U.S. Securities and Exchange Commission
Washington, D.C. 20549

FORM 40-F

o Registration statement pursuant to Section 12 of the
Securities Exchange Act of 1934

or

ý
Annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934

|For the fiscal year ended |  | Commission file number
|------------------------- |  | ----------------------
|September 25, 2004        |  | 333-06552             

Tembec Inc.(Exact name of Registrant as specified in its charter)

N/A(Translation of Registrant's name into English (if applicable))

Quebec(Province or other jurisdiction of incorporation or organization)

2611, 2621, 2631(Primary Standard Industrial Classification Code Number (if applicable))

N/A(I.R.S. Employer Identification Number (if applicable))

800, René-Lévesque Blvd., Suite 1050, Montreal, QC, Canada H3B 1X9
Tel: (514) 871-0137(Address and telephone number of Registrant's principal executive offices)

CT Corporation System, 1633 Broadway, New York, NY 10019
Telephone: (212) 664-1666
Russell S. Berman, EM., Kronish, Lieb, Wiener & Bellman,
1114 Avenue of the Americas
New York, NY 10036
Telephone: (212) 479-6000(Name, address (including zip code) and
telephone number (including area code)
of agent for service in the United States

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Securities
Registered or to be registered pursuant to Section 12(b) of the Act.

|N/ATitle of each class | N/AName of each exchange on which registered
|---------------------- | --------------------------------------------

Securities
Registered or to be registered pursuant to Section 12(g) of the Act

N/A(Title of Class)

N/A(Title of Class)

Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act.

Guarantee of Senior Notes of Tembec Industries Inc. due June 30, 2009
Guarantee of Senior Notes of Tembec Industries Inc. due February 1, 2011
Guarantee of Senior Notes of Tembec Industries Inc. due March 15, 2012(Title of Class)

For
annual reports, indicate by check mark the information filed with this Form:

|o Annual Information form |  | ý Audited financial statements
|------------------------- |  | ------------------------------

Indicate
the number of outstanding shares of each of the issuer's classes of capital/or common stock as of the close of the period covered by the annual report.

85,860,932 common shares
16,627,500 Series 2 Class B shares
9,103,710 Series 4 Class B shares

Indicate
by check mark whether the Registrant by filling the information contained in this Form is also thereby furnishing the information to the Commission pursuant to
Rule 12g3-2(b) under theSecurities Exchange Act of 1934(the "Exchange Act"). If "Yes" is marked, indicate the filing number
assigned to the Registrant in connection with such Rule.

|Yes o |  | 82- |  | No ý
|----- |  | --- |  | ----

Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

|Yes ý |  | No o
|----- |  | ----

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Material included in this Form 40-F:

*************

Disclosure
controls and procedures are defined by the Securities and Exchange Commission as those controls and procedures that are designed to ensure that information required to be
disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and
forms. Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures within 90 days prior to filing of this Annual Report on
Form 40-F and have determined that such disclosure controls and procedures are effective.

Subsequent
to our evaluation, there were no significant changes in internal controls or other factors that could significantly affect internal controls, including any corrective actions
with regards to significant deficiencies and material weaknesses.

The
design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

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LOGO

Tembec Inc.

Annual Information Form

December 17, 2004
For the fiscal year ended September 25, 2004

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TABLE OF CONTENTS

|ITEM 1   | DATE OF ANNUAL INFORMATION FORM          |                                                                            | 1 
|--------- | ---------------------------------------- | -------------------------------------------------------------------------- | --
|ITEM 2   | CORPORATE STRUCTURE                      |                                                                            | 1 
|ITEM 3   | GENERAL DEVELOPMENT OF THE BUSINESS      |                                                                            | 2 
|          | 3.1                                      | Business Overview                                                          |   
|          | 3.2                                      | Three Year Retrospective                                                   |   
|ITEM 4   | NARRATIVE DESCRIPTION OF THE BUSINESS    |                                                                            | 3 
|          | 4.1                                      | Principal Operations                                                       |   
|          |                                          | 4.1.1    Forest Products Group                                             |   
|          |                                          | 4.1.2    Pulp Group                                                        |   
|          |                                          | 4.1.3    Paper Group                                                       |   
|          | 4.2                                      | Environmental Policy                                                       |   
|          | 4.3                                      | Research and Development                                                   |   
|          | 4.4                                      | Risk Factors                                                               |   
|ITEM 5   | DIVIDEND POLICY                          |                                                                            | 15
|ITEM 6   | GENERAL DESCRIPTION OF CAPITAL STRUCTURE |                                                                            | 15
|          | 6.1                                      | General Description of Capital Structure                                   |   
|          | 6.2                                      | Ratings                                                                    |   
|ITEM 7   | MARKET FOR SECURITIES OF THE COMPANY     |                                                                            | 16
|ITEM 8   | DIRECTORS AND OFFICERS                   |                                                                            | 17
|          | 8.1                                      | Information Concerning Directors                                           |   
|          | 8.2                                      | Information Concerning Non-Director Officers                               |   
|          | 8.3                                      | Corporate Cease Trade Order                                                |   
|ITEM 9   | AUDIT COMMITTEE                          |                                                                            | 19
|          | 9.1                                      | General                                                                    |   
|          | 9.2                                      | Mandate of the Audit Committee                                             |   
|          | 9.3                                      | Relevant Education and Experience of the Audit Committee Members           |   
|          | 9.4                                      | External Auditor Service Fees                                              |   
|          | 9.5                                      | Policies and Procedures for the Engagement of Audit and Non-Audit Services |   
|ITEM 10  | LEGAL PROCEEDINGS                        |                                                                            | 21
|          | 10.1                                     | Countervailing and Antidumping Duties                                      |   
|ITEM 11  | TRANSFER AGENT                           |                                                                            | 21
|ITEM 12  | ADDITIONAL INFORMATION                   |                                                                            | 21

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TEMBEC INC.  ANNUAL INFORMATION FORM

ITEM 1  DATE OF ANNUAL INFORMATION FORM

This Annual Information Form (the "Form") is dated as of December 17, 2004. Except as otherwise indicated, the information contained in this Form is stated
as at September 25, 2004.

ITEM 2  CORPORATE STRUCTURE

Tembec Inc. was incorporated under Part 1 of theCompanies Act(Quebec) on July 12, 1972 and
continued under Part 1A of theCompanies Act(Quebec) by Certificate of Continuance dated March 18, 1983. Amendments to the Company's
articles were made at various times for the main purpose of modifying the authorized share capital.

The
Company's head office is located at Suite 1050, 800 René-Lévesque Blvd. West, Montreal, Quebec, H3B 1X9, telephone:
514-871-0137. Its website is found at www.tembec.com.

Unless
otherwise noted or the context otherwise indicates, references to the "Company" in this Form are to Tembec Inc. References to "Tembec" are to, as the context may require,
either the Company or the Company together with one or more of its subsidiaries (the "Subsidiaries"), associates and its interests in joint ventures and other entities. Reference to "Industries" is to
Tembec Industries Inc., a wholly-owned subsidiary of the Company.

The
chart below shows Tembec's various facilities by industry segment and the subsidiaries which operate them. Where the percentage of ownership is less than 100%, it is indicated.

1

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CORPORATE ORGANIZATION CHART OF THE COMPANY

LOGO

ITEM 3  GENERAL DEVELOPMENT OF THE BUSINESS

3.1BUSINESS OVERVIEW

Tembec is a large, diversified and integrated forest products company with operations principally located in North America and in France. Its core business
segments are forest, pulp and paper products with Tembec maintaining a small presence in the chemical and paperboard sectors which, in the aggregate, represent less than 20% of its consolidated assets
and 10% of its consolidated revenues. Tembec produces approximately 1.8 billion board feet of lumber, 2.2 million tonnes of market pulp and 1.0 million tonnes of newsprint and
groundwood papers. Tembec's strategy is to (i) be diversified into forest products, pulp products and paper products; (ii) strive to maintain low cost, efficient operations; and
(iii) utilize its technical and operating expertise to develop niche products and markets within such core business segments.

For
the fiscal year ended September 25, 2004, Tembec had sales of $3.7 billion, EBITDA of $168.7 million, and net earnings of $37.4 million. Tembec's total
assets at that date were $3.9 billion and it employed approximately 10,000 people.

3.2THREE YEAR RETROSPECTIVE

In the last three fiscal years, Tembec was active in pursuing its growth targets, completing a number of acquisitions and creating new joint-ventures. The Company
accessed the high-yield bond market in the United States primarily to refinance existing indebtedness.

2

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During
this period, growth occurred primarily in the eastern Canadian lumber sector, increasing Tembec's lumber production capacity by approximately 24% to 1.8 billion board feet.
A joint-venture was entered into with SGF-REXFOR Inc., which provided for the combination of their respective sawmills in the Gaspé peninsula. In the pulp group, a
high-yield pulp mill located in Chetwynd, British Columbia was added to Tembec's existing Temiscaming and Matane, Quebec, high-yield pulp mills to make Tembec the preeminent
Canadian supplier of high-yield pulps. This increased its total manufacturing capacity to 2.2 million tonnes.

In
the spring of 2002, Industries issued US $350 million of 7.75% senior notes due 2012 by way of private placement, which were unconditionally guaranteed on a senior
unsecured basis by the Company. These notes were subsequently registered. During this time, Industries completed the redemption of its US $250 million 9.875% Senior Notes due 2005. In
the spring of 2003, Industries issued US $100 million of 8.625% senior notes due 2009 by way of a private placement, which were unconditionally guaranteed on a senior unsecured basis by
the Company. These notes were subsequently registered.

ITEM 4  NARRATIVE DESCRIPTION OF THE BUSINESS

4.1PRINCIPAL OPERATIONS

Tembec's business is centered around the production and sale of forest, pulp and paper products. The manufacturing assets of the Company are located primarily in
Canada, with a fairly large presence in the eastern part of the country, namely, North Eastern Ontario and North Western Quebec. The lumber and paper businesses are more North American in nature and
the Company's assets are located in this market. The pulp business is global in nature, with Europe being the largest consumer. Three of the Company's 11 pulp mills are located in Europe. The other
eight mills are located in Canada. The following sections provide specifics in relation to each of the Company's principal business segments.

4.1.1    Forest Products Group

Tembec's Forest Products Group consists of operations employing, as at September 25, 2004, approximately 4,500 people. It produces an extensive range of
commodity and value-added forest products focusing on three main product groups: (i) Spruce, Pine, Fir Lumber ("SPF"), remanufactured lumber and Oriented Strand Board ("OSB") Panels,
(ii) Specialty Wood products and (iii) Engineered Wood products. For the fiscal year ended September 25, 2004, the Forest Products Group generated sales of $1.2 billion and
EBITDA of $130 million. The Forest Products Group's annual sales accounted for approximately 33% of Tembec's total consolidated sales in fiscal 2004.

3

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

Spruce, Pine, Fir Lumber and Panels

|Location and Product                    |  | MFBM(1)  
|--------------------------------------- |  | ---------
|Taschereau/LaSarre, QC(3)  Stud Lumber |  | 185,000  
|Senneterre, QC  Stud Lumber            |  | 150,000  
|Cochrane, ON  Stud Lumber              |  | 130,000  
|LaSarre N, QC  Stud Lumber             |  | 100,000  
|Opasatika, ON  Stud Lumber             |  | 95,000   
|Kapuskasing, ON  Stud Lumber           |  | 90,000   
|Kirkland Lake, ON  Stud Lumber         |  | 35,000   
|Elko, BC  Random Lumber                |  | 180,000  
|Canal Flats, BC  Random Lumber         |  | 150,000  
|Hearst, ON  Random Lumber              |  | 125,000  
|Timmins, ON  Random Lumber             |  | 125,000  
|Cranbrook, BC(4)  Random Lumber        |  | 100,000  
|Chapleau, ON  Random Lumber            |  | 100,000  
|Bearn, QC  Random Lumber               |  | 90,000   
|Nouvelle, QC(5)  Random Lumber         |  | 70,000   
|St. Alphonse, QC(5)  Random Lumber     |  | 30,000   
|Cranbrook, BC  Finger Joint Lumber     |  | 25,000   
|                                        |  |          
|                                        |  | 1,780,000
|                                        |  |          

|                                      |  | MFBM(1)
|------------------------------------- |  | -------
|Brantford, ON  Remanufactured Lumber |  | 100,000
|                                      |  |        

|                        |  | MSF(2)   
|----------------------- |  | ---------
|Saint-Georges, QC  OSB |  | 1,700,000
|                        |  |          

Specialty Wood

|Location and Product                         |  | MFBM(1)
|-------------------------------------------- |  | -------
|Davidson, QC  Pine and Hardwood Lumber      |  | 55,000 
|Mattawa, ON  Pine and Hardwood Lumber       |  | 30,000 
|Temiscaming, QC  Pine and Hardwood Lumber   |  | 15,000 
|Huntsville, ON  Hardwood Lumber             |  | 30,000 
|Huntsville, ON  Hardwood Flooring           |  | 18,000 
|Toronto, ON  Pre-Finished Hardwood Flooring |  | 10,000 
|Brassac, France  Pine Lumber                |  | 25,000 
|Curanilahue, Chile(6)  Radiata Pine Lumber  |  | 13,000 
|                                             |  |        
|                                             |  | 196,000
|                                             |  |        

4

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Engineered Wood

|Location and Product                         |  | Thousand Ft(3)
|-------------------------------------------- |  | --------------
|Ville-Marie, QC(7)  Laminated Veneer Lumber |  | 450           
|                                             |  |               

|                                             |  | MFBM(1)
|-------------------------------------------- |  | -------
|LaSarre, QC  Engineered Finger Joint Lumber |  | 50,000 
|                                             |  |        

|                                 |  | Thousand
Linear Feet
|-------------------------------- |  | --------------------
|Bolton, ON(7)  Wood I-Beams     |  | 17,000              
|Calgary, AB(7)  Wood I-Beams    |  | 10,000              
|Blainville, QC(7)  Wood I-Beams |  | 3,000               
|                                 |  |                     
|                                 |  | 30,000              
|                                 |  |                     

|                                      |  | Million lbs
|------------------------------------- |  | -----------
|Bolton, ON(7)  Metal Plates and Webs |  | 10.0       
|                                      |  |            

---

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, TemPlus and TemSelect 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. OSB panels are used in residential construction and industrial applications. Hardwood
flooring products are targeted for residential, commercial and recreational applications. The engineered wood products segment of the Forest Products Group principally manufactures laminated veneer
lumber and finger-jointed flange stock which is used in specialized residential and commercial construction applications such as roof and floor truss systems as well as I-beam and header
applications. In addition, the Forest Products Group produces and ships approximately 2.1 million tonnes of wood chips, approximately 86%of
which are directed to Tembec's pulp and paper facilities.

The
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 68 billion board feet, with U.S. demand of approximately 56 billion board feet and the balance being consumed in
Canada. U.S. producers currently supply 35 billion board feet, leaving a U.S. domestic shortfall of approximately 21 billion board feet. Canadian producers annually sell a
total of 33 billion board feet, shipping 19 billion board feet to the U.S. and exporting 2 billion board feet outside North America. The remaining 12 billion board feet is
consumed domestically in Canada. The Company's geographic sales activity is generally aligned with this breakdown. In fiscal 2004, 37% of the consolidated sales occurred in Canada, 59% in the U.S. and
the remaining 4% was sold outside of North 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.

5

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The
Forest Products Group business is highly commoditized and fosters a highly diversified customer base. Products are sold by Tembec's own internal sales force to wholesalers and
distributors as well as directly to large retailers and end-users.

The
Company competes directly with other Canadian and U.S. producers of softwood 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 ongoing trade dispute between the U.S. and Canada also have an impact on the Company's competitive position. The
Canada/U.S. Softwood Lumber Agreement, which imposed quotas on the duty-free volumes sold by mills in British Columbia, Alberta, Ontario and Quebec, expired on March 31,
2001. Litigation with respect to antidumping and countervailing duties on softwood lumber totaling 29% imposed by the U.S. Department of Commerce ("USDOC") and the U.S. International
Trade Commission ("USITC") on softwood lumber products sold by Canadian Producers into the United States has ensued and is still outstanding. Reference is made to the caption "Legal
Proceedings".

Tembec's
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.

Quebec

Tembec has timber supply and forest management agreements (commonly known as "CAAFs") with the Ministry of Natural Resources (Quebec) for the supply of its Quebec
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 (Quebec) and is subject to its determination that Tembec has satisfied the obligations specified under the relevant CAAF. The Quebec government appointed a Commission to
study and report on the management of Crown land on its territory, which Commission made its report public on December 14, 2004. It recommended that the Quebec government reduce timber cutting
rights by approximately 15% for fir, spruce, jack pine and tamarack. It is anticipated that beneficiaries of CAAFs will incur a reduction in timber supply. The Company expects that certain of its
facilities based in Quebec will be impacted by these reductions in timber allocation.

Ontario

Tembec's cutting rights are provided principally through several Sustainable Forest Licenses on Crown land issued by the Ministry of Natural Resources. 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). Licenses relating to 159,000 m2 of fibre processed in the facilities of Kirkland Lake and Timmins in Ontario as well as LaSarre in Quebec are
coming up for renewal in 2005. It is anticipated that these licenses will be renewed.

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. An environmental licensing process accompanies the submission of the long-term forest management plan
resulting in the issuing of a ten-year environmental license. The Province of Manitoba is

6

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undertaking
a broad area land use planning initiative ("LUPI") that includes a portion of the Tembec FMLs. Renewal of the long-term tenure agreements will begin after the LUPI is complete.
In the interim, short-term extensions to the FMLs are being approved. In the next fiscal year, agreements governing approximately 86,000 m3 or approximately 22% of the supply
of the Pine Falls paper mill will be up for renewal. It is anticipated that those agreements will be renewed.

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 Company 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 recent initiative of the Government of British Columbia, Bill 28, the Forest Revitalization Act, license holders across the province are 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 shall be reallocated to the British Columbia Timber Sales
Program, First Nations and small tenures (for example woodlots). While some volume of harvesting rights is lost from forest tenures (in Tembec's case 189,310 m3, effective
March 1, 2005, through March 1, 2006), it remains available on the open market through a competitive purchase program. In the next fiscal year, Tembec's tree farm licence which covers
160,000 m3 used for the Canal Flats sawmill will be up for replacement. It is anticipated that this licence will be replaced.

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.

4.1.2    Pulp Group

The Pulp Group currently consists of eleven manufacturing facilities operating at ten sites and employing approximately 2,500 people. These 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

7

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September 25,
2004, the Pulp Group generated sales of $1.3 billion and EBITDA of $62 million. The following table summarizes the products and current annual capacity of each
facility by main type:

Location and Product

|Paper Pulps     |                                        | Tonnes   
|--------------- | -------------------------------------- | ---------
|                | Skookumchuck, BC  Softwood Kraft      |          
|                | Tarascon, France  Softwood Kraft      |          
|                | Smooth Rock Falls, ON  Softwood Kraft |          
|                | Marathon, ON(1)  Softwood Kraft       |          
|                | Saint-Gaudens, France  Hardwood Kraft |          
|                | Temiscaming, QC  Hardwood High-Yield  |          
|                | Matane, QC  Hardwood High-Yield       |          
|                | Chetwynd, BC  Hardwood High-Yield     |          
|                |                                        |          
|                |                                        | 1,860,000
|                |                                        |          
|Specialty Pulps |                                        |          
|                | Temiscaming, QC  Specialty Cellulose  |          
|                | Tartas, France  Fluff                 |          
|                | Atholville, NB(1)  Dissolving         |          
|                |                                        |          
|                |                                        | 380,000  
|                |                                        |          
|Total           |                                        | 2,240,000
|                |                                        |          

---

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, Quebec, 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-users. 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 46 million tonnes. Canada is the largest net exporter of market pulp at 9 million tonnes per year, followed by the Nordic countries at
6 million tonnes and South America at 5 million tonnes. Europe is the largest net consuming region at 11 million tonnes per year, followed closely by Asia at 10 million
tonnes. In fiscal 2004, sales in these two markets represented approximately 80% of Pulp Group revenues. Tembec markets its pulp on a world-wide

8

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basis,
primarily through its own sales force, with a network of offices in Canada, Switzerland, China, Japan, Korea, Spain and India. This is consistent with Tembec's strategy of selling directly to
customers and establishing long-term strategic relationships. Sales from the Pulp Group represented approximately 36% of Tembec's total consolidated sales in fiscal 2004.

Tembec's
eight North American pulp mills consumed approximately 2.6 million bone dry tonnes of wood chips in fiscal 2004. 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 duration. 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 twelve paper machines producing newsprint, coated paper and specialty paper products,
employing approximately 2,200 people. For the fiscal year ended September 25, 2004, the Paper Group generated sales of $788 million and negative EBITDA of $37 million. The
following table summarizes the products and current annual operating levels of each facility by main type:

9

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Location and Product

|                |                                                               | Tonnes(1)
|--------------- | ------------------------------------------------------------- | ---------
|Newsprint       |                                                               |          
|                | Kapuskasing, ON[nc_sp,\t\][nc_cad,228][nc_so,\t\]Newsprint(2) |          
|                | Pine Falls, MB  Newsprint                                    |          
|                |                                                               |          
|                |                                                               | 515,000  
|                |                                                               |          
|Coated Paper    |                                                               |          
|                | St. Francisville, LA  Coated No 4 and 5                      |          
|Specialty Paper |                                                               |          
|                | St. Francisville, LA  Uncoated Bleached Board                |          
|                | St. Francisville, LA  Specialty Kraft Paper                  |          
|                | St. Raymond, QC  High-Brite Paper                            |          
|                |                                                               |          
|                |                                                               | 175,000  
|                |                                                               |          
|Total           |                                                               | 970,000  
|                |                                                               |          

---

Newsprint is used primarily for the publication of daily newspapers. It is generally considered to be a commodity product, having a uniform
definition and little 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. The total North American newsprint demand is approximately 11 million tonnes with the U.S. market consuming 10 million tonnes.
U.S. producers currently supply 5 million tonnes of this requirement. Canadian newsprint producers annually sell a total of 8 million tonnes, shipping 5 million tonnes to
the U.S. and exporting 2 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.

The
Company's newsprint capacity of 515,000 tonnes represents approximately 4% of total North American production capacity.

The
St-Francisville, Louisiana, paper facility produces coated and specialty papers. Coated papers made by Tembec are categorized as coated groundwood. 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 5% of the North American market. The specialty paper products segment, which is divided further into lightweight and heavyweight papers, encompasses
the food and medical papers markets and typical end uses are coffee filters, medical papers, cup stock for drinking cups, file folders and magazine reply cards. The lightweight segment of 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
focus of the Paper Group is the North American market which accounts for 97% of sales, with the U.S. representing 87% of such sales. For fiscal 2004, the Paper Group
represented 22% of consolidated sales.

The
Paper Group receives approximately one-third of its virgin fibre requirements through internal sources with the remainder purchased from sawmills and third-party
suppliers. The four paper mills consumed 1.0 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.

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The
Kapuskasing and Pine Falls mills both produce newsprint that contains recycled fibre. They utilize a combination of high-yield and de-inked recycled pulp
produced from old newspapers ("ONP") and old magazines ("OMG"). Their annual consumption of ONP and OMG is approximately 105,000 bone dry metric tonnes. ONP and OMG are purchased from various
merchants and collection groups.

4.2ENVIRONMENTAL POLICY

Tembec shares with the community important responsibilities towards the environment in which we live and work. The Company 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. Tembec is committed to implementing and maintaining an effective environmental management program that will govern its attitude and action in environmental
matters and will benefit the environment and the community, as well as its shareholders, employees and customers.

Tembec
maintains Environmental Management Programs ("EMPs") in order to demonstrate responsible stewardship of resources and a continual improvement of its environmental performance.
Tembec has two EMPs based on its corporate environmental policy  Forever Green® and Impact
Zero®  targeting the forestry and manufacturing sectors respectively. 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
(v) and continually improve environmental performance.

The
main goal of Impact Zero® is to reduce to a minimum the impact of manufacturing activities on the environment. The means of achieving this goal must be defined in a
technical and economic context. Impact Zero® includes the development of environmental objectives, targets and action plans that are based on specific performance criteria. Impact
Zero® also includes the implementation and maintenance of an environmental management system ("EMS"), in compliance with the ISO 14001-1996 standards. With Impact
Zero®, Tembec aims to become a leader in environmental protection and sustainable development. Impact Zero® objectives and targets are established in six key areas at each
Tembec manufacturing site. Some objectives and targets are common to all sites while others are site-specific, depending on the site's operations and equipment and particular environmental
context. 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. As part of Impact Zero®, Tembec has implemented the Environmental Profile Data Sheet? ("EPDSTM") system which applies to all Tembec pulp and paper products.
The EPDSTM is a voluntary labeling program introduced in 1997 by the Forest Products Association of Canada. It provides a standard template designed to assist customers in making
informed choices based on the actual environmental attributes of the pulp and paper products they are purchasing. It offers measurement data and explanatory comments related to the attributes that
cover the life cycle of the products. With the exception of products from recently acquired mills, the EPDSTM form has been completed for Tembec pulp and paper products and verified by
an independent auditor.

The
Tembec Forever Green® Environmental Management Program (the "Forever Green® Program") aims to promote environmental protection, sustainable forest management
and conformance with the Tembec environmental policy for forest operations. Tembec is committed to demonstrating responsible stewardship of resources and a continual improvement of environmental
performance. As part of the Forever Green® Program, Tembec has developed guiding principles (the "Forever Green® Guiding Principles") that direct forest managers in the
establishment of environmental objectives and targets. The Forever Green® Guiding Principles represent important environmental values that must be respected in all forest activities. The
Forever Green® Program also includes the implementation and maintenance of an EMS, in compliance with the ISO 14001-1996 standards. The values identified in the Forever
Green® Guiding Principles are respected by setting objectives and by maintaining an effective EMS. The Forever Green® Guiding Principles are reviewed on an annual basis by the
Tembec Corporate Forestry Committee. One of the key roles of this committee is to oversee the progress of the Forever Green® Program and provide the necessary direction in order to ensure
continual environmental improvement. 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. As of September 2004, 3.5 million

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hectares
of forest under license to Tembec is FSC certified and an additional four million hectares of forest (30% of target) has been audited or scheduled for certification assessment prior to the
end of the 2004 calendar year.

4.3RESEARCH 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 1% 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.

4.4RISK FACTORS

Special Note Regarding Forward-looking Statements

Certain statements contained in this Annual Information Form constitute forward-looking statements. When used in this document, the words "may", "would", "could",
"will", "intend", "anticipate", "believe", "expect" and similar expressions, as they relate to Tembec or its management, are intended to identify forward-looking statements. Such statements reflect
Tembec's current views with respect to future events, are based on information currently available to Tembec and are subject to certain risks, uncertainties and assumptions, including those discussed
above. These factors should be considered carefully and are made as of the date of this Annual Information Form. The following information is a summary only 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 Form.

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.

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 of similar products. 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 and/or demand.

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Operational Risks

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

Fibre
represents 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.

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 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.

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.

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 production costs for Tembec's Ontario operations.

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.

The
maintenance of a productive and efficient labour environment cannot be assured. Approximately 75% of Tembec's workforce is unionized. Collective agreements governing almost one third
of Tembec's 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 labour costs, which could have a material adverse effect on its business, financial condition, results of operations and cash flow.

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, significant capital and operating expenditures in order to comply with applicable environmental laws and regulations,
a significant part of these expenditures being related to the Temiscaming Complex and the three French pulp mills. Pending charges by the provincial regulator in connection with effluent discharges
from the Temiscaming Complex are contested by Tembec and are not expected to materially affect its financial results. Other federal and provincial enforcement actions are possible. 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

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capital
expenditures necessary for future compliance with such environmental laws and regulations could be financed from Tembec's available cash flow.

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.

Trade 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. 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.

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. In addition, a substantial portion of Tembec's bank credit
facilities have terms of one year and are subject to annual renewal. There is no assurance that the renewal of the short-term 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.

Growth Strategy/Acquisitions

Tembec has pursued a strategy of growth through acquisitions. 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.

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.

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ITEM 5  DIVIDEND POLICY

The Company has not paid dividends on any of its common shares in the last three years. There is currently no restriction preventing the Company from paying
dividends nor any specific dividend policy. The Company is essentially dependent on its operating subsidiaries to obtain the funds required for any dividend payment. The indentures relating to
Industries Senior Notes (the "Indentures") prohibit it from declaring or paying any dividends unless, at the time of declaring and paying such dividend: (i) Industries is not in default under
the Indentures (ii) after givingpro formaeffect 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 Industries 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 Industries after the date of the Indentures from the issue and sale of equity and debt securities that have
been converted into equity of Industries.

ITEM 6  GENERAL DESCRIPTION OF CAPITAL STRUCTURE

6.1GENERAL DESCRIPTION OF CAPITAL STRUCTURE

The articles of the Company provide for three classes of shares: the common shares, the Class B shares and the Class C shares.

The
common shares, of which there are an unlimited amount authorized, provide for the right to vote at all meetings of shareholders and to receive dividends pari passuwith Class C shares after
dividends on Class B shares. They are subordinated to the Class B shares in their
participation in the event of liquidation, dissolution, winding-up of the Company or other distribution of its assets.

The
Class B shares, of which there are an unlimited amount 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 common shares and Class C shares in the event of liquidation,
dissolution, winding-up of the Company or other distribution of its assets.

The
Series 2 Class B shares, of which there are 16,627,500 issued and an unlimited amount 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 Company or if more than half of the assets
of the Company are held by third-party interests residing outside of the province of Quebec. They may also be redeemed by the Company 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 common shares of the Company.

The
Series 4 Class B shares, of which 9,103,710 are authorized and issued, can be redeemed at any time by the Company by the issuance of 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 250,000 are authorized for issuance only to employees, are non-voting, redeemable and retractable at any time for their issue price plus
any increase in the book value per share since the issuance date. They are entitled to dividends and may participate in the event of liquidation, dissolution, winding-up of the Company or
other distribution of its assets, subject to the preference rights of Class B shareholders. The Company has not issued any Class C Shares.

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6.2RATINGS

The following credit rating agencies have assigned the following non-investment grade ratings to the Senior Notes issued by Tembec:

|Dominion Bond Rating Service Ltd., a division of the McGraw-Hill Companies Inc. ("DBRS"): |  | BB (low) |  | (the fifth highest ranking category granted by DBRS for long-term debt. The subcategory low indicates that the Senior Notes are to be considered at the lower end of the category.) 
|----------------------------------------------------------------------------------------- |  | -------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Moody's Investors Service ("Moodys"):                                                     |  | Ba3      |  | (the fifth highest category granted by Moodys for long term debt with the numerical modifier 3 indicating a ranking in the lower end of that generic rating category.)              
|Standard & Poor's Rating Services ("S&P"):                                                |  | BB-      |  | (the fifth highest category granted by S&P for long-term debt. The "minus" attributed by S&P indicates that the Senior Notes are to be considered at the lower end of the category.)

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.

ITEM 7  MARKET FOR SECURITIES OF THE COMPANY

The Company's common shares are listed on the Toronto Stock Exchange under the symbol TBC. The following table sets forth the market price range, in Canadian
dollars, and trading volumes of the Company's common shares on the Toronto Stock Exchange for each month of the most recently completed financial year.

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|Fiscal Year Ended September 25, 2004 |  | High  |  | Low   |  | Close Price |  | Trading Volumes
|------------------------------------ |  | ----- |  | ----- |  | ----------- |  | ---------------
|October 2003                         |  | 8.65  |  | 7.20  |  | 7.57        |  | 4,985,957      
|November 2003                        |  | 8.05  |  | 7.05  |  | 7.15        |  | 2,770,115      
|December 2003                        |  | 9.60  |  | 7.16  |  | 9.43        |  | 6,529,975      
|January 2004                         |  | 9.58  |  | 8.60  |  | 8.65        |  | 6,896,986      
|February 2004                        |  | 10.00 |  | 8.65  |  | 9.75        |  | 5,559,206      
|March 2004                           |  | 11.25 |  | 9.35  |  | 10.48       |  | 12,125,208     
|April 2004                           |  | 11.25 |  | 10.10 |  | 10.68       |  | 10,651,448     
|May 2004                             |  | 10.88 |  | 9.86  |  | 10.85       |  | 5,300,848      
|June 2004                            |  | 11.10 |  | 9.91  |  | 10.35       |  | 9,124,370      
|July 2004                            |  | 11.00 |  | 10.25 |  | 10.85       |  | 5,967,064      
|August 2004                          |  | 10.80 |  | 9.15  |  | 9.30        |  | 2,881,714      
|September 2004                       |  | 9.51  |  | 8.06  |  | 8.35        |  | 8,165,088      

On
October 15, 2004, the Company received acceptance from the Toronto Stock Exchange of a notice of intention to extend its normal course issuer bid. The filing of the notice
allows the Company to repurchase for cancellation up to 4,293,046 (approximately 5%) of its 85,860,932 Common Shares outstanding as at October 1, 2004. Repurchase of the Common Shares would be
carried out through the Toronto Stock Exchange and could be made from time to time, at market prices, during the period starting October 19, 2004, and ending no later than October 18,
2005. During the previous 12 months, the Company made no purchase of common shares.

ITEM 8  DIRECTORS AND OFFICERS

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

8.1INFORMATION CONCERNING DIRECTORS

The Board of Directors is composed of thirteen members. The Chairman of the Board and the majority of directors and members of Board committees are unrelated and
independent. Mr. Frank A. Dottori (the President and Chief Executive Officer of the Company) and Mr. Luc Rossignol (employee and President, Local 233 of the Communications, Energy and
Paperworkers Union of Canada), are the two board members who are considered to be related and inside directors.

CLAUDE BOIVIN, Quebec (Canada). Mr. Boivin is the former President and Chief Operating Officer of Hydro-Quebec and has been a
director of the Company since 1993 and serves as a member of its Corporate Governance and Human Resources committees. Mr. Boivin also serves as a director of CGI Group Inc.,
Héroux-Devtek Inc., Groupe Laperrière & Verreault Inc. and of Boralex Power Income Fund.

JAMES E. BRUMM, New York (United States). Mr. Brumm is the Executive Vice-President, General Counsel and
director of Mitsubishi International Corporation and has been a director of the Company since April 1999 and serves as a member of its Corporate Governance, Audit and Human Resources
committees. Mr. Brumm also served as a director of Mitsubishi Corporation from 1995 - 2002 and is a director of Brunei LNG S.B. He is a member of the Board of Visitors
of Columbia University Law School and a board member of Forest Trends, Sanctuary for Families 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 and the Corporate Advisory Council of Earthwatch.

FRANK A. DOTTORI, O.C., Quebec (Canada). Mr. Dottori, a founder of the Company, is the President and Chief Executive Officer of the
Company, has been a director of the Company since 1977 and serves as a member of its Environmental Committee. Mr. Dottori is Chairman of the Pulp and Paper Research Institute of Canada, and
co-chair of the Free Trade Lumber Council. He is also a director of Saputo Inc., Bell Nordiq Group Inc. and the Canadian Forest Innovation Council.

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JACQUES J. GIASSON, Quebec (Canada). Mr. Giasson is the Chairman and Chief Executive Officer of Groupe Giasson Ltd. and has
been Chairman and a director of the Company since 1991 and serves as a member of its Audit, Environmental and Human Resources committees. He is former Chairman of the board of directors and member of
all the committees of Uniboard Canada Inc. He is also former President, C.E.O. and director of St-Lawrence Cement Inc. Mr. Giasson has been a member of the Board of a
number of Canadian companies. He is also a life governor of the Foundation of UQAM. Mr. Giasson has announced that he will not seek a new term at the annual shareholders meeting on
January 20, 2005.

PIERRE GOYETTE, Quebec (Canada). Mr. Goyette has been a director of the Company since 1986 and chairs its Audit Committee as well
as serving as a member of its Corporate Governance Committee. Mr. Goyette is also a director of Groupe St-Hubert Inc., and is Chairman of the Montreal World Film Festival.

PETER JANSON, Ontario (Canada). Mr. Janson, former Chief Executive Officer of AMEC Inc. and of ABB Inc. USA, was
appointed to the board of directors of the Company in July 2004 and serves as a member of its Corporate Governance and Environmental committees. He also serves as a director of ATS Automation
Tooling Systems Inc., Nexia Biotechnologies Inc. and is Vice-Chair of the Royal Ontario Museum.

GORDON S. LACKENBAUER, Alberta (Canada). Mr. Lackenbauer is Deputy Chairman of BMO Nesbitt Burns and has been a director of the
Company since 1973 and chairs its Corporate Governance Committee.

BERNARD LAMARRE, O.C., O.Q., Quebec (Canada). Mr. Lamarre is the Chairman of Bellechasse Santé Inc. and has
been a director of the Company since 1997 and chairs its Environmental Committee. Mr. Lamarre is also Chairman of the Société du Vieux Port de Montreal, of
École polytechnique de Montreal and of the Montreal Fine Arts Museum. Mr. Lamarre has announced that he will not seek a new term at the annual shareholders meeting on
January 20, 2005.

MARY THERESA McLEOD, Ontario (Canada). Ms. McLeod has been a director of the Company since January 2003 and serves as a
member of its Audit Committee. Ms. McLeod held senior investment banking positions with Scotia McLeod Inc., Merrill Lynch Canada Inc., and Pitfield, MacKay, Ross &
Company Ltd. Ms. McLeod is a part-time member of the Ontario Securities Commission and member of its Audit and Adjudicative committees, and is its Lead Independent Director.
She is also a director, member of the Audit Committee and of the Corporate Governance Committee of Epcor Utilities Inc. and Wescast Industries Inc.

The
Hon.ROBERT K. RAE, P.C., O.C., Q.C., Ontario (Canada). Mr. Rae is a partner of Goodmans LLP and has been a director of
the Company since January 1997, Chairs its Human Resources Committee and serves as a member of its Corporate Governance Committee. Mr. Rae, former Premier of the Province of Ontario, is
a board member of Hydro One, Husky Injection Moulding Inc. and Niigon Technologies Ltd. He serves as Chairman of Retrocom Mid-Market Real Estate Investment Trust, the Forum
of Federations and the Institute for Research on Public Policy. He is a director of the Canadian Ditchley Foundation, Tennis Canada and the Pierre Elliott Trudeau Foundation and is national
spokesperson for the Leukemia Research Fund. He is also a member of the International Council of the Asia Society and of the Internal Trade Disputes Panel.

LUC ROSSIGNOL, Quebec (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 Company in January 2000.

GUYLAINE SAUCIER, C.M., Quebec (Canada). Ms. Saucier has been a director of the Company since 1993 and serves as a member of its
Audit and Human Resources committees. Ms. Saucier is also a director of AXA Insurances Inc., Petro-Canada, Bank of Montreal, Nortel Networks Corporation and Altran Technology.
Ms. Saucier is the former Chair of the board of directors of the Canadian Broadcasting Corporation, of the Canadian Institute of Chartered Accountants and of the Joint Committee on Corporate
Governance.

FRANÇOIS TREMBLAY, Quebec (Canada). Mr. Tremblay is a partner of Cain Lamarre Casgrain Wells and has been a director
of the Company since 1990 and serves as a member of its Environmental Committee.

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8.2INFORMATION CONCERNING NON-DIRECTOR OFFICERS

|Non-director Officers |  | Office with the Company                                       |  | Province of Residence and Country
|--------------------- |  | ------------------------------------------------------------- |  | ---------------------------------
|Pierre Brien          |  | Vice-President, Communications and Public Affairs             |  | Quebec, Canada                   
|Michel Dumas          |  | Executive Vice-President, Finance and Chief Financial Officer |  | Ontario, Canada                  
|Charles Gagnon        |  | Vice-President, Corporate Culture and Social Responsibility   |  | Quebec, Canada                   
|Thomas Gale           |  | Executive Vice-President, President Chemical Group            |  | Quebec, Canada                   
|Claude Imbeau         |  | Vice-President, General Counsel and Secretary                 |  | Quebec, Canada                   
|Terrence P. Kavanagh  |  | Executive Vice-President, Chief Operating Officer             |  | Quebec, Canada                   
|James Lopez           |  | Executive Vice-President, President Forest Products           |  | Ontario, Canada                  
|Marcus Moeltner       |  | Vice-President, Corporate Development                         |  | Ontario, Canada                  
|Stephen J. Norris     |  | Treasurer                                                     |  | Quebec, Canada                   
|Yves Ouellet          |  | Vice-President, Human Resources                               |  | Quebec, Canada                   
|Mahendra Patel        |  | Vice-President, Engineering, Purchasing and Logistics         |  | Ontario, Canada                  
|Jacques Rochon        |  | Vice-President, Information Technology                        |  | Quebec, Canada                   
|Jacques Rocray        |  | Vice-President, Environment and Technology                    |  | Quebec, Canada                   
|Jean-Louis Tétrault   |  | Vice-President, Administration and Legal Affairs              |  | Quebec, Canada                   
|Richard Tremblay      |  | Corporate Controller                                          |  | Quebec, Canada                   
|Mel Zangwill          |  | Senior Vice-President, President Paperboard Group             |  | Quebec, Canada                   

During
the past five years, each of the non-director officers of the Company have been engaged in their present principal occupations or in other executive capacities of the
Company or with related or affiliated companies indicated opposite their name, except for Thomas McAndrew Gale who, from October 1998 to December 2000, was Vice-President of
Cafa Financial Corp., while concurrently acting as President and Chief Executive officer of A.R.C. Resins International Corp. from October 1998 to present, and Pierre Brien who, from
October 1993 to February 2003, was a Member of Parliament for the riding of Temiscamingue.

As
at September 25, 2004, the directors and senior officers of the Company beneficially owned, as a group, or exercised control or direction over, directly or indirectly,
approximately 1,631,155 common shares representing less than 2% of the common shares outstanding.

8.3CORPORATE CEASE TRADE ORDER

Guylaine Saucier, one of the Company's directors, is also a director of Nortel Networks Corporation ("Nortel"). Following an order by the Ontario Securities
Commission ("OSC"), certain directors (including Ms. Saucier), officers and insiders of Nortel are suspended from trading in the securities of Nortel until two full business days following the
receipt by the OSC of all filings, including financial statements required to be made by Nortel.

ITEM 9  AUDIT COMMITTEE

9.1GENERAL

The Company has an Audit Committee which currently consists of Messrs. Pierre Goyette (Chairman), James E. Brumm, Jacques J. Giasson, Ms. Guylaine
Saucier 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. Goyette and Ms. Saucier considered "financial experts" within the meaning of Section 407 of
theSarbanes-Oxley Actof 2002.

19

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9.2MANDATE OF THE AUDIT COMMITTEE

The mandate of the Audit Committee is to assist the board of directors of the Company 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 and the Company'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 posted on Tembec's website at www.tembec.com.

9.3RELEVANT EDUCATION AND EXPERIENCE OF THE AUDIT COMMITTEE
MEMBERS

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 Company to
prepare its annual and interim financial statements.

|Name of Audit Committee Member |  | Relevant Education and Experience                                                                                                                                                                                                                                                                                                             
|------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Pierre Goyette                 |  | Mr. Goyette is a Chartered Accountant. He has been Chief Financial Officer of a large pulp and paper company and Chief Executive Officer of a savings bank. He has chaired 15 audit committees (including
Tembec).                                                                                                                            
|Jacques J. Giasson             |  | Mr. Giasson is a businessman. Mr. Giasson holds a diploma in Business Administration. He has chaired the audit committees of Sidbec, Ciment St-Laurent Inc., Uniboard Canada Inc., Campbell Soup Company and Olivetti and served as a
member of the audit committees of Black & Decker, International Paint and Le Groupe La Laurentienne Inc.
|James E. Brumm                 |  | Mr. Brumm as Executive Vice-President, General Counsel and director of Mitsubishi International Corporation has acquired financial experience and is familiar with financial statements.                                                                                                                                                      
|Guylaine Saucier               |  | Mrs. Saucier is a Chartered Accountant. She is the former Chair of the Canadian Institute of Chartered Accountants and a member of the audit committee of several large public companies.                                                                                                                                                     
|Mary Theresa McLeod            |  | Ms. McLeod is a Chartered Financial Analyst and earned her MBA from the University of Western Ontario. She held senior positions with major investment banks. Ms. McLeod sits on the Audit Committee of the Ontario Securities Commission, of
Wescast Industries Inc. and of Epcor Utilities Inc.                                             

9.4EXTERNAL AUDITOR SERVICE FEES

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

|                   |  | Year Ended September 27, 2003 |           | Year Ended September 25, 2004
|------------------ |  | ----------------------------- | --------- | -----------------------------
|KPMG               |  |                               |           |                              
|Audit Fees         |  | $                             | 1,022,000 |                              
|Audit-Related Fees |  | $                             | 419,000   |                              
|Tax Fees           |  | $                             | 156,000   |                              
|Other Fees         |  | $                             | 105,000   |                              
|                   |  |                               |           |                              
|Total              |  | $                             | 1,702,000 |                              

20

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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.

9.5POLICIES AND PROCEDURES FOR THE ENGAGEMENT OF AUDIT AND NON-AUDIT
SERVICES

The Company'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, services which involve
fees of less than $10,000 are pre-approved. 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 in excess of $10,000.

ITEM 10  LEGAL PROCEEDINGS

10.1COUNTERVAILING 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 USDOC
and the USITC, by certain U.S. industry and trade groups (the "Petitioners"). On May 22, 2002, USDOC published an antidumping and countervailing duty order in which the rates applicable
to Tembec were set at 18.79% and 10.21% respectively on the basis of which it has since deposited estimates of duties payable. The results of an administrative review process with respect to both
duties and results for the first year of shipments under the orders were released on December 14, 2004, and did not impact significantly these rates.

The
countervailing and anti-dumping order was imposed on the basis of a perceived threat of injury which the United States government has not been successful in
demonstrating in proceedings before a NAFTA panel and the WTO. These findings normally would bring an end to these duties but the United States has decided to launch an extraordinary challenge
to the decision rendered by the NAFTA panel, which is expected to be heard in early 2005. The final amount and the effective date of countervailing and antidumping duties that may be assessed on
Canadian softwood lumber exports to the U.S. cannot be determined at this time and will depend on the outcome of the extraordinary challenge and, depending on its outcome, the administrative
reviews.

ITEM 11  TRANSFER AGENT

Tembec's transfer agent and registrar is National Bank Trust Inc. The register of transfers of the Common Shares of Tembec maintained by National Bank
Trust Inc. is located at its offices in Montreal, Quebec.

ITEM 12  ADDITIONAL INFORMATION

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

21

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Additional
information, including directors' and officers' remuneration and indebtedness, principal holders of the Company's securities and securities authorized for issuance under
equity compensation plans, where applicable, is contained in the Company's information circular for its most recent annual meeting of shareholders that involved the election of directors.

Additional
financial information is provided in the Company's financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for its most
recently completed financial year.

22

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MANAGEMENT'S DISCUSSION AND ANALYSIS

The Management's Discussion and Analysis (MD&A) section provides a review of the significant developments and issues that influenced Tembec Inc.'s
financial performance during the fiscal year ended September 25, 2004 as compared to the fiscal year ended September 27, 2003. The MD&A should be read in conjunction with the audited
consolidated financial statements for the fiscal year ended September 25, 2004. All references to quarterly or Company information relate to Tembec Inc.'s fiscal quarters. "EBITDA"
refers to earnings before interest, income taxes, depreciation and amortization and other non-operating expenses.

|The MD&A contains statements that are forward-looking in nature. Such statements involve known and unknown risks and uncertainties that may cause the actual results of the Company to be
materially different from those expressed or implied by such forward-looking statements. Such items include, among others: general economic and business conditions; product selling prices; raw material and operating costs; changes in foreign currency
exchange rates and other factors referenced herein and in the Company's continuous disclosure filings.
    Throughout the MD&A, "Tembec" or "Company" means Tembec Inc. and its consolidated subsidiaries and investments. "AV Cell" refers to the Company's 50% participation in AV Cell Inc. which operates a dissolving
pulp mill located in Atholville, New Brunswick. "Marathon" refers to its 50% participation in Marathon Pulp Inc., which operates a northern bleached softwood kraft (NBSK) pulp mill in Marathon, Ontario. "Temlam" refers to the Company's 50%
participation in Temlam Inc., which operates a laminated veneer lumber (LVL) plant in Ville Marie, Quebec and wood I-beam manufacturing plants in Calgary, Alberta, Bolton, Ontario and Blainville, Quebec. "Temrex" refers to the Company's 50%
participation in Produits Forestiers Temrex Limited Partnership, which operates two sawmills in the Gaspé region of Quebec. These investments are accounted for by the proportionate consolidation method. |  | GRAPHIC MICHEL J. DUMASEXECUTIVE VICE-PRESIDENT,
FINANCE & CHIEF FINANCIAL OFFICER
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------

Tembec's
operations consist of five reportable business segments: Forest Products, Pulp, Paper, Paperboard and Chemicals. On September 25, 2004 Tembec had approximately 10,000
employees and operated manufacturing facilities in New Brunswick, Quebec, Ontario, Manitoba, Alberta, British Columbia, the states of Louisiana and Ohio as well as in Southern France. Principal
facilities are described in the Company's Annual Information Form (AIF).

On
October 28, 2003, the Company acquired all of the assets of a custom manufacturer of spray-dried powdered resins located in Toledo, Ohio. The financial results have been fully
consolidated in the Company's financial statements for the last 11 months of fiscal 2004.

On
November 3, 2003, the Company acquired the assets of two sawmills located in La Sarre and Senneterre, Quebec. The financial results have been fully consolidated in the
Company's financial statements for the last 11 months of fiscal 2004.

On
December 15, 2003, the Company acquired the assets of a sawmill located in Chapleau, Ontario. The financial results have been fully consolidated in the Company's financial
statements for the last 91/2 months of fiscal 2004.

On
August 4, 2004, the Company exercised its option to purchase the remaining 50% interest in Excel Forest Products, a sawmill located in Opasatika, Ontario. The initial 50%
interest had been purchased in March 2001. As the Company had effective control, the financial results have been fully consolidated since March 2001. The recognition of earnings or
losses attributable to minority shareholders was reflected in "minority interest". Since August 2004, this is no longer required.

Details
of these transactions are outlined in the "Acquisitions and Investments" section of the MD&A.

23

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Accounting Changes

Effective September 2002, the Company adopted retroactively with restatement of prior years, the new recommendations of Section 1650 of the Canadian
Institute of Chartered Accountants (CICA) with respect to foreign currency translation and accordingly, eliminated the deferral and amortization of the unrealized translation gains and losses on
foreign currency denominated monetary items that have a fixed or ascertainable life extending beyond the period.

Effective
September 2002, the Company adopted the new recommendations of Section 3062 of the CICA with regards to goodwill and intangible assets and accordingly, goodwill
is no longer amortized to earnings, but periodically tested for impairment. During fiscal 2003, the Company completed the first required annual impairment test of goodwill and did find impairment. The
carrying value of goodwill was reduced by $10.1 million. The fiscal 2004 impairment test did not find impairment of goodwill.

Effective
September 2003, the Company applied the accounting treatment prescribed by EIC-128 of the CICA with respect to derivative financial instruments that do not
qualify for hedge accounting. Prior to the implementation of this guideline, gains and losses related to financial instruments, primarily foreign exchange contracts, were recognized on the maturity
dates of the instruments. If derivative financial instruments were sold or traded prior to their stated maturity dates, the gains or losses were deferred and recognized on the statement of operations
as per the original maturity dates. The
previous rules required disclosure of outstanding derivative financial instruments and their mark to market value in the notes to the financial statements, but the positions were not shown on the
Company's balance sheet. The Company applied EIC-128 and the accounting guideline for discontinuing hedge accounting at the beginning of the current fiscal year. As a result, the Company
recognized a deferred gain of $223.4 million relating to derivative financial instruments that were outstanding at the beginning of the fiscal year. The same amount was also recognized as an
asset on the balance sheet.

Effective
September 2003, the Company adopted the new recommendations of Section 3063 of the CICA with respect to the impairment of long-lived assets. These
recommendations provide accounting guidance for the determination of long-lived asset impairment as well as recognition, measurement and disclosure of the impairment. The work conducted at
year-end did not indicate impairment of long-lived assets.

Effective
September 2003, the Company adopted prospectively without restatement the new recommendations of Section 3870 of the CICA with respect to stock-based compensation
plans. These recommendations require the use of a fair value-based approach to accounting for stock-based compensation awards granted to employees. The Company has recorded an expense for stock-based
compensation plans in fiscal 2004 and has provided the required pro forma disclosures for issuances from September 30, 2001 to September 27, 2003 in note 12 of the audited
consolidated financial statements.

Effective
October 2003, the CICA introduced new recommendations under section 1100 for the application of Generally Accepted Accounting Principles (GAAP), which,
among other things, provides guidance on alternate sources to consult when an issue is not specifically addressed by Canadian GAAP. Previously, the Company presented sales net of shipping, handling
costs and lumber export duties. As a result of applying this new standard, effective September 28, 2003, the Company has removed references to gross and net sales.

Effective
June 2004, the Company adopted the new recommendations of Section 3461 of the CICA with regards to employee future benefits. Section 3461 requires
disclosure of additional information concerning defined benefit pension plans and other employee future benefit plans. The disclosure is included in notes 19 and 20 of the audited
consolidated financial statements.

Impact of Accounting Pronouncements on Future Reporting Periods

The CICA has issued new recommendations relating to the recognition, measurement and disclosure of liabilities for asset retirement obligations and the associated
asset retirement costs.

These
recommendations will be applicable to the Company's fiscal 2005 financial statements. We do not anticipate a material impact resulting from the application of the new
recommendations.

24

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Critical Accounting Policies and Estimates

Fixed asset depreciation

The Company records its fixed assets, primarily production buildings and equipment, at cost. Interest costs are capitalized for projects in excess of
$1 million that have a duration in excess of one year. Investment tax credits or capital assistance received reduce the cost of the related assets. Fixed assets acquired as a result of a
business acquisition are recorded at their estimated fair value. Depreciation of fixed assets is provided over their estimated useful lives, generally on a straight-line basis. Forest
access roads are depreciated on the basis of harvested volumes and certain equipment is depreciated using the unit of production method. The estimated useful lives of fixed assets are based on
judgement and the best currently available information. Changes in circumstances can result in the actual useful lives differing from our estimates. Revisions to the estimated useful lives of fixed
assets constitute a change in accounting estimate and are dealt with prospectively by amending the rate of depreciation. There were no significant adjustments to depreciation rates in fiscal 2003 and
2004. Details are shown in note 1 of the audited consolidated financial statements.

Impairment of goodwill

Beginning in fiscal 2003, new accounting standards require that goodwill no longer be amortized to earnings, but be periodically tested for impairment. The
Company uses certain operating and financial assumptions to conduct its impairment test, principally those contained in its most recent multi-year operating plan. This ensures that
assumptions are supported, where available, by relevant independent information. During fiscal 2003, the Company completed the first required impairment test and did find impairment. The carrying
value of goodwill was reduced by $10.1 million. The fiscal 2004 impairment test did not find impairment of goodwill.

Impairment of long-lived assets

According to recently implemented guidelines, the Company must now review the carrying value of long-lived assets when events or changes in
circumstances indicate that the value may have been impaired and is not recoverable through future operations and cash flows. To estimate future cash flows, the Company uses operating and financial
assumptions, primarily those contained in its most recent multi-year operating plan. This ensures that the assumptions are supported, where available, by relevant independent information.
The work conducted at year-end did not indicate impairment of long-lived assets.

Employee future benefits

Tembec contributes to several defined benefit pension plans, primarily related to employees covered by collective bargaining agreements. The Company also provides
post-retirement benefits to certain retirees, primarily health-care related. For post-retirement benefits, funding of disbursements is done on a "pay as you go"
basis. The Company uses independent actuarial firms to quantify the amount of pension and post-retirement obligations. The Company, based on its own experience and recommendations from its
actuarial firms, evaluates the underlying assumptions on an annual basis. Changes in estimates or assumptions can have a substantial impact on the amount of pension and post-retirement
benefit expense, the carrying values on the balance sheet, and, in the case of defined benefit plans, the amount of plan surplus or deficit. At June 30, 2004, ("the measurement date"), the fair
value of defined benefit plan assets was $577.9 million, an amount equal to 81% of the estimated accrued benefit obligation of $716.7 million.

The
plan deficit was $138.8 million, a significant reduction from the deficit of $236.0 million at the prior measurement date, June 30, 2003. The deficit reduction
of $97.2 million that occurred over the 12 month period was caused primarily by three items. Plan assets generated actual returns that exceeded the interest cost on the accrued benefit
obligation by $26.1 million. A further gain of $24.6 million was due to employer contributions totalling $42.2 million while the current service cost of benefit accruals stood at
$17.6 million. Employer contributions included $3.4 million of voluntary contributions relating to the defined benefit plans of US operations.

25

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Finally
an actuarial gain of $46.6 million reduced the accrued benefit obligation at the measurement date. This last item was caused primarily by an increase from 5.93% to 6.38%
of the weighted average discount rate applied to the accrued benefit obligation. The discount rate is tied to the rates applicable to high-quality corporate bonds (AA or higher) in effect
as at the measurement date. Pension expense in fiscal 2004 was $34.8 million, as compared to $18.8 million in the prior year. Based on current assumptions, employer contributions and
pension expense in fiscal 2005 are expected to be approximately $36.1 million and $23.1 million respectively. A description of the Company's defined benefit pension plans and
assumptions used in the calculations are presented in note 19 of the audited consolidated financial statements.

With
regard to other employee future benefit plans, the accrued benefit obligation at the measurement date was $64.1 million, a decrease from $68.2 million in the prior
year. The decline was also due to an increase in the discount rate, from 5.90% to 6.30%. Benefits paid by the Company were $2.6 million as compared to $2.4 million in the prior year. The
expense recognized for other employee benefit plans was $7.4 million, up from $5.4 million in the prior year. Based on current assumptions, the amount of benefits to be paid and the
amount of expense to be recognized in fiscal 2005 are expected to be approximately $3.0 million and $6.0 million respectively. A description of the Company's other employee future
benefit plans and assumptions used in the calculations are presented in note 20 of the audited consolidated financial statements.

Future income taxes

Future income tax is provided for using the asset and liability method and recognizes temporary differences between the tax values and the financial statement
values of balance sheet items as well as certain carry-forward items. The Company only recognizes a future income tax asset to the extent that, in its opinion, it is more likely than not that the
future income tax asset will be realized. This opinion is based on estimates and assumptions as to the future financial performance of the various taxable legal entities in the various tax
jurisdictions. The Company periodically reviews the carrying value of its future income tax assets. Additional details are provided in note 18 of the audited consolidated financial statements.

Use of Non-GAAP Financial Measures

EBITDA is defined as earnings before interest, income taxes, depreciation and amortization and other non-operating expenses. On a consolidated basis,
the Company believes that it is a useful indicator of its ability to generate funds to meet debt service and capital expenditure requirements. EBITDA is not intended as an alternative measure of cash
flows from operating activities as determined in accordance with Canadian Generally Accepted Accounting Principles (GAAP). The Company also uses EBITDA internally to evaluate the financial and
operating performance of its reportable business segments and individual business units. The Company believes it is a useful indicator of the profitability of its business segments and individual
business units. Because EBITDA may not be calculated identically by all companies, the presentation in the Company's financial statements may not be directly comparable to similarly titled measures
used by other companies. A reconciliation of cash flow from operating activities as determined in accordance with Canadian GAAP to EBITDA is summarized in note 14 of the audited consolidated
financial statements.

26

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O V E R V I E W

|                                           |  | Financial Summary |  
|------------------------------------------ |  | ----------------- | -
|
|
|Sales                                      |  | 2,598.1           |  
|Freight and sales deductions               |  | 277.3             |  
|Lumber duties                              |  |                  |  
|Cost of sales                              |  | 1,651.8           |  
|SG&A                                       |  | 114.0             |  
|                                           |  |                   |  
|EBITDA                                     |  | 555.0             |  
|                                           |  |                   |  
|Depreciation & amortization                |  | 145.7             |  
|Interest, foreign exchange & other         |  | 84.5              |  
|Loss (gain) on translation of foreign debt |  | 19.7              |  
|Unusual items                              |  | (1.5              | )
|                                           |  |                   |  
|Pre-tax earnings (loss)                    |  | 306.6             |  
|Income taxes (recovery)                    |  | 108.4             |  
|Minority interests                         |  | 0.1               |  
|                                           |  |                   |  
|Net earnings (loss)                        |  | 198.1             |  
|                                           |  |                   |  
|Net earnings (loss) per share              |  | 2.46              |  
|                                           |  |                   |  
|Diluted earnings (loss) per share          |  | 2.29              |  
|                                           |  |                   |  
|Total assets (at end of year)              |  | 3,088.7           |  
|                                           |  |                   |  
|Total long-term debt(1) (at end of year)   |  | 1,107.7           |  
|                                           |  |                   |  

---

The increase in sales of $318.7 million is due primarily to higher shipments and selling prices in the Forest Products business.

The
$93.9 million increase in EBITDA was driven by the improved profitability of the Forest Products segment with lower margins in the Pulp and Paper segments providing a partial
offset.

Interest,
foreign exchange and other items improved by $217.0 million, primarily as a result of currency derivative gains, which more than offset the interest on debt of
$137.1 million incurred in fiscal 2004.

The
Company continued to benefit from the positive impact of restating its US $ denominated debt. In fiscal 2004, the Canadian $ strengthened by 6% and it recorded a gain
of $93.5 million. In the prior year, the Canadian $ strengthened by 17%, generating a gain of $263.9 million.

In
fiscal 2003, the Company incurred non-recurring unusual charges of $18.4 million relating to the impairment of goodwill, the permanent closure of a sawmill and
fixed assets removed from service. In fiscal 2004, the Company incurred a charge of $46.6 million relating to the write-downs of a paper mill investment and of an idled newsprint machine.

27

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For
the year ended September 25, 2004, the Company generated net earnings of $37.4 million or $0.44 per share compared to a net earnings of $11.4 million or $0.13
per share in fiscal 2003.

|                  |  | Sales   | 
|----------------- |  | ------- | 
|
|
|Forest Products   |  | 909.0   | 
|Pulp              |  | 1,290.6 | 
|Paper             |  | 824.9   | 
|Paperboard        |  | 185.4   | 
|Chemicals & other |  | 136.2   | 
|                  |  |         | 
|                  |  | 3,346.1 | 
|                  |  |         | 

Sales
reached a record $3,664.8 million in fiscal 2004, a 10% increase over the prior year. Higher selling prices and shipments in Forest Products generated $300.6 million
of the increase. To a lesser extent, the Pulp Group increased sales by $43.7 million. Faced with continued difficult market conditions, the Paper and Paperboard sales declined by a combined
$56.8 million. In terms of geographical distribution the US remained the Company's principal market with 48% of sales in fiscal 2004, the same percentage as in the prior year. Canadian sales
represented 20% of sales, compared to 19% in the prior year. Sales outside of the US and Canada represented the remaining 32% in fiscal 2004, down from 33% in the prior year.

Forest
Products segment sales increased by 33% because of higher prices and shipments of SPF lumber and higher prices for OSB. The Pulp segment saw its sales increase by 3%. Higher
selling prices for softwood paper pulps and higher volumes of hardwood high-yield and specialty pulps offset lower shipments of softwood paper pulps. Sales for the Paper segment decreased
by 4%. Lower prices for coated and specialty papers accounted for the majority of the decline.

GRAPHIC

|                  |  | EBITDA | 
|----------------- |  | ------ | 
|
|
|Forest Products   |  | 89.6   | 
|Pulp              |  | 329.9  | 
|Paper             |  | 117.2  | 
|Paperboard        |  | 10.4   | 
|Chemicals & other |  | 7.9    | 
|                  |  |        | 
|                  |  | 555.0  | 
|                  |  |        | 

28

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The
$93.9 million increase in EBITDA was caused by the improved profitability of the Forest Products segment, partially offset by difficult market fundamentals and the negative
EBITDA of the Paper business. Total EBITDA was $168.7 million, which represented a margin of 4.6% of sales, lower than the five-year average of 9.7%. EBITDA in two of the Company's
three largest business segments dropped to five-year lows in 2004. Forest Products EBITDA increased by $167.2 million as a result of higher selling prices for SPF lumber and OSB.
The Paper segment EBITDA declined by $57.6 million due primarily to negative impact on selling prices of the appreciation of the Canadian $ versus the US $.

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

GRAPHIC

|                                     |  | Depreciation and Amortization
|------------------------------------ |  | -----------------------------
|
|
|Fixed asset depreciation             |  | 222.0                        
|Deferred development costs and other |  | 8.2                          
|                                     |  |                              
|                                     |  | 230.2                        
|                                     |  |                              

The
increase in fixed asset depreciation is due to the acquisition of 3 sawmills during fiscal 2004.

|                                                            |  | Interest, Foreign Exchange and Other |  
|----------------------------------------------------------- |  | ------------------------------------ | -
|
|
|Interest on indebtedness                                    |  | 148.6                                |  
|Investment income                                           |  |                                     |  
|Amortization of deferred gain on foreign exchange contracts |  |                                     |  
|Derivative financial instruments gain                       |  | (63.3                                | )
|Other foreign exchange items                                |  | 26.3                                 |  
|Loss on consolidation of foreign integrated subsidiaries    |  | 6.4                                  |  
|Other items                                                 |  |                                     |  
|                                                            |  |                                      |  
|                                                            |  | 118.0                                |  
|                                                            |  |                                      |  

Interest,
foreign exchange and other items improved by $217.0 million over fiscal 2003. Interest on indebtedness declined by $11.5 million as a result of the stronger
Canadian $. Approximately 95% of the Company's term debt is US $ denominated.

29

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The
Company realized a gain of $22.7 million on the sale of shares of a Canadian publicly-traded forest products company, Slocan Forest Products. The shares were acquired in 2002
and subsequently appreciated significantly in value in December 2003, the result of Slocan's acquisition by Canfor Corporation.

Effective
September 28, 2003, the Company applied the accounting treatment prescribed by EIC-128 of the CICA with respect to the accounting treatment for derivative
financial instruments that do not qualify for hedge accounting. Prior to the implementation of this guideline, gains and losses related to financial instruments, primarily foreign exchange contracts,
were recognized on the maturity dates of the instruments. If derivative financial instruments were sold or traded prior to their stated maturity dates, the gains or losses were deferred and recognized
on the statement of operations as per the original maturity dates. The old rules required disclosure of outstanding derivative financial instruments and their mark to market value in the notes to the
financial statements, but the positions were not shown on the Company's balance sheet. The Company applied EIC-128 and the accounting guideline for discontinuing hedge accounting at the
beginning of the current fiscal year. As a result, the Company recognized a deferred gain of $223.4 million relating to derivative financial instruments that were outstanding at the beginning
of the fiscal year. The same amount was also recognized as an asset on the balance sheet.

The
following table summarizes the change in the unamortized deferred gain on foreign exchange contracts during the fiscal 2004:

|                                                                       |  | Opening Balance |  | Amortization |   | Ending Balance
|---------------------------------------------------------------------- |  | --------------- |  | ------------ | - | --------------
|
|Foreign exchange contracts sold prior to fiscal 2004                   |  | 82.2            |  | (56.4        | ) | 25.8          
|Foreign exchange contracts outstanding at the beginning of fiscal 2004 |  | 223.4           |  | (92.9        | ) | 130.5         
|                                                                       |  |                 |  |              |   |               
|                                                                       |  | 305.6           |  | (149.3       | ) | 156.3         
|                                                                       |  |                 |  |              |   |               

As
noted previously, the Company began applying EIC-128 of the CICA and the accounting guideline for discontinuing hedge accounting at the beginning of fiscal 2004. As a
consequence, there is no comparable table for fiscal 2003.

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

|Quarter Ending |  | $ millions
|-------------- |  | ----------
|December 2004  |  | 42.6      
|March 2005     |  | 33.7      
|June 2005      |  | 19.9      
|September 2005 |  | 21.7      
|December 2005  |  | 20.5      
|March 2006     |  | 17.9      
|               |  |           
|               |  | 156.3     
|               |  |           

Since
the beginning of fiscal 2004, the Company has shown the mark to market value of its derivative financial instruments on its balance sheet and the resulting gain or loss for the
period has been reflected in its statement of operations. Derivative financial instruments relate primarily to foreign exchange contracts but also include commodity-related instruments such as lumber
futures and hedges for purchased waste fibre and energy.

During
fiscal 2004, the Company recorded a gain of $86.5 million on its outstanding foreign exchange contracts as the relative value of the Canadian $ increased from
US $0.739 to US $0.784. In the prior year, under the previous accounting rules, the Company generated proceeds of $147.0 million, of which $64.8 million related to fiscal
2003 maturities and the balance for pre-sold contracts to be amortized into income in future periods. This compares to proceeds of $205.0 million received during fiscal 2004.

30

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

|                                                         |  | Opening Balance |  | Gain (Loss) |   | Disbursements (Proceeds) |   | Ending Balance
|-------------------------------------------------------- |  | --------------- |  | ----------- | - | ------------------------ | - | --------------
|
|Mark to market of outstanding foreign exchange contracts |  | 223.4           |  | 86.5        |   | (205.0                   | ) | 104.9         
|Commodity-related derivative financial instruments       |  |                |  | (1.9        | ) | 11.3                     |   | 9.4           
|                                                         |  |                 |  |             |   |                          |   |               
|                                                         |  | 223.4           |  | 84.6        |   | (193.7                   | ) | 114.3         
|                                                         |  |                 |  |             |   |                          |   |               

As
noted previously, the Company began applying EIC-128 of the CICA and the accounting guideline for discontinuing hedge accounting at the beginning of fiscal 2004. As a
consequence, there is no comparable table for the fiscal 2003.

Based
on the fair market value of foreign exchange contracts at the end of the most recent fiscal year and their scheduled maturity dates, the following table summarizes anticipated
proceeds by quarter:

|Quarter Ending |  | $ millions
|-------------- |  | ----------
|December 2004  |  | 20.6      
|March 2005     |  | 19.2      
|June 2005      |  | 16.8      
|September 2005 |  | 17.9      
|December 2005  |  | 14.9      
|March 2006     |  | 15.2      
|Thereafter     |  | 0.3       
|               |  |           
|               |  | 104.9     
|               |  |           

At
the September 25, 2004, the Company held lumber futures equal to approximately 7% of its annual SPF lumber capacity. The fair value of these instruments was
$5.8 million. The Company had natural gas hedges covering approximately 25% of its anticipated requirements for the next 2 years.

The
fair value of these instruments was $3.2 million. Finally, the Company held hedges relating to purchased old newspapers (ONP) representing approximately 21% of its annual
recycled fibre purchases. The fair value of these instruments was $0.4 million.

Gain on Translation of Foreign Debt

During fiscal 2004, the Company recorded a gain of $93.5 million on the translation of its US $ denominated debt as the relative value of the
Canadian $ increased from US $0.739 to US $0.784. In the prior fiscal year, the Canadian $ had increased from US $0.634 to US $0.739 and the Company had
recorded a gain of $263.9 million. The after-tax impact of the gain on translation of foreign-denominated debt was $78.4 million or $0.91 per share as compared to the prior
year after-tax gain of $221.0 million or $2.56 per share.

Unusual Items

During fiscal 2004, the Company recorded a non-cash charge of $36.8 million relating to the write-down of its investment in the
Gaspesia Papers Limited Partnership. The charge is the result of a decision to halt work on the modernization project and seek creditor protection. The charge includes the write-down of
the original investment of $35.0 million and a provision of $1.8 million for the non-recovery of expenses incurred as part of service agreements with Gaspesia Papers Limited
Partnership. As the majority of the unusual charge is a capital loss, the after-tax impact was $36.2 million or $0.42 per share.

During
fiscal 2004, the Company recorded a non-cash charge of $9.8 million relating to the write-down of a newsprint machine at the Kapuskasing, Ontario
paper mill. The machine has been idle since February 2004 and based on the relatively difficult market conditions it was deemed unlikely that the newsprint machine would be restarted. The
charge includes the complete write-down of the machine's net book value and related spare parts. The after-tax impact of the unusual charge was $6.6 million or $0.08 per
share.

31

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During fiscal 2003, the Company absorbed a non-cash charge of $5.7 million relating to the permanent closure of a pine sawmill located in Woodsville, Maine. It also
absorbed a non-cash charge of $2.6 million relating to the write-down of fixed assets removed from service at the paperboard mill located in Temiscaming, Quebec.
Finally, the Company performed the annual impairment test of goodwill and found that impairment did exist in relation to a remanufactured lumber facility acquired in 2000. As a result, the Company
absorbed a goodwill impairment charge of $10.1 million. The three aforementioned unusual items totaled $18.4 million. Their after-tax impact was $17.5 million or $0.21
per share. The most recent annual impairment test of goodwill did not find any impairment.

Income Taxes

In fiscal 2003, the Company recorded an income tax recovery of $37.6 million on a pre-tax loss of $27.9 million. The income tax recovery
was $27.9 million higher than the projected recovery of $9.7 million based on the Company's combined Canadian federal and provincial income tax rate of 34.8%. Favorable items increased
the recovery by $57.8 million. These included $42.7 million relating to the non-taxable portion of the exchange gain on US $ denominated debt, which currently receives
capital gains treatment in Canada and is taxed at 50% of regular business income. Lower corporate income tax rates in the Company's non-canadian operations increased the recovery by
$13.8 million. Finally, the Company benefited by $1.3 million from the manufacturing and processing deductions on its Canadian operations. This tax benefit is currently being phased out
by Canadian tax authorities and will no longer exist in 2005. The above favorable items were partially offset by several items which decreased the income tax recovery by $29.9 million. The
non-recognition of period losses in certain operations decreased the recovery by $11.1 million. The non-deductible loss on consolidation of foreign subsidiaries
decreased the recovery by $9.1 million. Finally, non-deductible expenses and the Canadian large corporations tax decreased the recovery by $4.8 million and
$4.9 million respectively.

In
fiscal 2004, the Company recorded an income tax provision of $42.5 million on pre-tax earnings of $80.3 million. The income tax provision was
$14.8 million higher than the projected provision of $27.7 million based on the Company's combined Canadian federal and provincial income tax rate of 34.5%. Favorable items reduced this
provision by $31.2 million. These included $16.1 million relating to the non-taxable portion of the exchange gain on US $ denominated debt, which currently receives
capital gains treatment in Canada and is taxed at 50% of regular business income. Lower corporate income tax rates in the Company's non-canadian operations decreased the provision by
$14.2 million. Finally, the Company benefited by $0.9 million from the manufacturing and processing deduction on its Canadian operations. This tax benefit is currently being phased out
by Canadian tax authorities and will no longer exist in 2005. The above favorable items were more than offset by several items which increased the income tax provision by $46.0 million. The
non-recognition of period losses in certain
operations increased the provision by $ 28.9 million. The provision was increased by $6.0 million to reflect higher income tax rates in the province of Ontario. The Canadian large
corporations tax added a further $5.5 million. Finally, the non-deductible loss on consolidation of foreign subsidiaries and non-deductible expenses increased the
provision by $ 3.2 million and $2.4 million respectively.

Details
regarding the Company's tax position are outlined in note 18 of the audited consolidated financial statements.

Net Earnings

The Company generated net earnings of $37.4 million or $0.44 per share compared to net earnings of $11.4 million or $0.13 per share in prior fiscal
year. As noted previously, the Company's financial results were impacted by certain specific items. The following table summarizes the impact of these items on the reported financial results. The
Company believes it is useful supplemental information as it provides an indication of

32

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results
excluding the specific items. This supplemental information is not intended as an alternative measure for net earnings (loss) as determined by Canadian Generally Accepted Accounting Principles
(GAAP).

|                                                                |                                                             | 2003   |        | 2004  |      
|--------------------------------------------------------------- | ----------------------------------------------------------- | ------ | ------ | ----- | -----
|
|Net earnings as reported  in accordance with GAAP              |                                                             | 11.4   |        | 0.13  |      
|Specific items (after-tax):                                     |                                                             |        |        |       |      
|                                                                | Gain on translation of foreign debt                         |        | (221.0 | )     | (2.56
|                                                                | Derivative financial instruments gain                       |        | (42.7  | )     | (0.50
|                                                                | Amortization of deferred gain on foreign exchange contracts |        |       |       |     
|Unusual items:                                                  |                                                             |        |        |       |      
|                                                                | Sawmill closure                                             |        | 5.7    |       | 0.07 
|                                                                | Asset removed from service                                  |        | 1.7    |       | 0.02 
|                                                                | Impairment of goodwill                                      |        | 10.1   |       | 0.12 
|                                                                | Write-down of Gaspesia investment                           |        |       |       |     
|                                                                | Write-down of paper machine                                 |        |       |       |     
|                                                                |                                                             |        |        |       |      
|Net loss excluding specific items  not in accordance with GAAP |                                                             | (234.8 | )      | (2.72 | )    
|                                                                |                                                             |        |        |       |      

FOREST PRODUCTS

|                                     |  | Forest Products |  
|------------------------------------ |  | --------------- | -
|
|
|Total sales                          |  | 918.3           |  
|Consolidated sales                   |  | 797.8           |  
|Lumber duties                        |  |                |  
|EBITDA                               |  | 89.6            |  
|EBITDA margin on consolidated sales  |  | 11.2            | %
|                                     |  |                 |  
|Identifiable assets (excluding cash) |  | 656.2           |  
|                                     |  |                 |  

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

The
Forest Resource Management group is responsible for managing all of the Company's Canadian forestry operations. This includes the harvesting of timber, either directly or by
contractual agreements, and all silviculture and regeneration work required to ensure a sustainable supply for all of the manufacturing units. The group is also responsible for third party timber
purchases, which are required to supplement total requirements. The group's main objective is the optimization of the flow of timber into various manufacturing units. As the Company's forest activity
in Canada is conducted primarily on Crown Lands, the Forest Resource Management group works closely with provincial governments to ensure harvesting plans and operations comply with established
regulations and that stumpage charged by the provinces is reasonable and reflects the fair value of the timber being harvested. During fiscal 2004, the Company's operations harvested and delivered
7.6 million cubic meters of timber versus 5.8 million cubic meters in 2003. Additional supply of approximately 1.6 million cubic meters was secured mainly through purchases and
exchanges with third parties, unchanged from the prior year.

The
Forest Products group includes operations located in Quebec, Ontario, Alberta, British Columbia and France. The group focuses on three main product areas: SPF Lumber and Panels,
Specialty Wood and
Engineered Wood. The SPF Lumber and Panels operations can produce approximately 1.8 billion board feet of lumber and 1.7 million square feet (1/16" basis) of OSB per year.
The Specialty Wood operations annually produce 183 million board feet of pine lumber, hardwood lumber and hardwood flooring. The Engineered Wood operations produce laminated veneer lumber
(LVL), finger joint lumber, wood I-Beams, rim joists, metal plates and webs. The normal annual capacities of the Forest Product's manufacturing sites are outlined in the Company's Annual
Information Form.

33

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The
segment is dominated by SPF lumber, which represented 67% of building material sales in fiscal 2004, up from 60% in the prior year. The average selling price of SPF lumber was $75
per mfbm (thousand foot board measure) higher than in the prior year. Average OSB selling prices increased by $29 per msf (thousand square feet), 63% higher than in the prior year. The higher prices
were the result of higher US $ reference prices partially offset by a Canadian $ that averaged 10% higher versus the US $. Specialty and Engineered Wood prices and revenues were
also negatively impacted by the stronger Canadian $. Overall, Specialty Wood represented 16% of building material sales in fiscal 2004, down from 24% in fiscal 2003. Engineered Wood sales in
the year decreased from 8% to 7% of building material sales.

In
addition to the above, the Forest Products group produced and shipped approximately 2.1 million tonnes of wood chips in fiscal 2004, 86% of which were directed to the Company's
pulp and paper operations. In 2003, the group produced 2.0 million tonnes and shipped 84% of this volume to the pulp and paper mills. The internal transfer price of woodchips is based on
current and expected market transaction prices.

Total
sales for this segment reached $1,422.8 million, an increase of $340.3 million over the prior year. SPF lumber was the cause of the sales increase as higher prices
and a 19% increase in shipments increased sales by $213.2 million. Higher OSB sales, primarily driven by increased selling prices, added a further $43.7 million. The balance of the
increase was due to higher wood chip and by-product revenues. Overall, the Forest Products segment generated 33% of Company consolidated sales, up from 27% in the prior year. As was the
case in 2003, virtually all sales occurred in North America.

|                         |                                         | Sales   |        | Shipments |        | Selling Prices
|------------------------ | --------------------------------------- | ------- | ------ | --------- | ------ | --------------
|
|
|SPF Lumber & Panels      |                                         |         |        |           |        |               
|                         | SPF Lumber (mfbm)(1)(2)                 |         | 489.8  |           | 703.0  |               
|                         | OSB (msf  1/16")                       |         | 65.9   |           | 109.6  |               
|                         | Remanufactured Lumber (mfbm)            |         | 23.1   |           | 17.4   |               
|                         |                                         |         |        |           |        |               
|                         |                                         | 578.8   |        | 830.0     |        |               
|                         |                                         |         |        |           |        |               
|Specialty Wood           |                                         |         |        |           |        |               
|                         | Pine and Hardwood (mfbm)                |         | 99.5   |           | 90.8   |               
|                         | Hardwood Flooring (mfbm)                |         | 73.1   |           | 80.6   |               
|                         |                                         |         |        |           |        |               
|                         |                                         | 172.6   |        | 171.4     |        |               
|                         |                                         |         |        |           |        |               
|Engineered Wood          |                                         |         |        |           |        |               
|                         | LVL (cubic feet)                        |         | 14.4   |           | 15.6   |               
|                         | Eng. Finger Joint Lumber (mfbm)         |         | 10.2   |           | 9.1    |               
|                         | Wood I-Beams and Rim Joists (linear ft) |         | 30.4   |           | 39.9   |               
|                         | Metal Plates & Webs (000 lbs)           |         | 7.6    |           | 10.0   |               
|                         |                                         |         |        |           |        |               
|                         |                                         | 62.6    |        | 74.6      |        |               
|                         |                                         |         |        |           |        |               
|Total Building Materials |                                         | 814.0   |        | 1,076.0   |        |               
|                         |                                         |         |        |           |        |               
|                         | Wood chip & other sales                 |         | 268.5  |           | 346.8  |               
|                         |                                         |         |        |           |        |               
|Total Sales              |                                         | 1,082.5 |        | 1,422.8   |        |               
|                         |                                         |         |        |           |        |               
|                         | Internal wood chip & other sales        |         | (173.5 | )         | (213.2 | )             
|                         |                                         |         |        |           |        |               
|Consolidated Sales       |                                         | 909.0   |        | 1,209.6   |        |               
|                         |                                         |         |        |           |        |               

---

34

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35

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Markets

The benchmark random length Western SPF lumber net price averaged US $376 per mfbm in 2004, an increase from US $251 per mfbm in 2003. In the East,
the random length Eastern SPF average lumber price (delivered Great Lakes) increased from US $321 per mfbm to US $449 per mfbm in 2004. The Company considers these to be relatively high
levels, approximately US $60 to US $70 above normal trendline prices for random lumber. As is normally the case during strong markets, the reference price for stud lumber did not
increase as much, with the Eastern average lumber price (delivered Great Lakes) up from US $321 per mfbm to US $395 per mfbm, a level approximately US $40 to US $50 per
mfbm above trendline prices. This
improved pricing correlated with a favourable interest rate environment and strong lumber demand as evidenced by US annual housing starts in excess of 1.9 million units.

It
has now been approximately 31/2 years since the five-year Canada/US Softwood Lumber Agreement (SLA) expired on April 1, 2001. On
April 2, 2001, petitions for the imposition of antidumping and countervailing duties on softwood lumber to the US were filed with the US Department of Commerce (USDOC) and the
US International Trade Commission (USITC) by certain US industry and trade groups. In August 2001, the USDOC made a preliminary countervailing duty determination, imposing a
bonding rate of 19.31% on Canadian softwood lumber shipped to the US after August 16, 2001.

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

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

On
May 16, 2002, the USITC announced it had found no current injury, but a threat of injury, to the US lumber industry, effectively removing the requirement to remit the
$21.8 million of accrued preliminary countervailing duty and the $9.7 million of accrued preliminary antidumping duty. The finding of threat of injury by USITC resulted in the USDOC
issuing an order to collect cash deposits of estimated countervailing and antidumping duties on a going forward basis. Effective May 22, 2002, the Company's softwood lumber exports to the US
have been subject to a countervailing duty cash deposit rate of 18.79% and an antidumping cash deposit rate of 10.21%. During fiscal 2003, the Company incurred a charge of $49.7 million
relating to countervailing duty and a charge of $31.5 million for antidumping duty for lumber shipped to the US. During fiscal 2004, the Company incurred a charge of $68.3 million
relating to countervailing duty and a charge of $43.1 million for antidumping duty. The Company continues to remit cash deposits to cover the applicable estimated duties.

Overall,
the net impact of duties in fiscal 2004 was a charge of $111.4 million, up from $81.2 million in the prior year. Higher prices and increased shipments of lumber to
the US generated the increase. To the end of September 2004, the Company had expensed a total of $220.9 million in duties since May 22, 2002. The following table summarizes duty
expensed and remitted over that period. Additional details are

|            |  | Duties Expensed
C$ |  | Duties remitted
C$ |  | Duties remitted
US$
|----------- |  | ------------------ |  | ------------------ |  | -------------------
|
|Fiscal 2002 |  | 28.3               |  | 25.2               |  | 15.7               
|Fiscal 2003 |  | 81.2               |  | 73.8               |  | 50.8               
|Fiscal 2004 |  | 111.4              |  | 106.3              |  | 80.9               
|            |  |                    |  |                    |  |                    
|            |  | 220.9              |  | 205.3              |  | 147.4              
|            |  |                    |  |                    |  |                    

Operations

The volume of SPF lumber sold increased by 19% or 232.5 million board feet compared to 2003. The acquisition of three eastern Canadian sawmills added
280.8 million board feet. Sales in our other eastern

36

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Canadian
sawmills declined by 56.4 mfbm as the Company continued to proactively manage its product mix and cost structure to minimize the impact of lumber export duties. The segment benefited from
lower SPF lumber manufacturing costs which decreased by $30 per mfbm compared to the prior year.

Overall,
EBITDA increased by $167.2 million. Sales margins averaged 10.7%, a level not seen since fiscal 2000. The higher SPF prices and shipments combined with the higher OSB
prices noted previously were the primary cause. The Forest Products segment generated 77% of consolidated EBITDA in fiscal 2004, whereas it had reduced total Company EBITDA in fiscal 2003.

PULP

|                                     |  | Pulp    |  
|------------------------------------ |  | ------- | -
|
|
|Total sales                          |  | 1,157.1 |  
|Consolidated sales                   |  | 1,073.8 |  
|EBITDA                               |  | 329.9   |  
|EBITDA margin on consolidated sales  |  | 30.7    | %
|                                     |  |         |  
|Identifiable assets (excluding cash) |  | 1,328.7 |  
|                                     |  |         |  

The
Pulp group consists of eleven market pulp manufacturing facilities operating at ten sites. The facilities are divided into two main types. Paper pulp mills produce softwood kraft,
hardwood kraft and high-yield pulps. Specialty pulp mills produce specialty cellulose, fluff and dissolving pulps. Nine of the pulp mills are wholly owned and the Company has a 50% joint
venture position in the Marathon, Ontario softwood kraft pulp mill and in the Atholville, New Brunswick dissolving pulp mill. All of the Company's financial and statistical data include only
its 50% proportionate share of these two mills. The Company does however have responsibility for marketing the entire output of the two joint ventures. The Company's partner in the AV Cell joint
venture is the Aditya Birla Group of India, which effectively purchases the entire output of the mill at market prices. In October 2002, the Company acquired the assets of the idled Chetwynd
high-yield pulp mill. The mill, located in northern British Columbia, had not operated since April 2001. Commercial production at the mill resumed in February 2003 and the
startup period lasted approximately 5 months. The paper pulp mills can produce approximately 1,860,000 tonnes per year after adjusting for proportionate joint ventures. The specialty pulp mills
can produce approximately 380,000 tonnes per year. The annual capacities of the pulp manufacturing sites are outlined in the Company's Annual Information Form.

Total
sales for the Pulp group reached a record high of $1,417.6 million, an increase of $37.2 million over the prior year. The Group benefited from higher softwood paper
pulp selling prices and set a new record for shipments. The Company sold an additional 28,500 tonnes of pulp in fiscal 2004, up 1% from the prior year. After eliminating internal sales, the Pulp group
generated 36% of consolidated sales, a decrease from 39% in the prior year.

GRAPHIC

37

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Markets

The Pulp segment is more "global" than the other business groups within Tembec. In 2004, 80% of consolidated sales were generated outside of Canada and the US,
compared to 76% in 2003. The Company markets its pulp on a world-wide basis, primarily through its own sales force. The Pulp Group maintains sales or representative offices in Toronto,
Canada, Signy/Nyon, Switzerland, San Sebastian, Spain, Beijing, China. The Company's sales force also markets pulp produced by third parties. In fiscal 2004, agency pulp sales totalled 12,100 tonnes
compared to 4,500 tonnes in 2003.

Year
over year, average selling prices of external pulp shipments increased by $13 per tonne with higher softwood pulp prices offsetting lower hardwood pulp realizations. In fiscal 2003,
the benchmark NBSK pulp price (delivered US) increased from US $505 per tonne to US $550 per tonne, and averaged US $532 per tonne. In fiscal 2004, price increases for NBSK
continued ending the year at US $650 per tonne. The average selling price for the year was US $626 per tonne, an increase of US $93 per tonne over the prior year. The improved US$
pricing also benefited hardwood pulps, but to a lesser extent.

During
fiscal 2004, the benchmark hardwood high-yield price (delivered Northern Europe) averaged US $484 per tonne, an increase of US $25 per tonne over the
US $459 per tonne experienced in fiscal 2003. In last year's MD&A, we had expressed a view that prices would increase in 2004. Although our view on prices turned out to be relatively accurate,
we had not anticipated the impact of the declining US $, as the Canadian $ averaged 10% higher and mitigated much of the positive impact of the higher softwood pulp prices and
effectively decreased hardwood pulp prices. The only positive in the area of currency, is that the Euro also strengthened considerably versus the US $ during 2004, reducing the effective cost
of pulp for European purchasers of market pulp.

Although,
the Company did attain record shipments in fiscal 2004, the recent market weakness experienced in the months of August and September 2004 increased inventories by 49,000
tonnes. The Company views this increase as temporary and expects to reduce its inventories in fiscal 2005.

38

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|                   |                        | Sales   |       | Shipments |       | Selling Prices
|------------------ | ---------------------- | ------- | ----- | --------- | ----- | --------------
|
|
|Paper pulps        |                        |         |       |           |       |               
|                   | Softwood kraft         |         | 533.8 |           | 508.6 |               
|                   | Hardwood kraft         |         | 184.1 |           | 184.0 |               
|                   | Hardwood high-yield(1) |         | 344.8 |           | 391.0 |               
|Specialty pulps    |                        | 292.0   |       | 309.9     |       | 329.2         
|                   |                        |         |       |           |       |               
|Total pulp sales   |                        | 1,354.7 |       | 1,393.5   |       | 1,968.5       
|                   |                        |         |       |           |       |               
|                   | Other sales            |         | 25.7  |           | 24.1  |               
|                   |                        |         |       |           |       |               
|Total sales        |                        | 1,380.4 |       | 1,417.6   |       |               
|                   |                        |         |       |           |       |               
|                   | Internal sales         |         | (89.8 | )         | (83.3 | )             
|                   |                        |         |       |           |       |               
|Consolidated sales |                        | 1,290.6 |       | 1,334.3   |       | 1,858.2       
|                   |                        |         |       |           |       |               

---

Operations

Total shipments in fiscal 2004 increased by 28,500 tonnes over the prior year, establishing a new record. The increase was primarily due to the restart of the
Chetwynd, B.C. high-yield pulp mill in February 2003. During fiscal 2003, the mill produced 75,000 tonnes and shipped 62,100 tonnes. In fiscal 2004, the mill produced 181,900 tonnes
and shipped 175,300 tonnes. During 2004, the Pulp group took 73,900 tonnes of total downtime, including 23,100 tonnes lost due to the flooding of the Tarascon pulp mill located
next to the Rhone River in southern France. This compares to 75,400 tonnes of downtime taken a year ago, which included 11,400 tonnes taken at two eastern Canadian NBSK mills in response to wood chip
supply constraints.

Despite
relatively "full" operations, the average delivered cash costs increased by $31.9 million or $16 per tonne shipped. Higher fibre costs accounted for the majority of the
increase.

As
noted previously, the Company remains mindful of allowing its inventories to increase beyond normal levels. Total consolidated pulp inventories at September 25, 2004,
represented approximately 40 days of production. This was higher than in 2003 when we ended the year with 24 days of production in inventory. The Company considers 40 days to be a
maximum level.

LOGO

Total
2004 shipments of 1,997,000 tonnes include 55,700 tonnes of high-yield and 32,500 tonnes of softwood kraft consumed by the Company's paperboard operations as compared
to 56,400 tonnes and 39,500 tonnes respectively in the prior year. As well, 12,400 tonnes of pulp were consumed internally by various other pulp and paper operations, as compared to 14,400 tonnes in
2003. In all, internal pulp consumption represented approximately 5% of total shipments, a decrease from 6% in the prior year.

39

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The
eight North American pulp mills purchased approximately 2.6 million bone dry tonnes of woodchips in fiscal 2004, up from 2.2 million tonnes in the prior year. Of this
amount, approximately 48% were supplied by the Forest Products Group. This represents a small increase over the prior year when 44% were supplied internally.

The
remaining requirements were purchased from third parties under contracts and agreements of various duration. The three pulp mills located in Southern France purchased
1.4 million bone dry tonnes of woodchips in fiscal 2004, the same amount as in 2003. The fibre is sourced from many private landowners.

Overall,
improved pricing was not able to offset increased manufacturing costs and margins dropped from 5.6% to 4.6%. The Pulp Group EBITDA represented 37% of total Company EBITDA in
2004. This contrasts sharply with 2003 when, as a result of the negative EBITDA of the Forest Products Group, the Pulp Group EBITDA represented 97% of total Company EBITDA.

PAPER

|                                     |  | Paper | 
|------------------------------------ |  | ----- | 
|
|
|Consolidated sales                   |  | 482.4 | 
|EBITDA                               |  | 117.2 | 
|EBITDA margin                        |  | 24.3% | 
|                                     |  |       | 
|Identifiable assets (excluding cash) |  | 644.5 | 
|                                     |  |       | 

The
Paper segment currently includes four paper manufacturing facilities with a total of 12 paper machines. The mills located in Kapuskasing, Ontario and Pine Falls, Manitoba produce
newsprint. The facility located in Saint-Raymond, Quebec produces specialty papers. The St. Francisville, Louisiana mill produces coated and specialty papers. The total capacity of the Paper Group is
970,000 tonnes. The annual capacities of the paper manufacturing sites are outlined in the Company's Annual Information Form.

Sales
for the segment declined to $788.4 million, a decrease of $36.5 million over 2003. Lower effective selling prices, primarily for coated and specialty papers reduced
sales by $33.7 million or $35 per tonne shipped. In the case of newsprint, prices were unchanged despite the increase in US $ reference prices, the stronger Canadian $ being the
cause. Coated paper prices dropped as the increase in US $ reference prices was not enough to offset the stronger Canadian $. Overall, the Paper group generated 22% of consolidated sales
in fiscal 2004, as compared to 25% in the prior year.

Markets

The focus of the Paper business is North America, which accounted for 97% of sales in 2004, compared to 95% in 2003. The US alone accounted for 87% of sales. In
fiscal 2003, the benchmark price for newsprint (48.8 gram  East Coast) increased from US $460 per tonne to US $500 per tonne, and averaged
US $483 per tonne. In fiscal 2004, the price increases continued ending the year at US $550 per tonne. The average selling price for the year was US $530 per tonne, an increase of
US $47 per tonne over the prior year. After giving effect to the stronger Canadian $, the Company's average selling price was relatively unchanged.

The
recovery in pricing of coated papers has been slower to materialize. In fiscal 2003, the benchmark price for coated papers (No 5  40 lb)
increased from US $665 per short ton to US $695 per short ton and averaged US $682 per short ton. In fiscal 2004, the price increases continued, ending the year at US $740
per short ton. The average selling price for the year was US $706 per short ton, an increase of US $24 per short ton over the prior year.

40

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This
increase was not enough to offset the impact of the stronger Canadian $ and effective prices declined by $58 per short ton or $64 per tonne.

|                   |  | Total Sales |  | Shipments |  | Selling Price
|------------------ |  | ----------- |  | --------- |  | -------------
|
|
|Newsprint          |  | 382.1       |  | 352.1     |  | 571.2        
|Coated papers      |  | 299.0       |  | 277.0     |  | 279.5        
|Specialty papers   |  | 143.8       |  | 159.3     |  | 125.1        
|                   |  |             |  |           |  |              
|Consolidated sales |  | 824.9       |  | 788.4     |  |              
|                   |  |             |  |           |  |              

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

LOGO

Operations

In fiscal 2003, the Group's mills enjoyed relatively "full" operations with no significant market-related production curtailments. This was not the case in fiscal
2004. The weaker than anticipated demand for newsprint led to the indefinite shutdown in February 2004 of No 1 paper machine at the Kapuskasing, Ontario mill. This reduced newsprint production
by the equivalent of 45,000 tonnes in the fiscal year. The machine's annual capacity is 70,000 tonnes or approximately 12% of total newsprint capacity.

The
Company also undertook an initiative at the St-Raymond, Quebec paper mill to convert its production to 100% specialty papers. Total cash costs at the three Canadian mills
increased by $32.1 million, primarily as a result of higher purchased energy costs. This unfavourable item was partially offset by a cash cost decrease of $23.0 million relating to the
St. Francisville, Louisiana paper mill. The decrease was due to the relative increase in the value of the Canadian $ versus the US $. The St. Francisville facility is the Paper Group's
largest operation and provides a significant natural hedge against the negative impact of a weaker US $. In fiscal 2004, the St. Francisville mill cash cost of manufacturing, including SG&A,
represented approximately 51% of the Group's total costs.

The
Paper Group's mills are large users of virgin fibre, primarily in the form of wood chips. During fiscal 2004, the operations purchased 1.0 million bone dry tonnes of virgin
fibre, of which approximately 36% was internally sourced. This compares to 1.1 million bone dry tonnes and 33% sourced internally in the prior year. The operations in Kapuskasing and Pine Falls
both produce newsprint that contains recycled fibre. In 2004, these two facilities consumed 103,500 tonnes of wastepaper, down from 104,900 tonnes in 2003.

Overall,
fiscal 2004 was a difficult year. Weak prices and demand combined with the stronger Canadian $ to generate low Canadian $ selling prices. Although, the US $
cost base of the St. Francisville mill provided a partial currency offset, the Group's EBITDA and margins declined to levels not seen since the Company

41

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diversified
into paper in 1997. The Paper segment reduced total consolidated EBITDA in fiscal 2004, whereas it had generated 28% of EBITDA in the prior year.

PAPERBOARD

|                                     |  | Paperboard
|------------------------------------ |  | ----------
|
|
|Consolidated sales                   |  | 180.5     
|EBITDA                               |  | 10.4      
|EBITDA margin                        |  | 5.8%      
|                                     |  |           
|Identifiable assets (excluding cash) |  | 236.8     
|                                     |  |           

The
Paperboard segment consists of a multi-ply bleached coated paperboard machine located in Temiscaming, Quebec. The annual capacity of the machine is 160,000 tonnes. The
paperboard mill is
partially integrated with the high-yield pulp mill and also consumes NBSK pulp manufactured by the Company at other sites.

|                    |  | Total Sales |  | Shipments |  | Selling Price
|------------------- |  | ----------- |  | --------- |  | -------------
|
|
|Paperboard  rolls  |  | 114.3       |  | 101.6     |  | 105.6        
|Paperboard  sheets |  | 71.1        |  | 63.5      |  | 43.9         
|                    |  |             |  |           |  |              
|Consolidated sales  |  | 185.4       |  | 165.1     |  |              
|                    |  |             |  |           |  |              

Markets

North American sales accounted for 91% of total sales in 2004, compared to 92% in the prior year. Products are sold in roll and sheet form, with the latter
commanding higher prices due to additional conversion costs. The Company markets its paperboard in three different market areas: commercial printing and publishing, specialty bleached linerboard and
packaging.

The
benchmark for coated bleached boxboard (15 point) averaged US $859 per short ton in fiscal 2004, a US $26 per short ton increase over the prior year. Here again, the
improved US $ reference prices were not enough to offset the stronger Canadian $ and lower prices reduced sales by $8.5 million. Reduced demand also led to lower shipments, which
accounted for balance of the total revenue decline of $20.3 million. The Paperboard segment generated 5% of consolidated sales compared to 6% in the prior year.

Operations

The board machine produced 155,000 saleable tonnes in 2004, an increased of 6% from 146,800 tonnes in 2003. The mill had 25 fewer operating days in fiscal 2003
due to the installation of new process equipment combined with market-related downtime to balance inventories and demand. In fiscal 2004, the mill once again took 15 days of market-related
downtime to balance inventories and demand. After allowing for the downtime, the operating efficiency of the machine increased by 7% or 27 tonnes per operating day and manufacturing costs were reduced
by $5.6 million.

Overall,
the stronger Canadian $ weakened prices, with higher efficiency and lower cash costs providing a partial offset. The Paperboard segment contributed 4% of total Company
EBITDA in fiscal 2004, down from 14% in the prior year.

LOGO

42

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CHEMICALS

|                                     |  | Chemicals
|------------------------------------ |  | ---------
|
|
|Consolidated sales                   |  | 63.5     
|EBITDA                               |  | 7.4      
|EBITDA margin                        |  | 11.7%    
|                                     |  |          
|Identifiable assets (excluding cash) |  | 44.1     
|                                     |  |          

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

The
resin business produces powder and liquid phenolic resins at three operating sites in Quebec: Temiscaming, Longueuil and Trois-Pistoles. In October 2003, the Company acquired
a fourth manufacturing operation located in Toledo, Ohio which manufactures powder and liquid amino based resins. The Longueuil operation also produces formaldehyde, both for internal resin production
and external sales. In addition to its manufactured products the resin binders also markets third party resin binders to complement its customer offering. Sales of third party products totalled
$50.9 million in fiscal 2004, compared to $27.6 million in the prior year.

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

43

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Temiscaming,
Quebec. The lignin and alcohol businesses effectively convert pulp mill waste into value added products.

|                     |                | Total Sales |      | Shipments |      | Selling Price
|-------------------- | -------------- | ----------- | ---- | --------- | ---- | -------------
|
|
|Resin (tonnes)(1)    |                | 93.5        |      | 130.0     |      | 97.9         
|Lignin (tonnes)      |                | 41.3        |      | 38.5      |      | 182.6        
|Alcohol (000 litres) |                | 5.6         |      | 6.2       |      | 8.5          
|                     |                |             |      |           |      |              
|Total sales          |                | 140.4       |      | 174.7     |      |              
|                     |                |             |      |           |      |              
|                     | Internal sales |             | (6.9 | )         | (7.4 | )            
|                     |                |             |      |           |      |              
|Consolidated sales   |                | 133.5       |      | 167.3     |      |              
|                     |                |             |      |           |      |              

---

Markets

Chemical products are sold primarily in North America with sales representing 82% of the total in 2004, compared to 78% in 2003. Resin products, which accounted
for 74% of chemical sales, are designed for the OSB industry and other specialty applications. Lignin is sold as a binder and surfactant for industrial markets such as animal feed, concrete admixture
and carbon black. Ethyl alcohol is sold into the Canadian vinegar and cosmetics markets. Chemical Group sales represented 5% of consolidated sales in 2004, up from 4% in the prior year.

The
increase in sales of $33.8 million is due primarily to higher volumes of resins and related products. The increase in the selling price of resins is due to a higher average
value for the mix of products sold as opposed to individual product prices, as such their margins were relatively unchanged. Lower selling prices
and higher costs in lignin accounted for the drop of $0.7 million in EBITDA. The Chemical Group generated 5% of total company EBITDA, down from 11% in fiscal 2003.

|                                                         |  | Free Cash Flow |  
|-------------------------------------------------------- |  | -------------- | -
|
|
|Cash flow from operations before working capital changes |  | 441.1          |  
|Net fixed asset additions                                |  | (264.9         | )
|                                                         |  |                |  
|                                                         |  | 176.2          |  
|                                                         |  |                |  

Cash
flow from operations before working capital changes for fiscal 2004 was $235.4 million, a $194.7 million improvement from last year. The higher cash flow is due
primarily to a $93.9 million increase in EBITDA, a $48.1 million increase in proceeds on sale of derivative financial instruments and a $22.7 million gain on the sale of Slocan
shares. For the year ended September 2004, non-cash working capital items used $28.6 million, as compared to $16.5 million generated by the same items in the prior
year. Working capital items at year end include a temporary investment of $21.9 million related to 665,000 common shares of Riverside Forest Products acquired at a cost of $32.93 per share.
These shares have recently been sold for cash consideration of $40.00 per share. The resulting gain of $4.7 million will be shown as investment income in the December 2004 quarterly
results. After allowing for net fixed asset additions of $142.7 million, "free cash flow" was $92.7 million versus a negative amount of $91.1 million a year ago. The Company
defines free cash flow as "cash provided by operating activities before changes in non-cash working capital balances less net fixed asset additions". The Company had set a free cash flow
target of $130 million for fiscal 2004.

44

---



A
shortfall in planned EBITDA of approximately $100 million was partially offset by higher than planned proceeds on derivative financial instruments, principally currency
contracts. The net result was the Company missed its target by $37.3 million. The Company has set a free cash flow target of $135 million for fiscal 2005.

|                                   |  | Capital Spending
|---------------------------------- |  | ----------------
|
|
|Forest Products                    |  | 65.8            
|Pulp                               |  | 135.9           
|Paper                              |  | 58.2            
|Paperboard                         |  | 3.4             
|Chemicals and other                |  | 1.6             
|                                   |  |                 
|Net fixed asset additions          |  | 264.9           
|                                   |  |                 
|As a % of sales                    |  | 10%             
|As a % of fixed asset depreciation |  | 190%            
|                                   |  |                 

In
response to relatively low EBITDA margins brought on by challenging market conditions, the stronger Canadian $ and significant export duties on lumber shipped to the US, the
Company has limited capital expenditures to mandatory projects and those with high rates of return. In fiscal 2004, net fixed asset additions totalled $142.7 million compared to
$131.8 million a year ago. The amount spent is equal to 63% of fixed asset depreciation and 4% of sales.

Significant
items in fiscal 2004 include $22.3 million spent on the specialty pulp mill modernization in Temiscaming, Quebec. The $146.3 million project is virtually
complete with a remaining $9.4 million forecast to be spent in fiscal 2005. Capital expenditures of $20.1 million were incurred to construct a new bark boiler at the
St-Gaudens, France, hardwood kraft pulp mill. This is a $34.6 million project that will be completed in fiscal 2005.

Acquisitions and Investments

On October 28, 2003, the Company acquired all of the assets of BTLSR Toledo Inc., a custom manufacturer of spray-dried resins located in Toledo,
Ohio. The total price paid for the manufacturing assets and the net working capital was $8.5 million in cash. Depending on the financial results of the operation over the five year period
following the purchase, the seller may be entitled to additional payments of up to US $3 million. Based on its performance to the end of September 2004, no additional payments to
the seller would be required.

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

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

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

45

---





Financing Activities

Net debt to total capitalization was 48.3% at September 25, 2004, a decrease from 51.4% at September 27, 2003. The Company's total debt decreased
from $1,727.6 million to $1,617.4 million. The decrease was due primarily to the revaluation of the Company's US $ denominated debt, the Canadian having ended the 2004 fiscal year
at US $0.784, compared to US $0.739 a year ago. The currency change reduced the carrying value of the Company's US $ denominated debt by $93.5 million in fiscal 2004. The
Company's inability to generate sufficient free cash flow under the current pricing environment limited its ability to reduce net debt.

As
part of its long-term strategy, the Company has resolved to maintain its percentage of net debt to total capitalization to 40% or less. The objective of the plan is to
keep a strong balance sheet and maintain the ability of the Company to access capital markets at favourable rates. The Company remains committed to this program. As the Company's leverage at
September 25, 2004 exceeds its stated goal, the emphasis in the near term will be to maintain relatively high liquidity and limit capital expenditures. Improvement in the pricing levels and
EBITDA margins of the Company's main business segments or a satisfactory resolution of the lumber trade dispute, including refund of deposits, will be required before any reduction in financial
leverage can be achieved.

Current
credit ratings of various agencies on the Company and its significant long-term debt instruments are outlined in the table below.

Dominion Bond Rating Service

Moody's Investors Service

Standard & Poor'sBB (low)

Ba 3

BB-


GRAPHIC

The
Company's ratings were reduced during 2004 as the continued low selling prices combined with a stronger Canadian $ and a full year of lumber export duties reduced EBITDA
margins to very low levels, primarily during the first half of fiscal 2004.

46

---



Long-Term Debt  $ millions

|                                                                      |  | 2003    |  | 2004   
|--------------------------------------------------------------------- |  | ------- |  | -------
|Tembec Inc.  non-interest bearing unsecured notes                    |  | 23.9    |  | 23.9   
|Tembec Industries  US $500 million 8.5% unsecured senior notes       |  | 676.5   |  | 637.6  
|Tembec Industries  US $350 million 7.75% unsecured senior notes      |  | 473.5   |  | 446.3  
|Tembec Industries  US $350 million 8.625% unsecured senior notes     |  | 473.5   |  | 446.3  
|Tembec Industries  7% unsecured subordinated debentures              |  | 10.0    |  |       
|Spruce Falls  8.39% unsecured senior notes (US $8.6 million in 2003) |  | 11.6    |  |       
|Tembec SA debt                                                        |  | 13.5    |  | 13.4   
|Tembec Envirofinance SAS debt                                         |  |        |  | 7.7    
|Proportionate share of Marathon debt (50%)                            |  | 17.0    |  | 15.5   
|Proportionate share of Temlam debt (50%)                              |  | 9.1     |  | 7.5    
|Other debt                                                            |  | 19.0    |  | 19.2   
|                                                                      |  |         |  |        
|                                                                      |  | 1,727.6 |  | 1,617.4
|                                                                      |  |         |  |        
|Current portion included in above                                     |  | 27.8    |  | 9.4    
|                                                                      |  |         |  |        

In
March 2003, the Company issued US $100 million of unsecured senior notes as an "add-on" to the existing US $250 million 8.625% unsecured
senior notes. The additional tranche was issued at par. The proceeds were used for general corporate purposes.

During
2003, the Company made required principal payments of $10.0 million on the 7% unsecured subordinated debentures, US $8.5 million on the 8.39% unsecured senior
notes and the final payment of $25.9 million on the Ontario Hydro loan. In 2004, the Company made the required final payment of $10.0 million on the 7% unsecured subordinated debentures
and US $8.6 million on the 8.39% unsecured senior notes.

During
the year, the Company's French operations obtained, via Tembec Envirofinance SAS, $7.7 Million (Euro 4.9 million) of non-interest bearings loans
to assist with the financing of certain capital expenditures being undertaken at the pulp mills.

During
fiscal 2003, the Company redeemed 1,250,000 Series 3 Class B Preferred Shares at their original issue price of $16 per share, or $20 million. The preferred
shares had been issued in 1994 as part of the restructuring of the paperboard facility.

At
the end of September 2004, Tembec had cash, temporary investments and derivative financial instruments of $206.3 million plus unused operating lines of
$253.8 million. At the date of the previous audited financial statements, the Company had cash and temporary investments of $114.3 million and unused operating lines of
$298.3 million. As well, the mark to market of its derivative financial instruments was $223.4 million. The Company defines "operating lines" to include loans of various duration which
are secured by charges on accounts receivable and/or inventories. Operating lines are used to fund short-term requirements associated with both seasonal and cyclical inventory increases
which can occur in the Company's business segments. The Company would not normally draw on the operating lines to fund capital expenditures or average working capital requirements. The operating lines
are established across multiple entities and jurisdictions to ensure they meet the needs of the various operating units.

The
following table summarizes availability by major area at the end of the last two fiscal years.

47

---



Operating Lines  Availability  $ millions

|                                      |  | 2003  |  | 2004 
|------------------------------------- |  | ----- |  | -----
|Canadian operations                   |  | 223.3 |  | 177.7
|US operations                         |  | 3.2   |  | 21.6 
|French operations                     |  | 59.9  |  | 44.6 
|Proportionate share of joint ventures |  | 11.9  |  | 9.9  
|                                      |  |       |  |      
|                                      |  | 298.3 |  | 253.8
|                                      |  |       |  |      

The
availability in Canadian operations relates primarily to two separate operating lines. The Company currently has in place a $140.0 million committed 364-day
facility renewable in March 2005. There are no maintenance covenants associated with this credit. A second 364-day facility of $100.0 million is renewable in
June 2005. Although, this facility does have maintenance covenants, they are not onerous and were met even with the relatively poor financial performance of recent years. Based on past
experience, the Company is confident it will be able to renew these operating lines on acceptable terms and conditions. The Company is also currently assessing the merits of combining these two
operating lines into a larger single credit facility.

The
US operations are supported by a US $20 million 3-year operating facility renewable in May 2006.

This
facility does have maintenance covenants. They are not unduly onerous and were also met despite relatively poor financial performance of the recent years.

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

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

Common Shares  millions

|                                             |  | 2003 |   | 2004
|-------------------------------------------- |  | ---- | - | ----
|Shares outstanding  opening                 |  | 86.4 |   | 85.8
|Issued pursuant to long-term incentive plans |  | 0.1  |   | 0.1 
|Normal course issuer bid repurchases         |  | (0.7 | ) |    
|                                             |  |      |   |     
|Shares outstanding  ending                  |  | 85.8 |   | 85.9
|                                             |  |      |   |     

The
following table summarizes the Company's quarterly repurchases of common stock over the last two years, pursuant to its normal course issuer bid. The bid was recently extended.

48

---



For
the period beginning October 19, 2004, and ending October 18, 2005, Tembec is entitled to repurchase up to 4,293,046 common shares.

|                  |  | 2003    |  | 2004
|----------------- |  | ------- |  | ----
|
|December quarter  |  |        |  |    
|March quarter     |  |        |  |    
|June quarter      |  | 726,800 |  | 6.60
|September quarter |  |        |  |    
|                  |  |         |  |     
|                  |  | 726,800 |  | 6.60
|                  |  |         |  |     

In
2003, the Company purchased and cancelled 726,800 shares at a total cost of $4.8 million. As the average price paid was less than the average issue price at
September 28, 2002, a purchase discount of $2.3 million was credited to contributed surplus. In fiscal 2004, no shares were repurchased under the normal course issuer bid. During the
last two fiscal years, the Company's focus on maintaining its liquidity combined with balance sheet leverage exceeding its stated target significantly reduced its ability to repurchase its common
shares. This continued focus will likely limit purchases in fiscal 2005 as well.

As
to dilution, an additional 3.4 million shares may be issued pursuant to options granted under the Long-Term Incentive Plan (LTIP). The exercise price of the options
ranges from $7.09 per share to $15.75 per share with expiry dates from 2005 to 2014. As at September 25, 2004, there were 2.6 million exercisable share options, unchanged from the end of
the prior year.

Loans
to employees of approximately $6.3 million are outstanding under the LTIP on 552,625 shares as at September 25, 2004. This compares to loans of $7.6 million on
739,475 shares at the end of the prior year. The shares are held in trust as collateral for the loans. Effective July 2002, the LTIP was amended and participants are no longer eligible to
receive Company loans to purchase shares.

Contractual Obligations  $ millions

|                               |  | Total   |  | Within 1 year |  | 1-3 years |  | 4-5 years |  | After 5 years
|------------------------------ |  | ------- |  | ------------- |  | --------- |  | --------- |  | -------------
|Long-term debt                 |  | 1,617.4 |  | 9.4           |  | 29.4      |  | 458.2     |  | 1,120.4      
|Operating leases               |  | 25.8    |  | 9.3           |  | 8.2       |  | 3.3       |  | 5.0          
|Purchase obligations           |  | 258.2   |  | 124.3         |  | 85.5      |  | 38.4      |  | 10.0         
|Balance of price  acquisition |  | 8.9     |  | 1.2           |  | 2.6       |  | 3.4       |  | 1.7          
|                               |  |         |  |               |  |           |  |           |  |              
|                               |  | 1,910.3 |  | 144.2         |  | 125.7     |  | 503.3     |  | 1,137.1      
|                               |  |         |  |               |  |           |  |           |  |              

The
table shows the Company's contractual obligations as at September 25, 2004. The Company has long-term debt with contractual maturities as described in
note 8 of the audited consolidated financial statements. The operating lease obligations relate primarily to property and equipment rentals entered into in the normal course of business.
Purchase obligations relate to ongoing normal commercial commitments to purchase timber, wood chips, energy, chemicals and other operating inputs. They also include outstanding obligations relating to
capital expenditures. Finally, the $ 8.9 million obligation represents the Company's proportionate (50%) share of the balance payable by the Temlam joint venture to the previous owners of Jager
Building Systems pursuant to its acquisition by Temlam in August 2001.

49

---



Quarterly Financial Information  $ millions, except per share amounts

|                               |               | 2003  |       | 2004 
|------------------------------ | ------------- | ----- | ----- | -----
|
|Sales                          |               | 840.8 |       | 857.8
|                               |               |       |       |      
|EBITDA                         |               | 18.2  |       | 12.5 
|                               |               |       |       |      
|Net earnings (loss)            |               | (41.8 | )     | 34.2 
|                               |               |       |       |      
|Net earnings (loss) per share: |               |       |       |      
|                               | Basic         |       | (0.48 | )    
|                               | Fully diluted |       | (0.48 | )    
|Cash flow per share(1)         |               | 0.12  |       | (0.14

---

Fourth Quarter Analysis

The Company reported net earnings of $90.8 million or $1.06 per share in the fourth quarter ended September 25, 2004 compared to a net loss of
$51.5 million or $0.60 or share in the same quarter of fiscal 2003. The weighted average number of common shares outstanding was 85.9 million, a small increase from 85.8 million
in the same quarter of the prior year.

The
Company generated EBITDA of $84.6 million on sales of $981.3 million compared to EBITDA of $ 31.9 million on sales of $838.6 million in
September 2003 quarter. The increase in sales of $142.7 million is due primarily to higher selling prices in all three main businesses: Forest Products, Pulp and Paper. The increase in
selling prices was mitigated by a stronger Canadian $, which averaged US $0.763, an increase of approximately 5% over US $0.724 in the year ago quarter. The $52.7 million
increase in EBITDA was driven by the improved profitability of the Forest Products business.

During
the September 2004 quarter, the Company recorded a gain of $90.4 million on the translation of its US $ denominated debt as the relative value of the
Canadian $ increased from US $0.741 to US $0.784. In the comparable period a year ago, the Canadian $ had decreased from US $0.743 to US $0.739 and the
Company had recorded a loss of $8.0 million. The after-tax impact of the gain on translation of foreign-denominated debt was $75.8 million or $0.88 per share as compared to
prior year after-tax loss of $6.7 million or $0.08 per share.

During
the September 2003 quarter, the Company absorbed a non-cash charge of $5.7 million relating to the permanent closure of a pine sawmill located in
Woodsville, Maine. It also absorbed a non-cash charge of $2.6 million relating to the write-down of fixed assets removed from service at the paperboard mill located in
Temiscaming, Quebec. Finally, the Company performed the annual impairment test of goodwill and found that impairment did exist in relation to a remanufactured lumber facility acquired in 2000. As a
result, the Company absorbed a goodwill impairment charge of $10.1 million. The three aforementioned unusual items totalled $18.4 million. Their
after  tax impact was $17.5 million or $0.21 per share.

During
the September 2004 quarter, the Company recorded a non-cash of $9.8 million relating to the write-down of a newsprint machine at the
Kapuskasing, Ontario paper mill. The machine has been idle since February 2004 and based on the relatively difficult market conditions it was deemed unlikely that the newsprint machine would be
restarted. The charge includes the complete write-down of the machine's net book value and related spare parts. The after-tax impact of the unusual charge was
$6.6 million or $0.08 per share.

The
fourth quarter 2004 interim MD&A issued on November 18, 2004 provides a more extensive analysis of items having impacted the Company's financial results.

Summary of Quarterly Results

On a quarterly basis, sales have benefited from improvements in US $ reference prices for lumber, pulp and paper over the last two years. However, much of
the benefit was offset by a strengthening Canadian $ compared

50

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to
the US $, increasing from an average of US $0.637 in the first quarter of fiscal 2003 to US $0.763 in the fourth quarter of fiscal 2004, a 20% increase. As a result, the
Company generated relatively marginal levels of EBITDA in fiscal 2003 and the first two quarters of fiscal 2004.

The
Company's financial performance and that of its Forest Products segment for the last eight quarters were negatively impacted by substantial export duties on lumber shipped to the US.
Total amount incurred over the last two years was $192.6 million, an amount equal to 79% of reported EBITDA.

While
the stronger Canadian $ reduced EBITDA, the Company realized significant gains on its derivative financial instruments, primarily US $ foreign exchange contracts.
Over the last eight quarters, the Company has recorded $297.2 million of realized and unrealized gains on derivative financial instruments, an amount greater than the $285.7 million of
interest on indebtedness incurred during the same period.

The
Company also realized a gain of $357.4 million on the translation of its US $ denominated debt over the last 2 years. However, the impact of these restatements
added considerable volatility to the quarterly results, with the quarterly impact ranging from a gain of $153.3 million in the June 2003 quarter and a loss of $38.5 million in the
June 2004 quarter.

During
the September 2003 quarter, the Company absorbed a non-cash charge of $5.7 million relating to the permanent closure of a pine sawmill located in
Woodsville, Maine. It also absorbed a non-cash charge of $2.6 million relating to the write-down of fixed assets removed from service at the paperboard mill located in
Temiscaming, Quebec. Finally, the Company performed the annual impairment test of goodwill and found that impairment did exist in relation to a remanufactured lumber facility acquired in 2000. As a
result, the Company absorbed a goodwill impairment charge of $10.1 million. The three aforementioned unusual items totalled $18.4 million. Their after-tax impact was
$17.5 million or $0.21 per share.

During
the March 2004 quarter, the Company recorded a non-cash charge of $36.8 million relating to the write-down of its investment in the Gaspesia
Papers Limited Partnership. The charge is the result of a decision to halt work on the modernization project and seek creditor protection. The charge includes the write-down of the
original investment of $35.0 million and a provision of $1.8 million for the non-recovery of expenses incurred as part of service agreements with Gaspesia Papers Limited
Partnership. As the majority of the unusual charge is a capital loss, the after-tax impact was $36.2 million or $0.42 per share.

During
the September 2004 quarter, the Company recorded a non-cash charge of $9.8 million relating to the write-down of a newsprint machine at the
Kapuskasing, Ontario paper mill. The machine has been idle since February 2004 and based on the relatively difficult market conditions it was deemed unlikely that the newsprint machine would be
restarted. The charge includes the complete write-down of the machine's net book value and related spare parts. The after-tax impact of the unusual charge was
$6.6 million or $0.08 per share.

51

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Fiscal 2003 Compared to Fiscal 2002  $ millions, unless otherwise noted

|                                         |  | 2002    |   | 2003   
|---------------------------------------- |  | ------- | - | -------
|Sales                                    |  | 3,391.0 |   | 3,346.1
|                                         |  |         |   |        
|EBITDA                                   |  | 275.5   |   | 74.8   
|                                         |  |         |   |        
|Net earning (loss)                       |  | (116.2  | ) | 11.4   
|                                         |  |         |   |        
|Net earnings (loss) per share            |  | (1.35   | ) | 0.13   
|                                         |  |         |   |        
|Diluted earnings (loss) per share        |  | (1.35   | ) | 0.13   
|                                         |  |         |   |        
|Total assets (at end of year)            |  | 3,991.3 |   | 3,818.8
|                                         |  |         |   |        
|Total long-term debt(1) (at end of year) |  | 1,927.0 |   | 1,727.6
|                                         |  |         |   |        

---

The decrease in consolidated sales of $44.9 million in 2003 was due primarily to lower selling prices in Forest Products and Paper,
partially offset by higher prices and volumes in the Pulp segment.

EBITDA
margins declined below 5% for the first time since 1993. Fiscal 2003 represented the first time that the Company had simultaneously experienced trough pricing and margins in its
three major segments, Forest Products, Pulp and Paper.

Despite
a decrease of $200.7 million in EBITDA, the Company's reported net earnings actually improved by $127.6 million over the prior year. There were two important items
that more than offset the declining profitability of the major business segments.

The
first relates to the Company's Euro and US $ hedging programs. In the prior year, both the Euro and Canadian $ had been weaker versus the US $, and the hedges
generated a loss of $53.8 million. In fiscal 2003, the US $ weakened against both currencies and the hedging program generated a gain of $64.8 million. The year over year
improvement relating to currency hedges was $118.6 million.

The
second item, also caused by currency, relates to the restatement of the Company's US $ denominated debt. Here again, the stronger Canadian $ at the end of fiscal 2003,
up 17% from the end of the prior year, generated a gain of $263.9 million on the translation of its foreign debt. In the prior year, the ending value of the Canadian $ versus the
US $ was relatively unchanged and a small gain of $3.7 million was recorded. Although larger in total dollars than the aforementioned currency hedges, the gain on debt translation is an
unrealized non-cash gain.

52

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During fiscal 2002, the Company incurred non-recurring unusual charges of $23.8 million relating to early redemption of debt and costs associated with the
modernization of its sawmills in Northern Ontario. In fiscal 2003, the Company incurred non-recurring unusual charges of $18.4 million relating to the impairment of goodwill, the
permanent closure of a sawmill and fixed assets removed from service.

For
the year ended September 27, 2003, the Company generated net earnings of $11.4 million or $0.13 per share compares to a net loss of $116.2 million or $1.35 per
share in fiscal 2002. As noted above, currency gains on hedges and foreign debt accounted for all the improvement.

Risks and Uncertainties

Product Prices

Our financial performance is dependent on the selling prices of our products. The markets for most lumber, pulp and paper products are cyclical and are influenced
by a variety of factors. These factors include periods of excess product supply due to industry capacity additions, periods of decreased demand due to weak general economic activity, inventory
de-stocking by customers, and fluctuations in currency exchange rates. During periods of low prices, the Company is subject to reduced revenues and margins, resulting in substantial
declines in profitability and possibly net losses.

Based
on 2005 planned sales volumes, the following table illustrates the approximate annual impact of changes to average Canadian dollar selling prices on after-tax earnings.

Selling price sensitivity

|                              |  | Impact on after-tax earnings |  | Average selling prices ($) 4th Quarter  2004
|----------------------------- |  | ---------------------------- |  | ---------------------------------------------
|
|Pulp  $25/tonne              |  | 36.3                         |  | 724                                          
|Publishing papers  $25/tonne |  | 16.3                         |  | 858                                          
|SPF lumber  $10/mfbm         |  | 11.8                         |  | 599                                          
|Paperboard  $50/tonne        |  | 5.6                          |  | 1,200                                        
|                              |  |                              |  |                                              

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

Foreign Exchange

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

Based
on 2005, planned sales volumes and prices, the following table illustrates the impact of a 1% change in the value of the US $ versus the Canadian $ and the Euro. For
illustrative purposes, we have assumed an increase of 1% in the value of the US $. A decrease would have the opposite effects of those shown below.

53

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Foreign exchange sensitivity  $ millions

|                              |  | Hedged |   | Unhedged |  
|----------------------------- |  | ------ | - | -------- | -
|Increase EBITDA               |  | 29.2   |   | 29.2     |  
|Increase interest expense     |  | (1.3   | ) | (1.3     | )
|Loss on currency hedges       |  | (4.3   | ) |         |  
|                              |  |        |   |          |  
|Increase cash flow            |  | 23.6   |   | 27.9     |  
|Loss on US $ debt translation |  | (15.5  | ) | (15.5    | )
|                              |  |        |   |          |  
|Pre-tax earnings              |  | 8.1    |   | 12.4     |  
|Tax provision                 |  | (5.1   | ) | (6.5     | )
|                              |  |        |   |          |  
|Net earnings                  |  | 3.0    |   | 5.9      |  
|                              |  |        |   |          |  

As
can be seen, interest paid on the Company's US $ denominated debt provides only a small offset to its total US $ exposure. To further reduce the impact of fluctuations
in the value of the US $, the Company has adopted a policy of hedging up to 50% of its anticipated US $ receipts for up to 36 months in duration. At September 25, 2004, the
Company held US $ foreign exchange contracts totalling US $348.9 million with a fair value of $104.9 million. This compares to September 27, 2003 when the Company
held US $ foreign exchange contracts totalling US $1,177.1 million with a fair value of $223.4 million. The position held at the end of fiscal 2004 is equal to
approximately 20% of the Company's net US $ receipts anticipated to occur over the next 18 months. The Company's derivative financial holdings at the end of fiscal 2004 are disclosed in
note 21 of the audited consolidated financial statements.

Operational Risks

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

Fibre
represents the Company's major raw material in the production of wood products, pulp and paper. In Canada, virgin fibre or timber is sourced primarily by agreements with provincial
governments.

The
agreements are granted for various terms from 5 to 25 years and are generally subject to regular renewals every 5 years. The agreements incorporate commitments with
respect to sustainable forest management, silvicultural work, forest and soil renewal, as well as cooperation with other forest users. In addition, the Company has undertaken, on a voluntary basis, to
have its timber harvesting certified by the Forest Stewardship Council (FSC). The Company expects the agreements to be extended as they come up for renewal. Aboriginal groups have claimed substantial
portions of land in various provinces over which they claim aboriginal title or in which they have a traditional interest and for which they are seeking compensation from various levels of government.
The Company has taken a proactive approach to enhance the economic participation of the First Nations in its operations wherever feasible. The Company's operations in the United States and
France source their fibre requirements from various private sources, primarily through long-term supply arrangements. The Company also purchases approximately
105,000 tonnes per year of recycled waste fibre. To mitigate the impact of price fluctuations, the Company periodically purchases ONP hedges. At September 25, 2004, the Company held hedges
relating to ONP representing approximately 21% of its annual recycled fibre purchases. The fair value of these instruments was $0.4 million.

Energy
is an important component of mill costs, especially for high-yield pulp mills, newsprint and paper mills. In 2004, we purchased approximately $325 million of
energy, 61% of which was electricity. Electrical purchases are made primarily from large public utilities, at rates set by regulating bodies. In certain jurisdictions, electricity is deregulated which
can lead to greater price volatility. To mitigate the effect of price fluctuations on its financial performance, the Company employs several tactics, including the securing of longer-term
supply

54

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agreements,
the purchase of derivative financial instruments and operational curtailments in periods of high prices (load shedding). At September 25, 2004, the Company did not hold any
derivative financial instruments relating to purchased electricity. Fossil fuels, primarily natural gas, are purchased at market rates. The Company purchases derivative financial instruments to hedge
its exposure. At September 25, 2004 the Company had natural gas hedges covering approximately 25% of its anticipated requirements for the next 2 years. The fair value of these
instruments was $3.2 million.

Nearly
all the Company's manufacturing units have a unionized workforce. Over the past 30 years, the Company has successfully negotiated new collective agreements in nearly all
instances, with very few work stoppages. At many of the Company's facilities, as well as those of the North American industry as a whole, we have seen reductions in employment levels resulting from
technological and process improvements resulting in a workforce with more years of service. This increases the relative costs of pensions and benefits. At September 2004, the Company had
approximately 7,700 hourly-paid employees, nearly all of which are covered by collective bargaining agreements. At the end of September 25, 2004, there were 12 agreements
covering 2,000 employees under active negotiations. During fiscal 2005, a total of 8 agreements covering 2,400 employees will expire. The remaining contracts expire at various dates to
December 2009. The Company anticipates it will reach satisfactory agreements on contracts currently under active negotiations and those expiring in the future.

The
Company's operations are subject to industry-specific environmental regulations relating to air emissions, wastewater (effluent) discharges, solid waste, landfill operations,
forestry practices, and site remediation. The Company has made significant progress in reducing the environmental impact of its operations over the last 15 years. This has occurred as a result
of changes in manufacturing processes, the installation of specialized equipment to treat/eliminate the materials being discharged and the implementation of standardized practices such as
ISO 14001. The provincial regulator has filed charges against the Temiscaming, Quebec site relating to discharges of effluent that exceeded the regulatory standard. The Company is currently
contesting the charges and considers that the outcome will not materially affect its financial results. Tembec has been actively assessing the merits of various options to address this situation.
These include strategies to reduce its effluents at source, improve the operating efficiency of the existing treatment equipment, expand treatment capacity and/or construct an anaerobic waste
treatment facility. Failure to improve the performance of the existing waste water treatment facility will lead to higher operating costs and reduced operating efficiencies at the Temiscaming site.

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

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

Trade Restrictions/Lumber Export Duties

The Company's manufacturing operations are located primarily in Canada. However, sales into the Canadian market represented only 20% of consolidated sales in
2004. As such, the Company's financial results are highly dependant on its ability to sell its products into the "export" markets. Tariffs and trade barriers that reduce or prohibit the movement of
our products across international borders constitute an ongoing risk. The current dispute between Canada and the United States over softwood lumber is a case in point. The United States
Department of Commerce has assessed the Company with aggregate countervailing and antidumping duties at an average rate of 29%. The Company has made the required cash deposits on its exports of
softwood lumber to the US. The final outcome of the dispute is not known at this time.

Financial Risks/Debt Service

The Company currently has a non-investment grade rating of BB-/BA3/BB low. The ratings reflect the relatively high use of debt combined
with periods of reduced operating earning due to the cyclicality of its three principal business segments. Of the total long-term debt of $1.6 billion, 95% relates to US $
denominated high-yield "Senior Notes". The annual interest coupon on the high-yield debt ranges between 7.75% and

55

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

Growth Strategy/Acquisition

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

O U T L O O K

Forest Products

In last year's MD&A, we had expressed concern that the significant amount of duties paid by Canadian lumber producers could lead to the acceptance of a negotiated
settlement that, while improving the near term financial health of Canadian producers, could have negative longer term implications. This did not occur in fiscal 2004. The Canadian lumber producers
continued, via various legal challenges, to improve their relative position. The strong demand and pricing experienced in the last six months of fiscal 2004 considerably mitigated the financial
hardship caused by the duties. The weaker US $ has also changed the competitive landscape, increasing the relative cost position of Canadian producers. The Company continues to promote an
approach that would see a concerted initiative by the North American industry to promote forest products as sustainable, environmentally-sound products. We will continue to pursue the full return of
all duties deposited as well as free trade for lumber in North America. The $220.9 million of duties charged since May 22, 2002, including $111.4 million incurred in fiscal 2004,
have negatively impacted the Company's reported financial results. We expect that fiscal 2005 will bring a refund of duties deposited and a satisfactory resolution to the long running dispute. As for
lumber markets, we do not anticipate that they will be as strong in fiscal 2005 versus those of fiscal 2004. The Company will also have to rationalize its Eastern Canadian lumber capacity in light of
declining timber supplies and increasing competitiveness in the North American lumber industry.

Pulp

In last year's MD&A, we viewed the risk of a further weakening of the US $ vis-à-vis the Canadian $ and the
Euro to be remote. However, the US $ ended the year 6% weaker against both the Canadian $ and the Euro. For a second consecutive year, we saw the benefit of higher US $ pulp
prices largely offset by a stronger Canadian $ and Euro. The benchmark NBSK pulp price (delivered US) ended fiscal 2004 at US $650 per tonne, an increase of US $100 per tonne
since the
end of fiscal 2003. Going forward, we anticipate a reduction in margins and profitability in the near term as US $ selling prices in the December 2004 quarter will be lower and the
US $ will be weaker versus the Canadian $ and the Euro.

We
view this as a temporary setback. We anticipate that pulp prices will recover in the next few months and will increase beyond US$ 700 per tonne in early calendar 2005. There
are risks associated with our outlook. There is a possibility that the US $ will weaken further, and cause global economic conditions to deteriorate. The supply of hardwood pulps remains
plentiful. Although the softwood pulp market is in better balance, historically both of these grades need to be in balance to create a positive environment for market pulp producers. Finally, a
stronger printing and writing paper business will be required for a good market pulp business.

56

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Paper

The story surrounding newsprint has many similarities with that of market pulp. We had correctly forecasted modest pricing improvement in fiscal 2004. The
benchmark newsprint price (48.8 gram  East Coast) increased from US $500 per tonne in September 2003 to US $550 per tonne in
September 2004. However, the 10% increase in selling price was offset by a 6% decline in the value of the Canadian $ versus the US $. Our outlook for newsprint is once again one
of modest pricing improvement. Although the higher relative cost position of Canadian producers will put upward pressure on newsprint prices, this will be mitigated by continued weak demand in North
America.

As
for coated paper, the gradual improvements we had foreseen in 2004 did materialize, albeit at a slower pace than we had anticipated. The benchmark price
(No 5 - 40 lb) increased by US $45 per short ton, reaching US $740, but still well below historical and trend line levels. Currency does not play
as important a role in the profitability of coated papers since both the Company's revenues and manufacturing costs are US $ denominated. However, there is an indirect impact. The weaker
US $ versus the Euro improves the relative cost position of US paper producers such as ourselves. The weaker currency should also benefit the US economy in broader terms. We
expect a much improved market for coated papers in fiscal 2005. Demand has been good and producers have been reducing inventories by shipping more than they produce.

Summary

In summary, the financial results of 2004 fell short of our expectations. Our view on pricing was fairly accurate but we had not foreseen the weakness of the
US $. The Company was able to offset a portion of the negative currency impact with its US $ hedging program, which will remain an important source of income and cash flow in fiscal 2005
as well. Better demand for the majority of our products over the next 12 months should allow for the "pass through" of currency and cost pressures, but this will likely take a few quarters to
put in place. Until then, the Company will continue to limit capital expenditures and focus on maintaining high levels of liquidity. The potential recovery of lumber export duties will be a key
determinant of financial performance in fiscal 2005.

Additional Information

Additional information relating to Tembec, including the Annual Information Form, can be found on SEDAR at www.sedar.com and on the Company's website at
www.tembec.com

57

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Consolidated Financial Statements of

TEMBEC INC.

Years ended September 25, 2004 and September 27, 2003

58

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AUDITORS' REPORT

To
the Shareholders of Tembec Inc.

We
have audited the consolidated balance sheets of Tembec Inc. as at September 25, 2004 and September 27, 2003, and the consolidated statements of operations,
retained earnings and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

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

In
our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at September 25, 2004 and
September 27, 2003, and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

GRAPHIC

Chartered
Accountants

Montréal,
Canada
November 5, 2004

59

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TEMBEC INC.    CONSOLIDATED FINANCIAL STATEMENTS    Years ended September 25, 2004 and September 27, 2003

|                                             |  | Page
|-------------------------------------------- |  | ----
|Financial Statements                         |  |     
|Consolidated Balance Sheets                  |  | 61  
|Consolidated Statements of Operations        |  | 62  
|Consolidated Statements of Retained Earnings |  | 62  
|Consolidated Statements of Cash Flows        |  | 63  
|Consolidated Business Segment Information    |  | 64  
|Consolidated Geographic Segment Information  |  | 65  
|Notes to Consolidated Financial Statements   |  | 66  

60

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TEMBEC INC.        CONSOLIDATED BALANCE SHEETS        September 25, 2004 and September 27, 2003  (in millions of dollars)

|                                                      |                                                                          | 2004 |         | 2003  |  
|----------------------------------------------------- | ------------------------------------------------------------------------ | ---- | ------- | ----- | -
|Assets                                                |                                                                          |      |         |       |  
|Current assets:                                       |                                                                          |      |         |       |  
|                                                      | Cash and cash equivalents                                                |      | $       | 70.1  |  
|                                                      | Temporary investments                                                    |      |         | 21.9  |  
|                                                      | Derivative financial instruments (note 21)                               |      |         | 82.2  |  
|                                                      | Accounts receivable (note 7)                                             |      |         | 464.5 |  
|                                                      | Inventories (notes 3 and 7)                                              |      |         | 569.4 |  
|                                                      | Prepaid expenses                                                         |      |         | 21.5  |  
|                                                      |                                                                          |      |         |       |  
|                                                      |                                                                          |      | 1,229.6 |       |  
|Derivative financial instruments (note 21)            |                                                                          |      | 32.1    |       |  
|Investments                                           |                                                                          |      | 22.1    |       |  
|Fixed assets (note 5)                                 |                                                                          |      | 2,400.5 |       |  
|Other assets (note 6)                                 |                                                                          |      | 119.1   |       |  
|Future income taxes (note 18)                         |                                                                          |      | 88.5    |       |  
|Goodwill (notes 2 and 17)                             |                                                                          |      | 28.9    |       |  
|                                                      |                                                                          |      |         |       |  
|                                                      |                                                                          | $    | 3,920.8 |       | $
|                                                      |                                                                          |      |         |       |  
|Liabilities and Shareholders' Equity                  |                                                                          |      |         |       |  
|Current liabilities:                                  |                                                                          |      |         |       |  
|                                                      | Operating bank loans (note 7)                                            |      | $       | 73.9  |  
|                                                      | Accounts payable and accrued charges                                     |      |         | 520.7 |  
|                                                      | Current portion of deferred gain on foreign exchange contracts (note 21) |      |         | 117.9 |  
|                                                      | Current portion of long-term debt (note 8)                               |      |         | 9.4   |  
|                                                      |                                                                          |      |         |       |  
|                                                      |                                                                          |      | 721.9   |       |  
|Long-term debt (note 8)                               |                                                                          |      | 1,608.0 |       |  
|Deferred gain on foreign exchange contracts (note 21) |                                                                          |      | 38.4    |       |  
|Other long-term liabilities and credits (note 9)      |                                                                          |      | 133.0   |       |  
|Future income taxes (note 18)                         |                                                                          |      | 191.8   |       |  
|Minority interests (note 10)                          |                                                                          |      | 5.3     |       |  
|Redeemable preferred shares (notes 11 and 12)         |                                                                          |      | 25.7    |       |  
|Commitments and contingencies (note 13)               |                                                                          |      |         |       |  
|Shareholders' equity:                                 |                                                                          |      |         |       |  
|                                                      | Share capital (note 12)                                                  |      |         | 833.8 |  
|                                                      | Contributed surplus                                                      |      |         | 5.5   |  
|                                                      | Cumulative exchange translation of a foreign subsidiary                  |      |         | (3.0  | )
|                                                      | Retained earnings                                                        |      |         | 360.4 |  
|                                                      |                                                                          |      |         |       |  
|                                                      |                                                                          |      | 1,196.7 |       |  
|                                                      |                                                                          |      |         |       |  
|                                                      |                                                                          | $    | 3,920.8 |       | $
|                                                      |                                                                          |      |         |       |  

On
behalf of the Board:

|Chairman | President and Chief Executive Officer
|--------- | --------------------------------------

See accompanying notes to consolidated financial statements.

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TEMBEC INC.        CONSOLIDATED STATEMENTS OF OPERATIONS        Years ended September 25, 2004 and September 27, 2003  (in millions of dollars, unless otherwise noted)

|                                                                                                                           |  | 2004 |         | 2003 |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | -
|Sales                                                                                                                      |  | $    | 3,664.8 |      | $
|Freight and sales deductions                                                                                               |  |      | 422.2   |      |  
|Countervailing and antidumping duties (note 13)                                                                            |  |      | 111.4   |      |  
|Cost of sales                                                                                                              |  |      | 2,783.9 |      |  
|Selling, general and administrative                                                                                        |  |      | 178.6   |      |  
|                                                                                                                           |  |      |         |      |  
|Earnings before interest, income taxes, depreciation and amortization, and other non-operating expenses (EBITDA) (note 14) |  |      | 168.7   |      |  
|Depreciation and amortization (note 15)                                                                                    |  |      | 234.3   |      |  
|                                                                                                                           |  |      |         |      |  
|Operating loss                                                                                                             |  |      | (65.6   | )    |  
|Interest, foreign exchange and other (note 16)                                                                             |  |      | (99.0   | )    |  
|Exchange gain on long-term debt                                                                                            |  |      | (93.5   | )    |  
|Unusual items (note 17)                                                                                                    |  |      | 46.6    |      |  
|Income taxes (note 18)                                                                                                     |  |      | 42.5    |      |  
|Minority interests                                                                                                         |  |      | 0.4     |      |  
|                                                                                                                           |  |      |         |      |  
|Net earnings                                                                                                               |  | $    | 37.4    |      | $
|                                                                                                                           |  |      |         |      |  
|Basic earnings per share (note 12)                                                                                         |  | $    | 0.44    |      | $
|                                                                                                                           |  |      |         |      |  
|Diluted earnings per share (note 12)                                                                                       |  | $    | 0.44    |      | $
|                                                                                                                           |  |      |         |      |  

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS        Years ended September 25, 2004 and September 27, 2003  (in millions of dollars)

|                                                                   |  | 2004 |       | 2003 |  
|------------------------------------------------------------------ |  | ---- | ----- | ---- | -
|Retained earnings, beginning of year                               |  | $    | 323.0 |      | $
|Adjustment resulting from a change in accounting policies (note 1) |  |      |      |      |  
|                                                                   |  |      |       |      |  
|Restated retained earnings, beginning of period                    |  |      | 323.0 |      |  
|Net earnings                                                       |  |      | 37.4  |      |  
|                                                                   |  |      |       |      |  
|Retained earnings, end of year                                     |  | $    | 360.4 |      | $
|                                                                   |  |      |       |      |  

See accompanying notes to consolidated financial statements.

62

---



TEMBEC INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        Years ended September 25, 2004 and September 27, 2003  (in millions of dollars)

|                                                                                                                                             |                                               | 2004                                                                  |        | 2003   |       
|-------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------- | --------------------------------------------------------------------- | ------ | ------ | ------
|Cash flows from operating activities:                                                                                                        |                                               |                                                                       |        |        |       
|                                                                                                                                             | Net earnings                                  |                                                                       | $      | 37.4   |       
|                                                                                                                                             | Adjustments for:                              |                                                                       |        |        |       
|                                                                                                                                             |                                               | Depreciation and amortization (note 15)                               |        |        | 234.3 
|                                                                                                                                             |                                               | Amortization of deferred financing costs                              |        |        | 5.3   
|                                                                                                                                             |                                               | Exchange gain on long-term debt                                       |        |        | (93.5 
|                                                                                                                                             |                                               | Amortization of deferred gain on foreign exchange contracts (note 21) |        |        | (149.3
|                                                                                                                                             |                                               | Derivative financial instruments gain (note 21)                       |        |        | (84.6 
|                                                                                                                                             |                                               | Proceeds on sale of derivative financial instruments (note 21)        |        |        | 193.7 
|                                                                                                                                             |                                               | Loss on consolidation of foreign integrated subsidiaries              |        |        | 2.0   
|                                                                                                                                             |                                               | Future income taxes (note 18)                                         |        |        | 35.4  
|                                                                                                                                             |                                               | Unusual items (note 17)                                               |        |        | 46.6  
|                                                                                                                                             |                                               | Other                                                                 |        |        | 8.1   
|                                                                                                                                             |                                               |                                                                       |        |        |       
|                                                                                                                                             |                                               |                                                                       | 235.4  |        |       
|                                                                                                                                             | Changes in non-cash working capital:          |                                                                       |        |        |       
|                                                                                                                                             |                                               | Temporary investments                                                 |        |        | 4.8   
|                                                                                                                                             |                                               | Accounts receivable                                                   |        |        | (25.9 
|                                                                                                                                             |                                               | Inventories                                                           |        |        | (59.0 
|                                                                                                                                             |                                               | Prepaid expenses                                                      |        |        | (6.5  
|                                                                                                                                             |                                               | Accounts payable and accrued charges                                  |        |        | 58.0  
|                                                                                                                                             |                                               |                                                                       |        |        |       
|                                                                                                                                             |                                               |                                                                       | (28.6  | )      |       
|                                                                                                                                             |                                               |                                                                       |        |        |       
|                                                                                                                                             |                                               |                                                                       | 206.8  |        |       
|Cash flows from investing activities:                                                                                                        |                                               |                                                                       |        |        |       
|                                                                                                                                             | Acquisition of companies (note 2)             |                                                                       |        | (99.7  | )     
|                                                                                                                                             | Additions to fixed assets                     |                                                                       |        | (144.7 | )     
|                                                                                                                                             | Proceeds from disposal of fixed assets        |                                                                       |        | 2.0    |       
|                                                                                                                                             | Acquisition of investments                    |                                                                       |        | (1.1   | )     
|                                                                                                                                             | Decrease (increase) in assets held for resale |                                                                       |        | 0.1    |       
|                                                                                                                                             | Other                                         |                                                                       |        | (15.8  | )     
|                                                                                                                                             |                                               |                                                                       |        |        |       
|                                                                                                                                             |                                               |                                                                       | (259.2 | )      |       
|Cash flows from financing activities:                                                                                                        |                                               |                                                                       |        |        |       
|                                                                                                                                             | Increase in long-term debt                    |                                                                       |        | 11.8   |       
|                                                                                                                                             | Repayments of long-term debt                  |                                                                       |        | (28.5  | )     
|                                                                                                                                             | Increase in other long-term liabilities       |                                                                       |        | 11.6   |       
|                                                                                                                                             | Repayments of other long-term liabilities     |                                                                       |        | (7.2   | )     
|                                                                                                                                             | Repurchase of common shares, net of expenses  |                                                                       |        | (0.4   | )     
|                                                                                                                                             | Repurchase of preferred shares                |                                                                       |        |       |       
|                                                                                                                                             | Other                                         |                                                                       |        | 4.4    |       
|                                                                                                                                             |                                               |                                                                       |        |        |       
|                                                                                                                                             |                                               |                                                                       | (8.3   | )      |       
|Foreign exchange loss on cash and cash equivalents held in foreign currencies                                                                |                                               |                                                                       | (0.3   | )      |       
|                                                                                                                                             |                                               |                                                                       |        |        |       
|Net decrease in cash and cash equivalents                                                                                                    |                                               |                                                                       | (61.0  | )      |       
|Cash and cash equivalents, net of operating bank loans, beginning of year                                                                    |                                               |                                                                       | 57.2   |        |       
|                                                                                                                                             |                                               |                                                                       |        |        |       
|Cash and cash equivalents, net of operating bank loans, end of year                                                                          |                                               | $                                                                     | (3.8   | )      | $     
|                                                                                                                                             |                                               |                                                                       |        |        |       
|Interest paid in 2004 totalled $138.7 million (2003  $149.6 million) and income taxes paid amounted to $8.7 million (2003  $11.0 million). |                                              

See accompanying notes to consolidated financial statements.

63

---





TEMBEC INC.        CONSOLIDATED BUSINESS SEGMENT INFORMATION        Years ended September 25, 2004 and September 27, 2003  (in millions of dollars)

|                                                          |                             | 2004 |        
|--------------------------------------------------------- | --------------------------- | ---- | -------
|
|Sales:                                                    |                             |      |        
|                                                          | External                    |      | $      
|                                                          | Internal                    |      |        
|                                                          |                             |      |        
|                                                          |                             |      | 1,422.8
|EBITDA                                                    |                             |      | 129.7  
|Depreciation and amortization                             |                             |      | 51.7   
|Operating earnings (loss)                                 |                             |      | 78.0   
|Net fixed asset additions:                                |                             |      |        
|                                                          | Gross fixed asset additions |      |        
|                                                          | Proceeds from disposals     |      |        
|                                                          |                             |      |        
|                                                          |                             |      | 38.8   
|Goodwill                                                  |                             |      | 6.4    
|Identifiable assets  excluding cash and cash equivalents |                             |      | 846.4  
|Cash and cash equivalents                                 |                             |      |       
|                                                          |                             |      |        
|Total assets                                              |                             |      |        
|                                                          |                             |      |        

|                                                          |                             | 2003 |        
|--------------------------------------------------------- | --------------------------- | ---- | -------
|
|Sales:                                                    |                             |      |        
|                                                          | External                    |      | $      
|                                                          | Internal                    |      |        
|                                                          |                             |      |        
|                                                          |                             |      | 1,082.5
|EBITDA                                                    |                             |      | (37.5  
|Depreciation and amortization                             |                             |      | 45.7   
|Operating earnings (loss)                                 |                             |      | (83.2  
|Net fixed asset additions:                                |                             |      |        
|                                                          | Gross fixed asset additions |      |        
|                                                          | Proceeds from disposals     |      |        
|                                                          |                             |      |        
|                                                          |                             |      | 30.3   
|Goodwill                                                  |                             |      | 3.9    
|Identifiable assets  excluding cash and cash equivalents |                             |      | 717.2  
|Cash and cash equivalents                                 |                             |      |       
|                                                          |                             |      |        
|Total assets                                              |                             |      |        
|                                                          |                             |      |        

64

---



TEMBEC INC.        CONSOLIDATED GEOGRAPHIC SEGMENT INFORMATION        Years ended September 25, 2004 and September 27, 2003  (in millions of dollars)

|       |                                  | 2004
|------ | -------------------------------- | ----
|
|Sales: |                                  |     
|       | Canada                           |     
|       | United States                    |     
|       | Pacific Rim and India            |     
|       | United Kingdom, Europe and other |     
|       |                                  |     
|       |                                  | $   
|       |                                  |     

|       |                                  | 2003
|------ | -------------------------------- | ----
|
|Sales: |                                  |     
|       | Canada                           |     
|       | United States                    |     
|       | Pacific Rim and India            |     
|       | United Kingdom, Europe and other |     
|       |                                  |     
|       |                                  | $   
|       |                                  |     

|                           |                                  | 2004 |         | 2003   
|-------------------------- | -------------------------------- | ---- | ------- | -------
|Fixed assets and goodwill: |                                  |      |         |        
|                           | Canada                           |      | $       | 2,019.0
|                           | United States                    |      |         | 221.3  
|                           | United Kingdom, Europe and other |      |         | 189.1  
|                           |                                  |      |         |        
|                           |                                  | $    | 2,429.4 |        
|                           |                                  |      |         |        

65

---





TEMBEC INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        Years ended September 25, 2004 and September 27, 2003  (in millions of dollars except, unless otherwise noted)

1.     SIGNIFICANT ACCOUNTING POLICIES:



66

---





Asset

PeriodBuildings, Pulp, Newsprint and Papermill production equipment

20 - 30 yearsSawmill production equipment

10 - 15 yearsBoardmill production equipment

25 - 30 years




67

---







68

---





2.     ACQUISITIONS:



2004BTLSR

La Sarre Senneterre

Chapleau

Excel

TotalNet assets acquired:Working capital:Non-cash working capital

$
2.6

$
9.4

$
3.5

$


$
15.52.6


9.4


3.5





15.5Non-working capital:Investments





1.0








1.0Fixed assets


5.9


51.3


21.9





79.1Other assets











2.1


2.1Goodwill











2.5


2.5Long-term debt and other liabilities





(2.6
)







(2.6
)Future income taxes











(0.7
)

(0.7
)Minority interests











2.8


2.85.9


49.7


21.9


6.7


84.2$
8.5

$
59.1

$
25.4

$
6.7

$
99.7Consideration paid in cash

$
8.5

$
59.1

$
25.4

$
6.7

$
99.7


69

---





20033626776 Canada Inc.

Brassac

TotalNet assets acquired:Working capital:Cash (bank indebtedness)

$
0.1

$
(0.3
)
$
(0.2
)Non-cash working capital


0.1





0.10.2


(0.3
)

(0.1
)Non-working capital:Fixed assets





3.1


3.1Other assets


5.0





5.0Long-term debt and other liabilities


(4.5
)




(4.5
)Minority interests





(0.7
)

(0.7
)0.5


2.4


2.9$
0.7

$
2.1

$
2.8Consideration paid in cash

$
0.7

$
2.1

$
2.8


3.     INVENTORIES:

2004

2003Finished goods

$
277.5

$
221.2Logs and wood chips


157.0


147.9Supplies and materials


134.9


127.6$
569.4

$
496.7


70

---



4.     INVESTMENTS IN JOINT VENTURES:



2004

2003Assets:Current assets

$
72.2

$
63.3Fixed assets and other


136.9


124.1$
209.1

$
187.4Liabilities and equity:Current liabilities

$
46.3

$
35.0Long-term debt


39.2


40.4Other long-term liabilities


10.1


12.0Equity


113.5


100.0$
209.1

$
187.4Sales

$
220.5

$
192.4Expenses


215.3


199.6Earnings (loss) before income taxes, interest, and minority interests

$
5.2

$
(7.2
)Cash provided by (used in):Operating

$
8.4

$
7.3Investing


(16.5
)

(12.2
)Financing


7.4


11.4$
(0.7
)
$
6.5


5.     FIXED ASSETS:

2004

2003Cost

Accumulated depreciation

Net

Cost

Accumulated depreciation

NetLand

$
23.0

$


$
23.0

$
23.3

$


$
23.3Production buildings and equipment:Pulp mills


1,737.6


760.2


977.4


1,607.5


654.6


952.9Newsprint and Paper mills


987.9


325.7


662.2


1,000.5


278.2


722.3Sawmills


573.2


247.4


325.8


508.1


212.0


296.1Boardmill


295.2


116.5


178.7


294.1


106.1


188.0Roads and timber holdings


142.3


57.6


84.7


123.5


51.5


72.0Other buildings and equipment


93.5


39.8


53.7


84.2


34.7


49.5Assets under construction


95.0





95.0


111.0





111.0$
3,947.7

$
1,547.2

$
2,400.5

$
3,752.2

$
1,337.1

$
2,415.1


71

---



6.     OTHER ASSETS:

2004

2003Deferred costs, at amortized value:Development, pre-operating costs and other

$
11.6

$
15.3Financing costs


13.6


17.8Assets held for resale


4.8


5.0Long-term loans to employees


9.5


11.5Timber rights


27.7


27.4Deferred pension costs


51.9


44.5$
119.1

$
121.5




72

---



7.     OPERATING BANK LOANS:



8.     LONG-TERM DEBT:

2004

2003Tembec Inc.:Unsecured notes, non-interest bearing, maturing on September 30, 2009. The notes may be prepaid at the option of the issuer at any time

$
23.9

$
23.9Tembec Industries Inc.:8.625% Unsecured Senior Notes (U.S. $350.0 million) redeemable at the option of the Company on or after June 30, 2004 at specified redemption prices, due June 30, 2009 with semi-annual interest
payments due June 30 and December 30 of each year


446.3


473.58.50% Unsecured Senior Notes (U.S. $500.0 million) redeemable at any time at the option of the Company, at a price that includes a make-whole payment, due February 1, 2011 with semi-annual interest payments
due February 1 and August 1 of each year


637.6


676.57.75% Unsecured Senior Notes (U.S. $350.0 million) redeemable at any time at the option of the Company, at a price that includes a make-whole payment, due March 15, 2012 with semi-annual interest payments
due March 15 and September 15 of each year


446.3


473.57% Unsecured subordinated debentures





10.0Spruce Falls Inc.:8.39% Unsecured Senior Notes (U.S. $8.6 million)

$


$
11.6Tembec SA:Unsecured term loans (Euro 3.3 million in 2004  Euro 4.0 million in 2003), bearing interest at rates up to 1.5%, repayable and maturing at various dates to
December 2013


5.1


6.3Other Tembec SA obligations


8.3


7.2Tembec Envirofinance SAS:Unsecured term loans (Euro 4.9 million), non-interest bearing, repayable and maturing at various dates from June 2014 to June 20167.7


1387332 Ontario Limited (Marathon Pulp joint venture) (50% proportionate consolidation):Revolving credit up to a maximum authorized amount of $15.6 million ($17.3 million in 2003), bearing interest at prime rate plus 1.75%, with declining authorized amounts to March 31, 2006


15.5


17.0Temlam Inc. (50% proportionate consolidation):Term loan bearing interest at 6.75% and prime rate plus 1%, maturing on August 1, 2006, repayable in quarterly instalments of varying amounts beginning in August 2002


7.5


9.1Other long-term obligations


19.2


19.01,617.4


1,727.6Less current portion


9.4


27.8$
1,608.0

$
1,699.8




2006

$
24.72007


4.72008


6.22009


452.0


73

---



9.     OTHER LONG-TERM LIABILITIES AND CREDITS:

2004

2003Accrued benefit liability  pension benefit plans

$
48.6

$
41.9Accrued benefit liability  other benefit plans


53.4


50.3Balance payable on acquisitions of companies:Davidson Industries Inc.





2.2Jager Building Systems Inc.


6.7


8.6Reforestation  BC operations


6.6


5.4Environmental


5.1


5.3Deferred government assistance


1.0


1.0Deferred gain on sale of assets


5.6


6.0Other


6.0


0.4$
133.0

$
121.1


10.   MINORITY INTERESTS:

2004

2003AV Cell Inc.

$
5.0

$
5.0Excel Forest Products





2.0Brassac SAS


0.3


0.5$
5.3

$
7.5


11.   REDEEMABLE PREFERRED SHARES:

2004

200316,627,500 Series 2 Class B shares

$
16.6

$
16.69,103,710 Series 4 Class B shares


9.1


9.1$
25.7

$
25.7


12.   SHARE CAPITAL:



2004

2003Issued and fully paid:85,860,932 common shares (2003  85,817,932)

$
833.8

$
834.2Series 2 Class B preferred shares (note 11)





Series 4 Class B preferred shares (note 11)





$
833.8

$
834.2


74

---



2004

2003Common shares

Amount

Common shares

AmountBalance, beginning of year

85,817,932

$
834.2

86,415,732

$
840.3Shares issued:Long-term Incentive Plan

43,000


0.4

129,000


1.0Excel Forest Products




(0.8
)



Shares repurchased






(726,800
)

(7.1
)Balance, end of year

85,860,932

$
833.8

85,817,932

$
834.2




2004

2003Net earnings

$
37.4

$
11.4Weighted average number of common shares outstanding


85,838,097


86,204,311Dilutive effects:Series 3 Class B preferred shares





1,250,000Employees stock options


48,460


104,809Weighted average number of diluted common shares outstanding


85,886,557


87,559,120Basic earnings per share

$
0.44

$
0.13Diluted earnings per share

$
0.44

$
0.13




2004

2003Net earnings:As reported

$
37.4

$
11.4Pro forma

$
36.9

$
10.6Earnings per share:As reported

$
0.44

$
0.13Pro forma

$
0.43

$
0.12


75

---





2004

2003Dividend yield


0.0
%

0.0
%Volatility


34.6
%

33.6
%Risk-free interest rate


4.4
%

4.5
%Expected option life (in years)


7.5


7.5Weighted average fair value of each option

$
3.02

$
3.87




2004

2003Shares

Weighted average exercise price

Shares

Weighted average exercise priceBalance, beginning of year

3,323,876

$
12.40

3,379,788

$
12.31Options granted

309,910


8.08

208,588


10.42Options exercised

(43,000
)

9.35

(124,000
)

7.41Options expired

(238,000
)

11.06

(140,500
)

11.79Balance, end of year

3,352,786

$
12.13

3,323,876

$
12.40Exercisable, end of year

2,621,275

$
12.71

2,627,123

$
12.60




Outstanding options

Exercisable optionsYear granted

Number of options

Weighted remaining contractual life

Average exercise price

Number of options

Weighted average exercise price1995

751,214

0.44

$
13.380

751,214

$
13.3801996

120,552

1.30


9.739

120,552


9.7391997

982,872

2.80


13.241

982,872


13.2411998

46,644

3.61


7.086

46,644


7.0861999

286,212

4.18


9.025

286,212


9.0252000

367,678

5.32


15.754

294,143


15.7542001

78,360

6.29


11.451

47,016


11.4512002

231,556

7.12


10.784

92,622


10.7842003

177,788

8.20


10.318




2004

309,910

9.14


8.079




3,352,786

3.88

$
12.133

2,621,275

$
12.713




13.   COMMITMENTS AND CONTINGENCIES:



76

---





Total

Less than 1 Year

1-3 Years

3-5 Years

More than 5 YearsOperating Leased obligations

$
25.8

$
9.3

$
8.2

$
3.3

$
5.0Purchase obligations

$
258.2

$
124.3

$
85.5

$
38.4

$
10.0




77

---



14.   EBITDA:



2004

2003Cash flows from operating activities

$
206.8

$
57.2Interest on long-term debt


135.1


146.4Interest on short-term debt


2.0


2.2Interest income


(3.9
)

(5.7
)Investment income


(22.7
)

Interest capitalized on construction projects


(5.2
)

(4.5
)Proceeds from sale of derivative financial instruments


(193.7
)

(145.6
)Other foreign exchange items


16.6


26.3Bank charges and other financing expenses


5.7


4.8Current income taxes


7.1


9.4Minority interests


0.4


(1.7
)Change in non-cash working capital


28.6


(16.5
)Other


(8.1
)

2.5EBITDA

$
168.7

$
74.8




15.   DEPRECIATION AND AMORTIZATION:

2004

2003Fixed assets

$
226.2

$
222.0Deferred development, pre-operating costs and other


8.1


8.2$
234.3

$
230.2


16.   INTEREST, FOREIGN EXCHANGE AND OTHER:

2004

2003Interest on long-term debt

$
135.1

$
146.4Interest on short-term debt


2.0


2.2Interest income


(3.9
)

(5.7
)Investment income


(22.7
)

Interest capitalized on construction projects


(5.2
)

(4.5
)105.3


138.4Amortization of deferred financing costs


5.3


5.4Amortization of deferred gain on foreign exchange contracts


(149.3
)

Derivative financial instruments gain


(84.6
)

(63.3
)Other foreign exchange items


16.6


26.3Loss on consolidation of foreign integrated subsidiaries


2.0


6.4Bank charges and other financing expenses


5.7


4.8(204.3
)

(20.4
)$
(99.0
)
$
118.0


78

---



17.   UNUSUAL ITEMS:



18.   INCOME TAXES:



2004

2003Future income tax assets:Non-capital loss carry forwards and pool of deductible scientific research and development expenditures

$
299.4

$
341.2Investment tax credits


57.5


45.9Employee future benefits


11.8


17.6Foreign exchange contract


16.4


23.8Corporate minimum taxes paid


5.6


5.6Capital loss carry forwards


15.2


Other


18.4


14.7Valuation allowance


(77.3
)

(47.9
)347.0


400.9Future income tax liabilities:Fixed assets


(355.9
)

(409.4
)Exchange gain on long-term debt


(57.1
)

(43.7
)Timber rights


(6.5
)

(6.7
)Other


(30.8
)

(16.4
)(450.3
)

(476.2
)Net future income tax liabilities

$
(103.3
)
$
(75.3
)As reported in the consolidated balance sheet:Future income tax assets

$
88.5

$
136.3Future income tax liabilities


(191.8
)

(211.6
)Net future income tax liabilities

$
(103.3
)
$
(75.3
)




Amounts

Expiring DatesNon-capital loss carried forward for Canadian subsidiaries

$
443.2

2005 to 2011Non-capital loss carried forward for foreign subsidiaries


244.3

2020 to 2023Pool of deductible scientific Research and Experimental development


198.9

UnlimitedInvestment tax credits and Corporate Minimum Tax


63.1

2005 to 2014


79

---





2004

2003Earnings (loss) before income taxes and minority interest

$
80.3

$
(27.9
)Income taxes based on combined federal and provincial income tax rates of 34.5% (2003  34.8%)

$
27.7

$
(9.7
)Increase (decrease) resulting from:Manufacturing and processing deduction


(0.9
)

(1.3
)Future income taxes adjustment due to rate enactments


6.0


Net losses not recognized


28.9


11.1Rate differential between jurisdictions


(14.2
)

(13.8
)Permanent differences:Non-taxable portion of exchange gain on long-term debt


(16.1
)

(42.7
)Non-deductible loss (non-taxable gain) on consolidation of foreign integrated subsidiaries


3.2


9.1Non-deductible expenses


2.4


4.8Large corporations tax


5.5


4.914.8


(27.9
)Income taxes

$
42.5

$
(37.6
)Income taxes:Current

$
7.1

$
9.4Future


35.4


(47.0
)Income taxes

$
42.5

$
(37.6
)


19.   PENSION PLANS:



2004

2003Current service cost

$
17.6

$
12.8Interest cost


43.8


41.5Actual return on plan assets


(69.9
)

(10.3
)Actuarial loss (gain)


(46.6
)

116.8Net expense (income) before adjustments to recognize the long-term nature on the plans


(55.1
)

160.8Difference between expected and actual return on plan assets


31.2


(29.1
)Difference between net actuarial loss (gain) and actuarial loss (gain)


58.6


(114.1
)Amortization of past service costs


0.2


0.2Special termination payments





1.2Other adjustments


(0.1
)

(0.2
)Net periodic benefit cost

$
34.8

$
18.8




80

---





2004

2003Accrued benefit obligation at beginning of year

$
719.7

$
587.3Current service cost


17.6


12.8Interest cost


43.8


41.5Employee contributions


4.8


4.5Benefits paid


(30.9
)

(27.0
)Special termination payments





1.2Actuarial loss (gain)


(46.6
)

116.8Foreign exchange rate changes


(7.5
)

(17.4
)Acquisitions


15.8


Accrued benefit obligation at end of year

$
716.7

$
719.7




2004

2003Fair value of defined benefit plan assets at beginning of year

$
483.7

$
494.1Actual return on plan assets


69.9


10.3Employer contributions


42.2


16.6Employee contributions


4.8


4.5Benefits paid


(30.9
)

(27.0
)Foreign exchange rate changes


(5.0
)

(14.8
)Acquisitions


13.2


Fair value of defined benefit plan assets at end of year

$
577.9

$
483.7




2004

2003Fair value of defined benefit plan assets

$
577.9

$
483.7Accrued benefit obligation


(716.7
)

(719.7
)Plan deficit


(138.8
)

(236.0
)Employer contributions after measurement date (June 30)


9.2


13.5Unamortized past service costs


2.7


2.8Unamortized net actuarial loss


130.2


222.3Net benefit asset

$
3.3

$
2.6


81

---





2004

2003Deferred pension costs

$
51.9

$
44.5Accrued benefit liability


(48.6
)

(41.9
)Net benefit asset

$
3.3

$
2.6




2004

2003Fair value of plan assets

$
499.6

$
475.6Accrued benefit obligations


(645.4
)

(713.2
)Plan deficit

$
(145.8
)
$
(237.6
)




2004

2003Accrued benefit obligation at end of year:Discount rate

6.38%

5.93%Rate of compensation increase

3.39%

3.01%Net periodic benefit cost for the year:Discount rate

5.93%

7.00%Rate of compensation increase

3.01%

4.00%Expected long-term return on assets

7.78%

8.00%


82

---



20.   OTHER EMPLOYEE FUTURE BENEFIT PLANS:



2004

2003Current service cost

$
1.4

$
1.5Interest cost


4.0


4.0Post-employment


0.9


Actuarial loss (gain)


(4.7
)

10.8Past service costs


1.0


Difference between amortization of past service costs for the year and actual plan amendment for the year


(1.0
)

Difference between net actuarial loss (gain) and actuarial loss (gain)


5.9


(10.6
)Other adjustments


(0.1
)

(0.3
)Periodic benefit cost

$
7.4

$
5.4




2004

2003Accrued benefit obligation at beginning of year

$
68.2

$
56.2Current service cost


1.4


1.5Interest cost


4.0


4.0Employee contributions


0.1


Benefits paid


(2.6
)

(2.4
)Actuarial loss (gain)


(4.7
)

10.8Past service costs


1.0


Foreign exchange rate changes


(1.6
)

(3.7
)Post-employment


(0.2
)

1.8Government prescription drug subsidy


(1.5
)

Accrued benefit obligation at end of year

$
64.1

$
68.2




2004

2003Fair value of assets of other employee future benefit plans at beginning of year

$


$
Employer contributions


2.5


2.4Employee contributions


0.1


Benefits paid


(2.6
)

(2.4
)Fair value of assets of other employee future benefit plans at end of year

$


$





83

---





2004

2003Fair value of plan assets

$


$
Accrued benefit obligation


(64.1
)

(68.2
)Plan deficit


(64.1
)

(68.2
)Employer contributions after measurement date (June 30)


0.8


Unamortized past service costs


1.0


Unamortized net actuarial loss


8.9


17.9Net benefit liability

$
(53.4
)
$
(50.3
)




2004

2003Accrued benefit obligation at end of year:Discount rate (weighted)


6.30%


5.90%Rate of compensation increase


3.50%


3.50%Benefit cost for year:Discount rate (weighted)


5.90%


7.00%Rate of compensation increase


3.50%


4.00%Assumed health care cost trend rate at end of year (weighted):Initial health care cost trend


10.00%


9.50%Annual rate of decline in trend rate


1.00%


1.00%Ultimate health care cost trend rate


5.00%


5.00%Effect of change in health care cost trend rate


1% increase


1% increaseTotal of service cost and interest cost

$
0.5

$
0.5Accrued benefit obligation

$
5.1

$
5.3Effect of change in health care cost trend rate


1% decrease


1% decreaseTotal of service cost and interest cost

$
(0.4
)
$
(0.4
)Accrued benefit obligation

$
(4.6
)
$
(4.8
)


21.   FINANCIAL INSTRUMENTS:





Opening balance

Gain (loss)

Disbursements (proceeds)

Ending balanceMark to market of outstanding foreign exchange contracts

$
223.4

$
86.5

$
(205.0
)
$
104.9Commodity related derivative financial instruments





(1.9
)

11.3


9.4$
223.4

$
84.6

$
(193.7
)

114.3Less current portion











82.2$
32.1


84

---





Opening balance

Amortization

Ending balanceForeign exchange contracts sold prior to fiscal 2004

$
82.2

$
(56.4
)
$
25.8Foreign exchange contracts outstanding at the beginning of fiscal 2004


223.4


(92.9
)

130.5$
305.6

$
(149.3
)

156.3Less current portion








117.9$
38.4






2004

2003Maturity per quarter

Average rate

US$ millions

Average rate

US$ millions2004  December 2003





1.5392

127.1 March 2004





1.5559

126.5 June 2004





1.5564

125.0 September 2004





1.5773

121.52005 - December 2004

1.5965

61.7

1.5975

123.8 March 2005

1.5883

60.6

1.5953

120.5 June 2005

1.5792

55.2

1.5769

105.0 September 2005

1.6029

55.0

1.6009

105.02006  December 2005

1.6112

45.0

1.6172

97.2 March 2006

1.5617

55.0

1.5687

107.31.5894

332.5

1.5772

1,158.9




2004

2003Maturity per quarter

Average rate

US$ millions

Average rate

US$ millions2004  December 2003





0.9751

2.5 March 2004





0.9508

2.2 June 2004





0.9600

2.2 September 2004





0.9991

2.42005  December 2004

1.0012

2.2

0.8890

1.4 March 2005

1.0953

2.2

1.0238

1.5 June 2005

1.0911

2.2

1.0252

1.4 September 2005

1.0744

1.9

1.0260

1.52006  December 2005

1.1253

1.4

1.0259

0.7 March 2006

1.1289

1.4

1.0483

0.7 June 2006

1.1752

1.4

1.1398

0.7 September 2006

1.1378

1.4

1.1011

1.02007  December 2006

1.2075

0.7



 March 2007

1.2006

0.7



 June 2007

1.2092

0.7



 September 2007

1.2125

0.2



1.1124

16.4

0.9933

18.2


85

---











22.   SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) IN CANADA AND THE UNITED STATES:



2004

2003Net earnings under Canadian GAAP

$
37.4

$
11.4Adjustments:Amortization of deferred gain on foreign exchange contracts


(145.1
)

324.3Income taxes


46.5


(104.1
)Share in earnings (loss) of affiliated companies


(4.0
)

11.4Goodwill impairment charge





(0.8
)Depreciation of fixed assets


0.3


0.3Amortization of pre-operating costs


3.8


2.4Development and pre-operating costs


(3.5
)

(5.2
)Pension


(0.3
)

(0.6
)Net earnings (loss) under U.S. GAAP

$
(64.9
)
$
239.1Earnings (loss) per share under U.S. GAAP:Basic

$
(0.76
)
$
2.77Diluted


(0.76
)

2.73


86

---





2004

2003Total assets under Canadian GAAP

$
3,920.8

$
3,818.8Adjustments:Goodwill


9.1


9.1Fixed assets


(7.3
)

(7.5
)Proportionate consolidation:Investments


116.5


106.9Assets


(214.4
)

(195.1
)Other assets:Derivative financial instruments





225.5Deferred development and pre-operating costs


(9.9
)

(7.8
)Loans to employees for share purchase loans


(6.3
)

(7.6
)Deferred pension costs


(1.2
)

(2.6
)Future income taxes


14.6


33.8(98.9
)

154.7Total assets under U.S. GAAP

$
3,821.9

$
3,973.5


2004

2003Total liabilities under Canadian GAAP

$
2,724.1

$
2,659.4Adjustments:Deferred gain on foreign exchange contracts


(153.3
)

(73.0
)Proportionate consolidation


(95.6
)

(87.5
)Future income taxes


40.4


77.6Pension liabilities


61.7


150.3(146.8
)

67.4Total liabilities under U.S. GAAP

$
2,577.3

$
2,726.8Total shareholders' equity under Canadian GAAP

$
1,196.7

$
1,159.4Total asset adjustments


(98.9
)

154.7Total liability adjustments


146.8


(67.4
)Total shareholders' equity under U.S. GAAP

$
1,244.6

$
1,246.7








87

---







2004

2003Earnings (loss) under U.S. GAAP

$
(64.9
)
$
239.1Other comprehensive loss:Minimum pension liabilities, net of income taxes


61.6


(93.9
)Comprehensive income (loss)

$
(3.3
)
$
145.2




23.   COMPARATIVE FIGURES:



88

---



UNDERTAKING

Tembec Inc. undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish
promptly, when requested to do so by the Commission staff, information relating to: the securities in relation to which the obligation to file an annual report on Form 40-F arises;
or transactions in said securities.

SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant certified that it meets all of the requirements for filing on Form 40-F
and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized.

|                        |  | TEMBEC INDUSTRIES INC. Registrant
|----------------------- |  | ---------------------------------
|                        |  | By:                              
|Date: December 17, 2004 |  |                                  

---



LIST OF EXHIBITS

The following document is attached to this annual report on Form 40-F:

|23   |  | Consent of Independent Auditors                                                                                                                        
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Frank A. Dottori, Chief Executive Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002                                  
|31.2 |  | Certification of Michel Dumas, Executive Vice President, Finance and Chief Financial Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002
|32.1 |  | Certification of Frank A. Dottori, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                  
|32.2 |  | Certification of Michel Dumas, Executive Vice President, Finance and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

---



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