**Exhibit
99.3**



|M A N A G E M E N T   R E S P O N S I B I L I T
      Y
      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.

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.

|                                            |  |                                                                    
|------------------------------------------- |  | -------------------------------------------------------------------
|JAMES M. LOPEZ                              |  | MICHEL J. DUMAS                                                    
|President and Chief Executive
      Officer |  | Executive Vice President, Finance and Chief
      Financial Officer

November 15, 2006,
except as to note 22(b) of the audited consolidated financial statements, which
is as of December 5, 2006.







44

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A U D I T O R S  R E P O R T

To the Shareholders
of Tembec Inc.

We have audited the
consolidated balance sheets of Tembec Inc. as at September 30, 2006 and
September 24, 2005, and the consolidated statements of operations, retained
earnings (deficit) 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 30, 2006 and September 24,
2005, and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting
principles.



Chartered Accountants
Montréal, Canada

November 15, 2006,
except as to note 22(b), which is as of December 5, 2006.





45

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****CONSOLIDATED BALANCE SHEETS****



|                                                                                    
|------------------------------------------------------------------------------------
|                                                                                    
|SEPTEMBER 30, 2006 AND SEPTEMBER 24,
      2005                                     
|(in
      millions of dollars)                                                      
|                                                                                    
|                                                                                    
|                                                                                    
|ASSETS                                                                              
|Current assets:                                                                     
|Cash and cash
      equivalents                                                     
|Temporary
      investments                                                         
|Derivative
      financial instruments (note 21)                                    
|Accounts
      receivable (note 8)                                                  
|Inventories
      (notes 3 and 8)                                                   
|Prepaid
      expenses                                                              
|Current assets
      of discontinued operations (note 2)                            
|                                                                                    
|                                                                                    
|                                                                                    
|Investments                                                                         
|Fixed assets (note 5)                                                               
|Other assets (note 6)                                                               
|Future income taxes (note 18)                                                       
|Goodwill (notes 7 and 16)                                                           
|Non-current assets of discontinued operations (note
      2)                        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|LIABILITIES AND SHAREHOLDERS
      EQUITY                                          
|Current liabilities:                                                                
|Bank
      indebtedness                                                             
|Operating bank
      loans (note 8)                                                 
|Accounts payable
      and accrued charges                                          
|Current portion
      of deferred gain on foreign exchange contracts (note
      21)
|Current portion
      of long-term debt (note 9)                                    
|Current
      liabilities related to discontinued operations (note
    2)           
|                                                                                    
|                                                                                    
|                                                                                    
|Long-term debt (note 9)                                                             
|Other long-term liabilities and credits (note
      10)                             
|Future income taxes (note 18)                                                       
|Minority interests (note 11)                                                        
|Redeemable preferred shares (notes 12 and
13)                                       
|                                                                                    
|Shareholders equity:                                                               
|Share capital
      (note 13)                                                       
|Contributed
      surplus (note 13)                                                 
|Cumulative
      exchange translation of foreign subsidiaries                       
|Retained
      earnings (deficit)                                                   
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    

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