---

Management responsibility

The consolidated financial statements and all information in
the Annual Report are the responsibility of the Company's management. The
consolidated financial statements have been prepared by management in accordance
with Canadian Generally Accepted Accounting Principles (GAAP) and, where
necessary, include amounts which are based on best estimates and judgement.
Financial information presented throughout the Annual Report is consistent with
the data presented in the consolidated financial statements.

A system of internal accounting and administrative controls
is maintained by management in order to provide reasonable assurance that
transactions are appropriately authorized, assets are safeguarded and financial
records are properly maintained to provide accurate and reliable financial
statements. In the year ended September 24, 2005, the Company did not make any
significant changes to, nor take any significant corrective actions regarding
its internal controls and procedures relating to financial reporting. As of
December 15, 2005, the undersigned were satisfied with the effectiveness of the
aforementioned controls and procedures.

As required by the Sarbanes-Oxley Act and the rules
promulgated by the US Securities and Exchange Commission (SEC), we have filed
certificates relating to the accuracy of the information contained in Tembecs
annual financial statements, annual MD&A and AIF, and the adequacy of procedures
and controls relating to financial disclosure.

The Company's external auditors are responsible for auditing
the consolidated financial statements and giving an opinion thereon. The
external auditors also prepare for management a report on internal control
weaknesses identified during the course of the annual audit. In addition, the
Company employs internal auditors to evaluate the effectiveness of its systems,
policies and procedures.

The Board of Directors has appointed an Audit Committee,
consisting solely of independent directors, which reviews the consolidated
financial statements and recommends their approval to the Board of Directors.
The Committee meets periodically with the external auditors, the internal
auditors and management to review their respective activities and the discharge
of each of their responsibilities. Both the external and internal auditors have
direct access to the Committee to discuss the scope of their audit work and the
adequacy of internal control systems and financial reporting procedures.

The accompanying consolidated financial statements have been audited by the
external auditors, KPMG LLP, whose report follows.

|                                          |                                      
|----------------------------------------- | -------------------------------------
|FRANK A. DOTTORI                          | MICHEL J. DUMAS                      
|President and Chief
    Executive Officer | Executive Vice
    President, Finance
|                                          | and Chief Financial
    Officer      

59

---

Auditors' reportTo the Shareholders of Tembec Inc.
We have audited the consolidated balance sheets of Tembec
Inc. as at September 24, 2005 and September 25, 2004, and the consolidated
statements of operations, retained earnings and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements
present fairly, in all material respects, the financial position of the Company
as at September 24, 2005 and September 25, 2004, and the results of its
operations and its cash flows for the years then ended in accordance with
Canadian generally accepted accounting principles.
Chartered Accountants 
Montreal, Canada 
November 8, 2005





60

---



|Consolidated balance sheets                                                 
|----------------------------------------------------------------------------
|SEPTEMBER 24, 2005 AND SEPTEMBER
    25, 2004                               
|(in millions of dollars)                                                    
|                                                                            
|                                                                            
|A S S E
    T S                                                             
|Current
    assets:                                                         
|Cash and cash equivalents                                                   
|Temporary investments                                                       
|Derivative financial instruments (note 22)                                  
|Accounts receivable (note 8)                                                
|Inventories (notes 3 and 8)                                                 
|Prepaid expenses                                                            
|                                                                            
|                                                                            
|Derivative
    financial instruments (note 22)                              
|Investments                                                                 
|Fixed
    assets (note 5)                                                   
|Other
    assets (note 6)                                                   
|Future
    income taxes (note 19)                                           
|Goodwill (notes 2, 7 and 17)                                                
|                                                                            
|                                                                            
|LIABILITIES AND SHAREHOLDERS' EQUITY                                        
|Current
    liabilities:                                                    
|Operating bank loans (note 8)                                               
|Accounts payable and accrued charges                                        
|Current portion of deferred gain on foreign
    exchange contracts (note 22)
|Current portion of long-term debt (note 9)                                  
|                                                                            
|                                                                            
|Long-term
    debt (note 9)                                                 
|Deferred
    gain on foreign exchange contracts (note 22)                   
|Other
    long-term liabilities and credits (note 10)                       
|Future
    income taxes (note 19)                                           
|Minority
    interests (note 11)                                            
|Redeemable
    preferred shares (notes 12 and 13)                           
|                                                                            
|Commitments and contingencies (note 14)                                     
|                                                                            
|Shareholders' equity:                                                       
|Share capital (note 13)                                                     
|Contributed surplus (note 13)                                               
|Cumulative exchange translation of foreign
    subsidiaries                 
|Retained earnings                                                           
|                                                                            
|                                                                            
|                                                                            
|See
    accompanying notes to consolidated financial statements.            
|On behalf
    of the Board:                                                 

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

61

---



|Consolidated statements of
    operations                              
|-----------------------------------------------------------------------
|YEARS
    ENDED SEPTEMBER 24, 2005 AND SEPTEMBER 25, 2004              
|(in millions of
    dollars, unless otherwise noted)                   
|                                                                       
|                                                                       
|Sales                                                                  
|                                                                       
|Freight and sales
    deductions                                       
|Countervailing and
    antidumping duties (note 14)                    
|Cost of sales                                                          
|Selling, general and administrative                                    
|                                                                       
|Earnings before
    unusual items, interest, income taxes, depreciation
|and amortization, and other non-operating expenses (EBITDA) (note 15)  
|                                                                       
|Depreciation and
    amortization (note 16)                            
|Unusual items (note 17)                                                
|                                                                       
|Operating loss                                                         
|                                                                       
|Interest, foreign
    exchange and other (note 18)                     
|Exchange gain on long-term debt                                        
|                                                                       
|Earnings (loss) before
    income taxes and minority interests         
|                                                                       
|Income taxes
    (recovery) (note 19)                                  
|Minority interests                                                     
|Net earnings (loss)                                                    
|Basic earnings (loss) per share (note
    13)                          
|Diluted earnings (loss) per share
    (note 13)                        



|Consolidated
    statements of retained earnings                       |         |        
|---------------------------------------------------------------------- | ------- | -------
|YEARS ENDED SEPTEMBER
    24, 2005 AND SEPTEMBER 25, 2004              |         |        
|(in millions of dollars)                                               |         |        
|                                                                       | 2005    | 2004   
|Retained earnings, beginning of year                                   | $ 360.4 | $ 323.0
|Adjustment resulting from a change in
    accounting policies (note 1) | (1.4)   | (1.0)  
|Restated retained
    earnings, beginning of year                      | 359.0   | 322.0  
|Net earnings (loss)                                                    | (304.3) | 37.0   
|Retained earnings, end of year                                         | $ 54.7  | $ 359.0
|                                                                       |         |        
|See accompanying notes to
    consolidated financial statements.       |         |        

62

---



|Consolidated statements of
    cash flows                                                                                                          
|---------------------------------------------------------------------------------------------------------------------------------------------------
|YEARS
    ENDED SEPTEMBER 24, 2005 AND SEPTEMBER 25, 2004                                                                                          
|(in millions of dollars)                                                                                                                           
|                                                                                                                                                   
|                                                                                                                                                   
|Cash flows from operating activities:                                                                                                              
|Net earnings (loss)                                                                                                                                
|Adjustments for:                                                                                                                                   
|Depreciation and amortization (note 16)                                                                                                            
|Amortization of deferred financing costs                                                                                                           
|Exchange gain on long-term debt                                                                                                                    
|Amortization of deferred gain on foreign exchange
    contracts (note 22)                                                                          
|Derivative financial instruments gain (note 22)                                                                                                    
|Proceeds on sale of derivative financial
    instruments (note 22)                                                                                 
|Loss on consolidation of foreign integrated
    subsidiaries                                                                                       
|Future income taxes (note 19)                                                                                                                      
|Unusual items (note 17)                                                                                                                            
|Other                                                                                                                                              
|                                                                                                                                                   
|Changes in non-cash
    working capital:                                                                                                           
|Temporary investments                                                                                                                              
|Accounts receivable                                                                                                                                
|Inventories                                                                                                                                        
|Prepaid expenses                                                                                                                                   
|Accounts payable and accrued charges                                                                                                               
|                                                                                                                                                   
|                                                                                                                                                   
|                                                                                                                                                   
|Cash flows from investing
    activities:                                                                                                          
|Acquisition of companies (note 2)                                                                                                                  
|Additions to fixed assets                                                                                                                          
|Proceeds from disposal of fixed assets                                                                                                             
|Acquisition of investments, net of disposals                                                                                                       
|Other                                                                                                                                              
|                                                                                                                                                   
|Cash flows from financing
    activities:                                                                                                          
|Change in operating bank loans                                                                                                                     
|Increase in long-term debt                                                                                                                         
|Repayments of long-term debt                                                                                                                       
|Increase in other long-term liabilities                                                                                                            
|Repayments of other long-term liabilities                                                                                                          
|Repurchase of common shares                                                                                                                        
|Other                                                                                                                                              
|                                                                                                                                                   
|Foreign exchange loss on
    cash and cash equivalents held in                                                                                     
|foreign currencies                                                                                                                                 
|Net increase (decrease)
    in cash and cash equivalents                                                                                           
|Cash and cash equivalents, beginning of
    year                                                                                                   
|Cash and cash equivalents, end of year                                                                                                             
|                                                                                                                                                   
|Interest
    paid in 2005 totalled $131.3 million (2004  $138.7 million) and income
    taxes paid amounted to $8.4 million (2004  $8.7 million).
|                                                                                                                                                   
|See accompanying notes to
    consolidated financial statements.                                                                                   

63

---



|Consolidated business
    segment information            
|---------------------------------------------------------
|YEARS
    ENDED SEPTEMBER 24, 2005 AND SEPTEMBER 25, 2004
|(in millions
    of dollars)                             
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|Sales:                                                   
|External                                                 
|Internal                                                 
|                                                         
|                                                         
|EBITDA                                                   
|                                                         
|Depreciation and
    amortization (note 16)              
|                                                         
|Unusual items (note 17)                                  
|                                                         
|Operating earnings (loss)                                
|                                                         
|Net fixed asset
    additions:                           
|Gross fixed asset additions                              
|Proceeds from disposals                                  
|                                                         
|                                                         
|Goodwill                                                 
|                                                         
|Identifiable assets 
    excluding cash                 
|and cash equivalents                                     
|                                                         
|Cash and cash equivalents                                
|Total assets                                             



64

---



|Consolidated business
    segment information (continued)
|---------------------------------------------------------
|YEARS ENDED
    SEPTEMBER 24, 2005 AND SEPTEMBER 25, 2004
|(in millions of dollars)                                 
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|Sales:                                                   
|External                                                 
|Internal                                                 
|                                                         
|                                                         
|EBITDA                                                   
|                                                         
|Depreciation and
    amortization (note 16)              
|                                                         
|Unusual items (note 17)                                  
|                                                         
|Operating earnings (loss)                                
|                                                         
|Net fixed asset additions:                               
|Gross fixed asset additions                              
|Proceeds from disposals                                  
|                                                         
|                                                         
|Goodwill                                                 
|                                                         
|Identifiable assets 
    excluding cash                 
|and cash equivalents                                     
|                                                         
|Cash and cash equivalents                                
|Total assets                                             



65

---



|Consolidated geographic
    segment information          
|---------------------------------------------------------
|YEARS
    ENDED SEPTEMBER 24, 2005 AND SEPTEMBER 25, 2004
|(in millions of
    dollars)                             
|                                                         
|                                                         
|                                                         
|                                                         
|Sales (by final destination):                            
|Canada                                                   
|United States                                            
|Pacific Rim and India                                    
|United Kingdom, Europe and other                         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|Sales (by final destination):                            
|Canada                                                   
|United States                                            
|Pacific Rim and India                                    
|United Kingdom, Europe and other                         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|Fixed assets and goodwill:                               
|Canada                                                   
|United States                                            
|United Kingdom, Europe and other                         
|                                                         

66

---

Notes to consolidated financial statementsYEARS ENDED SEPTEMBER 24, 2005 AND SEPTEMBER 25, 2004(in millions of dollars, unless otherwise noted)1.Significant
accounting policies:

Changes in accounting policies

Effective September 26, 2004, the Company adopted
retroactively with restatement the new recommendations of the Canadian Institute
of Chartered Accountants (CICA) under CICA Handbook Section 3110 with respect to
asset retirement obligations. These recommendations require entities to record a
liability at fair value, in the period in which a legal obligation associated
with the retirement of an asset is incurred. The associated costs are
capitalized as part of the carrying value of the related asset and depreciated
over its remaining useful life. The liability is accreted using a credit
adjusted risk free interest rate. For such assets, a liability will be initially
recognized in the period in which sufficient information exists to estimate a
range of possible settlement dates. For the Company, asset retirement
obligations in connection with the adoption of CICA Handbook Section 3110 were
primarily related to landfill capping obligations. The adoption of CICA Handbook
Section 3110 has decreased the September 25, 2004 retained earnings by $1.4
million, increased net fixed assets by $1.1 million, decreased future income
taxes by $0.7 million and increased liabilities by $3.2 million. The restatement
resulted in a decrease in net earnings of $0.4 million ($0.01 per share) for the
year ended September 25, 2004.

Effective October 1st, 2003, the CICA introduced new
recommendations under CICA Handbook Section 1100 for the application of
Generally Accepted Accounting Principles (GAAP), which, among other things,
provides guidance on alternate sources to consult with when an issue is not
specifically addressed by Canadian GAAP. Previously, the Company, along with
others in the Forest Industry, presented sales net of shipping, handling costs
and countervailing and anti-dumping duties. As a result of applying this new
standard, the Company has removed its reference to gross and net sales.

Effective September 28, 2003, the Company adopted
prospectively, without restatement, the new recommendations of CICA Handbook
Section 3870 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 2005 and has
provided the required pro forma disclosures for issuances from September 30,
2001 to September 27, 2003 in the notes of the current financial statements.

Effective September 28, 2003, the Company adopted the new
recommendations of CICA Handbook Section 3063 with respect to the impairment of
long-lived assets. These recommendations provide accounting guidance for the
determination of long-lived asset impairment as well as recognition, measurement
and disclosure of the impairment.

Effective September 28, 2003, the Company applied the
accounting treatment prescribed by Emerging Issues Committee ("EIC") EIC-128 of
the CICA Handbook with respect to the accounting for trading, speculative or
non-hedging derivative financial instruments. The abstract addresses the
accounting treatment for derivative financial instruments that do not qualify
for hedge accounting. The financial statements prospectively account for
derivative financial instruments on a market value basis and the deferred gain
recognized at the beginning of the fiscal year is being amortized into earnings
based on the original maturity dates of the derivative financial instruments. As
a result of applying EIC-128 of the CICA Handbook, the Company recognized a
deferred gain of $223.4 million relating to derivative financial instruments
that were outstanding at the beginning of fiscal 2004 and the same amount was
also recognized as an asset on the balance sheet.

Basis of consolidation

The consolidated financial statements include the accounts of
Tembec Inc. (the "Corporation") and all its subsidiaries and joint ventures
(collectively "Tembec" or the "Company"). Investments over which the Corporation
has effective control are fully consolidated. Investments over which the
Corporation exercises significant influence are accounted for by the equity
method. The Corporation's interest in joint ventures is accounted for by the
proportionate consolidation method.

67

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1.Significant
accounting policies (continued):

Business of the Company

The Company operates an integrated forest products business.
Prior to the December 2004 quarter, the Company consisted of five reportable
business segments: Forest products, Pulp, Paper, Paperboard and Chemicals. Due
to recent organizational and reporting changes, the Paper and Paperboard
segments have been regrouped under Paper. Comparative figures for prior periods
have been reclassified to conform with the new segment presentation. The
performance of each segment is evaluated by the management of the Company
against short-term and long-term financial objectives as well as environmental
and other key criteria. The Forest products segment consists primarily of forest
and sawmill operations, which produce lumber and building materials. The Pulp
segment includes the manufacturing and marketing activities of a number of
different types of pulps. The Paper segment consists primarily of production and
sales of newsprint, coated papers and bleached board. The Chemical and other
products segment consists primarily of the transformation and sale of resins and
pulp by-products. Intersegment transfers of wood chips, pulp, chemicals and
other services are recorded at transfer prices agreed to by the parties, which
are intended to approximate fair market value. The accounting policies used in
these business segments are the same as those described in this note.

Use of estimates

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Significant areas requiring the use of management estimates are: useful lives of
plant and equipment, impairment of long-lived assets and goodwill, employee
future benefits and income taxes. Actual results could differ from those
estimates.

Revenue

The Company recognizes revenue when persuasive evidence of an
arrangement exists, goods have been delivered, there are no uncertainties
surrounding product acceptance, the related revenue is fixed and determinable
and collection is reasonably assured.

Cash and cash equivalents

Cash and cash equivalents include cash on hand, demand deposits, banker's
acceptances and commercial paper with maturities of three months or less and are
recorded at cost, which approximates market value.

Inventories

Finished goods are valued at the lower of cost, on a first in, first out or
average cost basis, and net realizable value. Other inventories are valued at
the lower of cost, on a first in, first out or average cost basis, and
replacement cost.

Investments

Investments in affiliated companies in which Tembec has no significant
influence are carried at cost. Investments over which the Company exercises
significant influence are accounted for by the equity method.

68

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1.Significant
accounting policies (continued):

Fixed assets and government assistance

Fixed assets are recorded at cost after deducting investment tax credits and
government assistance.

Depreciation and amortization are provided over their estimated useful lives,
generally on a straight-line basis, as follows:

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

Certain forest access roads are depreciated in relation to the volume of wood
cut and certain machinery and equipment are depreciated using units of
production.

Capitalized interest is based on the average cost of construction of major
projects in progress during the year, using interest rates actually paid on
long-term debt.

Impairment of long-lived assets

Long-lived assets are reviewed for impairment upon the
occurrence of events or changes in circumstances indicating that the carrying
value of the assets may not be recoverable, as measured by comparing their net
book value to the estimated undiscounted future cash flows generated by their
use. Impaired assets are recorded at fair value, determined principally by using
discounted future cash flows expected from their use and eventual disposition.

Goodwill

Goodwill is subject to an annual impairment test or more
frequently if events or changes in circumstances indicate that goodwill might be
impaired. Testing for impairment is accomplished mainly by determining whether
the fair value of a reporting unit, based on discounted cash flows, exceeds the
net carrying amount of the net assets of that reporting unit as at the
assessment date. If the fair value is greater than the carrying amount, no
impairment is necessary. In the event that the carrying amount exceeds the fair
value, a second test must be performed whereby the fair value of the reporting
unit's goodwill must be estimated to determine if it is less than its carrying
amount. Fair value of goodwill is estimated in the same manner as goodwill is
determined in an acquisition, that is, the excess of the fair value of the
reporting unit's over the fair value of the identifiable net assets of the
reporting unit. In the case where the carrying value of the reporting unit
exceeds its fair value, the carrying value of goodwill will be reduced and an
impairment loss recognized and charged to operating results.

Other assets

(i)   Development and pre-operating expenses are amortized on a
straight-line basis over a period not exceeding 5 years.

(ii)  Financing costs are amortized on a straight-line basis over the
expected term of the related debt.

(iii) Timber rights are amortized on a straight-line basis over a period not
exceeding 40 years.

(iv) Assets held for resale are valued at the lower of cost and net
realizable value.

69

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1.Significant
accounting policies (continued):

Environmental costs

The Company is subject to environmental laws and regulations
enacted by federal, provincial, state and local authorities. Environmental
expenditures that will benefit the Company in future years are recorded at cost
and capitalized as part of fixed assets. Depreciation is charged to income over
the estimated future benefit period of the assets. Environmental expenditures,
that are not expected to provide a benefit to the Company in future periods, are
accrued and expensed to earnings, on a site-by-site basis, when a requirement to
remedy an environmental exposure is probable and a cost can be reasonably
estimated.

Asset retirement obligations

Asset retirement obligations are recognized, at fair value,
in the period in which the Company incurs a legal obligation associated to the
retirement of an asset. The associated costs are capitalized as part of the
carrying value of the related asset and depreciated over its remaining useful
life. The liability is accreted using a credit adjusted risk-free interest rate.

Employee future benefits

Pension benefit plans

The Company accrues the cost of defined benefit plans as determined by
independent actuaries based on assumptions determined by the Company. The net
periodic benefit cost includes:

>   the cost of pension benefits provided in
>   exchange for employees' services rendered during the year;
>    the interest cost of pension obligations;
>    the expected return on pension fund assets based
>   on the fair value of plan assets;
>     gains or losses on settlements or
>   curtailments, where, when the restructuring of a benefit plan gives rise to
>   both a curtailment and a settlement of obligations, the curtailment is
>   accounted for prior to the settlement;
>     the straight-line amortization of past
>   service costs and plan amendments over the average remaining service period of
>   the active employee group covered by the plans; and
>     the amortization of
>   cumulative unrecognized net actuarial gains and losses in excess of 10% of the
>   greater of the accrued benefit obligation or market-related value of plan
>   assets at the beginning of year over the average remaining service period of
>   the active employee group covered by the plans.

The pension plan obligations are determined in accordance with the projected
benefit method prorated on services.

Other employee future benefit plans

The Company accrues the cost of post-retirement benefits
other than pensions as determined by independent actuaries based on assumptions
determined by the Company. These benefits, which are funded by the Company as
they become due, include life insurance programs as well as medical and dental
benefits. The Company amortizes the cumulative unrecognized net actuarial gains
and losses in excess of 10% of the accrued benefit obligation at the beginning
of the year, over the average remaining service period of the active employee
group covered by the plans.

Translation of foreign currencies

Monetary assets and liabilities of domestic and integrated
foreign operations denominated in foreign currencies are translated at year-end
exchange rates. Non-monetary assets and liabilities of integrated foreign
operations are translated at the historical rate relevant for the particular
asset or liability. The exchange gains or losses resulting from the translations
are included in "Interest, foreign exchange and other" expenses. Revenues and
expenses are translated at prevailing market rates in the recognition year.

70

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1.Significant
accounting policies (continued):

Income taxes

The Company accounts for income taxes using the asset and
liability method. Under this method, future income tax assets and liabilities
are determined based on the temporary differences between the accounting basis
and the tax basis of assets and liabilities. These temporary differences are
measured using the current tax rates and laws expected to apply when these
differences reverse. Future tax benefits are recognized to the extent that
realization of such benefits is considered more likely than not. The effect on
future tax assets and liabilities of a change in income tax rates is recognized
in earnings in the period that includes the substantive enactment date.

Investment tax credits related to research and development
are recognized in earnings as a reduction of such expenses when the Company has
made the qualifying expenditures and there is reasonable assurance that the
credits will be realized.

Derivative financial instruments

The Company manages its foreign exchange exposure on anticipated net cash
inflows, principally U.S. dollars and Euros, through the use of options and
forward contracts.

The Company may, from time to time, manage its exposure to
commodity price risk associated with sales of lumber, pulp and newsprint through
the use of cash-settled hedge (swap) contracts. The Company does not hold or
issue derivative financial instruments for trading or speculative purposes.

The Company does not currently apply hedge accounting for
these derivative financial instruments. These are measured at fair value, with
changes in fair value after September 27, 2003, recognized in income. The
unrealized gain as of September 27, 2003, is being amortized into earnings based
on the original maturity date of the contracts.

2.Acquisitions:

2005 None

2004

On October 28, 2003, the Company acquired all of the assets
of BTLSR Toledo Inc. ("BTLSR"), a custom manufacturer of spray-dried powdered
resins located in Toledo, Ohio (USA). Depending on the financial results of
BTLSR, the seller is entitled to a maximum Contingent Value Right (CVR) payment,
over the five-year period following the sale, of U.S. $3.0 million (Canadian
$3.9 million).

On November 3, 2003, the Company acquired the assets of two sawmills located
in La Sarre and Senneterre ("La Sarre Senneterre"), Quebec from Nexfor Inc.

On December 15, 2003, the Company acquired the assets of a sawmill located in
Chapleau ("Chapleau"), Ontario from Weyerhaeuser Company Limited.

On August 4, 2004 the Company acquired the remaining 50% interest in Excel
Forest Products ("Excel"), a sawmill located in Opasatika, Ontario.

71

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2.Acquisitions:
(continued):

Details of the acquisitions are as follows:

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

3.

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



72

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS4.Investments in
joint ventures:

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

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

5.

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

73

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS6.Other assets:

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

Long-term loans to employees:

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

7.

|                            |          |        | Chemicals |             
|--------------------------- | -------- | ------ | --------- | ------------
|                            | Forest   |        | & other   |             
|                            | products | Paper  | products  | Consolidated
|2004                        |          |        |           |             
|Goodwill, beginning of year | $ 3.9    | $ 21.6 | $ 0.9     | $ 26.4      
|Acquisition (note 2)        | 2.5      |       |          | 2.5         
|Goodwill, end of year       | $ 6.4    | $ 21.6 | $ 0.9     | $ 28.9      
|                            |          |        |           |             
|2005                        |          |        |           |             
|Goodwill, beginning of year | $ 6.4    | $ 21.6 | $ 0.9     | $ 28.9      
|Goodwill impairment         | (4.0)    | (21.6) |          | (25.6)      
|Goodwill, end of year       | $ 2.4    | $     | $ 0.9     | $ 3.3       

8.

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

74

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS9.Long-term debt:

|                                                                                             | 2005      | 2004     
|-------------------------------------------------------------------------------------------- | --------- | ---------
|Tembec 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    | $ 23.9   
|Tembec Industries Inc.:                                                                      |           |          
|8.625% Unsecured Senior Notes (US$350.0
    million) redeemable at the                       |           |          
|option of the Company on or after June 30, 2004
    at specified redemption                  |           |          
|prices, due June 30, 2009 with semi-annual
    interest payments due                         |           |          
|June 30 and December 30 of each year                                                         | 409.9     | 446.3    
|8.50% Unsecured Senior Notes (US$500.0
    million) redeemable at any time                   |           |          
|at the option of the Company, at a price that
    includes a make-whole payment,             |           |          
|due February 1, 2011 with semi-annual interest
    payments due February 1                   |           |          
|and August 1 of each year                                                                    | 585.6     | 637.6    
|7.75% Unsecured Senior Notes (US$350.0
    million) redeemable at any time at                |           |          
|the option of the Company, at a price that
    includes a make-whole payment,                |           |          
|due March 15, 2012 with semi-annual interest
    payments due March 15                       |           |          
|and September 15 of each year                                                                | 409.9     | 446.3    
|Tembec SAS:                                                                                  |           |          
|Unsecured term loans (Euro 2.7 million in
    2005  Euro 3.3 million in 2004),              |           |          
|bearing interest at rates up to 1.5%, repayable
    and maturing at various dates            |           |          
|to December 2013                                                                             | 3.9       | 5.1      
|Other Tembec SAS obligations                                                                 | 7.1       | 8.3      
|Tembec Envirofinance SAS:                                                                    |           |          
|Unsecured term loans (Euro 8.9 million in
    2005  Euro 4.9 million in 2004),              |           |          
|non-interest bearing, repayable and maturing at
    various dates from June 2014             |           |          
|to June 2017                                                                                 | 12.6      | 7.7      
|1387332 Ontario Limited (Marathon Pulp
    joint venture) (50% proportionate consolidation): |           |          
|Term loan bearing interest at prime rate plus
    2.75%, maturing March 31, 2006             | 12.9      | 15.5     
|Temlam Inc. (50% proportionate
    consolidation):                                           |           |          
|Term loans bearing interest at 6.75% and
    between prime rate plus 3/4% and 11/2%,         |           |          
|maturing on various dates to June 2015, repayable
    in monthly instalments                 |           |          
|of varying amounts                                                                           | 32.5      | 7.5      
|Other long-term obligations                                                                  | 17.4      | 19.2     
|                                                                                             | 1,515.7   | 1,617.4  
|Less current portion                                                                         | 21.3      | 9.4      
|                                                                                             | $ 1,494.4 | $ 1,608.0

Certain covenants:

The indentures of agreements for Tembec's borrowings contain
restrictive covenants, including restrictions on the incurrence of additional
indebtedness, the investments in other persons, the creation of liens, sale and
leaseback transactions, certain amalgamations, mergers, consolidations and sales
of assets and certain transactions with affiliates.

The Marathon joint venture does not meet certain financial
covenants on its revolving operating line and its term loan with a syndicate of
banks. As a result, the operating line, which expired in March 2005, has not
been renewed pending the outcome of ongoing discussions with the syndicate.
There is no recourse to the shareholders on either of these loan facilities.

75

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS9.
Long-term debt
(continued):

Instalments on consolidated long-term debt for the four years following
September 30, 2006 are as follows:

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

10. Other long-term liabilities and credits:

|                                                                  | 2005    | 2004   
|----------------------------------------------------------------- | ------- | -------
|Accrued benefit liability  pension benefit plans                 | $ 54.3  | $ 48.6 
|Accrued benefit liability  other benefit
    plans               | 56.3    | 53.4   
|Balance payable on acquisition of Jager
    Building Systems Inc. | 7.0     | 6.7    
|Reforestation  BC operations                                     | 6.1     | 6.6    
|Environment and other asset retirement
    obligations            | 7.7     | 8.3    
|Deferred government assistance                                    |        | 1.0    
|Deferred gain on sale of assets                                   | 5.1     | 5.6    
|Other                                                             | 3.0     | 6.0    
|                                                                  | $ 139.5 | $ 136.2

11. Minority interests:

|             | 2005  | 2004 
|------------ | ----- | -----
|AV Cell Inc. | $ 5.0 | $ 5.0
|Brassac SAS  | 0.4   | 0.3  
|             | $ 5.4 | $ 5.3

12. Redeemable preferred shares:

|                                             | 2005   | 2004  
|-------------------------------------------- | ------ | ------
|16,627,500 Series 2 Class B preferred shares | $ 16.6 | $ 16.6
|9,103,710 Series 4 Class B preferred shares  | 9.1    | 9.1   
|                                             | $ 25.7 | $ 25.7

13. Share capital:

Authorized:

Unlimited number of common voting shares, without par value.

Unlimited number of non-voting Class B preferred shares issuable in series
without par value, with other attributes to be determined at time of issuance:

Unlimited number of Series 2 Class B shares redeemable at
  any time by the Company and, commencing on June 26, 2011, at the option of the
  holder, the redemption price being equal to the issue price plus declared and
  unpaid dividends. The Series 2 Class B shares are entitled to a preferential
  and non-cumulative dividend equal to the dividend yield percentage paid on the
  common shares.

76

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS13. Share capital (continued):
Authorized (continued):
9,103,710 0.5% per month non-cumulative Series 4 Class B
  shares redeemable at any time by the Company and after September 30, 2009, at
  the option of the holder, the redemption price being equal to the issue price
  plus declared and unpaid dividends. The Series 4 Class B shares can be
  redeemed in cash or in common shares at the option of the Company.250,000 Class C shares, with a par value of $1 each, non-voting,
participating and redeemable at the issue price plus the increase in the book
value per share since the issue date.

|                                             |  | 2005    |  | 2004   
|-------------------------------------------- |  | ------- |  | -------
|Issued and fully paid:                       |  |         |  |        
|85,616,232 common shares (2004  85,860,932) |  | $ 831.4 |  | $ 833.8
|Series 2 Class B preferred shares (note 12)  |  |        |  |       
|Series 4 Class B preferred shares (note 12)  |  |        |  |       
|                                             |  | $ 831.4 |  | $ 833.8

|                           |            |         |            |        
|-------------------------- | ---------- | ------- | ---------- | -------
|                           |            | 2005    |            | 2004   
|                           | Common     |         | Common     |        
|                           | shares     | Amount  | shares     | Amount 
|Balance, beginning of year | 85,860,932 | $ 833.8 | 85,817,932 | $ 834.2
|                           |            |         |            |        
|Shares issued:             |            |         |            |        
|Long-term Incentive Plan   |           |        | 43,000     | 0.4    
|Excel Forest Products      |           |        |           | (0.8)  
|                           |            |         |            |        
|Shares repurchased         | (244,700)  | (2.4)   |           |       
|Balance, end of year       | 85,616,232 | $ 831.4 | 85,860,932 | $ 833.8

During the year, the Company extended its normal course
issuer bid allowing it to repurchase for cancellation up to 4,293,046 common
shares (2004  4,290,896) (approximately 5% of outstanding shares). In 2005, the
Company purchased and cancelled 244,700 common shares at a total cost of $1.9
million. The discount of the repurchase price over the average historical issue
price amounted to $0.5 million and was included in contributed surplus. No
common shares were repurchased under the plan during 2004.

As a result of a contingency based on the share price of Tembec, the Company
was required to pay $0.8 million with respect to the March 19, 2001 acquisition
of a 50% interest in Excel Forest Products.

The following table provides the reconciliation between basic and diluted
earnings (loss) per share:

|                                                                 |            | 2005       |  | 2004  
|---------------------------------------------------------------- | ---------- | ---------- |  | ------
|Net earnings (loss)                                              |            | $ (304.3)  |  | $ 37.0
|Weighted average number of common shares
    outstanding         | 85,637,908 | 85,838,097
|Dilutive effects:                                                |            |            |  |       
|Employees stock options                                          |            | 62,644     |  | 48,460
|Weighted average number of diluted common
    shares outstanding | 85,700,552 | 85,886,557
|Basic earnings (loss) per share                                  |            | $ (3.55)   |  | $ 0.43
|Diluted earnings (loss) per share                                |            | $ (3.55)   |  | $ 0.43

77

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS13. Share capital (continued):

The diluted loss per share is the same as the basic loss per share as the
dilutive factors result in a decrease in the loss per share.
Under the Long-term Incentive Plan, the Company may, from
time to time, grant options to its employees. The plan provided for the issuance
of up to a maximum of 5,400,000 common shares at an exercise price equal to the
market price of the Company's common shares on the date of the grant. These
options vest over a five-year period and expire ten years from the date of
issue.
The Company applied the settlement-based method of accounting
for stock-based compensation awards granted to employees prior to September 28,
2003. Under this method, no compensation expense was recorded over the vesting
period of these options. The Company disclosed the pro forma effect on net
earnings (loss) and earnings (loss) per share had the fair value-based method
been applied for options granted between September 29, 2001 and September27,
2003.
In accordance with Section 3870 of the CICA Handbook, the following pro forma
disclosures present the effect on earnings (loss) per share had the fair
value-based method been chosen.

|                           | 2005      | 2004  
|-------------------------- | --------- | ------
|Net earnings (loss):       |           |       
|As reported                | $ (304.3) | $ 37.0
|Pro forma                  | $ (304.5) | $ 36.5
|Earnings (loss) per share: |           |       
|As reported                | $ (3.55)  | $ 0.43
|Pro forma                  | $ (3.55)  | $ 0.43

For stock options granted during the year, the Company
recorded a compensation expense of $1.1 million (2004  $0.3 million).
Contributed surplus has been adjusted for the same amount. The fair value of
each option granted was estimated on the date of grant using the Black & Scholes
option-pricing model with the following assumptions:

|                                           | 2005   | 2004  
|------------------------------------------ | ------ | ------
|Dividend yield                             | 0.0%   | 0.0%  
|Volatility                                 | 35.4%  | 34.6% 
|Risk-free interest rate                    | 3.8%   | 4.4%  
|Expected option life (in years)            | 7.5    | 7.5   
|Weighted average fair value of each option | $ 1.85 | $ 3.02

The following table summarizes the changes in options outstanding and the
impact on weighted average per share exercise price during the year:

|                           |           | 2005     |           |          | 2004 
|-------------------------- | --------- | -------- | --------- | -------- | -----
|                           |           | Weighted |           | Weighted
|                           |           | average  |           | average 
|                           |           | exercise |           | exercise
|                           | Shares    | price    | Shares    |          | price
|Balance, beginning of year | 3,352,786 | $ 12.13  | 3,323,876 |          | 12.40
|Options granted            | 1,701,253 | 5.02     | 309,910   |          | 8.08 
|Options exercised          |          |         | (43,000)  |          | 9.35 
|Options expired            | (924,786) | 13.04    | (238,000) |          | 11.06
|Balance, end of year       | 4,129,253 | $ 9.00   | 3,352,786 |          | 12.13
|Exercisable, end of year   | 1,952,215 | $ 12.41  | 2,621,275 |          | 12.71

78

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS13. Share capital (continued):

The following table summarizes the weighted average per share exercise price
and the weighted remaining contractual life of the options outstanding as at
September 24, 2005:

|             |           | Outstanding options | Exercisable options
|------------ | --------- | ------------------- | -------------------
|             |           | Weighted            |                    
|             | Number    | remaining           | Average            
|             | of        | contractual         | exercise           
|Year granted | options   | life                | price              
|1996         | 120,552   | 0.30                | $ 9.739            
|1997         | 902,872   | 1.80                | 13.224             
|1998         | 46,644    | 2.61                | 7.086              
|1999         | 265,812   | 3.18                | 9.035              
|2000         | 349,678   | 4.31                | 15.743             
|2001         | 76,860    | 5.29                | 11.458             
|2002         | 226,556   | 6.12                | 10.790             
|2003         | 173,088   | 7.20                | 10.305             
|2004         | 274,043   | 8.15                | 8.117              
|2005         | 1,693,148 | 9.44                | 5.009              
|             | 4,129,253 | 6.15                | $ 9.001            

Under the Employee Share Purchase Plan, employees may
purchase common shares of the Company up to 10% of their base salary or wage.
The Company contributes 25% of the amount invested by the employee if the shares
are held for a minimum period of time. Purchases of common shares under this
plan occur on the open market. In 2005, the cost of share purchases for the
benefit of the employees amounted to $0.4 million ($0.4 million  2004).

14. Commitments and contingencies:

Countervailing and antidumping duties:

In response to the expiration of the Softwood Lumber
Agreement, a number of industry groups in the United States filed petitions with
the U.S. Department of Commerce ("USDOC") and the U.S. International Trade
Commission ("USITC") alleging unfair trade practices by the Canadian softwood
lumber industry. These petitions proposed that certain softwood lumber exports
from Canada to the United States be charged with countervailing and antidumping
duties.

Countervailing duty

On August 9, 2001, the USDOC imposed a preliminary
countervailing duty of 19.31% on Canadian softwood lumber shipped to the U.S.
The Company subsequently accrued $21.8 million of countervailing duty covering
shipments of lumber to the U.S. between August 17, 2001 and December 15, 2001.
On March 22, 2002, the USDOC issued its final determination in the
countervailing duty investigations, adjusting the rate from 19.31% to 19.34% and
subsequently corrected for ministerial errors to 18.79%. The USDOC also
determined that no critical circumstances existed, and accordingly, the duty
would not apply retroactively to May 19, 2001. On May 16, 2002, the USITC
announced it had found no current injury, but a threat of injury, to the U.S.
lumber industry, effectively removing the requirement to remit any funds
relating to lumber shipped to the U.S. prior to December 15, 2001. The finding
of threat of injury resulted in the USDOC issuing an order to collect
countervailing duties on a going forward basis. During the June 2002 quarter,
the Company reversed the $21.8 million it had accrued from August 2001 to
December 2001. The bonds posted to cover the liability were also cancelled.

79

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS14. Commitments and contingencies (continued):
Countervailing duty (continued)

Effective May 22, 2002, the Company has been subject to a
countervailing duty of 18.79%. A charge of $18.2 million was incurred during
Fiscal 2002 relating to lumber shipments to the U.S. between May 22 and
September 28, 2002. A charge of $49.7 million was incurred during Fiscal 2003
relating to lumber shipments to the U.S. between September 29, 2002 and
September 27, 2003. A charge of $68.3 million was incurred during fiscal 2004
relating to lumber shipments to the U.S. between September 28, 2003 and
September 25, 2004. On December 20, 2004, the USDOC reduced the countervailing
duty deposit rate to 17.18%. On February 17, 2005, the rate was further
corrected to 16.37%. For Fiscal 2005, a charge of $57.0 million was incurred
relating to lumber shipments to the U.S. between September 26, 2004 and
September 24, 2005. The Company is currently remitting cash deposits to cover
the applicable duty.
Antidumping duty

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

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

|                            | Total   | Less than 1 | 2-3     | 4-5     | More than
|--------------------------- | ------- | ----------- | ------- | ------- | ---------
|                            | years   | year        | years   | years   | 5 years  
|Operating lease obligations | $ 27.5  | $ 8.6       | $8.1    | $ 4.6   | $ 6.2    
|Purchase obligations        | $ 292.1 | $ 114.4     | $ 83.3  | $ 55.6  | $ 38.8   
|Interest Payments           | $ 636.3 | $ 121.2     | $ 240.7 | $ 203.4 | $ 71.0   

80

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS14. Commitments and contingencies (continued):
Other:

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

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

|                                                           | 2005     | 2004   
|---------------------------------------------------------- | -------- | -------
|Cash flows from operating activities                       | $ (37.2) | $ 206.8
|Interest on long-term debt                                 | 124.3    | 135.1  
|Interest on short-term debt                                | 5.7      | 2.0    
|Interest income                                            | (2.5)    | (3.9)  
|Investment income                                          | (0.7)    | (22.7) 
|Interest capitalized on construction projects              | (2.8)    | (5.2)  
|Proceeds from sale of derivative financial
    instruments | (138.7)  | (193.7)
|Other foreign exchange items                               | 17.1     | 16.6   
|Bank charges and other financing expenses                  | 6.8      | 5.7    
|Current income taxes                                       | 6.7      | 6.9    
|Minority interests                                         |         | 0.4    
|Unusual items  cash portion                               | 31.4     |       
|Change in non-cash working capital                         | 24.6     | 28.6   
|Other                                                      | (9.6)    | (8.1)  
|EBITDA                                                     | $ 25.1   | $ 168.5

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

16. Depreciation and amortization:

|                                                        | 2005    | 2004   
|------------------------------------------------------- | ------- | -------
|Fixed assets                                            | $ 234.0 | $ 226.6
|Deferred development, pre-operating costs and
    other | 6.1     | 8.1    
|Impairment charge                                       | 3.6     |       
|                                                        | $ 243.7 | $ 234.7

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

81

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS17. Unusual items:
2005

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

During the September 2004 quarter, the Company recorded a
non-cash charge of $9.8 million relating to the write-down of a paper machine
removed from service at a newsprint facility. The after-tax impact of this item
was $6.6 million.
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 was the result of a decision
made by the partners to halt work on the modernization project and seek creditor
protection. The charge included 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.
The after-tax impact was $36.2 million.
The following table provides the components of the unusual items by
reportable segment:

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

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

82

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS17. Unusual items (continued):

|                          |  |       |          |          |              | 2004  
|------------------------- |  | ----- | -------- | -------- | ------------ | ------
|                          |  |       | Chemical |          |             
|                          |  |       |          | & other  |              |       
|                          |  | Paper |          | products | Consolidated
|Fixed assets write-down   |  | $ 9.8 |          | $       |              | $ 9.8 
|Write-down of investments |  |      |          | 36.8     |              | 36.8  
|                          |  | $ 9.8 |          | $ 36.8   |              | $ 46.6

During the year, as a result of its restructuring activities,
the Company reduced its salaried and hourly workforce at certain locations and
recorded approximately $23.4 million for termination costs including severance
and other labour-related costs. Idling and other costs of $8.0 million were also
recorded.

The following table provides the reconciliation components of the mill
closure provisions by reportable segment. No charges were incurred in 2004.

|                |                                          |          |        |        |              |        | 2005  
|--------------- | ---------------------------------------- | -------- | ------ | ------ | ------------ | ------ | ------
|                |                                          |          | Forest |        |              |        |       
|                |                                          | products |        | Paper  | Consolidated
|Opening balance |                                          | $       |        | $     |              | $    
|Additions:      | Severance and other labour-related costs |          | 12.8   |        | 10.6         |        | 23.4  
|                | Idling and other costs                   |          | 3.3    |        | 4.7          |        | 8.0   
|Payments:       | Severance and other labour-related costs |          | (6.6)  |        | (3.4)        |        | (10.0)
|                | Idling and other costs                   |          | (1.4)  |        | (1.2)        |        | (2.6) 
|Ending balance  |                                          | $ 8.1    |        | $ 10.7 |              | $ 18.8

18. Interest, foreign exchange and other:

|                                                                | 2005    | 2004    
|--------------------------------------------------------------- | ------- | --------
|Interest on long-term debt                                      | $ 124.3 | $ 135.1 
|Interest on short-term debt                                     | 5.7     | 2.0     
|Interest income                                                 | (2.5)   | (3.9)   
|Investment income                                               | (0.7)   | (22.7)  
|Interest capitalized on construction projects                   | (2.8)   | (5.2)   
|                                                                | 124.0   | 105.3   
|                                                                |         |         
|Amortization of deferred financing costs                        | 5.4     | 5.3     
|Amortization of deferred gain on foreign
    exchange contracts | (117.9) | (149.3) 
|Derivative financial instruments gain                           | (30.3)  | (84.6)  
|Other foreign exchange items                                    | 17.1    | 16.6    
|Loss on consolidation of foreign integrated
    subsidiaries    | 6.0     | 2.0     
|Bank charges and other financing expenses                       | 6.8     | 5.7     
|                                                                | (112.9) | (204.3) 
|                                                                | $ 11.1  | $ (99.0)

83

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS19. Income taxes:

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

|                                                          | 2005     | 2004     
|--------------------------------------------------------- | -------- | ---------
|Future income tax assets:                                 |          |          
|Non-capital loss carryforwards and pool of
    deductible |          |          
|scientific research and development expenditures          | $ 374.8  | $ 299.4  
|Investment tax credits                                    | 68.2     | 57.5     
|Employee future benefits                                  | 13.0     | 11.8     
|Foreign exchange contract                                 |         | 16.4     
|Corporate minimum taxes paid                              | 5.6      | 5.6      
|Capital loss carryforwards                                | 14.7     | 15.2     
|Other                                                     | 13.8     | 19.5     
|Valuation allowance                                       | (156.4)  | (77.3)   
|                                                          | 333.7    | 348.1    
|Future income tax liabilities:                            |          |          
|Fixed assets                                              | (251.3)  | (356.3)  
|Exchange gain on long-term debt                           | (79.7)   | (57.1)   
|Timber rights                                             | (5.9)    | (6.5)    
|Other                                                     | (21.2)   | (30.8)   
|                                                          | (358.1)  | (450.7)  
|Net future income tax liabilities                         | $ (24.4) | $ (102.6)
|                                                          |          |          
|As reported in the consolidated balance
    sheet:        |          |          
|Future income tax assets                                  | $ 94.9   | $ 88.5   
|Future income tax liabilities                             | (119.3)  | (191.1)  
|Net future income tax liabilities                         | $ (24.4) | $(102.6) 

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

|                                                                        |         | Expiring    
|----------------------------------------------------------------------- | ------- | ------------
|                                                                        | Amounts | dates       
|Non-capital loss carried forward for Canadian subsidiaries              | $ 504.0 | 2006 to 2015
|Non-capital loss carried forward for foreign
    subsidiaries           | 338.1   | 2020 to 2025
|Pool of deductible scientific research and
    experimental development | 289.8   | Unlimited   
|Investment tax credits and corporate minimum tax                        | 73.8    | 2007 to 2014

84

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS19. Income taxes (continued):

The reconciliation of income taxes calculated at the statutory rate to the
actual tax provision is as follows:2005
    2004Earnings (loss) before income taxes
    and minority interest
    $ (359.4)
    $ 79.7Income taxes based on
    combined federal and provincialincome tax
    rates of 33.3% (2004  34.5%)
    $ (119.7)
    $ 27.5Increase (decrease)
    resulting from:Manufacturing and processing deduction
    
    (0.9)Future
    income taxes adjustment due to rate enactments
    
    6.0Net losses
    not recognized
    32.9
    28.9Change in
    valuation allowance
    32.2
    Rate
    differential between jurisdictions
    (9.1)
    (14.2)Permanent
    differences:Non-taxable
    portion of exchange gain on long-term debt
    (19.5)
    (16.1)Non-deductible loss on consolidation of foreign integrated subsidiaries
    4.1
    3.2Other
    permanent differences
    21.0
    2.4Large
    corporations tax
    3.0
    5.564.6
    14.8Income taxes (recovery)
    $ (55.1)
    $ 42.3Income taxes:Current
    $ 6.7
    $ 6.9Future
    (61.8)
    35.4Income taxes (recovery)
    $ (55.1)
    $ 42.320. Pension plans:
Defined contribution plans

The Company contributes to defined contribution plans,
provincial and labour sponsored pension plans, group registered retirement
savings plans, deferred profit sharing plans, and 401(k) plans. The pension
expense under these plans is equal to the Company's contribution. The 2005
pension expense was $14.8 million ($14.6 million in 2004.)
Defined benefit plans

The Company has several defined benefit pension plans.
Non-unionized employees in Canada joining the Company after January 1, 2000,
participate in defined contribution plans. Some of the defined benefit plans are
contributory. The pension expense and the obligation related to the defined
benefit plans are actuarially determined using management's most probable
assumptions.85NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20. Pension plans
(continued):

Components of net periodic benefit cost
for defined benefit plans:

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

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

Change in accrued benefit obligation:

|                                                        | 2005    | 2004   
|------------------------------------------------------- | ------- | -------
|Accrued benefit obligation at beginning of year         | $ 716.7 | $ 719.7
|Current service cost                                    | 15.9    | 17.6   
|Interest cost                                           | 45.7    | 43.8   
|Employee contributions                                  | 4.9     | 4.8    
|Benefits paid                                           | (32.8)  | (30.9) 
|Plan amendments                                         | 0.7     |       
|Actuarial loss (gain)                                   | 169.7   | (46.6) 
|Foreign exchange rate changes and other
    adjustments | (9.1)   | (7.5)  
|Acquisitions                                            |        | 15.8   
|Accrued benefit obligation at end of year               | $ 911.7 | $ 716.7

86

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20. Pension plans (continued):

Change in fair value of defined benefit plan assets:

|                                                                   | 2005    | 2004   
|------------------------------------------------------------------ | ------- | -------
|Fair value of defined benefit plan assets at beginning of
    year | $ 577.9 | $ 483.7
|Actual return on plan assets                                       | 62.6    | 69.9   
|Employer contributions                                             | 33.9    | 42.2   
|Employee contributions                                             | 4.9     | 4.8    
|Benefits paid                                                      | (32.8)  | (30.9) 
|Foreign exchange rate changes                                      | (9.0)   | (5.0)  
|Acquisitions                                                       |        | 13.2   
|Fair value of defined benefit plan assets at end of year           | $ 637.5 | $ 577.9

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

Equity securities include Tembec's common shares in the
amount of $0.3 million (0.05% of total plan assets held at CIBC Mellon) and $0.7
million (0.17% of total plan assets held at CIBC Mellon) at June 30, 2005 and
June30,2004, respectively.

The following table presents the difference between the fair
value of the defined benefit pension plan assets and the actuarially determined
accrued benefit obligation as at September 24, 2005 and September 25, 2004. This
difference is also referred to as either the deficit or surplus, as the case may
be, or the funded status of the plans.

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

Reconciliation of funded status:

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

Amounts recognized in the Consolidated Balance Sheets:

|                          | 2005   | 2004  
|------------------------- | ------ | ------
|Deferred pension costs    | $ 66.1 | $ 51.9
|Accrued benefit liability | (54.3) | (48.6)
|Net benefit asset         | $ 11.8 | $ 3.3 

87

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS20. Pension plans (continued):

The accrued benefit obligations in excess of fair value of plan assets at
year-end with respect to pension benefit plans that are not fully funded are as
follows:

|                            | 2005      | 2004     
|--------------------------- | --------- | ---------
|Fair value of plan assets   | $ 637.5   | $ 499.6  
|Accrued benefit obligations | (911.7)   | (645.4)  
|Plan deficit                | $ (274.2) | $ (145.8)

Weighted-average significant assumptions:

|                                           | 2005  | 2004 
|------------------------------------------ | ----- | -----
|Accrued benefit obligation at end of year: |       |      
|Discount rate                              | 4.98% | 6.38%
|Rate of compensation increase              | 3.45% | 3.39%
|Net periodic benefit cost for the year:    |       |      
|Discount rate                              | 6.38% | 5.93%
|Rate of compensation increase              | 3.39% | 3.01%
|Expected long-term return on assets        | 7.48% | 7.78%

21. Other employee future benefit plans:

The Company offers post-retirement life insurance, health care and dental
care plans to some of its retirees. The Company offers post-employment health
care and dental care plans to disabled employees.

The post-retirement and post-employment plans are unfunded.

The Company measures its accrued benefit obligation for accounting purposes
as at June 30 of each year.

Components of net periodic benefit cost for other employee future benefit
plans:

|                                                                           | 2005  | 2004 
|-------------------------------------------------------------------------- | ----- | -----
|Current service cost                                                       | $ 1.3 | $ 1.4
|Interest cost                                                              | 3.9   | 4.0  
|Post-employment                                                            | 0.9   | 0.9  
|Actuarial loss (gain)                                                      | 8.9   | (4.7)
|Past service costs                                                         |      | 1.0  
|Difference between amortization of past
    service costs for the          |       |      
|year and actual plan amendment for the year                                | 0.1   | (1.0)
|Difference between net actuarial loss (gain)
    and actuarial loss (gain) | (8.4) | 5.9  
|Other adjustments                                                          | 1.1   | (0.1)
|Periodic benefit cost                                                      | $ 7.8 | $ 7.4

88

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS21. Other employee future benefit plans (continued):

Change in accrued benefit obligation:

|                                                    | 2005   | 2004  
|--------------------------------------------------- | ------ | ------
|Accrued benefit obligation at
    beginning of year | $ 64.1 | $ 68.2
|Current service cost                                | 1.3    | 1.4   
|Interest cost                                       | 3.9    | 4.0   
|Employee contributions                              | 0.3    | 0.1   
|Benefits paid                                       | (3.2)  | (2.6) 
|Actuarial loss (gain)                               | 8.9    | (4.7) 
|Past service costs                                  |       | 1.0   
|Foreign exchange rate
    changes                   | (1.2)  | (1.6) 
|Post-employment                                     | 1.3    | (0.2) 
|Government prescription drug subsidy                |       | (1.5) 
|Accrued benefit obligation at end of
    year       | $ 75.4 | $ 64.1

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

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

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

Reconciliation of funded status:

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

89

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS21. Other employee future benefit plans (continued):

Weighted-average significant assumptions:

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

22. Financial instruments:

(a) Derivative financial instruments:

The following tables summarize the changes in the market value of derivative
financial instruments and in the deferred gain on foreign exchange contracts:

(i) Derivative financial instruments:

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

90

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS22. Financial instruments (continued):
(a) Derivative financial instruments (continued):

(ii) Unamortized deferred gain on foreign exchange contracts:

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

(b) Foreign currency rate risk:

The Company realizes a significant portion of its sales in
foreign currencies, principally US$ and Euros, and enters into various types of
foreign exchange contracts in managing its foreign exchange risk. In addition,
this risk is partially covered by US$ purchases and debt service. The Company
does not hold or issue financial instruments for trading purposes.

The Company had the following US$ foreign exchange contracts convertible into
Canadian $ at September 24, 2005 and September 25, 2004:

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

91

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS22. Financial instruments (continued):
(b) Foreign currency rate risk (continued):

The Company had the following US$ foreign exchange contracts convertible into
Euros at September 24, 2005 and September 25, 2004:

|                     |              | 2005         |              | 2004        
|-------------------- | ------------ | ------------ | ------------ | ------------
|Maturity per quarter | Average rate | US$ millions | Average rate | US$ millions
|2005  December 2004 |             |             | 1.0012       | 2.2         
| March 2005         |             |             | 1.0953       | 2.2         
| June 2005          |             |             | 1.0911       | 2.2         
| September 2005     |             |             | 1.0744       | 1.9         
|                     |              |              |              |             
|2006  December 2005 | 1.2050       | 1.7          | 1.1145       | 0.9         
| March 2006         | 1.1671       | 1.9          | 1.1461       | 1.6         
| June 2006          | 1.1480       | 1.4          | 1.1480       | 1.4         
| September 2006     | 1.1479       | 1.7          | 1.1479       | 1.7         
|                     |              |              |              |             
|2007  December 2006 | 1.2752       | 1.4          | 1.2075       | 0.7         
| March 2007         | 1.2280       | 1.0          | 1.2006       | 0.7         
| June 2007          | 1.2092       | 0.7          | 1.2092       | 0.7         
| September 2007     | 1.3052       | 0.7          | 1.2125       | 0.2         
|                     |              |              |              |             
|2008  December 2007 | 1.3498       | 0.3          |             |            
|                     | 1.2033       | 10.8         | 1.1124       | 16.4        

(c) Commodity price risk:

Markets for the Company's principal products are highly
competitive and cyclical in nature. To mitigate the impact of commodity price
volatility of earnings, the Company may periodically purchase commodity price
hedges (lumber, pulp and newsprint). The Company does not hold or acquire
commodity price instruments for trading purposes. However, due to the nature of
lumber futures contracts, they are not normally held to maturity. At September
24, 2005 and September 25, 2004, the Company did not hold any significant
commodity price hedges.

(d) Credit risk:

The Company does not have a significant exposure to any
individual customer or counterparty. The Company reviews a new customer's credit
history before extending credit and conducts regular reviews of its existing
customers' credit performance. The Company may require payment guarantees, such
as letters of credit, or obtains credit insurance coverage. The allowance for
doubtful accounts as at September 24, 2005 and September 25, 2004 was $5.8
million and $6.2 million, respectively.

(e) Fair value of financial instruments:

The carrying amount of cash and cash equivalents, accounts receivable,
operating bank loans and accounts payable and accrued charges approximates their
fair values because of the near-term maturity of those instruments.

The carrying value and the fair value of long-term debt,
balance payable on acquisition of companies and redeemable preferred shares at
September 24, 2005 were $1,548.5 million (2004  $1,649.9 million) and $1,073.0
million (2004  $1,689.2 million), respectively.

The fair value of long-term debt that is actively traded is
based on the closing trading value at the respective year-end dates. The fair
value of the long-term debt that is not actively traded, balance payable on
acquisition of companies and redeemable preferred shares debt has been
determined based on management's best estimate of the fair value to renegotiate
these financial instruments with similar terms at the respective year-end dates.

92

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS23. Summary of material differences between generally
accepted accounting principles (GAAP) in Canada and the United States:

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

|                                                                    | 2005      | 2004    
|------------------------------------------------------------------- | --------- | --------
|Net earnings (loss) under Canadian GAAP                             | $ (304.3) | $ 37.0  
|Adjustments:                                                        |           |         
|Amortization of deferred gain on foreign exchange
    contracts (a) | (115.8)   | (145.1) 
|Income taxes (b), (c)                                               | 39.0      | 46.5    
|Share in loss of affiliated companies (a), (d)                      | (2.2)     | (4.0)   
|Goodwill impairment charge (c)                                      | (9.1)     |        
|Depreciation of fixed assets (c)                                    | 0.3       | 0.3     
|Amortization of pre-operating costs (d)                             | 4.4       | 3.8     
|Development and pre-operating costs (d)                             | (1.3)     | (3.5)   
|Pension                                                             | 0.9       | (0.3)   
|Net loss under U.S. GAAP                                            | $ (388.1) | $ (65.3)
|                                                                    |           |         
|Loss per share under U.S. GAAP:                                     |           |         
|Basic                                                               | $ (4.53)  | $ (0.76)
|Diluted                                                             | $ (4.53)  | $ (0.76)

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

|                                                 | 2005      | 2004     
|------------------------------------------------ | --------- | ---------
|Total assets under Canadian GAAP                 | $ 3,424.7 | $ 3,921.9
|Adjustments:                                     |           |          
|Goodwill (c)                                     |          | 9.1      
|Fixed assets (c)                                 | (7.0)     | (7.3)    
|Investments (a), (d), (e)                        | 106.5     | 111.2    
|Proportionate consolidation (e)                  | (229.1)   | (209.1)  
|Other assets:                                    |           |          
|Deferred development and pre-operating costs (d) | (9.2)     | (9.9)    
|Loans to employees for share purchases (g)       | (5.6)     | (6.3)    
|Deferred pension costs (f)                       | 3.1       | (1.2)    
|Future income taxes (b), (c)                     | 26.0      | 14.6     
|                                                 | (115.3)   | (98.9)   
|Total assets under U.S. GAAP                     | $ 3,309.4 | $ 3,823.0

93

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS23. Summary of material differences between generally accepted accounting
principles (GAAP) in Canada and the United States (continued):

|                                                | 2005      | 2004     
|----------------------------------------------- | --------- | ---------
|Total liabilities under Canadian GAAP           | $ 2,534.5 | $ 2,726.6
|Adjustments:                                    |           |          
|Deferred gain on foreign exchange contracts (a) | (37.6)    | (153.3)  
|Proportionate consolidation (e)                 | (120.5)   | (95.6)   
|Future income taxes (b), (c)                    | (10.7)    | 40.4     
|Pension liabilities (f)                         | 174.0     | 61.7     
|                                                | 5.2       | (146.8)  
|Total liabilities under U.S. GAAP               | $ 2,539.7 | $ 2,579.8
|                                                |           |          
|Total shareholders' equity under Canadian GAAP  | $ 890.2   | $ 1,195.3
|Total asset adjustments                         | (115.3)   | (98.9)   
|Total liability adjustments                     | (5.2)     | 146.8    
|Total shareholders' equity under U.S. GAAP      | $ 769.7   | $ 1,243.2

(a) Derivative financial instruments:

Prior to September 28, 2003, under Canadian GAAP, the Company applied hedge
accounting for derivative financial instruments, which mainly consist of foreign
exchange contracts, which were used to hedge future revenue stream.

Effective September 28, 2003, as a result of the adoption in
Canada of the Accounting guideline AcG-13 of the CICA Handbook, the Company
started accounting for derivative financial instruments on a market value basis.
As a result, a deferred gain was recognized at the beginning of the fiscal year
2004 and is being amortized into earnings based on the original maturity dates
of the then outstanding foreign exchange contracts.

Under U.S. GAAP, such derivative financial instruments were
never accounted for using hedge accounting and, consequently, periodic changes
in unrealized gains and losses on these derivative financial instruments are
included in earnings based on the change in their current market value.
Accordingly, the only difference remaining between Canadian and U.S. GAAP in
respect of these derivative financial instruments is the amount of the deferred
gain either recognized in each year or not yet recognized in earnings under
Canadian GAAP. The outstanding balance of the deferred gain and the amount
recognized in earnings during the year on such derivative financial instruments
are reversed out of earnings and shareholders' equity under U.S. GAAP.

(b) Income taxes:

On October 1, 2000, Tembec adopted the Canadian accounting
recommendations for income taxes (CICA Handbook Section 3465). The Canadian
accounting recommendations essentially harmonize the principles of Canadian GAAP
with those of U.S. GAAP. For Canadian GAAP, the new standard was applied
prospectively. For U.S. GAAP, the statement has been applied since 1992. Prior
to 2000, under Canadian GAAP, Tembec accounted for income taxes using the
deferral method. Under U.S. GAAP, income taxes are being provided for by the
liability method. The deferred tax impact of other reconciling items is also
included in this caption.

(c) Income taxes related to purchase accounting and
goodwill:

> (i)  Prior to adoption of
>   CICA Handbook Section 3465, deferred tax assets or liabilities resulting from
>   temporary differences between the recorded costs of acquired fixed assets and
>   the tax bases of such assets were not recorded under Canadian GAAP.
>   Consequently, purchase price allocation under U.S. GAAP related to
>   acquisitions before October 1, 2000 was different and this results in
>   continued differences because Tembec has adopted CICA Handbook Section 3465
>   prospectively.

94

---

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS23. Summary of material differences between generally
accepted accounting principles (GAAP) in Canada and the United States
(continued):
(c) Income taxes related to purchase accounting and
goodwill (continued):

(ii)  Furthermore, under US
  GAAP, goodwill resulted from purchase price allocation, which did not exist
  under Canadian GAAP and was found to be impaired as a result of the annual
  impairment test and was subsequently written off.
(d) Deferred development and pre-operating costs:

Under U.S. GAAP, certain development and pre-operating costs, capitalized
under Canadian GAAP, would have been charged against earnings.
(e) Joint ventures:

Interest in joint ventures is recognized using the proportionate
consolidation method under Canadian GAAP. Under U.S. GAAP, joint ventures are
accounted for using the equity method.
Earnings recognized by each of the two methods are the same. However, a
reconciliation of U.S. GAAP of the financial statements of the joint venture may
result in adjustments.
(f) Pension liabilities:

At September 24, 2005, $170.9 million (2004  $62.1 million)
was recognized as an additional minimum pension liability on the balance sheet
and in other comprehensive income. The amount was recognized under SFAS No. 87
due to an actuarially valued minimum accumulated benefit obligation in excess of
the fair value of the Plans' assets.
(g) Loans to employees for share purchases:

Under U.S. GAAP, loans to employees for share purchases, classified as other
assets under Canadian GAAP, have been reclassified under shareholders' equity.
(h) Comprehensive income:

Under U.S. GAAP, the Company is required to disclose certain information
about comprehensive income. This information would be as follows for the years
ended September 24, 2005 and September 25, 2004:

|                                                     | 2005      | 2004    
|---------------------------------------------------- | --------- | --------
|Loss under U.S. GAAP                                 | $ (388.1) | $ (65.3)
|Other comprehensive (loss) income:                   |           |         
|Minimum pension liabilities, net of income taxes (f) | (85.2)    | 61.6    
|Comprehensive loss                                   | $ (473.3) | $ (3.7) 

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

24. Comparative figures:

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

95

---

Ten-Year Financial Review

|                                                                                                                                                                                                                |   | 1996       |   | 1997       |   | 1998      
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------- | - | ---------- | - | ----------
|SALES & EARNINGS($ millions)                                                                                                                                                                                    |   |            |   |            |   |           
|Sales                                                                                                                                                                                                           | $ | 990.8      | $ | 1,348.6    | $ | 1,605.2   
|Freight and sales deductions                                                                                                                                                                                    |   | 130.3      |   | 170.2      |   | 182.3     
|Cost of sales                                                                                                                                                                                                   |   | 708.8      |   | 927.7      |   | 1,003.2   
|Selling, general & administrative                                                                                                                                                                               |   | 47.2       |   | 74.0       |   | 85.2      
|EBITDA                                                                                                                                                                                                          |   | 104.5      |   | 176.7      |   | 334.5     
|                                                                                                                                                                                                                |   |            |   |            |   |           
|Depreciation & amortization                                                                                                                                                                                     |   | 74.2       |   | 95.0       |   | 109.6     
|Unusual items                                                                                                                                                                                                   |   |            |   |            |   | (22.6)    
|Interest on debt                                                                                                                                                                                                |   | 84.4       |   | 92.4       |   | 99.0      
|Exchange loss (gain) on long-term debt                                                                                                                                                                          |   | 9.5        |   | 10.4       |   | 71.9      
|Foreign exchange and other financial charges (credits)                                                                                                                                                          |   | (9.5)      |   | (2.4)      |   | 17.7      
|                                                                                                                                                                                                                |   | (54.1)     |   | (18.7)     |   | 58.9      
|                                                                                                                                                                                                                |   |            |   |            |   |           
|Income taxes (recovery)                                                                                                                                                                                         |   | (10.6)     |   |            |   | 50.0      
|Share in loss (earnings) of related companies and minority
    interests                                                                                                                                        |   | (35.6)     |   | (3.7)      |   |           
|Net earnings (loss)                                                                                                                                                                                             |   | (7.9)      |   | (15.0)     |   | 8.9       
|Interest on equity component of convertible
    debentures                                                                                                                                                      |   | 2.0        |   | 2.7        |   | 1.7       
|Net earnings (loss) applicable to common shares                                                                                                                                                                 | $ | (9.9)      | $ | (17.7)     | $ | 7.2       
|                                                                                                                                                                                                                |   |            |   |            |   |           
|ASSETS & CAPITALIZATION($ millions)                                                                                                                                                                             |   |            |   |            |   |           
|Working capital (excluding cash and short
    term debt)                                                                                                                                                        | $ | 187.7      | $ | 255.2      | $ | 318.7     
|Investments                                                                                                                                                                                                     |   | 101.7      |   | 6.6        |   | 13.5      
|Fixed assets (net)                                                                                                                                                                                              |   | 1,262.4    |   | 1,535.7    |   | 1,560.3   
|Other assets                                                                                                                                                                                                    |   | 134.3      |   | 151.0      |   | 127.0     
|Net assets                                                                                                                                                                                                      | $ | 1,686.1    | $ | 1,948.5    | $ | 2,019.5   
|                                                                                                                                                                                                                |   |            |   |            |   |           
|Net debt                                                                                                                                                                                                        | $ | 819.3      | $ | 877.2      | $ | 804.7     
|Deferred items and other long-term
    liabilities                                                                                                                                                              |   |            |   | 2.9        |   | 1.8       
|Future income taxes                                                                                                                                                                                             |   | 104.7      |   | 141.3      |   | 189.7     
|Minority interests                                                                                                                                                                                              |   | 5.7        |   | 4.4        |   | 85.3      
|Redeemable preferred shares                                                                                                                                                                                     |   | 36.6       |   | 36.6       |   | 36.6      
|Shareholders' equity                                                                                                                                                                                            |   | 719.8      |   | 886.1      |   | 901.4     
|Total capitalization                                                                                                                                                                                            | $ | 1,686.1    | $ | 1,948.5    | $ | 2,019.5   
|Net fixed assets additions                                                                                                                                                                                      | $ | 102.4      | $ | 54.9       | $ | 116.7     
|                                                                                                                                                                                                                |   |            |   |            |   |           
|FINANCIAL STATISTICS                                                                                                                                                                                            |   |            |   |            |   |           
|Common shares outstanding at year end                                                                                                                                                                           |   | 46,899,039 |   | 69,570,809 |   | 69,854,628
|Book value per share ($)                                                                                                                                                                                        |   | 12.81      |   | 11.60      |   | 11.74     
|Earnings (loss) per share ($)                                                                                                                                                                                   |   | (0.21)     |   | (0.32)     |   | 0.10      
|Diluted earnings (loss) per share ($)                                                                                                                                                                           |   | (0.21)     |   | (0.32)     |   | 0.13      
|EBITDA margin                                                                                                                                                                                                   |   | 10.5%      |   | 13.1%      |   | 20.8%     
|Cash flow provided by operations per share
    ($)                                                                                                                                                              |   | 0.44       |   | 1.40       |   | 2.99      
|Ratio of current assets to current
    liabilities                                                                                                                                                              |   | 2.2:1      |   | 1.6:1      |   | 3.0:1     
|Net debt to total capitalization                                                                                                                                                                                |   | 48.6%      |   | 45.0%      |   | 39.8%     
|                                                                                                                                                                                                                |   |            |   |            |   |           
|The comparative figures have
    been restated to reflect the effect of the adoption of the amended Canadian
    Institute of Chartered Accountants recommendations regarding foreign
    currency translation.

96

---

TEN-YEAR FINANCIAL REVIEW

|  | 1999       |   | 2000       |   | 2001       |   | 2002       |   | 2003       |   | 2004       |  |   | 2005      
|- | ---------- | - | ---------- | - | ---------- | - | ---------- | - | ---------- | - | ---------- |  | - | ----------
|$ | 1,883.5    | $ | 2,598.1    | $ | 2,990.8    | $ | 3,391.0    | $ | 3,346.1    | $ | 3,664.8    |  | $ | 3,585.0   
|  | 211.0      |   | 277.3      |   | 333.4      |   | 414.2      |   | 473.2      |   | 533.6      |  |   | 502.7     
|  | 1,210.6    |   | 1,651.8    |   | 2,047.6    |   | 2,534.6    |   | 2,635.9    |   | 2,784.1    |  |   | 2,885.6   
|  | 99.4       |   | 114.0      |   | 136.3      |   | 166.7      |   | 162.2      |   | 178.6      |  |   | 171.6     
|  | 362.5      |   | 555.0      |   | 473.5      |   | 275.5      |   | 74.8       |   | 168.5      |  |   | 25.1      
|  |            |   |            |   |            |   |            |   |            |   |            |  |   |           
|  | 119.3      |   | 145.7      |   | 202.9      |   | 227.5      |   | 230.2      |   | 234.7      |  |   | 243.7     
|  | 15.2       |   | (1.5)      |   |            |   | 23.8       |   | 18.4       |   | 46.6       |  |   | 254.5     
|  | 97.3       |   | 93.5       |   | 129.2      |   | 162.1      |   | 148.6      |   | 137.1      |  |   | 130.0     
|  | (35.6)     |   | 19.7       |   | 69.2       |   | (3.7)      |   | (263.9)    |   | (93.5)     |  |   | (124.8)   
|  | 43.0       |   | (9.0)      |   | 27.8       |   | 48.1       |   | (30.6)     |   | (236.1)    |  |   | (118.9)   
|  | 123.3      |   | 306.6      |   | 44.4       |   | (182.3)    |   | (27.9)     |   | 79.7       |  |   | (359.4)   
|  |            |   |            |   |            |   |            |   |            |   |            |  |   |           
|  | 46.6       |   | 108.4      |   | 16.4       |   | (66.5)     |   | (37.6)     |   | 42.3       |  |   | (55.1)    
|  | 0.6        |   | 0.1        |   | (0.5)      |   | 0.4        |   | (1.7)      |   | 0.4        |  |   |           
|  | 76.1       |   | 198.1      |   | 28.5       |   | (116.2)    |   | 11.4       |   | 37.0       |  |   | (304.3)   
|  |            |   |            |   |            |   |            |   |            |   |            |  |   |           
|  | 1.2        |   |            |   |            |   |            |   |            |   |            |  |   |           
|$ | 74.9       | $ | 198.1      | $ | 28.5       | $ | (116.2)    | $ | 11.4       | $ | 37.0       |  | $ | (304.3)   
|  |            |   |            |   |            |   |            |   |            |   |            |  |   |           
|  |            |   |            |   |            |   |            |   |            |   |            |  |   |           
|$ | 335.5      | $ | 382.4      | $ | 545.7      | $ | 499.2      | $ | 440.5      | $ | 416.8      |  | $ | 490.5     
|  | 19.2       |   | 25.5       |   | 28.0       |   | 59.5       |   | 55.0       |   | 22.1       |  |   | 19.5      
|  | 1,748.7    |   | 2,064.8    |   | 2,586.4    |   | 2,487.8    |   | 2,415.1    |   | 2,401.6    |  |   | 2,130.8   
|  | 118.2      |   | 139.8      |   | 163.1      |   | 274.8      |   | 284.2      |   | 236.5      |  |   | 221.0     
|$ | 2,221.6    | $ | 2,612.5    | $ | 3,323.2    | $ | 3,321.3    | $ | 3,194.8    | $ | 3,077.0    |  | $ | 2,861.8   
|  |            |   |            |   |            |   |            |   |            |   |            |  |   |           
|$ | 898.1      | $ | 994.6      | $ | 1,623.4    | $ | 1,798.7    | $ | 1,643.7    | $ | 1,485.0    |  | $ | 1,681.7   
|  | 10.0       |   | 60.9       |   | 143.0      |   | 130.4      |   | 146.9      |   | 174.6      |  |   | 139.5     
|  | 174.1      |   | 252.0      |   | 237.6      |   | 186.0      |   | 211.6      |   | 191.1      |  |   | 119.3     
|  | 83.9       |   | 31.4       |   | 8.5        |   | 8.7        |   | 7.5        |   | 5.3        |  |   | 5.4       
|  | 36.6       |   | 25.7       |   | 25.7       |   | 25.7       |   | 25.7       |   | 25.7       |  |   | 25.7      
|  | 1,018.9    |   | 1,247.9    |   | 1,285.0    |   | 1,171.8    |   | 1,159.4    |   | 1,195.3    |  |   | 890.2     
|$ | 2,221.6    | $ | 2,612.5    | $ | 3,323.2    | $ | 3,321.3    | $ | 3,194.8    | $ | 3,077.0    |  | $ | 2,861.8   
|$ | 90.9       | $ | 264.9      | $ | 230.8      | $ | 98.9       | $ | 131.8      | $ | 142.7      |  | $ | 145.0     
|  |            |   |            |   |            |   |            |   |            |   |            |  |   |           
|  |            |   |            |   |            |   |            |   |            |   |            |  |   |           
|  | 73,881,392 |   | 81,666,459 |   | 86,147,268 |   | 86,415,732 |   | 85,817,932 |   | 85,860,932 |  |   | 85,616,232
|  | 12.61      |   | 15.04      |   | 14.68      |   | 13.33      |   | 13.51      |   | 13.92      |  |   | 10.40     
|  | 1.05       |   | 2.46       |   | 0.35       |   | (1.35)     |   | 0.13       |   | 0.43       |  |   | (3.55)    
|  | 0.91       |   | 2.29       |   | 0.34       |   | (1.35)     |   | 0.13       |   | 0.43       |  |   | (3.55)    
|  | 19.2%      |   | 21.4%      |   | 15.8%      |   | 8.1%       |   | 2.2%       |   | 4.6%       |  |   | 0.7%      
|  | 2.68       |   | 5.47       |   | 3.40       |   | 0.64       |   | 0.47       |   | 2.74       |  |   | (0.15)    
|  | 2.5:1      |   | 2.0:1      |   | 2.5:1      |   | 1.9:1      |   | 1.9:1      |   | 1.7:1      |  |   | 1.4:1     
|  | 40.4%      |   | 38.1%      |   | 48.9%      |   | 54.2%      |   | 51.4%      |   | 48.3%      |  |   | 58.8%     

97

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