'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. Tembec incurs, and expects to continue to incur capital and
operating expenditures in order to comply with applicable environmental laws and
regulations. Charges by the provincial and federal regulator in connection with
effluent discharges from the Temiscaming Complex have been recently settled. No
assurance can be given that changes in environmental laws and regulations or
their application or the discovery of previously unknown contamination or other
liabilities will not have a material adverse effect on Tembec's business,
financial condition and results of operations. Similarly, no assurance can be
given that any capital expenditures necessary for future compliance with such
environmental laws and regulations could be financed from Tembec's available
cash flow.

Operation and Maintenance of Equipment

The production of lumber, pulp and paper is capital
intensive. Although Tembec maintains its production equipment with regular
periodic and scheduled maintenance, there can be no assurance that key pieces of
equipment in Tembec's various production processes will not need to be repaired
or replaced. The costs of repairing or replacing such equipment and the
associated downtime of the affected production line could have a material
adverse effect on Tembec's business, financial condition and results of
operations.

Because of the relatively high fixed cost component of
certain manufacturing processes, especially in pulp and paper, the operations
are run 24 hours a day seven days a week with target uptime 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 increase the
quantity of products offered in the market and therefore have a negative impact
on product prices, further increasing the inherent cyclicality of the industry.

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Annual Information FormTrade Restrictions/Lumber Export Duties
Tembec's manufacturing operations are located primarily in
Canada. However, a significant portion of Tembec's sales are conducted in
international markets. Tariffs and trade barriers that reduce or prohibit the
movement of our products across international borders constitute an ongoing
risk. The imposition of duties by any country to which Tembec exports its
products could have a material adverse effect on its business, financial
condition and cash flow.
Since October 12, 2006, Tembec's sawmills are subject to an export tax on
shipments to the U.S. Québec and Ontario sawmills are also subject to an export
quota. The tax and quotas may adversely affect Tembec's financial position.
Financial Risks/Debt Service
There is no assurance that Tembec's business will generate
sufficient cash flow from operations in the future to service Tembec's debt and
make necessary capital expenditures, in which case Tembec may seek additional
financing, dispose of certain assets or seek to refinance some or all of its
debt. Of the total long-term debt of $1.5 billion, 89% 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, 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. In addition, Tembec's two principal bank credit
facilities, aggregating CDN $286 million, are committed until 2008. There is no
assurance that the renewal of the credit facilities or that additional
financing, refinancing or asset disposals could be effected, if at all, on
satisfactory terms, the failure of which would materially adversely affect
Tembec's financial position.
The indentures covering Tembec's Senior Notes contain
covenants that may limit management's ability to act in certain circumstances.
This may place restrictions on Tembec's ability to incur additional
indebtedness, to create liens or other encumbrances, to make certain payments
and investments and to sell or otherwise dispose of assets and merge or
consolidate with other entities. A failure to comply with the obligations
contained in the indentures governing Tembec's debt instruments could permit
acceleration of the related debt and acceleration of debt under other
instruments that contain cross acceleration or cross default provisions.
22Annual Information FormGrowth Strategy/Acquisitions
Tembec 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.
While Tembec continues to evaluate strategic acquisition opportunities, there
can be no assurance that Tembec will be able to make further acquisitions on
acceptable terms, establish, maintain or increase the profitability of acquired
businesses or integrate such businesses successfully into Tembec's operations.
In addition, there can be no assurance that Tembec will be able to realize
long-term cost savings or synergetic benefits from the acquisitions of such
businesses.
First Nation Land Claims
Canadian courts have recognized that aboriginal people may
possess rights in respect of land used or occupied by their ancestors where
treaties have not been concluded to deal with these rights. The courts have
encouraged the federal and provincial governments and aboriginal people to
resolve rights claims through the negotiation of treaties. 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 or for which
they are seeking compensation from various levels of government. Tembec,
cognizant of its presence in territories on which aboriginal people assert
rights and interests, has concluded agreements with many First Nations including
the Ktunaxa Nation Tribal Council, the Missanabie Cree First Nation, the
Wahgoshig First Nation, the Nipissing First Nation, the Taykwa Tagamou Nation,
the Timiskaming First Nation, the Wolf Lake First Nation, the Eagle Village
First Nation, the Pikogan First Nation, the Listuguj First Nation and the Long
Point First Nation.
Tembec cannot predict whether aboriginal land claims or other
rights will affect Tembec's existing Crown lands or its private timberlands or
its ability to harvest timber from these sources in the future, or its ability
to renew or secure other sources in the future. Furthermore, any failure to
reach an agreement, conflict or disagreement with an aboriginal group could have
a material adverse effect on its operations.ITEM 5 - DIVIDEND POLICYThe Corporation has not paid dividends on any of its Class A
shares in the last three years. The indentures relating to the Corporation`s
Senior Notes (the "Indentures") prohibit it from declaring or paying any
dividends unless, at the time of declaring and paying such dividend: (i) the
Corporation is not in default under the Indentures (ii) after giving pro forma
effect to the payment of the dividend, the dividend, together with the aggregate
amount of all other Restricted Payments (as defined in the Indentures) made by
the Corporation after the date of the Indentures is less than the sum of (a) 50%
of Tembec's cumulative consolidated net income since the date of the Indentures
and (b) 100% of the aggregate net proceeds received by the Corporation after the
date of the Indentures from the issue and sale of equity and debt securities
that have been converted into equity of the Corporation. The Corporation is
currently precluded from paying dividends based on the foregoing test.ITEM 6 - GENERAL DESCRIPTION OF CAPITAL STRUCTURE
6.1           GENERAL
DESCRIPTION OF CAPITAL STRUCTUREThe articles of the Corporation provide for five classes of shares: the Class
A, B, C, D and E shares.
The Class A shares, of which there are 536,807,704 issued and
an unlimited number authorized, provide for the right to vote at all meetings of
shareholders and to receive dividends after dividends on Class B shares. They
are subordinated to the Class B shares and Class C shares in their participation
in the event of liquidation, dissolution, winding-up of the Corporation or other
distribution of its assets.
23Annual Information FormThe Class B shares, of which there are an unlimited number
authorized, are issuable in series. There are currently two series of the Class
B shares authorized, namely Series 2 shares and Series 4 shares, both of which
are non-voting and participate in priority to the Class A, Class C, Class D and
Class E shares in the event of liquidation, dissolution, winding-up of the
Corporation or other distribution of its assets.
The Series 2 Class B shares, of which there are 16,627,500
issued and an unlimited number authorized, are retractable at the option of the
holder starting on June 26, 2011, at their issue price plus declared and unpaid
dividends. They may be retracted at any time in the event of a change of control
of the Corporation or if more than half of the assets of the Corporation are
held by third-party interests residing outside of the province of Québec. They
may also be redeemed by the Corporation at any time at their issue price plus
any unpaid dividends. The right to receive dividends is set as a function of the
amount of dividends paid on the Class A shares of the Corporation.
The Series 4 Class B shares, of which 9,103,710 are
authorized and issued, can be redeemed at any time by the Corporation by the
issuance of Class A shares or payment in cash of an amount equal to their issue price
and any declared and unpaid dividends. They are retractable starting after
September 30, 2009. These shares carry a non-cumulative monthly dividend of
$0.005 per share.
The Class C shares, of which there are an unlimited number
authorized, for issuance only to employees, are non-voting, participating and
redeemable at the issue price and, depending on the duration of the employment
of the employee, any increase in the book value per share since the issuance
date or any declared and unpaid dividend thereon. They are entitled to dividends
and may participate in the event of liquidation, dissolution, winding-up of the
Corporation or other distribution of its assets, subject to the preference
rights of Class B, D and E shareholders, but in priority to the Class A shares.
The Corporation has not issued any Class C shares.
The Class D shares, of which there are an unlimited number
authorized, are redeemable at the option of the Corporation and the holders at
the fair market value of the consideration received by the Corporation upon
issue of such shares. They are entitled to a preferential and non-cumulative
annual dividend at the rate of 6% of the redemption price. The Corporation has
not issued any Class D shares.
The Class E shares, of which there are an unlimited number
authorized, are redeemable at the option of the Corporation and the holders at
the fair market value of the consideration received by the Corporation upon
issue of such shares. They are entitled to a preferential and non-cumulative
annual dividend at the rate of 6% of the redemption price. The Corporation has
not issued any Class E shares.6.2     RATINGSThe following credit rating agencies have assigned the
following non-investment grade ratings to the Senior Notes issued by the
Corporation:

|Dominion Bond Rating Service Ltd.,
    a division of the McGraw-Hill Companies Inc. ("DBRS"):                                                                          | CCC (the seventh ranking category out of ten granted by DBRS for long-term
    debt.)  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------
|                                                                                                                                                                       |                                                                                        
|Moody's Investors Service ("Moody's"):                                                                                                                                 | Ca (the eighth ranking category out of nine granted by Moody's for long term
    debt.)
|                                                                                                                                                                       |                                                                                        
|Standard & Poor's Rating Services ("S&P"):                                                                                                                             | CCC- (the seventh ranking category out of ten granted by S&P for long-term
    debt.)  
|                                                                                                                                                                       |                                                                                        
|A security rating is not a recommendation to buy, sell or hold securities
    and may be subject to revision or withdrawal at any time by the rating
    organization.
|                                                                                                                                                                      

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DBRS credit ratings are on a long-term debt rating scale that
ranges from AAA to D, which represents the range from highest to lowest quality
of such securities rated. According to the DBRS rating system, an obligation
rated CCC is defined as very highly speculative and in danger of default of
interest and principal. The degree of adverse elements present is more severe
than long-term debt rated B. Long term-debt rated below B often have features
which, if not remedied, may lead to default. The ratings from AA to CCC may be
modified by the addition of a high or low modifier to show relative standing
within the major rating categories. The lack of one of these designations
indicates a rating which is essentially in the middle of the category.

Moody's credit ratings are on a long-term debt rating scale
that ranges from AAA to C, which represents the range from highest to lowest
quality of such securities rated. According to the Moody's rating system, an
obligation rated Ca is judged to be highly speculative and likely in, or very
near, default, with some prospect of recovery of principal and interest. Moody
applies numerical modifiers 1, 2 and 3 in each generic rating classification
from AA through CAA in its corporate bond rating system. The modifier 1
indicates that the issue ranks in the higher end of its generic rating category,
the modifier 2 indicates a mid-range ranking and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.

S&P's credit ratings are on a long-term debt rating scale
that ranges from AAA to D, which represents the range from highest to lowest
qualities of such securities rated. According to the S&P's rating system, an
obligation rated CCC is vulnerable to non-payment and is dependent on favourable
business, financial, and economic conditions for the obligor to meet its
financial commitment on the obligation. In the event of adverse business,
financial, or economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligation. The ratings from AA
to CCC may be modified by the addition of a + or  sign to show relative
standing within the major rating categories.

ITEM 7 - DIRECTORS AND OFFICERS

The directors of the Corporation are elected annually to hold
office until the next annual meeting or until a successor is elected or
appointed.

7.1          
INFORMATION CONCERNING DIRECTORS

The board of directors of the Corporation is composed of
twelve members. The Chairman of the Board and the majority of directors and
members of Board committees are independent. Mr. James M. Lopez (the President
and Chief Executive Officer of the Corporation) and Mr. Luc Rossignol (employee
and President, Local 233 of the Communications, Energy and Paperworkers Union of
Canada) are not considered independent.

Set forth below is information pertaining to the directors of
the Corporation based on data furnished by the directors.

ANDRÉ BÉRARD, Québec (Canada). Mr. Bérard was Chairman of
the board of directors of the National Bank of Canada from 1990 to 2004. During
that time, he held various positions in a number of key sectors within the
National Bank of Canada, including that of Chairman of the Board and Chief
Executive Officer from July 1989 to March 2002. Mr. Bérard serves on the board
of directors of the following public companies: BCE Inc., Bell Aliant Regional
Communications Income Fund, Bell Canada, BMTC Group Inc., Bombardier Inc.,
Saputo Inc., Telesat Canada and TransForce Income Fund. Mr. Bérard has been a
director of Tembec since January 2006 and serves as a member of the
Corporation's Corporate Governance and Human Resources Committee and Special
Committee for Strategic Purposes.

NORMAN M. BETTS, New Brunswick (Canada). Mr. Betts is
Associate Professor at the Faculty of Business Administration, University of New
Brunswick. He serves as Chairman of the board of directors and Chairman of the
audit committee of Minacs Worldwide Inc. He also serves as director and Chairman
of the audit committee for Tanzanian Royalty Exploration Corp., formerly known
as Tan Range Exploration Corporation, New Brunswick Power Corporation and Rtica
Corporation. From February 2004 to February 2006, he served as director and
Chairman of the audit committee of Slam Exploration Ltd. He has been lead
independent director and member of the governance committee of Starfield
Resources Inc. since March 2006. He has been a director of the Corporation since
January 2005 and serves as a member of its Audit Committee and Special Committee
for Strategic Purposes.



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JAMES E. BRUMM, New York (United States). Mr. Brumm is
the Executive Vice-President, General Counsel and director of Mitsubishi
International Corporation, the North American subsidiary of Mitsubishi
Corporation, an international trade, finance and investment company
headquartered in Japan. Mr. Brumm also served as a director of Mitsubishi
Corporation from 1995 to 2002 and is a director of Brunei LNG S.B. He is a
member of the Boards of Visitors of Columbia University Law School and
California State University, Fresno and a board member of Forest Trends and of
the American Bird Conservancy. He is also President of the Mitsubishi
International Corporation Foundation and a member of the Corporate Council of
the New York Botanical Garden. Mr. Brumm has been a director of the Corporation
since April 1999 and Chairs its Corporate Governance and Human Resources
Committee.

FRANÇOIS BUJON DE L'ESTANG, Paris (France). Mr. Bujon de
l'Estang serves as Chairman of Citigroup France and is a member of Citigroup's
International Advisory Board. He has enjoyed a distinguished public career where
he has served his country by occupying several positions such as Senior Advisor
for Diplomatic Affairs & Defense to the Prime Minister, Ambassador of France to
Canada and to the United States of America. He is an Officer of the Order of the
Legion of Honour and Officer of the National Order of Merit, and was elevated by
the French Government to the rank of Ambassador of France. Mr. Bujon de l'Estang
also serves as a director of Thales, S.A., of the French Space Agency (Centre
National d'Études Spatiales), of the Institut français des relations
internationales (IFRI) and of the International Advisory Board of Total S.A. He
is also Vice-Chairman of the French-American Foundation, New York, and of the
Atlantic Partnership. Mr. Bujon de l'Estang has been a director of the
Corporation since January 2005 and serves as a member of its Environment, Health
and Safety Committee.

GILLES CHEVALIER, Québec (Canada). Mr. Chevalier was,
until July 2005, a Professor of auditing at École des Hautes Études Commerciales
(HEC), the Business School at University of Montreal. Mr. Chevalier also
acts as a consultant to the Canadian Public Accountability Board, an
organization that oversees auditors of reporting issuers in Canada. He retired
as a Senior Partner at Samson Bélair/Deloitte & Touche LLP in 2002, and was
President of the Ordre des comptables agréés du Québec in 1987. Mr.
Chevalier was appointed to the board of directors of the Corporation in July
2005 and Chairs its Audit Committee.

GUY G. DUFRESNE, Québec (Canada). Mr. Dufresne was
President and CEO of La Compagnie Minière Québec Cartier, a producer of iron ore
products from 1992 to October 2006. Mr. Dufresne served as Chairman of the board
of directors of Cambior Inc. and served on its audit, corporate governance and
human resources committees from April 1995 to November 2006. He is a director of
the Royal & Sun Alliance Insurance Company of Canada and of IAMGold Corporation.
He is chairman of the Chamber of Maritime Commerce and was chairman of Conseil du patronat du Québec from June 2002 to October 2006. Mr. Dufresne(1)
has been a director of the Corporation since January 2005 and serves as a member
of its Audit Committee and Special Committee for Strategic Purposes.

PETER S. JANSON, Ontario (Canada). Mr. Janson is the
former Chief Executive Officer of AMEC Inc. and of ABB Inc. USA. He currently
serves as a director of ATS Automation Tooling Systems Inc., Terra Industries
Inc. and Teekay Shipping Corporation. Mr. Janson was appointed to the board of
directors of the Corporation in July 2004 and serves as a member of its
Corporate Governance and Human Resources Committee and Chairs its Environment,
Health & Safety Committee and Special Committee for Strategic Purposes.

GORDON S. LACKENBAUER, Alberta (Canada). Mr. Lackenbauer
was Deputy Chairman at BMO Nesbitt Burns from 1990 to 2004 and is currently a
director of TransAlta Corporation, NAL Energy Inc. and Bell Globemedia Inc. Mr.
Lackenbauer is also a member of the Board of Governors of Mount Royal College.
Mr. Lackenbauer2 has been a director of the Corporation since 1973
and Chairman(1) of the board of directors of the Corporation since
January 20, 2005. Mr. Lackenbauer serves as a member of the Corporation's
Corporate Governance and Human Resources committee and Special Committee for
Strategic Purposes.

____________________________

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JAMES M. LOPEZ, Ontario (Canada). Mr. Lopez joined the
Corporation in 1989 and has been a director and President and Chief Executive
Officer of the Corporation since January 2006. Prior to his appointment in
January 2006, he served as Executive Vice President and President of Tembec's
Forest Products Group from August 2003 to January 2006. From 1999 to August
2003, Mr. Lopez was Executive Vice President, Forest Resource Management Group
of the Corporation. Mr. Lopez is past Chairman of the board of directors of the
Ontario Forest Industry Association (OFIA), of the Forest Engineering Research
Institute of Canada (FERIC), and of WoodWorks Canada Corp. He is Vice Chairman
of the board of directors of Forintek Canada Corp., a research organization
involved in the technological advancement of the Canadian wood products
industry.

MARY THERESA McLEOD, Ontario (Canada). Ms. McLeod was a
part-time commissioner of the Ontario Securities Commission and a member of its
Board of Directors from November 1999 to May 2006. At various times she was a
member of the Ontario Securities Commission's Audit, Adjudicative, Compensation
and Nominating and Corporate Governance committees. Ms. McLeod has held senior
investment banking positions with Scotia McLeod Inc., Merrill Lynch Canada Inc.,
and Pitfield, MacKay, Ross & Company Ltd. She is currently a director and member
of the audit committee and of the corporate governance committee of Wescast
Industries Inc. Ms. McLeod has been a director of the Corporation since January
2003 and serves as a member of its Audit Committee and Special Committee for
Strategic Purposes.

LUC ROSSIGNOL, Québec (Canada). Mr. Rossignol is the
President of Local 233 of the Communications, Energy and Paper Workers Union and
was elected to the board of directors of the Corporation in January 2000. He
serves as a member of the Corporation's Environment, Health & Safety Committee.

EMANUELE (LINO) SAPUTO, Québec (Canada). Mr. Saputo
founded the dairy processing business Saputo Inc. with his parents in 1954 and
became that company's Chairman of the Board and President in 1969. In 1997,
following the initial public offering of Saputo Inc., he was named Chairman of
the Board and Chief Executive Officer, a position he held until March 2004. He
has remained as Chairman of the Board of Saputo Inc. since that time. Mr. Saputo
has been a director of the Corporation since January 2006.





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Attendance Record of Directors for Board and Committee Meetings

The following table summarizes for
each of the directors the number of board and committee meetings they attended
since September 24, 2005.

|Directors                 | Board of  | Audit     | Corporate    | Environment, | Corporate    | Human        | Special      
|------------------------- | --------- | --------- | ------------ | ------------ | ------------ | ------------ | -------------
|                          | Directors | Committee | Governance   | Health and   | Governance   | Resources    | Committee for
|                          |           |           | and Human    | Safety       | Committee(1) | Committee(1) | Strategic    
|                          |           |           | Resources    | Committee    |              |              | Purposes     
|                          |           |           | Committee(1) |              |              |              |              
|André Bérard(2)           | 7 of 8    | n/a       | 4 of 6       | n/a          | n/a          | n/a          | 9 of 10      
|Norman M. Betts           | 9 of 10   | 5 of 5    | n/a          | n/a          | n/a          | 3 of 3       | 14 of 14     
|James E. Brumm(3)         | 10 of 10  | 2 of 2    | 6 of 6       | n/a          | 3 of 3       | n/a          | n/a          
|François Bujon de         | 8 of 10   | n/a       | n/a          | 1 of 2       | n/a          | 3 of 3       | n/a          
|L'Estang(4)               |           |           |              |              |              |              |              
|Gilles Chevalier          | 10 of 10  | 5 of 5    | n/a          | n/a          | n/a          | n/a          | n/a          
|Guy G. Dufresne(5)        | 8 of 10   | 3 of 3    | n/a          | 1 of 2       | n/a          | 2 of 3       | 13 of 14     
|Peter S. Janson           | 10 of 10  | n/a       | 6 of 6       | 4 of 4       | 3 of 3       | n/a          | 14 of 14     
|Gordon S. Lackenbauer     | 10 of 10  | n/a       | 6 of 6       | n/a          | 3 of 3       | 3 of 3       | 13 of 14     
|James M. Lopez(6)         | 8 of 8    | n/a       | n/a          | 2 of 2       | n/a          | n/a          | n/a          
|Mary Theresa McLeod(7)    | 8 of 10   | 4 of 5    | n/a          | n/a          | 2 of 3       | n/a          | 6 of 7       
|Luc Rossignol             | 10 of 10  | n/a       | n/a          | 4 of 4       | n/a          | n/a          | n/a          
|Emanuele (Lino) Saputo(8) | 8 of 8    | n/a       | n/a          | n/a          | n/a          | n/a          | n/a          
|Attendance Record         | 93.13%    | 96%       | 91.67%       | 80%          | 91.67%       | 91.67%       | 93.58%       

(1) On January 26, 2006, the board of directors approved the
merger of the Corporate Governance and Human Resources Committees into a single
Committee. 
(2) Mr. André Bérard was elected to the board of directors and appointed to the
Corporate Governance and Human Resources Committee on January 26, 2006. 
(3) Mr. James E. Brumm resigned from the Audit Committee on January 26, 2006.

(4) Mr. François Bujon de l'Estang was appointed to the Environment, Health and
Safety Committee on January 26, 2006. 
(5) Mr. Guy G. Dufresne was appointed to the Audit Committee and resigned from
the Environment, Health and Safety Committee on January 26, 2006. 
(6) Mr. James M. Lopez was elected to the board of directors and appointed to
the Environment, Health and Safety Committee on January 26, 2006. 
(7) Ms. Mary Theresa McLeod was appointed to the Special Committee for Strategic
Purposes on May 1, 2006. 
(8) Mr. Emanuele (Lino) Saputo was elected to the board of directors on January
26, 2006.

The table below summarizes the number of board and committee
meetings held since September 24, 2005:

Meeting Type
      TotalsBoard
      10Audit
      5Corporate Governance
      and Human Resources
      6Environment, Health
      and Safety
      4Corporate Governance
      (prior to January 26, 2006)
      3Human Resources
      (prior to January 26, 2006)
      3Special Committee
      for Strategic Purposes
      14Total number of meetings held
      45


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7.1.1           Other
Directorships

The following current directors of the Corporation also serve
as directors of the reporting issuers (or equivalent) indicated beside their
name:

- André Bérard: BCE Inc., Bell Aliant Regional Communications
  Income Fund, Bell Canada, BMTC Group Inc., Bombardier Inc., Telestat Canada,
  Saputo Inc. and TransForce Income Fund.
- Norman M. Betts: Starfield Resources Inc., Tanzanian
  Royalty Exploration Corporation, Rtica Corporation and New Brunswick Power
  Corporation.
- Guy G. Dufresne: IAMGold Corporation and Royal & Sun
  Alliance Company of Canada.
- Peter S. Janson: ATS Automation Tooling Systems Inc., Terra
  Industries Inc. and Teekay Shipping Corporation.
- Gordon S. Lackenbauer: TransAlta Corporation, NAL Energy
  Inc. and Bell Globemedia Inc.
- Mary Theresa McLeod: Wescast Industries Inc.
- Emanuele (Lino) Saputo: Saputo Inc.

7.1.2          
Independence

The Corporation considers that all directors, except Messrs.
Lopez and Rossignol, qualify as independent directors within the meaning of
National Instrument 58-101 Disclosure of Corporate Governance Practices
and all Audit Committee members qualify as independent within the meaning of
Multilateral Instrument 52-110  Audit Committees Mr. James M. Lopez,
President and Chief Executive Officer of the Corporation and Luc Rossignol, an
employee of the Corporation and the President of Local 233 of the
Communications, Energy and Paperworkers Union (Temiscaming Complex), are not
considered independent.

7.1.3           Mandate of
the Board

The board of directors and management consider good corporate
governance to be central to the effective operation and success of the
Corporation. In order to ensure proper and current corporate governance
practices, the board of directors and management regularly compare the
Corporation's practices and procedures with the guidelines set out in National
Instrument 58-201  Corporate Governance Guidelines, the proposals of
various other regulatory authorities, as well as the practices adopted by its
peers.

The formal written mandate which describes the principal
functions of the board of directors may be found at www.tembec.com and is annexed hereto as Schedule "A". The mandate
provides that the board will consider recommendations made by the officers of
the Corporation who are responsible for the general day-to-day management of the
Corporation. The board of directors is also responsible for overseeing the
formulation by management of long-term strategic, financial and organizational
and related objectives. The mandate of the board also establishes a requirement
that it implement structures and procedures to ensure that it functions
independently of management, such as the board's practice of conducting
in-camera sessions as part of each regularly scheduled meeting.

In accordance with its mandate, the board ensures that it
excludes management from its meetings, from time to time, as appropriate.
Although the board of directors did not, in the past fiscal year, schedule
separate meetings to be held without certain members of management being
present, it did conduct in camera sessions as part of each regularly scheduled
meeting and regularly excluded management from parts of the in camera sessions.
In addition to the President and Chief Executive Officer, the Vice President,
General Counsel and Secretary and the Executive Vice President, Finance and
Chief Financial Officer of the Corporation were also present at all regularly
scheduled meetings of the board of directors. At the invitation of the board,
other members of senior management attended board meetings and provided reports
to the board on the financial and operating performance of the various business
groups of the Corporation.

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The Chairman of the board of directors is appointed by the
full board and may not be a member of management. The Chairman of the board,
Gordon Lackenbauer(1), was chosen by the full board, is an
independent director and serves as board leader. The board has developed a
written position description for the Chairman of the board. The Chairman's role
is to be primarily responsible for the proper functioning of the board, for its
balance of membership subject to shareholder's approval, for ensuring that all
relevant issues are on the agenda, and for ensuring that all directors are
enabled and encouraged to play their full part in its activities. The Chairman
must make certain that the directors receive timely, relevant information
tailored to their needs, and that they make an effective contribution as board
members in practice. The Chairman is responsible for ensuring that the board
evaluates the performance of management objectively and that the board
understands the boundaries between board and management responsibilities. The
Chairman also ensures that the board is in full control of the Corporation's
affairs and alert to its obligations to the shareholders.

The functions of the board include the review and approval of
(a) the audited annual financial statements and the management's discussion and
analysis contained therein following review by the Audit Committee; (b) the
interim unaudited financial statements and the management's discussion and
analysis contained therein following review by the Audit Committee, (c)
transactions out of the ordinary course of business, and (d) any capital
expenditures or other financial commitments in excess of $2,500,000. The board
also considers and reviews the means by which shareholders can communicate with
the Corporation, including the opportunity to do so at the annual meeting,
through the website of Tembec Inc. and the adequacy of resources available
within the Corporation to respond to shareholders through the office of the
Secretary or otherwise.

7.1.4          
Selection of Candidates to the Board of Directors, Orientation and Continuing
Education

Pursuant to its mandate, the board of directors has developed
a profile to define the skills and competence required from the members of the
board. The profile is used to determine annually which additional skills and
competence will be helpful to the board as well as to evaluate specific
candidates submitted for consideration for board membership. The identification
of candidates is the responsibility of the Corporate Governance and Human
Resources Committee, which is guided by the profile developed by the board of
directors. When recommending suitable candidates for nominees for election, the
Corporate Governance and Human Resources Committee specifies which of the
criteria established by the board form the basis of each recommendation. At
least three directors must be or have been directly or indirectly involved in
the development, operation or management of a forest products company. The
majority of the board must be independent within the meaning of Multilateral
Instrument 52-110  Audit Committeesand National Instrument
58-101. The mandate of the board of directors has been amended to reflect
the requirements of National Instrument 58-101.

The board, through its Corporate Governance and Human
Resources Committee, is also responsible for providing prospective directors
with sufficient information to permit them to fully understand the role of the
board, the role of its committees, and the contribution that individual
directors are expected to make, including the commitment of time and energy that
the Corporation expects from directors, as well as the nature and operations of
the Corporation's business. In this respect, the Corporate Governance and Human
Resources Committee approves and implements an appropriate orientation and
education program for new members of the board and a continuing education
program for all board members. The Corporate Governance and Human Resources
Committee has produced a directors manual which is used in the orientation
program for new Directors. As part of the continuing education program, the
Committee arranges presentations by experts on relevant topics, where
appropriate. The board of directors also holds budget and strategy meetings at
which directors familiarize themselves with the Corporation's operations and
meet a larger number of management individuals.

____________________________(1)

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7.1.5          
Assessments

Every year, a detailed questionnaire is addressed to each
director, in his or her capacity as director and, as the case may be, as a
member of one or more of the committees of the board of directors, aimed at
obtaining their views on the effectiveness of the board or of a committee of the
board and contribution of its members. The results of the questionnaires are
compiled by the Secretary and sent to the Chairman of the Corporate Governance
and Human Resources Committee and those that are relevant to a particular
committee are sent to its Chairman and to the Chairman of the board of
directors. The committee Chairmen and the Chairman of the board, at the meeting
following the receipt of the results, share these with the members of the
committee and of the board where any and all issues are discussed.

The Corporate Governance and Human Resources Committee
reports to the board on the performance of the board and its committees and the
contribution of members of the board and its committees. The board of directors
reviews annually the assessment of the board's and committees' performance and
recommendations provided by the Corporate Governance and Human Resources
Committee and evaluates its own effectiveness, the whole in accordance with the
Corporation's corporate governance policy. The board of directors takes
appropriate action based upon the results of the review process.

7.1.6          
Committees of the Board of Directors

The board of directors has established three standing
committees, each of which is constituted by its own charter, to which the board
of directors has delegated certain of its authority and responsibilities, as
well as certain advisory functions and power to make recommendations and report
to the board. All committees of the board of directors are composed of a
majority of independent directors, except for the Environment, Health and Safety
Committee which is composed of an even number of independent and non-independent
directors.

The Corporation's Corporate Governance Policy includes a
position description for each director and a short description of the roles and
responsibilities of the Chairman of the Board. The Corporation has adopted
position descriptions for the Chair of each committee. Each Chair must be an
independent director and is primarily responsible for the proper functioning of
his/her respective committee, for ensuring that all relevant issues are on the
agenda, and for ensuring that all members are enabled and encouraged to play
their full part in its activities. The Chair must make certain that the
directors receive timely, relevant information tailored to their needs.

Corporate Governance and Human Resources Committee

The Corporate Governance and Human Resources Committee is
responsible for developing the Corporation's approach to board and corporate
governance issues. The Corporate Governance and Human Resources Committee
reviews and reports to the board annually on what ought to be the size,
composition, profile and compensation of the board of directors. It also
recommends candidates to be nominated for election or appointment as directors
and evaluates the board's performance. The Committee also evaluates the
performance of the board's committees and the contribution of members of the
board and its committees. The Corporate Governance and Human Resources Committee
also reviews, on an annual basis, the board/management relationship and
recommends to the board structures and procedures to ensure that the board
functions independently of management. The Corporation's Corporate Governance
and Human Resources Committee charter may be found on the website of Tembec Inc.
at www.tembec.com.

The Corporate Governance and Human Resources Committee met
six times during the last financial year. The Corporate Governance and Human
Resources Committee is composed of Messrs. James E. Brumm (Chairman), André
Bérard, Peter S. Janson and Gordon S. Lackenbauer.

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Environment, Health and Safety Committee

The Environment, Health and Safety Committee is responsible
for reviewing and making recommendations and reports to the board of directors
relating to the policies, standards, practices and programs of the Corporation
on matters pertaining to both the environment and occupational health and
safety. The Committee monitors the Corporation's performance in relation to its
own policies, as well as in relation to applicable legislation pertaining to
both the environment and occupational health and safety. It also reviews and
reports to the board of directors on the Corporation's state of readiness to
respond to crisis situations. The Environment, Health and Safety Committee
charter may be found on the website of Tembec Inc. at www.tembec.com

This committee met four times during the last financial year.
This committee is composed of Messrs. Peter S. Janson (Chairman), François Bujon
de l'Estang, James M. Lopez and Luc Rossignol.

Audit Committee

The Corporation has an Audit Committee which currently
consists of Messrs. Gilles Chevalier (Chairman), Norman M. Betts, Guy G.
Dufresne, and Ms. Mary Theresa McLeod. All the members of the Audit Committee
are considered "independent" and "financially literate" within the meaning of
Multilateral Instrument 52-110  Audit Committees with Mr. Betts and Mr.
Chevalier possessing the professional designation of Chartered Accountant and
considered "financial experts" within the meaning of Section 407 of the Sarbanes-Oxley Act of 2002.

The mandate of the Audit Committee is to assist the board of
directors of the Corporation in fulfilling its oversight responsibilities and as
such reviews the financial reporting process, the system of internal control and
management of financial risks, the audit process, the auditor attestation
process regarding internal controls and the Corporation's process for monitoring
compliance with laws and regulations and its own corporate policies. In
performing its duties, the committee maintains effective working relationships
with the board of directors, management and internal and external auditors. The
mandate of the Audit Committee is attached hereto as Schedule "B" and is also
posted on the website of Tembec Inc. at www.tembec.com

The Audit Committee meets on a regular basis with the
financial officers of the Corporation and the independent auditors to, among
other things, review and inquire into: (a) matters affecting financial
reporting; (b) the adequacy of internal controls and procedures for financial
reporting and accounting; (c) the audit procedures and audit plans; and (d) the
financial and business risks or exposures of the Corporation and the steps that
management has taken to control such risks. It also recommends, to the board of
directors, the external auditors to be appointed and their remuneration. The
Audit Committee annually reviews the independence of the external auditors.

The Audit Committee reviews and recommends to the board, for
its approval: (a) the interim unaudited financial statements and the
management's discussion and analysis contained therein; (b) the audited annual
financial statements and the management's discussion and analysis contained
therein; (c) prospectuses and other offering memoranda; and (d) the annual and
interim earnings press release and other public disclosure documents containing
audited or unaudited financial information required by regulatory authorities.
The responsibilities of the Audit Committee, including those responsibilities
described above, are reviewed by the board of directors annually.

The following is a brief summary of the education and
experience of each member of the Audit Committee that is relevant to the
performance of his or her responsibilities as a member of the Audit Committee,
including any education or experience that has provided the member with an
understanding of the accounting principles used by the Corporation to prepare
its annual and interim financial statements.

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|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name of Audit       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Committee Member    | Relevant Education and
    Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Norman M. Betts     | Mr. Betts is a
    Fellow Chartered Accountant and holds a Ph.D. in Management with a
    concentration in accounting and finance from Queen's University. He is an
    Associate Professor at the Faculty of Business Administration, University of
    New Brunswick. He was made a Fellow of the New Brunswick Institute of
    Chartered Accountants in 2001. Mr. Betts also serves as director and
    chairman of the audit committee of Minacs Worldwide Inc., Rtica Corporation
    and Tanzanian Royalty Exploration Corp., formerly known as Tan Range
    Exploration Corporation. He is also a member of the audit committee of the
    New Brunswick Power Corporation and, prior to February 2006, he served as
    director and chairman of the audit committee of Slam Exploration Ltd.
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Gilles Chevalier    | Mr. Chevalier
    is a Fellow Chartered Accountant and holds a Ph.D. degree in accounting from
    the University of Illinois. He was a Professor of auditing at the École des
    Hautes Études Commerciales (HEC), University of Montreal and at Laval
    University. He was made a Fellow of the Ordre des comptables agréés du
    Québec in 1986 and was President of the Ordre des comptables agréés
    du Québec in 1987. He was a senior partner with Belair/Deloitte & Touche
    LLP until 2002. Mr. Chevalier presently chairs the audit committee of two
    foundations.                                                                                                                                                                                                                
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Guy G. Dufresne     | Mr. Dufresne
    holds a MBA from Harvard University and was President and Chief Executive
    Officer of Québec Cartier Mining Company. Mr. Dufresne also served on
    several boards and audit committees, including as Chairman of the board of
    directors of Cambior Inc. and as member of its audit committee and on the
    board of directors of the Royal & Sun Alliance Insurance Company of Canada
    and of IAMGold Corporation.                                                                                                                                                                                                                                                                                                                                                       
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Mary Theresa McLeod | Ms. McLeod is a
    Chartered Financial Analyst and holds a MBA from the University of Western
    Ontario.She held senior positions with major investment banking
    firms, such as Scotia McLeod Inc. and Merrill Lynch Canada Inc. Ms. McLeod
    served as director and member of audit committees of several public
    companies. Until recently, Ms. McLeod served on the audit committee of the
    Ontario Securities Commission. Ms. McLeod also presently serves on the audit
    committee of Wescast Industries Inc.                                                                                                                                                                                                                                                                     

7.2           COMPENSATION
OF DIRECTORS

Non-management directors receive compensation for acting as members of the
board of directors and as members of any committee of the board. Such directors
receive the following annual and attendance fees:

|ANNUAL BOARD RETAINERS                   
|-----------------------------------------
|Chairman of the board                    
|Board members                            
|(excluding the Chairman of the
    Board)
|                                         

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|                                                       |                                           |        | 
|------------------------------------------------------ | ----------------------------------------- | ------ | 
|ANNUAL COMMITTEE RETAINERS                            
|Audit Committee                                        |                                          
|-                                                      | Chairman                                  | $7,500
|-                                                      | Member (excluding Committee
    Chairman) | $5,000
|Corporate Governance and Human
    Resources Committee |                                          
|-                                                      | Chairman                                  | $7,500
|-                                                      | Member (excluding Committee
    Chairman) | $5,000
|Environment, Health and Safety
    Committee           |                                          
|-                                                      | Chairman                                  | $5,000
|-                                                      | Member (excluding Committee
    Chairman) | $3,000
|MEETING ATTENDANCE FEES                               
|In person                                              | $1,500                                   
|Via conference call                                    | $1,000                                   

The Corporate Governance and Human Resources Committee
annually conducts a review of directors' compensation for board and committee
service and recommends changes to the board where appropriate. The board
considers and approves the adequacy and form of the compensation of directors
upon recommendation of the Corporate Governance and Human Resources Committee
and ensures the compensation realistically reflects the responsibilities and
time involved in being an effective director. For the purpose of conducting its
annual review of directors' compensation, the Corporate Governance and Human
Resources Committee refers to a report provided by Towers Perrin and other
information regarding compensation practices in the forest products industry.
Towers Perrin also provides reports to the Corporate Governance and Human
Resources Committee on pension-related matters.

Non-management directors are reimbursed for travel and other
out-of-pocket expenses incurred in attending board or committee meetings.

From time to time, the Corporation may ask a director to
attend other meetings or functions. Directors are paid $1,500 for attending each
such meeting or function.

During fiscal 2006, no ad hoc committees of the board of
directors were created. A Special Committee for Strategic Purposes was created
in fiscal 2005. This committee's mandate involves considering and advising the
board of directors on matters of strategic importance to the Corporation. It is
still meeting from time to time to consider such matters. Members of this
committee are paid $1,500 per meeting attended in person and $1,000 for each
meeting in which they participated by telephone.

The directors serve concurrently on the board of directors of
Tembec Inc. and that of the Corporation. Similarly, directors serving on the
various committees of the Corporation also serve concurrently on the committees
of Tembec Inc. The total amount of fees paid by Tembec to its directors in
respect of meetings of the board and committees of both Tembec Inc. and the
Corporation during fiscal 2006 was $613,375.

Former Long-Term Incentive Plan

Prior to fiscal 2006, directors could, twice-yearly, elect to
subscribe for common shares of Tembec Inc. under the stock purchase program set
forth in the former long term incentive plan (the "Former LTIP") up to an
amount equal to their retainer and attendance fees. In January and July of each
year, directors were awarded options to purchase that number of shares equal to
their semi-annual retainer and attendance fees divided by the market price of
the shares multiplied by two which vest according to the vesting schedule under
the Former LTIP. Directors who elected not to subscribe for the full amount of
their semi-annual retainer and attendance fees would lose a pro rata portion of
the options granted. Directors were not entitled to participating awards and
bonuses and were not eligible for the Long-Term Bonus under the Former LTIP.
There are no longer any share purchases or options granted under the Former LTIP.

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Deferred Share Unit Plan

In January 2006, a Share Unit Plan for Non-Executive
Directors was approved (the "DSU Plan") intended to replace the Former
LTIP regarding long term incentive compensation for non-executive directors. The
purpose of the DSU Plan is to enhance the Corporation's ability to attract and
retain high quality individuals to serve as members of the board and to promote
a greater alignment of interests between non-executive members of the board and
the shareholders of Tembec Inc. The Corporate Governance and Human Resources
Committee determines directors' annual entitlement to deferred share units (the
"DSUs"). The Committee has decided that the Chairman of the board is
entitled to an annual grant equivalent to $40,000 worth of DSUs and other
non-executive directors receive annually the equivalent of $12,500 in DSUs.
Grants are issued on a semi-annual basis. Non-executive directors may also elect
to receive up to 100% of his or her annual retainer fee and/or fees other than
the annual retainer fee in the form of DSUs in lieu of being paid in cash. The
Committee may require that a percentage (up to 100%) of all fees payable
semi-annually that would otherwise be paid in cash to an eligible director be
received in the form of DSUs until such time as the eligible director meets the
ownership guideline established from time to time by the Committee. The number
of DSUs credited to a participant's account is equal to the dollar amount of the
grant or fees divided by either (i) the average market value of common shares of
Tembec Inc. for the twelve months immediately preceding the applicable reference
date for the fixed annual grant, or (ii) the average market value of the common
shares of Tembec Inc. for five days immediately preceding the applicable
reference date for the grant, when the director opts to have his or her fees
paid in DSUs.

7.3          
LIABILITY PROTECTION FOR DIRECTORS AND OFFICERS

Tembec has entered into indemnification agreements with each
of its directors. It also maintains directors' and officers' liability insurance
which provides coverage against claims made against them during their term of
office. The aggregate protection under the policy is for an amount of $75
million with no deductible for non-indemnifiable losses and deductibles of
$250,000 for all other claims. Aggregate premiums were $981,490 for the 2005
policy year.

7.4          
CODE OF ETHICS

The Corporation has adopted a written Code of Ethics and
Business Conduct which provides guidelines to ensure that all directors,
officers and employees of the Corporation and its subsidiaries and all
consultants, suppliers and other persons working on behalf of the Corporation
respect its commitment to conduct business relationships with respect, openness
and integrity. The Corporation believes that its success is possible because of
its values, which include integrity, accountability, trust, transparency, and
teamwork. The Corporation is committed to conducting its business in compliance
with applicable laws, statutes and regulations and expects its employees,
directors, consultants, suppliers and other individuals working with or on
behalf of the Corporation to do likewise. In addition, business dealings among
employees and by employees with shareholders, customers, suppliers, community
organizations and governmental and regulatory authorities must be based on the
highest ethical standards.

The board monitors compliance with the Corporation's Code of
Ethics and Business Conduct and is responsible for granting any waivers from
compliance. Compliance with the Corporation's Code of Ethics and Business
Conduct is also reviewed by the Audit Committee as part of the Corporation's
internal audit process. Management and mid-management employees of the
Corporation are requested to provide a written acknowledgement confirming that
they have received a copy of the Code of Ethics and Business Conduct and that
they will comply with it. In addition, the Code of Ethics and Business Conduct
provides a procedure for individuals working with the Corporation to
confidentially communicate concerns or complaints to the Corporation, including
to the Chairman of the Audit Committee, where appropriate. The Corporation has
not filed any material change report that pertains to a conduct of a director or
officer that constitutes a departure from the Code of Ethics and Business
Conduct since the beginning of its most recently completed financial year.The Corporation's written Code of Ethics and Business Conduct is available
on the website of Tembec Inc. at www.tembec.com and was filed on www.sedar.com
on November 29, 2005.

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ITEM 8 - EXECUTIVE AND OTHER COMPENSATION

The Corporate Governance and Human Resources Committee
oversees the application of the policies, plans and compensation for all
employees. The Corporation's general philosophy is to pay for performance at all
levels of the Corporation. The Committee makes recommendations to the board of
directors on compensation payable to employees up to and including the Chief
Executive Officer and other senior executives and approves compensation levels
and grants for officers other than senior executives.

Compensation  Unionized Employees

The majority of Tembec's employees
are covered under contractual agreements with unions representing the employees.
The agreements define rates of pay for specific responsibilities as well as
fringe benefits. The Corporation encourages flexibility and commitment, and in
return, where applicable, provides enhanced job security, performance based
incentive programs, and Tembec's Profit Sharing Plan. The Corporation also
provides an opportunity to employees to become shareholders via its Employee
Stock Purchase Plan.

Compensation  Non-Unionized/Management Employees
and Executives

The majority of Tembec's non-unionized employees are
paid a base salary plus an annual performance bonus determined by meeting
objectives set out under the Short-Term Incentive Plan.

Prior to January 2006, executives and
key employees would also be able to participate in the Former LTIP. The
objective of this plan is to retain key employees and align their interests with
those of shareholders of Tembec Inc. by providing incentives to create enhanced
shareholder value and encourage employees to own at least 50% of their annual
salary on an ongoing basis in common shares of Tembec Inc. Members of the board
of directors of the Corporation were also eligible to participate in the Former
LTIP but were not eligible for participating awards, participating bonuses or
the Long-Term Bonus.

In establishing the compensation of
senior executives, the Corporate Governance and Human Resources Committee refers
to the average compensation levels from Hay Group Limited's All Industrial
market. This market covers most sectors of the economy with the exception of all
Financial Organizations, Governments (at all levels), Government Agencies,
Health and Education Institutions and Not-for-Profit Organizations and is felt
to be the most representative for the Corporation's activities. As of May 2005,
this survey included 324 organizations.

Base Salary

The base salary midpoint is set at 95% of the applicable All
Industrial Average (AIA) for positions of similar responsibility as determined
from time to time by various surveys conducted by independent professional
compensation consultants. Annual salaries are then adjusted on the basis of the
individual's performance, experience and position relative to peers in Tembec.
Salary scales vary from 80% to 120% of the above mid-point. The salary of
employees who do not qualify under the Corporation's incentive plans is set at
the applicable median for total compensation and adjusted as noted above.

In establishing the compensation of senior executive
positions, the Committee refers to the AIA data provided by Hay Group Limited
(the "Hay Group"), which is considered to be the most representative for
Tembec's activities and which surveys a total of 382 companies.

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Employee Stock Purchase Plan

The Employee Stock Purchase Plan is aimed at enabling
employees to acquire an ownership interest in Tembec Inc. and to participate in
its future growth. Employees can purchase common shares of Tembec Inc. up to 10%
of their base salary or wage. All contributions made by the employees to the
Employee Stock Purchase Plan shall constitute a trust fund which shall be held
by a trustee. The trustee is responsible for purchasing shares on the market.
Under certain conditions and if the shares are held for a minimum period of
twelve months, participating employees will receive a bonus in shares bought on
their behalf by the trustee on the open market equal to 25% of their total
contributions.

Short-Term Incentive Plan

The Short-Term Incentive Plan ("STIP") is designed to relate
a portion of the individual's compensation to the Corporation's performance via
an objective-based incentive program. The participants are compensated on
corporate, business unit and individual objectives. A bonus target established
for each position is expressed as a percentage of Salary Midpoint (AIA) and
varies according to the position of the individual, with the target being 70% of
Salary Midpoint for the Chief Executive Officer and senior executives and
ranging down to 15% of Salary Midpoint for front-line supervision level.
Satisfactory performance of the individual should result in an annual STIP
pay-out equivalent to 100% of the target. For outstanding performance, an
employee could attain a maximum potential of 200% of his target. The objectives
and achievements for senior executives under the STIP are reviewed by the
Corporate Governance and Human Resources Committee on an annual basis. Members
of the board participate in the Corporation's annual strategic planning meeting
where corporate objectives to be used under this plan are set.

Former Long-Term Incentive Plan

The Former LTIP was designed to:

|1. | align the interests of key employees with those of shareholders of Tembec Inc.
by participation in a stock purchase program and through the granting of options
in order to ensure that key employees own at least 50% of their base salary in
shares on an ongoing basis;
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                           
|2. | reward key employees if the Corporation's relative performance is superior to
its competitors; and                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                           
|3. | retain key employees.                                                                                                                                                                                                                                                     

Under the stock purchase program, participants in the Former
LTIP were granted an annual entitlement to purchase common shares of Tembec
Inc., without any financial assistance from the Corporation, determined by
multiplying the individual's base salary by a factor applicable to the position.
The factor ranged from 0.50 for the Chief Executive Officer, down to 0.10
depending on the level of the position. On the date of the grant of the
entitlement, a key employee was awarded options to purchase that number of
shares which is equal to the entitlement divided by the market price of the
shares multiplied by two. An option granted under the LTIP expires no later than
ten years after the date on which the option was granted. An option becomes
vested and may be exercised after 24 months following the date of grant for up
to 40% of the number of shares to which the participant is entitled, after 36
months following the date of grant, up to another 20% of the number of shares to
which the participant is entitled, after 48 months following the date of grant,
up to another 20% of the number of shares to which the participant is entitled
and, after 60 months following the date of grant, up to the last 20% of the
number of shares to which the participant is entitled. If an optionholder
retires at normal age, the holder's options vest immediately and may be
exercised within five years. If an optionholder retires earlier than normal
retirement age, all of the holder's vested options may be exercised within five
years and all of the holder's unvested options, at the discretion of the
Committee, vest immediately and may be exercised within five years. In case of a
change of control of Tembec Inc. leading to termination of an optionholder's
employment, such holder's options will vest immediately and may be exercised
within five years.

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Options are exercisable at a price per share equal to the
weighted average closing price of the common shares of Tembec Inc. on the TSX
during the five trading days preceding the date of the option grant.

As of November 30, 2006, the total number of common shares of
Tembec Inc. reserved for issuance under the Former LTIP is 5,159,966, or
approximately 6% of the issued and outstanding common shares of Tembec Inc.
4,790,939 options to purchase 4,790,939 common shares representing 5.6% of the
issued and outstanding common shares of Tembec Inc. are outstanding under
predecessor plans as of November 30, 2006.

Any options granted under the Former LTIP will terminate (i)
on the date of expiration specified in the notice of grant, such date being no
later than ten years after the date the option is granted; (ii) immediately upon
the termination of the optionee's employment when the employment is terminated
for cause; (iii) 90 days after the date of the termination of the optionee's
employment due to his or her resignation; and (iv) 180 days after the date of
the optionee's death, during which period the options may be exercised only by
the optionee's legal personal representatives and only to the extent the
optionee would have been entitled to exercise the options at the time of his or
her death.

Key employees who committed to purchase shares under an
annual entitlement received a participating award and a participating bonus and
will be eligible to receive a Long-Term Bonus based on the Corporation's
performance compared with a sample of the return on capital invested of
companies in the Canadian forest products industry at the end of a measurement
period and based on the number of shares committed in the subscription.

The rights of a participant pursuant to the provisions of the
Former LTIP are non-assignable. The board of directors of the Corporation may,
subject to approval of the TSX, amend or terminate the Former LTIP at any time
but, in such event, the rights of employees will be preserved and maintained.
The terms of the Former LTIP do not require that shareholder approval be
obtained in order for the Former LTIP to be amended. In accordance with TSX
Staff Notice 2006  0001 dated June 6, 2006, the board is proposing to
shareholders at the annual and special meeting of shareholders to be held on
February 1, 2006 amendments to the Former LTIP to include a new amendment
procedure and the extension of the expiry date of options should such date fall
within a blackout period.

Current Long-Term Incentive Plan:

The new long-term incentive plan provides for the award of
Performance Share Units (the "PSUs"). The purpose of the Performance
Share Unit Plan (the "PSU Plan") is to retain key employees and encourage
the achievement of the Corporation's objectives by key employees and to promote
a greater alignment of interests between such employees and the shareholders of
Tembec Inc. The number of PSUs to be awarded is determined by applying a factor
to the Participant's base salary and dividing the result with the 12-month
average month-end closing price market value of common shares of Tembec Inc.
These factors are defined in the PSU Plan as follows:

Maximum Annual Performance Share
      Unit ValueParticipants
      
      (multiple of Base Salary)Chief Executive Officer
      
      0.500Group Presidents,
      Executive Vice-Presidents
      
      0.250and Chief Financial OfficerCorporate Vice-Presidents
      
      0.175Other Participants
      
      0.100


25% of the awarded PSUs vest following three years after the
effective date, provided that the participant is still an employee of the
Corporation. All or a portion of the remaining 75% vest after three years
following the effective date, based on actual financial performance versus
pre-determined objectives, as determined by the Committee. Following the
determination of the vesting percentage, a participant shall receive in
satisfaction of the number of vested PSUs, a cash

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payment determined as the product of the number of vested
PSUs and the average market value of the common shares of Tembec Inc. over the
last 5 trading days prior to the date of payment. Upon receipt of a cash
payment, a participant is required to use 50% thereof to purchase common shares
of Tembec Inc. until he or she attains predetermined ownership levels.

Key Employee Retention Plan

Prior to introducing the PSU Plan, the Committee adopted a
one-time Key Employee Retention Plan to reward and retain a core group of
executives and key employees. This plan provides for payment of pre-determined
lump sum bonuses based on increasing market enterprise value of Tembec Inc.
Market Enterprise Value is defined as the sum of market value of equity, market
value of public debt, bank indebtedness, other interest bearing debt including
proportionate share of 50% ventures, minority interest and preferred shares;
less cash on hand. A potential payment to each participant will occur after a
three-year period and a maximum lump sum amount has been determined for each
participant.

CEO Compensation

Mr. James M. Lopez currently receives an annual base salary
of $850,000 as President and Chief Executive Officer of the Corporation and
Tembec Inc. The Committee has decided to adjust Mr. Lopez's base salary to
$880,000 for the coming year.

With respect to his total compensation for Fiscal 2006, Mr.
Lopez earned a bonus of $358,505 under the short-term incentive plan
representing 50% of his target or 25% of his maximum bonus potential under such
plan.

The annual cash compensation package of the President and
Chief Executive Officer consists of an annual base salary and an annual bonus
with a target amount that is based on an anticipated level of performance. The
practice of the Committee when establishing the amount for each element of the
compensation is to align them to the median of a pertinent reference market.
This information reported by the Hay Group is based on an analysis of
compensation practices for positions similar to that of Mr. Lopez, performed in
relation to a selected group of 30 organizations in the Canadian industrial
sector. This approach is felt to be the most appropriate based on Tembec's size
and activities.

Mr. Lopez's total compensation package for Fiscal 2006 places
him at the P25 reference point for the sample organizations found in Hay Group's
analysis.

The above report is submitted by the
Corporate Governance and Human Resources Committee which is composed of the
following members:

JAMES E. BRUMM     ANDRÉ BÉRARD    
PETER S. JANSON     GORDON S. LACKENBAUER

Executive Compensation

The following summary compensation table shows certain
compensation components earned under the above programs by the Chief Executive
Officer, Chief Financial Officer and the three other most highly compensated
executive officers of the Corporation and the former Chief Executive Officer of
the Corporation ("Named Executive Officers") for services rendered during the
financial years ended September 30, 2006, September 24, 2005 and September 25,
2004. This information includes the dollar value of base salaries and bonus
awards, the number of shares covered by options and certain other compensation.

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SUMMARY COMPENSATION TABLE

|                               |      |            |         |              |            | Long-Term Compensation |        
|------------------------------ | ---- | ---------- | ------- | ------------ | ---------- | ---------------------- | -------
|                               |      |            |         |              | Awards     | Payouts                |        
|                               |      |            |         |              | Securities |                        |        
|                               |      |            |         | Other        | Under      | Shares or              |        
|                               |      |            |         | annual       | Options    | Units
    Subject      | LTIP(2)
|Name and Principal             |      | Salary     | Bonus   | Compensation | Granted    | to
    Resale          | Payouts
|Position                       | Year | ($)        | ($)     | ($)(1)       | (#)        | ($)                    | ($)    
|                               |      |            |         |              |            |                        |        
|James M. Lopez                 | 2006 | 787,100    | 358,505 | 5,763        | 182,160    |                       | 43,750 
|President and Chief            | 2005 | 337,500    | 127,140 | 5,389        | 88,598     |                       | 37,500 
|Executive Officer              | 2004 | 287,500    | 166,427 | 5,978        | 8,027      |                       | 15,626 
|                               |      |            |         |              |            |                        |        
|Terrence P. Kavanagh           | 2006 | 500,000    | 91,005  | 19,315       |           |                       |       
|Executive
    Vice-President,  | 2005 | 500,000    | 187,525 | 17,077       | 146,492    |                       | 113,750
|Chief Operating
    Officer    | 2004 | 487,500    | 179,779 | 16,855       | 28,899     |                       | 56,250 
|                               |      |            |         |              |            |                        |        
|Michel Dumas                   | 2006 | 370,000    | 74,936  | 8,902        | 136,854    |                       | 46,250 
|Executive
    Vice-President,  | 2005 | 365,000    | 127,388 | 7,987        | 95,030     |                       | 43,750 
|Finance and Chief              | 2004 | 350,000    | 154,786 | 7,452        | 22,477     |                       | 43,750 
|Financial Officer              |      |            |         |              |            |                        |        
|                               |      |            |         |              |            |                        |        
|John Valley(5)                 | 2006 | 335,417    | 115,240 |             | 182,160    |                       | 43,750 
|Executive Vice
    President,  | 2005 |           |        |             |           |                       |       
|Business Development
    and   | 2004 |           |        |             |           |                       |       
|Corporate Affairs              |      |            |         |              |            |                        |        
|                               |      |            |         |              |            |                        |        
|Yvon Pelletier                 | 2006 | 280,000    | 68,873  | 1,427        | 6,000      |                       |       
|Executive Vice
    President,  | 2005 | 259,500    | 68,559  | 1,720        | 16,531     |                       | 12,000 
|President Pulp Group           | 2004 | 238,750    | 71,846  | 3,135        |           |                       |       
|                               |      |            |         |              |            |                        |        
|Frank A. Dottori               | 2006 | 713,125(6) |        |             |           |                       | 241,250
|Former President and
    Chief | 2005 | 948,750    | 587,066 | 65,030       | 265,791    |                       | 225,000
|Executive Officer              | 2004 | 885,000    | 322,387 | 77,811       | 107,889    |                       | 210,000

(1)

(2)   
Amounts shown in this column include the participating awards used by the
trustee to purchase shares and the participating bonuses in cash granted under
the Former LTIP. See "Compensation  Non-Unionized / Management Employees and
Executives  Former Long-Term Incentive Plan".

(3)   
Amounts shown in this column include Tembec's contribution under the
Employee Stock Purchase Plan. The executive officers of the Corporation
participate in this plan on the same basis as all other employees of the
Corporation. Under this plan, employees can purchase common shares of Tembec
Inc. up to 10% of their base salary or wage. The Corporation contributes 25% of
the amount invested by the employee if the shares are held for a minimum period
of twelve months. Purchases of common shares under this plan occur on the open
market.

(4)   
Amounts shown in this column also include Tembec's contributions under the
defined contribution pension plan which were made for all the Named Executive
Officers.

(5)   
Mr. Valley has been engaged as Executive Vice-President, Business Development
and Corporate Affairs of the Corporation since October 15, 2005.

(6)$442,292 of this amount represents the salary earned by Mr. Dottori as
President and Chief Executive Officer from October 1, 2005 to January 26, 2006
and as employee from January 26, 2006 to March 14, 2006. $270,833 of this amount
represents fees received by Mr. Dottori as a consultant from March 15, 2006 to
September 30, 2006.

(7)   
$21,000 of this amount represents the estimated taxable benefit to Mr. Dottori
in relation to his use of a residence owned by the Corporation for the 2006
fiscal year, $300,000 of this amount represents a special retirement bonus,
$2,306,131 of this amount represents a payment under the Supplementary Pension
Plan and $25,183 of this amount represents pension payments received by Mr.
Dottori during the 2006 fiscal year.

(8)This amount represents the estimated taxable benefit to Mr. Dottori in
relation to his use of a residence owned by the Corporation for the 2005 fiscal
year.

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SECURITIES AUTHORIZED FOR ISSUANCE
UNDER EQUITY COMPENSATION PLANS

The following table sets out
information as of September 30, 2006 with respect to the Former LTIP.

Plan
    Category
    Number of securities to
    be issued upon exercise of
    outstanding options,
    warrants and rights
    Weighted-average
    exercise price of
    outstanding options,
    warrants and rights
    Number of securities remaining
    available for future issuance under
    equity compensation plans
    (excluding securities reflected in
    the first column)Former LTIP
    4,829,239
    $7.35
    330,727


OPTION GRANTS DURING THE MOST
RECENTLY COMPLETED FINANCIAL YEAR

The following table summarizes the option grants made to the Named Executive
Officers during the financial year ended September 30, 2006 under the Former
LTIP.

Name
    Securities
    Under
    Options
    Granted
    (#)
    % of Total
    Options
    Granted to
    Employees
    in
    Financial
    Year
    Exercise or
    Base Price
    ($/Security)
    Market Value of
    Securities
    Underlying
    Option on the
    Date of Grant
    ($/Security)
    Performance
    or Other(1)Period Until
    Maturation
    or Payout
    Expiration DateJames M. Lopez
    182,160
    17.0%
    2.1300
    2.1300
    10 years
    November 24, 2015Michel Dumas
    86,854
    8.1%
    2.1300
    2.1300
    10 years
    November 24, 201550,000
    4.7%
    0.9700
    0.9700
    10 years
    January 25, 2016John Valley
    50,000
    4.7%
    2.4000
    2.4000
    10 years
    October 17, 201582,160
    7.6%
    2.1300
    2.1300
    10 years
    November 24, 201550,000
    4.7%
    0.9700
    0.9700
    10 years
    January 25, 2016Yvon Pelletier
    6,000
    0.6%
    0.9700
    0.9700
    10 years
    January 25, 2016(1)See description of the
    Former LTIP above.


The securities under options granted are common shares of Tembec Inc.

The following table summarizes for each of the Named
Executive Officers, the number of options exercised in the financial year ended
September 30, 2006, the aggregate value realized upon exercise and the total
number of unexercised options held at September 30, 2006. The value realized
upon exercise is the difference between the market value of the common shares of
Tembec Inc. on the exercise date and the exercise or base price of the options.
The value of unexercised in-the-money options at financial year-end is the
difference between their exercise price and $1.39 per share, which was the
market value of the common shares of Tembec Inc. on September 30, 2006. These
options have not been and, in some cases, may not be exercised. Actual gains on
exercise, if any, will depend on the value of the common shares of Tembec Inc.
on the date of exercise.

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AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY 
COMPLETED FINANCIAL YEAR AND FINANCIAL YEAR-END OPTION VALUES

|                     | Securities
    Acquired On
    Exercise
    (#) | Aggregate
    Value
    Realized
    ($) | Unexercised Options
             
    at FY-End
             
    (#) | Value of Unexercised
    in-the-Money Options
    at FY-End
    ($)
|-------------------- | ----------------------------------------------- | ---------------------------------------- | --------------------------------------------------------------------- | -------------------------------------------------------------------
|                     |                                                 |                                          | Exercisable                                                           | Unexercisable                                                      
|                     |                                                 |                                          |                                                                       |                                                                    
|Frank A. Dottori     | 0                                               | 0                                        | 444,526                                                               | 362,104                                                            
|                     |                                                 |                                          |                                                                       |                                                                    
|Terrence P. Kavanagh | 0                                               | 0                                        | 102,900                                                               | 149,892                                                            
|                     |                                                 |                                          |                                                                       |                                                                    
|Michel Dumas         | 0                                               | 0                                        | 106,531                                                               | 253,730                                                            
|                     |                                                 |                                          |                                                                       |                                                                    
|James M. Lopez       | 0                                               | 0                                        | 66,731                                                                | 281,054                                                            
|                     |                                                 |                                          |                                                                       |                                                                    
|John Valley          | 0                                               | 0                                        | 0                                                                     | 182,160                                                            
|                     |                                                 |                                          |                                                                       |                                                                    
|Yvon Pelletier       | 0                                               | 0                                        | 37,000                                                                | 22,531                                                             

Retirement Plans

Retirement Plans  Unionized Employees

The purpose of retirement plans is to provide an adequate
income replacement upon retirement. Tembec provides certain benefits through
basic pension plans. The basic plans for unionized employees will vary from
defined benefit plans to defined contribution plans to RRSP's, pursuant to the
various labour agreements.

Retirement Plans  Management Employees and Executives

The Corporation provides certain benefits through basic
pension plans, as well as supplemental pension benefits for certain individuals.

Base Plan

For services prior to January 1, 2000, the basic plan for
management employees and executives is a defined benefit plan which provides for
a benefit of 1.0% of the average of the best consecutive five years of earnings
(base salary and bonus) of the last ten years, multiplied by the years of
credited service up to December 31, 1999.

For services after January 1, 2000, the basic plan for
management employees and executives is a defined contribution plan which
provides for a contribution by Tembec of 6% of the employee's base salary and
bonus. Individual accounts are set up for each employee who can direct their
investments amongst a selection of mutual funds and a 5-year GIC. A group RRSP
is also available to allow employees to save additional amounts for their
retirement.

Earnings under this plan are limited to $100,000 for
executives participating in the Supplementary Pension Plan. The cap of $100,000
in the base plan for Mr. Dottori and Mr. Kavanagh was introduced in 1990.

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Supplementary Pension Plan

A Supplementary Pension Plan is in place for the executives
who participated in this plan prior to January 1, 2000. The plan provides
coverage for earnings in excess of $100,000 per year. The benefit of the
Supplementary Pension Plan is fixed at 1.6% of the average of the best
consecutive five years of earnings (base salary plus bonus earned) of the last
ten years, in excess of the base salary as defined in the basic plan above,
multiplied by the years of credited service.

The following tables show the estimated annual benefits
payable to participants under the retirement plans (base plan) and Tembec's
Supplementary Pension Plan upon retirement after a certain number of credited
years of service.

PLAN TABLERemuneration
    
    Years of Service(1)($)
    15
    20
    25
    30
    35Base Plan$100,000+
    $15,000
    $20,000
    $25,000
    $30,000
    $35,000Supplementary Plan$   150,000
    $  12,000
    $  16,000
    $  20,000
    $  24,000
    $  28,000$   175,000
    $  18,000
    $  24,000
    $  30,000
    $  36,000
    $  42,000$   200,000
    $  24,000
    $  32,000
    $  40,000
    $  48,000
    $  56,000$   250,000
    $  36,000
    $  48,000
    $  60,000
    $  72,000
    $  84,000$   300,000
    $  48,000
    $  64,000
    $  80,000
    $  96,000
    $112,000$   400,000
    $  72,000
    $  96,000
    $120,000
    $144,000
    $168,000$   500,000
    $  96,000
    $128,000
    $160,000
    $192,000
    $224,000$   600,000
    $120,000
    $160,000
    $200,000
    $240,000
    $280,000$   700,000
    $144,000
    $192,000
    $240,000
    $288,000
    $336,000$   800,000
    $168,000
    $224,000
    $280,000
    $336,000
    $392,000$   900,000
    $192,000
    $256,000
    $320,000
    $384,000
    $448,000$1,000,000
    $216,000
    $288,000
    $360,000
    $432,000
    $504,000$1,100,000
    $240,000
    $320,000
    $400,000
    $480,000
    $560,000$1,200,000
    $264,000
    $352,000
    $440,000
    $528,000
    $616,000$1,300,000
    $288,000
    $384,000
    $480,000
    $576,000
    $672,000$1,400,000
    $312,000
    $416,000
    $520,000
    $624,000
    $728,000$1,500,000
    $336,000
    $448,000
    $560,000
    $672,000
    $784,000(1) Under the
    Plans, the following Named Executive Officers have earned the following
    number of credited years of service on September 30, 2006.


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The benefits listed in the table above are not subject to any
deduction for social security or other offset amounts such as Canadian Pension
Plan or Québec Pension Plan amounts.

|                                                                                                    | Supplementary Plan Years | Basic Plan Years
|--------------------------------------------------------------------------------------------------- | ------------------------ | ----------------
|                                                                                                    |                          |                 
|F.A.
    DOTTORI                                                                                    | 32.4                     | 26.1            
|T.P.
    KAVANAGH                                                                                   | 31.2                     | 25.4            
|M. DUMAS*                                                                                           | 20.1                     | 14.3            
|J. M.
    LOPEZ                                                                                     | 15.8                     | 10.0            
|Y.
    PELLETIER                                                                                    | 24.1                     | 18.3            
|J. VALLEY
    (Defined contribution plan only)                                                      | N/A                      | N/A             
|                                                                                                    |                          |                 
|                                                                                                    |                          |                 
|* Mr.
    Dumas' service includes years with a subsidiary of the Corporation in a
    similar plan.

ITEM 9 - INDEBTEDNESS

The aggregate indebtedness to Tembec as at November 14, 2006of all executive officers, directors, employees and former executive
officers, directors and employees entered into regarding the purchase of
securities of the Corporation and all other indebtedness, excluding routine
indebtedness (as defined under applicable securities laws), was approximately
$4,400,000. The table below represents the approximate aggregate indebtedness,
excluding routine indebtedness, outstanding as at November 18, 2006
entered into in connection with a purchase of securities and all other
indebtedness.

AGGREGATE INDEBTEDNESS (MILLION $)

|Purpose        | To
    the Corporation or its Subsidiary | To
    Another Entity
|-------------- | ---------------------------------------- | ---------------------
|               |                                          |                      
|Share Purchase | $2.6                                     | N/A                  
|               |                                          |                      
|Other          | $1.8                                     | N/A                  

The table below represents amounts
outstanding on loans made prior to July 2002.

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TABLE OF INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS
UNDER SECURITIES PURCHASE AND OTHER PROGRAMS

|                                                                                              | Involveme
    nt of
    Tembec
    Inc. or
    Subsidiary | Largest Amount
    Outstanding
    During 2006
    Fiscal Year
    ($) | Amount
    Outstanding as
    at November 2,
    2006
    ($) | Financially
    Assisted Securities
    Purchases
    During 2006 Fiscal
    Year | Security for
    Indebtedness(1) | Amount
    Forgiven
    During
    2006 Fiscal
    Year
|--------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------------------- | --------------------------------------------------------------------------------- | -------------------------------- | -------------------------------------------------------
|                                                                                             
|                                                                                             
|                                                                                             
|Name and Principal Position                                                                  
|Securities Purchase Programs                                                                  |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|JAMES
    M. LOPEZ                                                                            |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|President and Chief Executive Officer                                                         | Lender                                                    | 169,861.00                                                             | 158,923.20                                                    | N/A                                                                               | 12,900 common shares             | N/A                                                    
|ÉRIC
    BERGERON                                                                             |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Vice-President, Human Resources                                                               | Lender                                                    | 3,642.50                                                               | 3,278.25                                                      | N/A                                                                               | 250 common shares                | N/A                                                    
|PAOLO
    DOTTORI                                                                             |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Vice-President, Environment, Energy                                                           |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|and
    Technology                                                                            | Lender                                                    | 25,267.00                                                              | 22,296.00                                                     | N/A                                                                               | 2,500 common shares              | N/A                                                    
|MICHEL
    DUMAS                                                                              |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Executive Vice-President, Finance                                                             |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|and
    Chief Financial Officer                                                               | Lender                                                    | 261,502.00                                                             | 243,522.00                                                    | N/A                                                                               | 21,000 common shares             | N/A                                                    
|CHARLES GAGNON                                                                                |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Former
    Vice-President, Corporate                                                          |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Culture and Social Responsibility                                                             | Lender                                                    | 88,995.60                                                              | 82,608.30                                                     | N/A                                                                               | 6,950 common shares              | N/A                                                    
|THOMAS
    MCANDREW GALE                                                                      |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Executive Vice-President, President                                                           |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Chemical Group                                                                                | Lender                                                    | 42,120.00                                                              | 42,120.00                                                     | N/A                                                                               | 4,000 common shares              | N/A                                                    
|TERRENCE P. KAVANAGH                                                                          |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Executive Vice-President and                                                                  |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Chief
    Operating Officer                                                                   | Lender                                                    | 350,071.00                                                             | 324,935.70                                                    | N/A                                                                               | 28,150 common shares             | N/A                                                    
|STEPHEN NORRIS                                                                                |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Treasurer                                                                                     | Lender                                                    | 52,813.10                                                              | 49,067.70                                                     | N/A                                                                               | 4,925 common shares              | N/A                                                    
|YVES
    OUELLET                                                                              |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Vice-President, Administration                                                                | Lender                                                    | 86,286.00                                                              | 80,678.10                                                     | N/A                                                                               | 7,450 common shares              | N/A                                                    
|MAHENDRA A. PATEL                                                                             |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Vice-President, Engineering, Purchasing                                                       |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|and
    Services                                                                              | Lender                                                    | 89,580.00                                                              | 84,613.50                                                     | N/A                                                                               | 6,750 common shares              | N/A                                                    
|YVON
    PELLETIER                                                                            |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Executive Vice-President, President Pulp                                                      |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Group                                                                                         | Lender                                                    | 43,456.00                                                              | 38,400.00                                                     | N/A                                                                               | 3,500 common shares              | N/A                                                    
|JACQUES ROCHON                                                                                |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Vice-President, Information Technology                                                        | Lender                                                    | 47,637.00                                                              | 43,173.00                                                     | N/A                                                                               | 3,750 common shares              | N/A                                                    
|JACQUES ROCRAY                                                                                |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Former
    Vice-President, Environment                                                        |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|and
    Technology                                                                            | Lender                                                    | 94,260.60                                                              | 90,151.80                                                     | N/A                                                                               | 7,450 common shares              | N/A                                                    
|DENNIS
    ROUNSVILLE                                                                         |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Executive Vice-President, President                                                           |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Forest
    Products Group                                                                     | Lender                                                    | 10,199.00                                                              | 9,179.10                                                      | N/A                                                                               | 700 common shares                | N/A                                                    
|JEAN-LOUIS TÉTRAULT                                                                           |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Vice-President, Insurance and Risk                                                            |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Management                                                                                    | Lender                                                    | 82,002.00                                                              | 77,538.00                                                     | N/A                                                                               | 7,000 common shares              | N/A                                                    
|RICHARD TREMBLAY                                                                              |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Corporate Controller                                                                          | Lender                                                    | 61,370.00                                                              | 56,806.95                                                     | N/A                                                                               | 5,175 common shares              | N/A                                                    
|MEL
    ZANGWILL                                                                              |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Senior
    Vice-President, President                                                          |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Paperboard Group                                                                              | Lender                                                    | 104,620.00                                                             | 98,700.00                                                     | N/A                                                                               | 11,000 common shares             | N/A                                                    
|Other Programs                                                                                |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|ÉRIC
    BERGERON                                                                             |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Vice-President, Human Resources                                                               | Lender                                                    | 13,666.00                                                              | 12,222.00                                                     | N/A                                                                               | N/A                              | N/A                                                    
|TERRENCE P. KAVANAGH                                                                          |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Executive Vice-President and                                                                  |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Chief
    Operating Officer                                                                   | Lender                                                    | 214,167.00                                                             | 208,750.00                                                    | N/A                                                                               | N/A                              | N/A                                                    
|YVES
    OUELLET                                                                              |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Vice-President, Administration                                                                | Lender                                                    | 1,749.00                                                               | 666.00                                                        | N/A                                                                               | N/A                              | N/A                                                    
|YVON
    PELLETIER                                                                            |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Executive Vice-President, President Pulp                                                      |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Group                                                                                         | Lender                                                    | 68,922.00                                                              | 68,922.00                                                     | N/A                                                                               | N/A                              | N/A                                                    
|RICHARD TREMBLAY                                                                              |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|Corporate Controller                                                                          | Lender                                                    | 456.00                                                                 | 0.00                                                          | N/A                                                                               | N/A                              | N/A                                                    
|                                                                                              |                                                           |                                                                        |                                                               |                                                                                   |                                  |                                                        
|(1) The common shares given
    as security for indebtedness are common shares of Tembec Inc.

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The loans granted by Tembec to the persons named above to
purchase common shares of Tembec Inc. were made for a term of ten years bearing
an interest rate determined by the Human Resources Committee, one of two
predecessor committees to the Corporate Governance and Human Resources
Committee. The loans granted by Tembec under other programs relate to home
purchases and are not interest-bearing, except for the home purchase loan made
to Yvon Pelletier in the amount of $68,922.00 which bears interest at an annual
rate of 5.3%.All loans were made prior to July 2002. Directors and
executive officers are no longer entitled to be granted loans in connection with
a purchase of securities.

9.1           INFORMATION
CONCERNING NON-DIRECTOR OFFICERS

|                        |                                                                          | Province/State of
|----------------------- | ------------------------------------------------------------------------ | -----------------
|                        |                                                                          | Residence        
|Non-director Officers   | Office with the Corporation                                              | and Country      
|                        |                                                                          |                  
|                        |                                                                          |                  
|Dan Alexander(1)        | Executive Vice President, President,
    Paper Group                     | Michigan, USA    
|                        |                                                                          |                  
|Eric Bergeron           | Vice
    President, Human Resources                                      | Québec, Canada   
|                        |                                                                          |                  
|Pierre Brien            | Vice
    President, Communications and Public Affairs                    | Québec, Canada   
|                        |                                                                          |                  
|Paolo Dottori(2)        | Vice
    President, Environment, Energy and Technology                   | Québec, Canada   
|                        |                                                                          |                  
|Michel J. Dumas         | Executive
    Vice President, Finance and Chief Financial Officer        | Ontario, Canada  
|                        |                                                                          |                  
|Antonio Fratianni       | Vice
    President, General Counsel and Secretary                        | Québec, Canada   
|                        |                                                                          |                  
|Thomas McAndrew Gale    | Executive
    Vice President, President, Chemical Group                  | Québec, Canada   
|                        |                                                                          |                  
|Terrence P. Kavanagh(3) | Executive
    Vice President and Chief Operating Officer,                | Ontario, Canada  
|                        |                                                                          |                  
|Stephen J. Norris       | Treasurer                                                                | Québec, Canada   
|                        |                                                                          |                  
|Yves Ouellet            | Vice
    President, Administration                                       | Québec, Canada   
|                        |                                                                          |                  
|Mahendra Patel          | Vice
    President, Engineering, Purchasing and Services                 | Ontario, Canada  
|                        |                                                                          |                  
|Yvon Pelletier(4)       | Executive
    Vice President, President, Pulp Group                      | Ontario, Canada  
|                        |                                                                          |                  
|Jacques Rochon          | Vice
    President, Information Technology                               | Québec, Canada   
|                        |                                                                          |                  
|Dennis Rounsville       | Executive
    Vice President, President, Forest Products Group           | B.C., Canada     
|                        |                                                                          |                  
|Jean-Louis Tétrault     | Vice
    President, Insurance and Risk Management                        | Québec, Canada   
|                        |                                                                          |                  
|Richard Tremblay        | Corporate
    Controller                                                 | Québec, Canada   
|                        |                                                                          |                  
|John Valley             | Executive
    Vice President, Business Development and Corporate Affairs | Ontario, Canada  
|                        |                                                                          |                  
|Mel Zangwill            | Senior Vice President, President,
    Paperboard Group                   | Québec, Canada   
|                        |                                                                          |                  

|                                                                                                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)   Effective
    October 1, 2006, Mr. Dan Alexander was appointed Executive Vice President,
    President Paper Group.                                                                                                                                       
|(2)   Effective
    October 1, 2006, Mr. Paolo Dottori was appointed Vice President,
    Environment, Energy and Technology in replacement of Jacques Rocray who
    retired as   Vice-President
    Environment and Technology effective on September 30, 2006.
|(3)   Effective
    December 31, 2006, Mr. Terry P. Kavanagh will be retiring from Tembec.                                                                                                                                                                      
|(4)   Effective
    October 1, 2006, Mr. Yvon Pelletier was appointed Executive Vice President,
    President Pulp Group.                                                                                                                                       
|                                                                                                                                                                                                                                                                

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During the past five years, each of the non-director officers
of the Corporation have been engaged in their present principal occupations or
in other executive capacities of the Corporation or with related or affiliated
companies indicated opposite their name, except for Dan Alexander, who, from
March 1994 to October 2002, was President and CEO of Silver Creek Paper, from
October 2002 to October 2004, was President and CEO of Missota Paper Corporation
LLC and from October 2004 to March 2006, was President of Alexander &
Associates; Pierre Brien who, from October 1993 to February 2003, was a Member
of Parliament for the riding of Temiscaming, Antonio Fratianni who, from May
1999 to December 2004, was Senior Counsel with Royal Bank of Canada, and John
Valley who from April 1994 to January 2001 acted as a Managing Director of Chase
Manhattan Bank of Canada and from May 2001 to October 2005 acted as Managing
Partner and Principal of the Biscayne Group and most recently also served as
Chief Negotiator for the Province of Ontario in the softwood lumber dispute.

9.2           CEASE TRADE
ORDERS, BANKRUPTCIES, PENALTIES AND SANCTIONS

To the knowledge of the Corporation and based on the
information furnished by the directors and executive officers, except as
disclosed below, no director or executive officer:

(a) is, as at the date of the AIF or
has been, within the 10 years before the date of the AIF, a director or
executive officer of any corporation, that while that person was acting in that
capacity,

(i) was the subject of a cease trade
or similar order or an order that denied the relevant corporation access to any
exemption under securities legislation, for a period of more than 30 consecutive
days; or

(ii) was subject to an event that
resulted, after the director or executive officer ceased to be a director or
executive officer, in the corporation being the subject of a cease trade or
similar order or an order that denied the relevant corporation access to any
exemption under securities legislation, for a period of more than 30 consecutive
days; or

(iii) within a year of that person
ceasing to act in that capacity, became bankrupt, made a proposal under any
legislation relating to bankruptcy or insolvency or was subject to or instituted
any proceedings, arrangement or compromise with creditors or had a receiver,
receiver manager or trustee appointed to hold its assets;

(b) has, within the 10 years before
the date of the AIF, become bankrupt, made a proposal under any legislation
relating to bankruptcy or insolvency, or become subject to or instituted any
proceedings, arrangement or compromise with creditors, or had a receiver,
receiver manager or trustee appointed to hold his assets;

(c) has, since January 1, 2001, been
subject to:

(i) any penalties or sanctions
imposed by a court relating to securities legislation or by a securities
regulatory authority or has entered into a settlement agreement with a
securities regulatory authority; or

(ii) any other penalties or sanctions
imposed by a court or regulatory body that would likely be considered important
to a reasonable investor in making an investment decision.

Mr. Emanuele (Lino) Saputo is a director of Arbec Forest
Products Inc. (formerly Uniforêt Inc.) which filed for protection under the
Companies' Creditors Arrangement Act on April 17, 2001. In May 2003, Uniforêt
Inc. entered into a plan of arrangement with its creditors. In February 2004, it
completed the implementation of this plan.

Mr. Michel Dumas was a director of Gestion Papiers Gaspésia
Inc. and its subsidiary, Papiers Gaspésia Inc. from March 2004 until October
2004. On January 30, 2004, Papiers Gaspésia Inc. and Papiers Gaspésia Limited
Partnership filed for protection under the Companies' Creditors Arrangement Act.
On July 4, 2005, the plan of arrangement submitted by Papiers Gaspésia Inc. and
Papiers Gaspésia Limited Partnership to their creditors was homologated by the
Court and is being implemented since then.

Mr. John Valley was a director of Betacom Corporation Inc.
from October 2002 until November 2003. On November 14, 2003, the Court appointed
an Interim Receiver for Betacom Corporation Inc. to hold its assets. In December
2003, Betacom Corporation Inc. made a formal assignment into bankruptcy to
wind-up its affairs.

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ITEM 10 - AUDITORS

The following table shows fees paid to KPMG LLP in Canadian
dollars in the past two fiscal years for various services provided to Tembec:

Year Ended
    
    Year EndedSeptember 24, 2005
    
    September 30, 2006KPMGAudit Fees
    1,100,000
    
    
    2,015,000Audit-Related Fees
    335,000
    
    
    407,000Tax Fees
    223,000
    
    
    264,000Other Fees
    37,000
    
    
    17,000Total
    1,695,000
    
    
    2,703,000


Audit Fees

These fees include professional services rendered by the
external auditors for statutory audits of the annual financial statements and
for other audits.

Audit-Related Fees

These fees include professional services that reasonably
relate to the performance of the audit or review of Tembec's financial
statements, including audit of the pension plans.

Tax Fees

These fees include professional services for tax compliance,
tax advice and tax planning.

Other Fees

The fees include the total fees paid to the auditors for all
services other than those presented in the categories of audit fees, audit
related fees and tax fees, including the consultation services for the diligent
audit for the purposes of acquisition, expatriates fees and certain filings.

Policies and Procedures for the Engagement of Audit and Non-Audit Services

The Corporation's Audit Committee has adopted the
Pre-approval Policy and Procedures for Services Provided by External Auditors
which sets forth the procedures and the conditions pursuant to which permissible
services proposed to be performed by external auditors are pre-approved. Under
the terms of the policy, the Audit Committee has delegated to the Chairman of
the Audit Committee pre-approval authority for any services not previously
approved by the Audit Committee which involve the payment of unbudgeted fees not
in excess of $50,000. Any service approved by the Chairman is reported to the
Audit Committee at its next meeting.

ITEM 11 -             LEGAL PROCEEDINGS

11.1         COUNTERVAILING AND
ANTIDUMPING DUTIES

On April 2, 2001, petitions for the imposition of punitive
antidumping and countervailing duties on softwood lumber from Canada were filed
with the U.S. Department of Commerce (the "USDOC") and the U.S.
International Trade Commission (the "USITC"), by certain U.S. industry
and trade groups (the "Petitioners"). On May 22, 2002, USDOC published
antidumping and countervailing duty orders in which the rates applicable to
Tembec were set at 10.21% and 18.79% respectively. Tembec deposited estimates of
duties payable until October 12, 2006, based on these orders. The results of an
administrative review process for the first year of shipments under the orders
were published on December 20, 2004. The antidumping results were subsequently
amended on January 24, 2005 and the countervailing duty results

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were amended on February 24, 2005. Those results changed the
estimated deposit rates to 16.37% (countervailing duties) and 9.10% (antidumping
duties). The results of an administrative review process for the second year of
shipments under the orders were published on December 12, 2005. Those results
changed the estimated deposit rates to 8.70% (countervailing duties) and 4.02%
(antidumping duties).

The countervailing duty and anti-dumping orders were imposed
in part on the basis of a USITC threat of injury finding which was reversed as a
result of proceedings before a NAFTA panel. The United States launched an
extraordinary challenge to the decision rendered by the NAFTA panel. The
Extraordinary Challenge Committee ("ECC") upheld the NAFTA Panel's
decision on August 10, 2005. The EEC decision normally would bring an end to
these duties but the U.S. government refused to refund and continued to collect
deposits of estimated duties in defiance of these NAFTA decisions. Tembec and
other Canadian parties have sued the U.S. Government in the U.S. Court of
International Trade ("CIT") seeking a court order mandating the
revocation of the countervailing duty and anti-dumping orders and full refund of
all deposits of estimated duties. On July 21, 2006, the CIT ruled in Canada's
favor, upholding the decision of the ECC, confirming that the orders had to be
revoked, the collection of deposits had to cease, and that all deposits
collected after November 4, 2004 had to be returned with interest. The CIT
reserved judgment, however, as to the return of deposits collected between May
2002 and November 2004. On this question the CIT invited further briefing from
the parties, but eventually ruled, on October 13, 2006, that NAFTA panels have
the same effective authority as U.S. courts and that all deposits, reaching back
to the beginning of their collection, must be returned with interest.

The countervailing duty order was based on alleged subsidies
in Canada. On March 17, 2006, a NAFTA panel ruled definitively that there were
no subsidies, but on the last possible day, April 27, the United States
challenged the panel decision and the Government of Canada supported a
"suspension" of the challenge, which prevented the panel decision from taking
effect. The countervailing duty order, based on the March 17 decision, should
have been revoked on April 28.

Meanwhile, on July 1, 2006, Canada and the United States of
America (USA) secured an agreement, based on Basic Terms initialed on April 27,
to settle the softwood lumber dispute (the "Agreement"). Pursuant to this
Agreement, Canadian softwood lumber exporters will, depending upon the province
in which the lumber originated, either: (i) pay an export tax that varies
inversely with the market price of lumber ("Export Tax") or (ii) pay a
reduced Export Tax and be subject to a volume restraint which also shall be a
function of the market price of lumber. Also, pursuant to this Agreement, the
USA agreed to return approximately 82% of the duties paid by the Canadian
softwood lumber companies to the US Customs since May 2002. The remainder is
being turned over to the Coalition for Fair Lumber Imports Executive Committee
in the United States, the organization that brought the litigation, and
organizations chosen by the U.S. Government, in consultation with Canada, for
public works in the United States. Most lumber companies in the industry backed
the Agreement, including Tembec. On September 12, 2006, Canada and the USA
signed the Agreement which then entered into force, with amendments, on October
12, 2006. The United States revoked the orders on October 12, terminating the
collection of duty deposits.

On October 30, 2006, Tembec received payment of US $242
million pertaining to softwood lumber duty deposits made by Tembec to US Customs
since May 2002. The funds were advanced by Export Development Corporation ("EDC")
of Canada as part of a financing transaction made possible by the Agreement. The
purchase by EDC of rights of the duties to be refunded eliminated the waiting
period anticipated for US Customs to process the refunds.

11.2         GENERAL

Tembec is involved in various legal proceedings relating to
contracts, commercial disputes, taxes, environmental issues, employment and
workers' compensation claims and other matters. The Corporation periodically
reviews the status of these proceedings with both inside and outside counsel.
The Corporation believes that the ultimate disposition of these matters will not
have a material adverse effect on its financial position.

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ITEM 12 -             INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

On February 27, 2006, Jolina Capital Inc., an entity who
together with Placements Jolina Inc. exercises control over more than 10% of the
outstanding common shares of Tembec Inc. and both of whom are controlled by Mr.
Emanuele (Lino) Saputo, purchased from Tembec its oriented strandboard (OSB)
business located in Saint-Georges-de-Champlain, Québec for a total consideration
of $98 million.

ITEM 13 -             MATERIAL CONTRACTS

The Corporation, entered into a credit agreement dated March
24, 2005 with CIT Business Credit Canada Inc. providing for a $150 million
revolving operating line of credit. This facility is a three-year committed
facility, to March 2008, which is automatically extended for additional one year
periods, unless notice is given by either party to the agreement, and provides
for floating rates of interest.

Spruce Falls Inc., a wholly owned subsidiary of the
Corporation, entered into a credit agreement dated June 29, 2005 with the
Toronto-Dominion Bank and other institutional lenders providing for a three-year
committed $190 million revolving operating line of credit, subsequently
increased to $200 million, with an initial 364-day operating period ending June
2006, which was extendable annually and provides for floating rates of interest.
In June 2006, the lenders declined the extension of the operating line of
credit. It became a non-revolving line of $136 million expiring in June 2008.

The Corporation entered into three trust indentures dated
respectively April 6, 1999, January 19, 2001 and March 13, 2002 with HSBC Bank
USA which govern Senior Notes issued by it in an aggregate amount of US $1.2
billion. The Senior Notes are guaranteed by Tembec Inc., are unsecured but
require compliance with certain covenants that could in certain circumstances
restrict the ability of Tembec or its subsidiaries to incur additional
indebtedness, to encumber or dispose of their assets, or to make certain
payments or distributions.

Tembec completed the sale of its oriented strandboard (OSB)
business located in Saint-Georges-de-Champlain, Québec to Jolina Capital Inc.,
on February 27, 2006, for a total consideration of $98 million, with $88 million
payable at closing, and the balance being payable in the form of a $10 million
interest-bearing note, repayable in equal annual installments over a five-year
period. As a result of this transaction, Tembec recorded a gain of $63.5 million
in the quarter ending March 25, 2006 with an after tax effect of $47.2 million.

ITEM 14 -             INTERESTS OF EXPERTS

KPMG LLP are the external auditors of the Corporation who
prepared the Auditors' Report to the shareholders dated November 15, 2006,
except as to note 22(b) which is as of December 5, 2006, with respect to the
consolidated annual financial statements of the Corporation for the year ended
September 30, 2006 consisting of consolidated balance sheets and consolidated
statement of operations, retained earnings and cash flows. KPMG LLP is
independent with respect to Tembec within the meaning of the Code of Ethics of
theOrdre des comptables agréés du Québec.

ITEM 15 -             ADDITIONAL INFORMATION

Additional information relating to the Corporation may be
found on SEDAR at www.sedar.com.

Additional financial information is provided in the 2006
Annual Report.

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DEFINITIONS

Biomass  Bark and residual wood waste used as fuel to operate
cogeneration facilities or boilers.

Board feet  The plural of board foot; a board foot is calculated by
multiplying 1" x 12" x 12" = 1 foot board measure gross count. Lumber is then
finished (planed/sanded) to a smaller size and sold based on the original gross
count. The difference between gross size and net size is approximately 72%.

Capacity  the number of units which can be produced in a year based on
operating with the normal number of shifts and maintenance interruptions.

Coated paper  paper which is coated with clay and treated to impart a
smooth glossy surface.

Cogeneration  Generation of power in an industrial power plant to
produce both steam and electricity for in-plant use, as well as electricity for
sale to outside utility companies.

EBITDA  Operating earnings (losses) before unusual items, interest,
income taxes, depreciation and amortization and other non-operating income and
expenses.

Effluent  outflowing waste discharge from a pulp and paper mill.

Hectare  2.471 acres

ISO 14001  is an independent third party certification that confirms
that Tembec's internal Environmental Management system meets internationally
accepted standards for protecting environmental values, and that the system is
properly maintained and applied by Tembec.

Measurements

Tonne  metric ton  1,000 kilograms or 2,204
pounds (1.1023 tons).

Mfbm  One thousand board feet measure (see board
feet).

Msf (MMsf)  Measurement for panel products equal
to a thousand (million) square feet, 1/16-inch thick.

NAFTA  The North American Free Trade Agreement.

Newsprint  A printing paper whose major use is in newspapers. It is made
largely from groundwood or mechanical pulp.

OSB  Oriented strand board. An engineered structural wood panel produced
by chemically bonding wood strands in a uniform direction under heat and
pressure.

Pulp  the generic term describing the fibres derived from wood. Pulp can
result from a variety of pulping processes including cooking, refining, grinding
or the processing and cleaning (de-inking) of waste paper. Pulp can be either in
a wet or dry state. Types of pulp include:

Kraft pulp  chemical pulp produced by an
alkaline cooking process using sodium sulphate.

High yield pulp  pulp produced by a combined
chemical, thermal and refining process.

Specialty cellulose pulp  chemical pulp produced
by an acid cooking process which can be either ammonia, sodium or calcium based.

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Sludge  Solid waste material produced in mill effluent
treatment systems disposed of by burning or landfilling.

Wood chips - Small pieces of wood used to make pulp. The
wood chips are produced either from wood waste in a sawmill or a log
merchandiser or from pulp wood cut specifically for this purpose. Wood chips are
generally uniform in size and are larger and coarser than sawdust.









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SCHEDULE A

MANDATE OF THE BOARD OF DIRECTORS


I.       Overall Purpose / Objectives

The Board of Directors (the "Board")
of Tembec Inc. and Tembec Industries Inc. (collectively, the "Corporation")
is responsible for the overall stewardship of the Corporation and has full power
and authority to manage and control the affairs and business of the Corporation.
It establishes the overall policies and standards for the Corporation. While
delegating certain of its authority and responsibilities to committees and to
the management of the Corporation, it retains full effective control over the
Corporation and monitors senior management.

II.     Composition

The Board should be constituted of a
majority of Independent Directors, as defined under applicable securities
legislation. The Corporation expects and requires directors to be and remain
free of conflictual interests or relationships and to refrain from acting in
ways which are actually or potentially harmful, conflictual or detrimental to
the Corporation's best interests.

The Board is responsible for evaluating its size and
determining the appropriate number of directors for the Board.

The membership of the Board shall
consist of at least three directors that are or have been directly or indirectly
involved in the development, operation or management of a forest products
company. The membership of the Board will also include (i) at least one Audit
Committee financial expert, as required in applicable U.S. securities laws, and
(ii) a sufficient number of individuals who are Financially Literate and
Independent, as defined in applicable securities legislation, to ensure that the
members of the Audit Committee fulfill the requirements described at
section 111(9) hereof.

Normal retirement age for directors is 70 years.

III.    Meetings

The Board will meet at least five
times per year. It will ensure that it excludes management from its meetings,
from time to time, as appropriate. The Board will implement structures and
procedures to ensure that it functions independently of management. Minutes of
all meetings of the Board shall be maintained.

IV.    Responsibilities and Duties

The Principal Functions of the Board are as
Follows:

Selection of Directors

(1)   
The Board is responsible for approving new nominees to the Board and for
assessing directors based upon the recommendations of the Corporate Governance
and Human Resources Committee.

(2)   
The Board will annually consider the skills and competencies of the members of
the Board from the perspective of determining what additional skills and
competencies would be helpful to the Board. The Board will convey its findings
to the Corporate Governance and Human Resources Committee to be used to identify
specific candidates.

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(3)   
The Board will ensure that there is an appropriate orientation and education
program for new members of the Board and continuing education program for all
Board members. It shall ensure that prospective candidates for Board membership
have received the appropriate information to permit them to fully understand the
role of the Board and its committees, the contributions expected from individual
directors, as well as a general understanding of the nature and operations of
the Corporation's business.

(4)   
The Board will annually review the assessment of the Board's performance and
recommendations provided by the Corporate Governance and Human Resources
Committee and evaluate its own effectiveness, the whole in accordance with the
Corporation's corporate governance policy. The Board will take appropriate
action based upon the results of the review process.

Remuneration of the Directors

(5)   
The Board of Directors will consider and approve the adequacy and form of the
compensation of directors, upon recommendation of the Corporate Governance and
Human Resources Committee, and ensure the compensation realistically reflects
the responsibilities and time involved in being an effective director.

Committees

(6)    The Board
shall appoint committees to assist it in performing its duties and processing
the quantity of information it receives.

(7)   
The Board shall name members of committees after considering the recommendations
of the Corporate Governance and Human Resources Committee as well as the skills,
preferences and availability of individual Board members, all in accordance with
the mandates of such committees approved by the Board.

(8)    The Corporate
Governance and Human Resources Committee will be composed only of Independent
Directors.

(9)   
The Audit Committee will be composed only of independent directors, as defined
in applicable securities legislation. All members of the Audit Committee will be
Financially Literate, as defined in applicable securities legislation and at
least one member shall be an audit committee financial expert, as defined in
applicable U.S. securities laws.

(10)  
The Environment, Health and Safety Committee shall consist of not fewer than
four directors, all of whom will be environmentally knowledgeable and at least
one will have an engineering or scientific background.

(11)  
The Board will receive reports from each committee as to the work undertaken by
the committee and, in each case, the committee's recommendations, if any, for
change with respect to its responsibilities. The Board will evaluate and
approve, if appropriate, such recommendations. The Board will also receive
minutes of all Committee meetings.

(12)   The Board will
annually evaluate the performance and review the work of its committees,
including their respective mandates and the sufficiency of such mandates.

(13)   The Board will
annually appoint a member of each of its committees to act as chairman of the
committee.

Senior Management

(14)  The Board will oversee
management through an ongoing review process.

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(15)  The
Board will appoint and determine the remuneration of the Chief Executive Officer
(the "CEO") and other Senior Executives of the Corporation, upon
recommendation of the Corporate Governance and Human Resources Committee.

(16)  The
Board will, together with the CEO, and with the assistance of the Corporate
Governance and Human Resources Committee, develop a position description for the
CEO, for the chair of the Board and for the chair of each committee of the
Board. The Board will review and approve the objectives developed for the CEO by
the Human Resources Committee and review the assessment of the CEO's performance
in relation to such objectives made by the Corporate Governance and Human
Resources Committee.

(17)  The
Board will, to the extent feasible, satisfy itself as to the integrity of the
CEO and other executive officers and that the CEO and other executive officers
create a culture of integrity throughout the Corporation.

(18)  The
Board will annually receive and consider a report from its Corporate Governance
and Human Resources Committee on succession planning, including appointing,
training and monitoring of senior management and the CEO.

General Responsibilities of the Board of Directors

(19)  The Board will oversee
the management of the Corporation. In doing so, the Board will establish an
effective working relationship with the CEO and other members of senior
management.

(20)  The
Board will oversee the formulation of long-term strategic, financial and
organizational goals for the Corporation on a regular basis, taking into
account, among other things, the opportunities and risks of the business.

(21)  As part of the
responsibility of the Board to oversee management of the Corporation, the Board
will engage in active monitoring of the Corporation and its affairs in its
stewardship capacity.

(22)  The Board will, through
its Audit Committee, review the integrity of the Corporation's internal control
and management information systems.

(23)  The Board will engage in
a review of short and long-term performance of the Corporation in accordance
with approved plans.

(24)  The
officers of the Corporation, headed by the CEO, shall be responsible for general
day to day management of the Corporation and for making recommendations to the
Board with respect to long term strategic, financial, organization and related
objectives.

(25)  The
Board will annually review the significant risks and opportunities affecting the
Corporation and its businesses and the systems and controls in place to manage
and monitor risks and opportunities. The Board may impose such limits as may be
in the interests of the Corporation and its shareholders.

(26)  The
Board will oversee an annual strategic planning process within the Corporation
and will approve the Corporation's strategic plan. This plan will take into
account the opportunity and risks of the Corporation's business. The Board will
also, from time to time, approve annual business plans and multi-year business
plans for the Corporation and its businesses.

(27) The Board will approve capital
expenditures or other financial commitments in excess of $2,500,000.

(28) The Board will adopt prudent
financial standards with respect to the businesses of the Corporation and
prudent levels of debt in relation to the Corporation's consolidated
capitalization.

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(29)  The
Board will monitor compliance with the ethics policies or codes of the
Corporation and will be responsible for granting any waivers from compliance
with such policies or codes for directors and officers.

(30)  The Board will also
consider and approve:

(i)    transactions
out of the ordinary course of business;

(ii)   special employment
contracts, upon recommendation of the Corporate Governance and Human Resources
Committee;

(iii)  all matters that would
be expected to have a major impact on shareholders;

(iv)  the appointment of any
person to any position that would qualify such person as an officer of the
Corporation;

(v)  any amendments to the
Corporation's pension plans relating to governance structure and design of
benefits.

(31)  The Board will also
receive reports and consider:

(i)    The quality
of relationships between the Corporation and its key customers;

(ii)   Changes in the
shareholder base of the Corporation from time to time and relationships between
the Corporation and its significant shareholders;

(iii)  Periodic reports from
Board committees with respect to matters considered by such committees;

(iv)  Environment, health and
safety matters as they affect the Corporation and its business.

(32)  The
Board will oversee how the Corporation communicates its goals and objectives to
its shareholders and other relevant constituencies, including the approval of
policies relating to: (i) how the Corporation interacts with analysts,
investors, other key stakeholders and the public; and (ii) continuous disclosure
obligations and selective disclosure. Such policies shall be reviewed annually
or when necessary.

(33)  The
Board will review and approve the Corporation's management proxy circular and
annual information form following review by its Corporate Governance and Human
Resources Committee and its Audit Committee.

(34)  The Board will review
and approve annual audited financial statements, quarterly financial statements
and related management discussion and analysis disclosure following review by
the Audit Committee.

(35)  The
Board will consider and review the means by which stakeholders can communicate
with the Corporation and the Board including the opportunity to do so at the
annual meeting, communications interfaces through Tembec Inc's website and the
adequacy of resources available within the Corporation to respond to
shareholders through the office of the Secretary and otherwise.

(36)  The
Board shall, through its Audit Committee, ensure that the Corporation adopts
suitable policies regulating disclosure to and communication with shareholders,
the investment community, members of the media, governments and organizations,
employees and the greater public.

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(37)  The
Board has the responsibility for monitoring compliance by the Corporation with
the corporate governance requirements of applicable securities regulators and
stock exchanges. The Board will approve the disclosure of (i) the Corporation's
system of governance and (ii) the operation of its system of governance prepared
by the Corporate Governance and Human Resources Committee.

(38)  The
Board will consider and approve such other matters as the Board may, from time
to time, determine.









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SCHEDULE B

AUDIT COMMITTEE CHARTER


I.       OVERALL PURPOSE / OBJECTIVES

The Audit Committee (the "Committee")
will assist the Boards of Directors (the "Board") of Tembec Inc.
and Tembec Industries Inc. (collectively, the "Corporation") in
fulfilling its oversight responsibilities. The Committee will review the
financial reporting process, the system of internal control and management of
financial risks, the audit process, the auditor attestation process regarding
internal controls and the Corporation's process for monitoring compliance with
laws and regulations and its own corporate policies. In performing its duties,
the Committee will maintain effective working relationships with the Board,
management, and the internal and external auditors. The Corporation shall ensure
that appropriate funding is provided to the Committee to compensate the auditors
and any other advisors engaged by the Committee, as well as for ordinary
administrative expenses.

Subject to any power (i) conferred to
the Committee under the Corporation's by-laws or any applicable laws, rules or
regulations (including those of any stock exchange), or (ii) otherwise assigned
to the Committee by resolution of the Board of Directors, the Committee shall
have no decision-making authority other than as specifically contemplated in
this Charter.

II.      COMPOSITION

The Committee shall consist of not
fewer than three directors, each of whom shall be "independent", as defined in
applicable securities legislation. All members of the Committee shall be
"financially literate", as defined in applicable securities legislation, and at
least one member of the Committee shall satisfy the definition of "financial
expert", as set forth in the applicable U.S. securities legislation. Members of
the Committee shall be appointed by the Board and shall serve at the pleasure of
the Board. Unless a chairman is appointed by the Board, the members of the
Committee will select its chairman (the "Chairman").

III.     MEETINGS

The Committee shall meet at least
four times annually. The Committee shall meet at least quarterly with the
external auditors and at least annually with the internal auditors to discuss
any matters that the Committee believes should be discussed, including privately
held conversations. Meetings of the Committee may be called by its Chairman or
the chairman of the Board, the external auditors or the internal auditors.
Minutes of all meetings of the Committee shall be maintained and submitted as
soon as practicable to the Board. In addition, the Committee will report to the
Board on the Committee's activities at the Board meeting following each
Committee meeting.

A majority of Committee members shall constitute a
quorum.

The members of the Committee shall
have the right, for the purposes of discharging the powers and responsibilities
of the Committee, to inspect any relevant records of the Corporation and its
subsidiaries. The Committee shall also have the authority to hire independent
counsel and other advisors at the Corporation's expense, if necessary to carry
out its duties and the authority to set and pay the compensation for any
independent counsel or advisor employed by the Committee. The Committee shall
also have the authority to communicate directly with internal and external
auditors.

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IV.     RESPONSIBILITIES AND DUTIES

The Audit Committee shall:

Documents/Reports Review

(1)   
Review and reassess the adequacy of this Charter annually, report to the Board
thereon and ensure that it is reproduced in the annual information form on an
annual basis and posted in an up-to-date format on Tembec Inc's website.

(2)    Review and
discuss with management and the external auditor and, if appropriate, recommend
for approval by the Board prior to any disclosure:

(i)     interim
unaudited financial statements;

(ii)    audited
annual financial statements, in conjunction with the report of the external
auditors; and

(iii)  
all public disclosure documents containing audited or unaudited financial
information, including management's discussion and analysis of financial
condition and results of operations, any prospectus and annual and interim
earnings press releases.

This review shall include, where
appropriate, an examination of:

(i)     
the existence and substance of significant accruals, estimates, or accounting
judgments, and the level of conservatism;

(ii)    
transactions with related parties and adequacy of disclosures; and

(iii)  
qualifications, if any, contained in letters of representation and the contents
of review or audit reports from the Corporation's external auditors, with
respect to the Corporation's financial statements.

(3)   
Review any report which accompanies published financial statements (to the
extent such a report discusses financial condition or operating results) for
consistency of disclosure with the financial statements themselves.

(4)   
Obtain an explanation from management of all significant variances between
comparative reporting periods and an explanation from management for items which
vary from expected or budgeted amounts as well as from previous reporting
periods.

(5)    Review
uncertainties, commitments, and contingent liabilities material to financial
reporting.

External Audit

(6)   
Recommend to the Board the firm to be proposed to the Corporation's shareholders
for appointment or reappointment as external auditors and recommend the fees to
be paid to the external auditors. The external auditors are accountable to the
Board and the Committee, as representatives of the Corporation's shareholders,
and the external auditors shall confirm same in their annual engagement letter.
The external auditors must report directly to the Committee.

(7)   
Pre-approve all services to be provided by the external auditors to the
Corporation or any of its subsidiaries or adopt specific policies and procedures
for the engagement of such services, provided that such pre-approval policies
and procedures are detailed as to the particular service, the Committee is
informed of each service and the procedures do not include delegation of the
Committee responsibilities

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to management. The Committee may
delegate to one or more members of the Committee the authority to pre-approve
services provided by external auditors, provided that such member or members
must present any such services so approved to the full Committee at its first
scheduled meeting following such pre-approval.

(8)   
On an annual basis, review and discuss a written report by the external auditors
detailing all factors that might have an impact on the auditors' independence,
including all services provided and fees charged by the external auditors.

(9)    Oversee the
work, review the performance of the external auditors and approve any proposed
change of the external auditors. In such a case, approve the information
required to be disclosed by regulations.

(10)   Approve the scope
and plan of the annual audit, of the attest services and require the external
auditors to review the quarterly financial statements and related documents.

(11)   Review the audit
findings and recommendations and management's response thereto.

(12)   Review the
attestation report by the external auditors of management's assessment of the
effectiveness of internal controls.

(13)  
Review any analysis prepared by management and/or the external auditor setting
forth significant financial reporting issues and judgements made in connection
with the preparation of the financial statements, including any analysis of the
effects of alternative generally accepted accounting principles methods on the
financial statements.

(14)  
Review annually with the external auditors the acceptability and the quality of
the implementation of generally accepted accounting principles focused on the
accounting estimates and judgments made by management and their selection of
accounting principles.

(15)   Review any
disagreement between management and the external auditors regarding financial
reporting and, to the extent possible, resolve any such disagreements.

(16)   At
least annually consult with the external auditors out of the presence of
management about the adequacy of internal controls (including the steps to be
adopted in light of any material control deficiencies), the fullness and
accuracy of the financial statements and any significant difficulties
encountered during the course of the audit, including any restrictions on the
scope of work or access to required information.

(17)   Consider and, if
appropriate, require the rotation of the lead audit partner, concurring
partner and other audit partners.

(18)   Review and approve
the Corporation's hiring policies for partners, employees and former partners
and employees of its present external auditors and of its former external
auditors.

Internal Audit and Internal Control

(19)   Review any
decisions related to the need for internal auditing, including whether this
function should be outsourced and in that case, approve the supplier which shall
not be the external auditors.

(20)   Review and approve
the appointment or removal of the director of internal audit who shall report to
a senior officer other than the Corporate Controller.

(21)   Approve the
mandate of the internal audit function, and review annually the internal audit
plan and the corresponding budgets.

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(22)  Ensure
that management has established and maintained adequate internal controls and
procedures for financial reporting and accounting, with particular emphasis on
controls over computerized systems, and review annually a management assessment
of the effectiveness of internal controls. In the event of a material deficiency
in internal controls, the Committee shall work with the external auditors and
internal auditors to resolve such deficiency.

(23)  Review significant
internal audit findings, recommendations and management's response.

(24)  Ensure the coordination
of the work between internal and external auditors.

(25)  Ensure the internal
auditor has ongoing access to the Chairman as well as all officers of the
Corporation, particularly the chairman of the Board and the President.

(26)  At least
annually, undertake private discussions with staff of the internal audit
function to establish internal audit independence, the level of co-operation
received from management, the degree of interaction with the external auditor,
and any unresolved material differences of opinion or disputes.

Risk Management

(27)  Review
periodically and inquire of management, the internal auditors and the external
auditors concerning the financial and business risks or exposures of the
Corporation and assess the steps management has taken to control such risks.
Business risks include, but are not limited to, risks in the nature of
treasury-related risks (including foreign exchange risks), information
systems-related risks, disclosure quality and standards relating to financial
reporting.

Financial Reporting Processes

(28)  In
consultation with the external auditors and the internal auditors, review the
integrity and adequacy of the financial reporting processes, both internal and
external, including procedures for review of the Corporation's public disclosure
of financial information extracted or derived from its financial statements.

(29)  Consider and approve, if
appropriate, changes to the accounting principles and practices as recommended
by the external auditors, management or the internal auditors.

Disclosure Policy Oversight

(30)  Review,
report and, where appropriate, provide recommendations to the Board on the
Corporation's disclosure policy and other related policies and procedures, and
recommend changes as deemed appropriate. The Committee, in performing this task,
will review any reports on or proposed amendments to the disclosure policy
submitted to it by the Disclosure Committee.

(31)  Assist the Disclosure
Committee and the Board in interpreting and applying the Corporation's
disclosure policy and other related policies and procedures.

(32)  Oversee
directors, officers and employees' compliance with the Corporation's disclosure
policy and set out, or cause to be set out, measures for receiving feedback from
security holders on such policy and its effectiveness.

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Legal compliance and other responsibilities

(33)  Ensure
that management has the proper review system in place to ensure that financial
statements, reports and other financial information disseminated to governmental
organizations and the public satisfies legal and regulatory requirements.

(34)  Review incidents of
fraud, illegal acts, conflicts of interest and related-party transactions.

(35) 
Establish procedures for the receipt, retention and treatment of complaints
received by the Corporation regarding accounting, internal accounting controls,
or auditing matters, and the confidential, anonymous submission by employees of
the Corporation of concerns regarding questionable accounting or auditing
matters.

(36)  Review claims or
potential claims and any other legal matters as reported to the Committee that
could have an impact on the financial statements.

(37)  Review the expenses of,
including the use of Corporation assets by officers.

(38)  Review material matters
relating to audits of subsidiaries.

(39)  Perform any other
activities consistent with this Charter, the Corporation's by-laws and governing
laws, as the Committee or the Board deems necessary or appropriate.

Remuneration of Committee Members

(40)  No
member of the Committee may earn fees from the Corporation or any of its
subsidiaries other than fees for acting as a member of the Board or any Board
committee (which fees may include cash or other in-kind consideration ordinarily
available to directors, as well as all of the regular benefits that other
directors receive). For greater certainty, no member of the Committee shall
accept, directly or indirectly, any consulting, advisory or other compensatory
fee from the Corporation.

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