---

**Exhibit 99.2**



Consolidated Financial Statements of

TEMBEC INC.

Years ended September 28, 2013 and September 29, 2012



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| |                               |                                         
| | ----------------------------- | ----------------------------------------
| | KPMG LLP                      | Telephone    (514) 840-2100             
| | 600 de Maisonneuve Blvd. West | Fax                
      (514) 840-2187
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      www.kpmg.ca      
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INDEPENDENT AUDITORS' REPORT

To the Shareholders of Tembec Inc.

We have audited the accompanying consolidated financial
statements of Tembec Inc., which comprise the consolidated balance sheets as at
September 28, 2013 and September 29, 2012, the consolidated statements of net
earnings (loss), comprehensive earnings (loss), changes in shareholders equity
and cash flows for the years then ended, and notes, comprising a summary of
significant accounting policies and other explanatory information.

Managements Responsibility for theConsolidated Financial Statements

Management is responsible for the preparation and fair
presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards as issued by the International
Accounting Standards Board, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or
error.

AuditorsResponsibility

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 comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on our judgment, including the
assessment of the risks of material misstatement of the consolidatedfinancial statements, whether due to fraud or error. In making those risk
assessments, we consider internal control relevant to the entitys preparation
and fair presentation of the consolidated financial statements in order to
design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entitys
internal control.An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our
audits is sufficient and appropriate to provide a basis for our audit opinion.

KPMG LLP is a Canadian limited liability
partnership and a member firm of the KPMGnetwork of
independent member firms affiliated with KPMG International Cooperative(KPMG International), a Swiss entity. KPMG Canada
provides services to KPMG LLP.

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Page 2

Opinion

In our opinion, the consolidated financial statements present
fairly, in all material respects, the consolidated financial position of Tembec
Inc. as at September 28, 2013 and September 29, 2012, and its consolidated
financial performance and its consolidated cash flows for the years then ended,
in accordance with International Financial Reporting Standards as issued by the
International Accounting Standards Board.

November 29, 2013 Montreal,Canada

*CPA auditor, CA, public accounting permit no. A110592

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|TEMBEC INC.                                    
|-----------------------------------------------
|Consolidated Balance Sheets                    
|                                               
|As at September 28, 2013 and September 29, 2012
|(in millions of Canadian dollars)              

|                                                      |   | 2013  |   |   | 2012  |  
|----------------------------------------------------- | - | ----- | - | - | ----- | -
|ASSETS                                                |   |       |   |   |       |  
|                                                      |   |       |   |   |       |  
|Current assets:                                       |   |       |   |   |       |  
|Cash and cash equivalents                             | $ | 73    |   | $ | 87    |  
|Restricted cash                                       |   | 1     |   |   | 5     |  
|Trade and other receivables (notes 9 and 19)          |   | 157   |   |   | 200   |  
|Inventories (notes 5 and 9)                           |   | 237   |   |   | 255   |  
|Prepaid expenses                                      |   | 6     |   |   | 7     |  
|Asset classified as held for sale (note 6)            |   | 7     |   |   | -     |  
|                                                      |   | 481   |   |   | 554   |  
|                                                      |   |       |   |   |       |  
|Property, plant and equipment (note 6)                |   | 496   |   |   | 485   |  
|Biological assets (note 7)                            |   | 5     |   |   | 4     |  
|Employee future benefits (note 12)                    |   | 24    |   |   | -     |  
|Other long-term receivables (note 8)                  |   | 10    |   |   | 12    |  
|Deferred tax
      assets (note 18)                   |   | 5     |   |   | 4     |  
|                                                      | $ | 1,021 |   | $ | 1,059 |  
|                                                      |   |       |   |   |       |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                  |   |       |   |   |       |  
|                                                      |   |       |   |   |       |  
|Current liabilities:                                  |   |       |   |   |       |  
|Operating bank loans (note 9)                         | $ | 57    |   | $ | 68    |  
|Trade, other payables and
      accrued charges       |   | 195   |   |   | 230   |  
|Interest payable                                      |   | 10    |   |   | 10    |  
|Income tax payable                                    |   | 8     |   |   | 3     |  
|Provisions (note 11)                                  |   | 6     |   |   | 3     |  
|Current portion of long-term debt (note 10)           |   | 16    |   |   | 16    |  
|                                                      |   | 292   |   |   | 330   |  
|                                                      |   |       |   |   |       |  
|Long-term debt (note 10)                              |   | 369   |   |   | 323   |  
|Provisions (note 11)                                  |   | 12    |   |   | 17    |  
|Employee future benefits (note 12)                    |   | 126   |   |   | 285   |  
|Other long-term liabilities                           |   | 2     |   |   | 2     |  
|                                                      |   | 801   |   |   | 957   |  
|                                                      |   |       |   |   |       |  
|Shareholders' equity:                                 |   |       |   |   |       |  
|Share capital (note 13)                               |   | 567   |   |   | 564   |  
|Deficit                                               |   | (353  | ) |   | (453  | )
|Accumulated other comprehensive earnings
      (loss) |   | 6     |   |   | (9    | )
|                                                      |   | 220   |   |   | 102   |  
|                                                      | $ | 1,021 |   | $ | 1,059 |  

Guarantees, commitments and contingencies (note 14)
Subsequent events (note 22)

The accompanying notes are an integral part of these
consolidated financial statements.

On behalf of the Board:

|James V. Continenza   | James M. Lopez                       
|--------------------- | -------------------------------------
|Chairman of the Board | President and Chief Executive Officer

- 1 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Consolidated Statements of Net Earnings (Loss)           
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)

|                                                                        |   | 2013  |   |   | 2012  |  
|----------------------------------------------------------------------- | - | ----- | - | - | ----- | -
|Sales                                                                   | $ | 1,534 |   | $ | 1,666 |  
|Freight and other deductions                                            |   | 201   |   |   | 232   |  
|Lumber export taxes                                                     |   | 3     |   |   | 7     |  
|Cost of sales (excluding depreciation and amortization)
      (note 15) |   | 1,159 |   |   | 1,290 |  
|Selling, general and administrative (note
      15)                     |   | 72    |   |   | 74    |  
|Share-based compensation (note 13)                                      |   | 1     |   |   | (1    | )
|Depreciation and amortization                                           |   | 40    |   |   | 46    |  
|Other items (note
      16)                                             |   | 29    |   |   | 50    |  
|Operating earnings (loss)                                               |   | 29    |   |   | (32   | )
|                                                                        |   |       |   |   |       |  
|Interest, foreign exchange and other                                    |   | 28    |   |   | 41    |  
|Exchange loss
      (gain) on long-term debt                            |   | 14    |   |   | (13   | )
|Net finance costs (note 17)                                             |   | 42    |   |   | 28    |  
|Loss before income taxes                                                |   | (13   | ) |   | (60   | )
|                                                                        |   |       |   |   |       |  
|Income tax expense
      (note 18)                                      |   | 21    |   |   | 22    |  
|Net loss                                                                |   | (34   | ) |   | (82   | )
|                                                                        |   |       |   |   |       |  
|Basic and diluted net loss in dollars per share (note 13)               | $ | (0.34 | ) | $ | (0.82 | )

|                                                        
|--------------------------------------------------------
|Consolidated Statements of Comprehensive Earnings (Loss)
|                                                        
|Years ended September 28, 2013 and September 29, 2012   
|(in millions of Canadian dollars)                       

|                                                                          |   | 2013 |   |   | 2012 |  
|------------------------------------------------------------------------- | - | ---- | - | - | ---- | -
|Net loss                                                                  | $ | (34  | ) | $ | (82  | )
|                                                                          |   |      |   |   |      |  
|Other comprehensive earnings (loss), net of
      income taxes:           |   |      |   |   |      |  
|Items that will never be reclassified to
      earnings (loss):           |   |      |   |   |      |  
|Defined
      benefit pension plans (note 12)                             |   | 128  |   |   | (42  | )
|Other benefit plans (note
      12)                                       |   | 4    |   |   | 4    |  
|Income tax                                                                |   | 2    |   |   | -    |  
|                                                                          |   | 134  |   |   | (38  | )
|                                                                          |   |      |   |   |      |  
|Item that may be reclassified to earnings
      (loss) in future periods: |   |      |   |   |      |  
|Foreign currency
      translation differences for foreign operations     |   | 15   |   |   | (11  | )
|Other
      comprehensive earnings (loss) for the year                    |   | 149  |   |   | (49  | )
|Total comprehensive earnings (loss)                                       | $ | 115  |   | $ | (131 | )

The accompanying notes are an integral part of these
consolidated financial statements.

- 2 -

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|TEMBEC INC.                                               
|----------------------------------------------------------
|Consolidated Statements of Changes in Shareholders Equity
|                                                          
|Years ended September 28, 2013 and September 29, 2012     
|(in millions of Canadian dollars)                         

|                                                                      |   |         |  |   | Translation |   |   |         |   |   |               |  
|--------------------------------------------------------------------- | - | ------- |  | - | ----------- | - | - | ------- | - | - | ------------- | -
|                                                                      |   | Share   |  |   | of foreign  |   |   |         |   |   | Shareholders' |  
|                                                                      |   | capital |  |   | operations  |   |   | Deficit |   |   | equity        |  
|Balance - beginning of year, September 24,
      2011                 | $ | 564     |  | $ | 2           |   | $ | (333    | ) | $ | 233           |  
|                                                                      |   |         |  |   |             |   |   |         |   |   |               |  
|Net loss                                                              |   | -       |  |   | -           |   |   | (82     | ) |   | (82           | )
|Other comprehensive earnings (loss), net of income taxes:             |   |         |  |   |             |   |   |         |   |   |               |  
|Defined benefit pension plans
      (note 12)                         |   | -       |  |   | -           |   |   | (42     | ) |   | (42           | )
|Other benefit plans (note 12)                                         |   | -       |  |   | -           |   |   | 4       |   |   | 4             |  
|Foreign currency translation differences for
      foreign operations |   | -       |  |   | (11         | ) |   | -       |   |   | (11           | )
|Balance - end of year, September 29, 2012                             |   | 564     |  |   | (9          | ) |   | (453    | ) |   | 102           |  
|                                                                      |   |         |  |   |             |   |   |         |   |   |               |  
|Net loss                                                              |   | -       |  |   | -           |   |   | (34     | ) |   | (34           | )
|Other comprehensive earnings (loss), net of
      income taxes:       |   |         |  |   |             |   |   |         |   |   |               |  
|Defined benefit pension plans (note 12)                               |   | -       |  |   | -           |   |   | 128     |   |   | 128           |  
|Other benefit plans (note 12)                                         |   | -       |  |   | -           |   |   | 4       |   |   | 4             |  
|Income tax                                                            |   | -       |  |   | -           |   |   | 2       |   |   | 2             |  
|Foreign currency translation
      differences for foreign operations |   | -       |  |   | 15          |   |   | -       |   |   | 15            |  
|Issue
      of warrants (note 13)                                     |   | 3       |  |   | -           |   |   | -       |   |   | 3             |  
|Balance - end of year, September 28, 2013                             | $ | 567     |  | $ | 6           |   | $ | (353    | ) | $ | 220           |  

The accompanying notes are an integral part of these
consolidated financial statements.

- 3 -

---

|TEMBEC INC.                                          
|-----------------------------------------------------
|Consolidated Statements of Cash Flows                
|                                                     
|Years ended September 28, 2013 and September 29, 2012
|(in millions of Canadian dollars)                    

|                                                                                           |   | 2013 |   |   | 2012 |  
|------------------------------------------------------------------------------------------ | - | ---- | - | - | ---- | -
|Cash flows from operating activities:                                                      |   |      |   |   |      |  
|Net loss                                                                                   | $ | (34  | ) | $ | (82  | )
|Adjustments for:                                                                           |   |      |   |   |      |  
|Depreciation and
      amortization                                                        |   | 40   |   |   | 46   |  
|Net finance
      costs (note 17)                                                          |   | 42   |   |   | 28   |  
|Income tax expense (note 18)                                                               |   | 21   |   |   | 22   |  
|Income tax
      paid                                                                      |   | (15  | ) |   | (14  | )
|Excess cash contributions
      over employee future benefits expense                      |   | (34  | ) |   | (34  | )
|Provisions
      (note 11)                                                                 |   | -    |   |   | 12   |  
|Impairment loss (note 16)                                                                  |   | 22   |   |   | 67   |  
|Gain on sale
      of assets                                                               |   | -    |   |   | (30  | )
|Other                                                                                      |   | (6   | ) |   | (2   | )
|                                                                                           |   | 36   |   |   | 13   |  
|Changes in non-cash working capital:                                                       |   |      |   |   |      |  
|Trade and other receivables                                                                |   | 16   |   |   | (30  | )
|Inventories                                                                                |   | 3    |   |   | (40  | )
|Prepaid expenses                                                                           |   | 1    |   |   | (1   | )
|Trade, other payables and accrued charges                                                  |   | (33  | ) |   | (14  | )
|                                                                                           |   | (13  | ) |   | (85  | )
|                                                                                           |   | 23   |   |   | (72  | )
|Cash flows from investing activities:                                                      |   |      |   |   |      |  
|Disbursements for property, plant and
      equipment                                      |   | (127 | ) |   | (108 | )
|Proceeds from sale of net
      assets (note 16)                                           |   | 100  |   |   | 84   |  
|Change in restricted cash                                                                  |   | 4    |   |   | -    |  
|Other                                                                                      |   | 1    |   |   | (1   | )
|                                                                                           |   | (22  | ) |   | (25  | )
|Cash flows from financing activities:                                                      |   |      |   |   |      |  
|Change in operating bank loans                                                             |   | (11  | ) |   | 62   |  
|Increase in long-term debt                                                                 |   | 40   |   |   | 74   |  
|Repayments of long-term debt                                                               |   | (8   | ) |   | (11  | )
|Interest paid                                                                              |   | (40  | ) |   | (34  | )
|                                                                                           |   | (19  | ) |   | 91   |  
|                                                                                           |   | (18  | ) |   | (6   | )
|                                                                                           |   |      |   |   |      |  
|Foreign exchange
      gain (loss) on cash and cash equivalents held in foreign currencies |   | 4    |   |   | (6   | )
|Net decrease in cash and cash equivalents                                                  |   | (14  | ) |   | (12  | )
|                                                                                           |   |      |   |   |      |  
|Cash and cash equivalents, beginning of year                                               |   | 87   |   |   | 99   |  
|                                                                                           |   |      |   |   |      |  
|Cash and cash equivalents, end of year                                                     | $ | 73   |   | $ | 87   |  

The accompanying notes are an integral part of these
consolidated financial statements.

- 4 -

---

|TEMBEC INC.                                          
|-----------------------------------------------------
|Consolidated Business Segment Information            
|                                                     
|Years ended September 28, 2013 and September 29, 2012
|(in millions of Canadian dollars)                    
|                                                     

The Company operates an integrated forest products business,
which is managed in four segments. During the December 2012 quarter, the Company
reorganized its internal reporting structure. The High-Yield Pulp segment was
renamed the Paper Pulp segment and now includes the chemical pulp mill that was
previously part of the Specialty Cellulose and Chemical Pulp segment. The latter
was then renamed the Specialty Cellulose Pulp segment. The Forest Products and
the Paper segments were unaffected by the organizational changes. The segments
are:

| | The Forest Products segment consists primarily of forest
      and sawmills operations, which produce lumber and building materials.                                                                                                                                                                                                                   
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                        
| | The Specialty Cellulose Pulp segment consists primarily
      of manufacturing and marketing activities of specialty cellulose including
      the transformation and sale of resins and pulp by-products. A significant
      portion of chemical products sales are related to by-products generated by
      the two specialty cellulose pulp mills.
| |                                                                                                                                                                                                                                                                                                                                                        
| | The Paper Pulp segment includes the manufacturing and
      marketing activities of high-yield pulps and chemical pulps.                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                        
| | The Paper segment consists primarily of production and
      sales of coated bleached board and newsprint.                                                                                                                                                                                                                                             

Intersegment transfers of wood chips, pulp and other services
are recorded at transfer prices agreed to by the parties, which are intended to
approximate fair market value. The basis of presentation and the accounting
policies used in these business segments are the same as those described in
notes 2 and 3. Comparative prior period segment information has been restated to
conform with the new segment presentation.

The performance of each segment is evaluated by management of
the Company against short-term and long-term financial objectives as well as
environmental, safety and other key criteria. The financial performance is
measured based on earnings before interest, income taxes, depreciation and
amortization, and other specific or non-recurring items (adjusted EBITDA). This
measure is included in the internal reports that are reviewed by senior
management. Segment adjusted EBITDA is used to measure performance as management
believes that such information is the most relevant in evaluating financial
results relative to other entities that operate within similar businesses. Net
finance costs and income tax are not allocated to operating segments.

- 5 -

---

|TEMBEC INC.                                          
|-----------------------------------------------------
|Consolidated Business Segment Information (continued)
|                                                     
|Years ended September 28, 2013 and September 29, 2012
|(in millions of Canadian dollars)                    

|                                                        |   |          |  |   |                |  |   |       |   |   |       |  |   |           |   |   |               |   |   | 2013         | 
|------------------------------------------------------- | - | -------- |  | - | -------------- |  | - | ----- | - | - | ----- |  | - | --------- | - | - | ------------- | - | - | ------------ | 
|                                                        |   | Forest   |  |   | Specialty      |  |   | Paper |   |   |       |  |   |           |   |   | Consolidation |   |   |              | 
|                                                        |   | Products |  |   | Cellulose Pulp |  |   | Pulp  |   |   | Paper |  |   | Corporate |   |   | adjustments   |   |   | Consolidated | 
|Sales:                                                  |   |          |  |   |                |  |   |       |   |   |       |  |   |           |   |   |               |   |   |              | 
|External                                                | $ | 354      |  | $ | 460            |  | $ | 388   |   | $ | 332   |  | $ | -         |   | $ | -             |   | $ | 1,534        | 
|Internal                                                |   | 66       |  |   | -              |  |   | 30    |   |   | -     |  |   | 12        |   |   | (108          | ) |   | -            | 
|                                                        |   | 420      |  |   | 460            |  |   | 418   |   |   | 332   |  |   | 12        |   |   | (108          | ) |   | 1,534        | 
|                                                        |   |          |  |   |                |  |   |       |   |   |       |  |   |           |   |   |               |   |   |              | 
|Freight and other deductions                            |   | 39       |  |   | 36             |  |   | 80    |   |   | 46    |  |   | -         |   |   | -             |   |   | 201          | 
|Lumber export taxes                                     |   | 3        |  |   | -              |  |   | -     |   |   | -     |  |   | -         |   |   | -             |   |   | 3            | 
|Cost of sales                                           |   | 350      |  |   | 331            |  |   | 325   |   |   | 250   |  |   | 11        |   |   | (108          | ) |   | 1,159        | 
|Selling, general and administrative                     |   | 11       |  |   | 20             |  |   | 8     |   |   | 11    |  |   | 22        |   |   | -             |   |   | 72           | 
|Share-based
      compensation (note 13)                |   | -        |  |   | -              |  |   | -     |   |   | -     |  |   | 1         |   |   | -             |   |   | 1            | 
|                                                        |   |          |  |   |                |  |   |       |   |   |       |  |   |           |   |   |               |   |   |              | 
|Earnings (loss) before the following (adjusted EBITDA): |   | 17       |  |   | 73             |  |   | 5     |   |   | 25    |  |   | (22       | ) |   | -             |   |   | 98           | 
|Depreciation and amortization                           |   | 9        |  |   | 14             |  |   | 14    |   |   | 3     |  |   | -         |   |   | -             |   |   | 40           | 
|Other
      items (note 16)                             |   | -        |  |   | -              |  |   | 24    |   |   | -     |  |   | 5         |   |   | -             |   |   | 29           | 
|Operating earnings (loss)                               | $ | 8        |  | $ | 59             |  | $ | (33   | ) | $ | 22    |  | $ | (27       | ) | $ | -             |   | $ | 29           | 
|Additions to
      property, plant and equipment        | $ | 7        |  | $ | 110            |  | $ | 10    |   | $ | 9     |  | $ | 1         |   | $ | -             |   | $ | 137          | 
|Total assets                                            | $ | 155      |  | $ | 538            |  | $ | 142   |   | $ | 137   |  | $ | 49        |   | $ | -             |   | $ | 1,021        | 
|Total liabilities                                       | $ | 57       |  | $ | 210            |  | $ | 32    |   | $ | 71    |  | $ | 431       |   | $ | -             |   | $ | 801          | 

|                                                        |   |          |   |   |                |  |   |       |   |   |       |  |   |           |   |   |               |   |   | 2012         |  
|------------------------------------------------------- | - | -------- | - | - | -------------- |  | - | ----- | - | - | ----- |  | - | --------- | - | - | ------------- | - | - | ------------ | -
|                                                        |   | Forest   |   |   | Specialty      |  |   | Paper |   |   |       |  |   |           |   |   | Consolidation |   |   |              |  
|                                                        |   | Products |   |   | Cellulose Pulp |  |   | Pulp  |   |   | Paper |  |   | Corporate |   |   | adjustments   |   |   | Consolidated |  
|Sales:                                                  |   |          |   |   |                |  |   |       |   |   |       |  |   |           |   |   |               |   |   |              |  
|External                                                | $ | 348      |   | $ | 507            |  | $ | 465   |   | $ | 346   |  | $ | -         |   | $ | -             |   | $ | 1,666        |  
|Internal                                                |   | 84       |   |   | -              |  |   | 42    |   |   | -     |  |   | 13        |   |   | (139          | ) |   | -            |  
|                                                        |   | 432      |   |   | 507            |  |   | 507   |   |   | 346   |  |   | 13        |   |   | (139          | ) |   | 1,666        |  
|                                                        |   |          |   |   |                |  |   |       |   |   |       |  |   |           |   |   |               |   |   |              |  
|Freight and other deductions                            |   | 41       |   |   | 40             |  |   | 105   |   |   | 46    |  |   | -         |   |   | -             |   |   | 232          |  
|Lumber export taxes                                     |   | 7        |   |   | -              |  |   | -     |   |   | -     |  |   | -         |   |   | -             |   |   | 7            |  
|Cost of sales                                           |   | 385      |   |   | 352            |  |   | 427   |   |   | 252   |  |   | 13        |   |   | (139          | ) |   | 1,290        |  
|Selling, general and administrative                     |   | 15       |   |   | 20             |  |   | 7     |   |   | 11    |  |   | 21        |   |   | -             |   |   | 74           |  
|Share-based
      compensation (note 13)                |   | -        |   |   | -              |  |   | -     |   |   | -     |  |   | (1        | ) |   | -             |   |   | (1           | )
|                                                        |   |          |   |   |                |  |   |       |   |   |       |  |   |           |   |   |               |   |   |              |  
|Earnings (loss) before the following (adjusted EBITDA): |   | (16      | ) |   | 95             |  |   | (32   | ) |   | 37    |  |   | (20       | ) |   | -             |   |   | 64           |  
|Depreciation and amortization                           |   | 10       |   |   | 11             |  |   | 23    |   |   | 2     |  |   | -         |   |   | -             |   |   | 46           |  
|Other
      items (note 16)                             |   | (22      | ) |   | -              |  |   | 50    |   |   | -     |  |   | 22        |   |   | -             |   |   | 50           |  
|Operating earnings (loss)                               | $ | (4       | ) | $ | 84             |  | $ | (105  | ) | $ | 35    |  | $ | (42       | ) | $ | -             |   | $ | (32          | )
|Additions to
      property, plant and equipment        | $ | 12       |   | $ | 86             |  | $ | 13    |   | $ | 7     |  | $ | 2         |   | $ | -             |   | $ | 120          |  
|Total assets                                            | $ | 216      |   | $ | 398            |  | $ | 302   |   | $ | 120   |  | $ | 23        |   | $ | -             |   | $ | 1,059        |  
|Total liabilities                                       | $ | 68       |   | $ | 216            |  | $ | 74    |   | $ | 126   |  | $ | 473       |   | $ | -             |   | $ | 957          |  

- 6 -

---

|TEMBEC INC.                                          
|-----------------------------------------------------
|Consolidated Geographic Area Information             
|                                                     
|Years ended September 28, 2013 and September 29, 2012
|(in millions of Canadian dollars)                    

2013Forest
    
    
    Specialty
    
    
    PaperProducts
    
    
    Cellulose Pulp
    
    
    Pulp
    
    
    Paper
    
    
    ConsolidatedSales (by final destination):Canada
    $
    187
    
    $
    39
    
    $
    4
    
    $
    65
    
    $
    295United States
    
    167
    
    
    134
    
    
    49
    
    
    247
    
    
    597China
    
    -
    
    
    42
    
    
    169
    
    
    -
    
    
    211European Union
    
    -
    
    
    203
    
    
    56
    
    
    12
    
    
    271Other
    
    -
    
    
    42
    
    
    110
    
    
    8
    
    
    160$
    354
    
    $
    460
    
    $
    388
    
    $
    332
    
    $
    1,534


2012Forest
    
    
    Specialty
    
    
    PaperProducts
    
    
    Cellulose Pulp
    
    
    Pulp
    
    
    Paper
    
    
    ConsolidatedSales (by final destination):Canada
    $
    194
    
    $
    41
    
    $
    7
    
    $
    61
    
    $
    303United States
    
    145
    
    
    150
    
    
    53
    
    
    265
    
    
    613China
    
    6
    
    
    53
    
    
    176
    
    
    -
    
    
    235European Union
    
    -
    
    
    209
    
    
    57
    
    
    10
    
    
    276Other
    
    3
    
    
    54
    
    
    172
    
    
    10
    
    
    239$
    348
    
    $
    507
    
    $
    465
    
    $
    346
    
    $
    1,666


|                               |   | 2013 |  |   | 2012 | 
|------------------------------ | - | ---- |  | - | ---- | 
|Property, plant and equipment: |   |      |  |   |      | 
|Canada                         | $ | 379  |  | $ | 393  | 
|France                         |   | 117  |  |   | 91   | 
|Other                          |   | -    |  |   | 1    | 
|                               | $ | 496  |  | $ | 485  | 

- 7 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|1. | Reporting entity and nature of
operations                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Tembec Inc. (the Corporation) and its subsidiaries
      (collectively Tembec or the Company) operate an integrated forest
      products business.                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The Corporation is incorporated and domiciled in Canada
      and listed on the Toronto Stock Exchange under the symbol TMB. The address
      of the Company's registered office is 800 René-Lévesque Blvd. West, Suite
      1050, Montreal, Quebec, Canada, H3B 1X9.                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|2. | Basis of presentation
      Statement of compliance                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | These audited consolidated financial statements and the
      notes thereto have been prepared in accordance with International
      Financial Reporting Standards (IFRS) as issued by the International
      Accounting Standards Board (IASB).                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | These audited consolidated financial statements were
      authorized for issue by the Board of Directors on November 21,
  2013.                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Basis of measurement                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The audited consolidated financial statements have been
      prepared on the historical cost basis, except for the following items in
      the consolidated balance sheet:                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Functional and presentation currency                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | These audited consolidated financial statements are
      presented in Canadian dollars, which is the Companys functional currency.
      Management believes that the Canadian dollar best reflects the currency of
      the primary economic environment in which Tembec operates. All financial
      information presented has been rounded to the nearest million, unless
      otherwise noted.                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Use of estimates and judgements                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The preparation of financial statements in conformity
      with IFRS requires management to make judgements, estimates and
      assumptions that affect the application of accounting policies and 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. Actual
      results could differ from those estimates.

- 8 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|2. | Basis of presentation (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Use of estimates and judgements
  (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Estimates and underlying assumptions are reviewed on an
      ongoing basis. Revisions to accounting estimates are recognized in the
      period in which the estimates are revised and in any future periods
      affected.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Critical judgments in applying accounting policies that
      have the most significant effect on the amounts recognized in the
      financial statements include the identification of triggering events
      indicating that property, plant and equipment might be impaired.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Significant areas requiring the use of management
      estimates in applying accounting policies that have the most significant
      effect on the amounts recognized in the consolidated financial statements
      and that may result in material adjustments to the carrying amounts within
      the next fiscal year include the determination of the net realizable value
      of inventories (note 5), provisions (note 11), recoverability of deferred
      tax assets (note 18), the measurement of defined benefit obligations and
      the valuation of pension plan assets (note 12).                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Other areas requiring the use of management estimates
      include the determination of the value of biological assets, financial
      instruments, guarantees, commitments, and contingencies. It also includes
      collectability of accounts receivable, estimating the useful life and
      residual value of property, plant and equipment, as well as assessing the
      recoverability of property, plant and equipment, and long- term
      receivables.                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|3. | Significant accounting policies
      Basis of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | These audited consolidated financial statements include
      the accounts of the Company. Investments over which the Corporation has
      effective control are fully consolidated. The financial statements of
      subsidiaries are included in the consolidated financial statements from
      the date that control commences until the date that control ceases. The
      accounting policies of subsidiaries have been changed when necessary to
      align them with the policies adopted by the Company.                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Foreign currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Foreign currency transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Transactions in foreign currencies are translated to the
      respective functional currencies of each operation using exchange rates at
      the dates of the transactions. Monetary assets and liabilities denominated
      in foreign currencies at the reporting date are translated to the
      functional currency using the exchange rate at that date. Non-monetary
      assets and liabilities denominated in foreign currencies that are measured
      at fair value are translated to the functional currency using the exchange
      rate at the date that the fair value was determined. Non-monetary items
      that are measured in terms of historical cost in a foreign currency are
      translated using the exchange rate at the date of the transaction. Foreign
      currency differences arising on translation are recognized in profit or
      loss.

- 9 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|3. | Significant accounting policies (continued)
      Foreign currency (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Foreign operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The assets and liabilities of foreign operations with
      functional currencies other than the Canadian dollar are translated to
      Canadian dollars using the exchange rates at the reporting date. The
      income and expenses of foreign operations are translated to Canadian
      dollars using the average exchange rates during the reporting
    period.                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Foreign currency differences are recognized in other
      comprehensive income. When a foreign operation is disposed of, in part or
      in full, the relevant amount in the foreign currency translation reserve
      is transferred to the statement of earnings (loss) as part of the gain or
      loss on disposal.                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Non-derivative financial assets and
    liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Cash and cash equivalents, restricted cash, trade and
      other receivables and long-term receivables are classified as loans and
      receivables, which is the Companys only type of non-derivative financial
      asset. Operating bank loans, trade and other payables, interest payable
      and long-term debt are classified as other liabilities, which is the
      Companys only type of non-derivative financial liability.                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The Company initially recognizes all financial assets and
      liabilities on the date that they are originated. Subsequent to initial
      recognition at fair value, the financial assets are accounted for on an
      amortized cost basis using the effective interest rate method. Subsequent
      to initial recognition at fair value plus any directly attributable
      transaction costs, the financial liabilities are accounted for on an
      amortized cost basis using the effective interest rate method.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Transaction costs incurred upon the issuance of debt
      instruments or modification of a financial liability are deducted from the
      financial liability and are amortized using the effective interest method
      over the expected life of the related liability.                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Derivative financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The Company may manage, from time to time, its foreign
      exchange exposure on anticipated net cash inflows, principally US dollars
      and euros, through the use of options and forward contracts.                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The Company may manage, from time to time, 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.                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | All derivatives are recognized initially at fair value.
      Attributable transaction costs are recognized in profit or loss as
      incurred. Subsequent to initial recognition, derivatives are measured at
      fair value and changes therein are accounted for in net finance
    costs.                                                                                                                                                                                                                               

- 10 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|3. | Significant accounting policies (continued)
      Financial instruments (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Common shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Common shares are classified as equity. Incremental costs
      directly attributable to the issue of common shares are recognized as a
      deduction from equity, net of any tax effects.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Warrants granted in connection with the second ranking
      term loan facilities have been issued as an equity-settled share-based
      payment transaction. Accordingly, they are classified as equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Cash and cash equivalents / restricted
  cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Cash and cash equivalents, as well as restricted cash,
      comprise cash in financial institutions, short-term deposits and highly
      liquid money market instruments with maturities of three months or less
      from the date of acquisition. Cash and cash equivalents are presented net
      of outstanding cheques.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Finished goods, work-in-process, wood chips, logs, and
      other raw materials are valued at the lower of cost, determined on an
      average cost basis, and net realizable value. In the case of manufactured
      inventories and work-in-process, cost includes expenditure incurred in
      acquiring raw materials, production or conversion costs and other costs
      incurred in bringing the inventory to their existing location and
      conditions as well as an appropriate share of production overheads based
      on normal operating capacity. For all raw materials to be used in the
      production of finished goods, net realizable value is determined on an
      as-converted-to-finished-goods basis. Operating, maintenance and spare
      parts inventories are valued at lower of average cost and net realizable
      value.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Property, plant and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Recognition and measurement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Property, plant and equipment are recorded at cost, after
      deducting investment tax credits and government assistance, less
      accumulated depreciation and accumulated impairment losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Cost includes expenditures that are directly attributable
      to acquiring and bringing the assets to a working condition for their
      intended use. The Company capitalizes borrowing costs, which are directly
      attributable to the acquisition, construction or production of qualifying
      assets, unless development activities on these qualifying assets are
      suspended, in which case borrowing costs are expensed.                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Subsequent costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The cost of replacing a component of an item of property,
      plant and equipment is recognized in the carrying amount of the item if it
      is probable that the future economic benefits embodied within the part
      will flow to the Company, and its cost can be measured reliably. The
      carrying amount of the replaced component is derecognized. The costs of
      the day-to-day servicing of property, plant and equipment are recognized
      in profit or loss as incurred.                                                                                                                                                                                                                                                                                                                                                                  

- 11 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|3. | Significant accounting policies (continued)
      Property, plant and equipment
(continued)                                                                                                                                                                                                         
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                     
|   | Depreciation                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                     
|   | Depreciation is calculated over the depreciable amount,
      which is the cost of an asset less its residual value. Depreciation is
      recognized in profit or loss on a straight-line basis over the estimated
      useful lives of each part of an item of property, plant and
    equipment.
|   |                                                                                                                                                                                                                                                                                                     
|   | The estimated useful lives of the current and comparative
      periods are as follows:                                                                                                                                                                                                             

Assets
    PeriodBuildings
    20 - 30
      yearsProduction equipment:Pulp and paper
    20 - 30
      yearsSawmill
    10 - 15 yearsForest access roads
    3 - 20 years


Assets under construction are
recognized at cost and are not depreciated as the assets are not available for
use. Repairs and maintenance as well as planned shutdown maintenance are charged
to expense as incurred.

Depreciation methods, useful lives and
residual values are reviewed at each financial year-end and adjusted if
appropriate.

Biological assets

Standing timber on privately held
forest land that is managed for timber production is characterized as a
biological asset. Accordingly, on each balance sheet date, the biological asset
is valued at its fair value less costs to sell with any change therein, as a
result of growth, harvest and change in valuation assumptions recognized in net
income (loss) for the period. Standing timber is transferred to inventory at its
fair value less costs to sell at the date the logs are removed from the forest.
Land under standing timber is measured at cost and included in property, plant
and equipment.

Leased assets

Leases in terms of which the Company
assumes substantially all the risks and rewards of ownership are classified as
finance leases. Upon initial recognition, the leased asset is measured at an
amount equal to the lower of its fair value and the present value of the minimum
lease payments. Subsequent to initial recognition, the asset is accounted for in
accordance with the accounting policy applicable to that asset.

Other leases are operating leases and
the leased assets are not recognized in the Companys balance sheet.

- 12 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|3. | Significant accounting policies (continued)
      Impairment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Financial assets (including receivables)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | A financial asset not carried at fair value through
      profit or loss is assessed at each reporting date to determine whether
      there is objective evidence that it is impaired. A financial asset is
      impaired if objective evidence indicates that a loss event has occurred
      after the initial recognition of the asset, and that the loss event had a
      negative effect on the estimated future cash flows of that asset that can
      be estimated reliably.                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Impairment losses recognized in prior periods are
      assessed at each balance sheet date for any indication that the loss has
      decreased or no longer exists. For financial assets measured at amortized
      cost, the reversal is recognized in profit or loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Non-financial assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The carrying amounts of the Companys non-financial
      assets, other than biological assets, inventories and deferred tax assets,
      are reviewed at each reporting date to determine whether there is any
      indication of impairment. If any such indication exists, then the assets
      recoverable amount is estimated.                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The recoverable amount of an asset or cash-generating
      unit (CGU) is the greater of its value in use and its fair value less
      costs to sell. In assessing value in use, the estimated future cash flows
      are discounted to their present value using a pre-tax discount rate that
      reflects current market assessments of the time value of money and the
      risks specific to the asset or the CGU. For the purpose of impairment
      testing, assets that cannot be tested individually are grouped together
      into the smallest group of assets that generates cash inflows from
      continuing use that are largely independent of the cash inflows of other
      assets or groups of assets.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | An impairment loss is recognized if the carrying amount
      of an asset or CGU exceeds its estimated recoverable amount. Impairment
      losses are recognized in profit or loss. Impairment losses recognized in
      respect of CGUs reduce the carrying amounts of the assets in the unit that
      is subject to the impairment test on a pro rata basis.                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | An impairment loss recognized in prior periods is
      assessed at each reporting date for any indications that the loss has
      decreased or no longer exists. An impairment loss is reversed only to the
      extent that the assets carrying amount does not exceed the carrying
      amount that would have been determined, net of depreciation or
      amortization, if no impairment loss had been recognized.                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Provisions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | A provision is recognized if, as a result of a past
      event, the Company has a present legal or constructive obligation that can
      be estimated reliably, and it is probable that an outflow of economic
      benefits will be required to settle the obligation. Provisions are
      determined by discounting the expected future cash flows at a pre-tax rate
      that reflects current market assessments of the time value of money and
      the risks specific to the liability. The unwinding of the discount is
      recognized as finance cost.                                                                                                                                                           

- 13 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|3. | Significant accounting policies (continued)
      Provisions (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Environmental costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The Company is subject to environmental laws and
      regulations enacted by federal, provincial, state and local authorities.
      Environmental expenditures that relate to current operations are expensed
      or capitalized as appropriate. Expenditures that relate to an existing
      condition caused by past operations and that are not expected to
      contribute to current or future operations are expensed. Liabilities are
      recorded when environmental assessments and/or remedial efforts are
      likely, and when the costs, based on a specific plan of action in terms of
      the technology to be used and the extent of the corrective action
      required, can be reasonably estimated.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Reforestation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Forestry legislation in British Columbia requires the
      industry to assume the cost of reforestation on certain harvest licences.
      Accordingly, the Company records a liability for the costs of
      reforestation in the period in which the timber is harvested. In periods
      subsequent to the initial measurement, changes in the liability resulting
      from the passage of time and revisions to managements estimates are
      recognized in net income as they occur.                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Site restoration                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | In accordance with the Companys published environmental
      policy and applicable legal requirements, a provision for site restoration
      in respect of contaminated land, and the related expense, is recognized
      when the land is contaminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Restructuring                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | A provision for restructuring is recognized when the
      Company has approved a detailed and formal restructuring plan, and the
      restructuring either has commenced or has been announced publicly. Future
      operating costs and losses are recognized on the same basis as if they
      arose independently of the restructuring.                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Onerous contracts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | A provision for onerous contracts is recognized when the
      expected benefits to be derived by the Company from a contract are lower
      than the unavoidable cost of meeting its obligations under the contract.
      The provision is measured at the present value of the lower of the
      expected cost of terminating the contract and the expected net cost of
      continuing with the contract. Before a provision is established, the
      Company recognizes any impairment loss on the assets associated with that
      contract.                                                                                                                                                                           

- 14 -

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|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|3. | Significant accounting policies (continued)
      Provisions (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Contingent liability                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | A contingent liability is a possible obligation that
      arises from past events and of which the existence will be confirmed only
      by the occurrence or non-occurrence of one or more uncertain future events
      not within the control of the Company, or a present obligation that arises
      from past events (and therefore exists), but is not recognized because it
      is not probable that a transfer or use of assets, provision of services or
      any other transfer of economic benefits will be required to settle the
      obligation, or the amount of the obligation cannot be estimated
      reliably.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Employee future benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Employee future benefits include pension plans and other
      benefit plans. Other benefit plans include post-employment life insurance
      programs, healthcare and dental care benefits as well as certain other
      long-term benefits provided to disabled employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Defined contribution pension plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | A defined contribution plan is a post-employment benefit
      plan under which an entity pays fixed contributions into a separate entity
      and will have no legal or constructive obligation to pay further amounts.
      Obligations for contributions to defined contribution pension plans are
      recognized as an employee benefit expense in profit or loss in the periods
      during which services are rendered by employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Defined benefit pension plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | A defined benefit plan is a post-employment benefit plan
      other than a defined contribution plan. The Companys net obligation in
      respect of defined benefit pension plans is calculated separately for each
      plan by estimating the amount of future benefit that employees have earned
      in return for their service in the current and prior periods; that benefit
      is discounted to determine its present value. Any unrecognized past
      service costs and the fair value of any plan assets are deducted. The
      discount rate is the yield at the reporting date on AA credit-rated bonds
      that have maturity dates approximating the terms of the Companys
      obligations and that are denominated in the same currency in which the
      benefits are expected to be paid. The calculation is performed annually by
      a qualified actuary using the projected unit credit method. When the
      calculation results in a benefit to the Company, the recognized asset is
      limited to the total of any unrecognized past service costs and the
      present value of economic benefits available in the form of any future
      refunds from the plan or reductions in future contributions to the plan.
      In order to calculate the present value of economic benefits,
      consideration is given to any minimum funding requirements that apply to
      any plan in the Company. An economic benefit is available to the Company
      if it is realizable during the life of the plan, or on settlement of the
      plan liabilities.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | When the benefits of a plan are improved, the portion of
      the increased benefit relating to past service by employees is recognized
      in profit or loss on a straight-line basis over the average period until
      the benefits become vested. To the extent that the benefits vest
      immediately, the expense is recognized immediately in the statement of net
      earnings (loss).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

- 15 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|3. | Significant accounting policies (continued)
      Employee future benefits (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | The Company recognizes the current service cost in the
      employee future benefit costs. Interest cost and the expected return on
      plan assets are recognized in interest, foreign exchange and other. The
      actuarial gains and losses arising from defined benefit plans are
      recognized in other comprehensive income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Other benefit plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | The Companys net obligation in respect of long-term
      employee benefits, other than pension plans, is the amount of future
      benefit that employees have earned in return for their service in the
      current and prior periods. That benefit is discounted to determine its
      present value, and the fair value of any related assets is deducted. The
      discount rate is the yield at the reporting date on AA credit-rated bonds
      that have maturity dates approximating the terms of the Companys
      obligations. The calculation is performed using the projected unit credit
      method. Any actuarial gains and losses are recognized in the statement of
      comprehensive earnings (loss) in the period in which they arise.                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Other employee benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Short-term employee benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Short-term employee benefit obligations are measured on
      an undiscounted basis and are expensed as the related service is
      provided.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | A liability is recognized for the amount expected to be
      paid under the short-term incentive plan if the Company has a present
      legal or constructive obligation to pay this amount as a result of past
      service provided by the employee, and the obligation can be estimated
      reliably.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Share-based compensation transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | The Company uses the fair value based approach of
      accounting for all share options granted to its employees, whereby a
      compensation expense is recognized over the vesting period of the options,
      with a corresponding increase to contributed surplus. The Company bases
      the accruals of compensation cost on the best available estimate of the
      number of options that are expected to vest and revises that estimate if
      subsequent information indicates that actual forfeitures are likely to
      differ from initial estimates. Any consideration paid by plan participants
      in the exercise of share options or purchase of shares is credited to
      share capital. The contributed surplus component of share-based
      compensation is transferred to share capital upon the issuance of common
      shares.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Deferred Share Units (DSU) are recognized in compensation
      expense and accrued liabilities as they are earned. DSUs are remeasured at
      each reporting period at fair value, until settlement.
      Performance-Conditioned Restricted Share Units (PCRSU)
      and Performance-Conditioned Share Units (PCSU) are recognized in
      compensation expense and accrued liabilities when it is likely that the
      performance conditions attached to the unit will be met. Compensation cost
      is prorated based on the underlying service period and the liability is
      remeasured at each reporting period at fair value, until
  settlement.                                                                                                                                                                                                

- 16 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|3. | Significant accounting policies (continued)
      Other employee benefits (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Termination benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Termination benefits are recognized as an expense when
      the Company is committed demonstrably, without realistic possibility of
      withdrawal, to a formal detailed plan to either terminate employment
      before the normal retirement date, or to provide termination benefits as a
      result of an offer made to encourage voluntary redundancy. Termination
      benefits for voluntary redundancies are recognized as an expense if the
      Company has made an offer of voluntary redundancy, it is probable that the
      offer will be accepted, and the number of acceptances can be estimated
      reliably. If benefits are payable more than 12 months after the reporting
      period, then they are discounted to their present value.                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Sale of goods is measured at the fair value of the
      consideration received or receivable, net of returns, trade discounts and
      volume rebates. Revenue is recognized when persuasive evidence exists,
      usually in the form of an executed sales agreement, that the significant
      risks and rewards of ownership have been transferred to the buyer,
      recovery of the consideration is probable, the associated costs and
      possible return of goods can be estimated reliably, there is no continuing
      management involvement with the goods, and the amount of revenue can be
      measured reliably. If it is probable that discounts will be granted and
      the amount can be measured reliably, then the discount is recognized as a
      reduction of revenue as the sales are recognized.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Freight and other deductions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Freight associated with shipping products to customer and
      handling finished goods as well as discounts on prompt payment are
      included in Freight and other deductions in the consolidated statement of
      net earnings (loss).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Investment tax credits and government
      assistance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Amounts received resulting from government assistance
      programs, including grants and investment tax credits for scientific
      research and experimental development, are reflected as a reduction of the
      cost of the asset or expense to which they relate at the time the eligible
      expenditure is incurred. Government financial assistance is recorded when
      there is reasonable assurance that the Company will comply with relevant
      conditions. Investment tax credits are recognized when the Company has
      made the qualifying expenditures and there is reasonable assurance that
      the credits will be realized.                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Finance costs and finance income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Finance costs comprise interest expense on borrowings,
      unwinding of the discount on provisions and the amortization of other
      related transactions costs. Borrowing costs that are not directly
      attributable to the acquisition, construction or production of a
      qualifying asset are recognized in profit or loss using the effective
      interest method.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Foreign currency gains and losses, gain or loss on
      embedded and freestanding derivative instruments, and interest on employee
      future benefit obligations and pension plan assets are reported on a net
      basis as finance cost or finance income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

- 17 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|3. | Significant accounting policies (continued)
      Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Income tax expense comprises current and deferred tax.
      Current tax and deferred tax are recognized in profit or loss except to
      the extent that it relates to a business combination, or items recognized
      directly in equity or in other comprehensive income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Current tax is the expected tax payable or receivable on
      the taxable income or loss for the year, using tax rates enacted or
      substantively enacted at the reporting date, and any adjustment to tax
      payable in respect of previous years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Deferred tax is recognized using the balance sheet
      method, with respect to temporary differences between the carrying amounts
      of assets and liabilities for financial reporting purposes and the amounts
      used for taxation purposes. Deferred tax is not recognized for the
      following temporary differences: the initial recognition of assets or
      liabilities in a transaction that is not a business combination and that
      affects neither accounting nor taxable profit or loss, and differences
      relating to investments in subsidiaries and associates to the extent that
      it is probable that they will not reverse in the foreseeable future.
      Deferred tax is measured at the tax rates that are expected to be applied
      to temporary differences when they reverse, based on the laws that have
      been enacted or substantively enacted by the reporting date. Deferred tax
      assets and liabilities are offset if there is a legally enforceable right
      to offset current tax liabilities and assets, and they relate to income
      taxes levied by the same tax authority on the same taxable entity, or on
      different tax entities, but they intend to settle current tax liabilities
      and assets on a net basis or their tax assets and liabilities will be
      realized simultaneously.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | A deferred tax asset is recognized for unused tax losses,
      tax credits and deductible temporary differences, to the extent that it is
      probable that future taxable profits will be available against which they
      can be utilized. Deferred tax assets are reviewed at each reporting date
      and are reduced to the extent that it is no longer probable that the
      related tax benefit will be realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4. | New standards and interpretation not yet
      adopted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | IFRS 7 Financial Instruments 
  Disclosures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | In December 2011, the IASB amended the standard IFRS 7,
      Financial Instruments  Disclosures, to provide additional
      information about offsetting of financial assets and financial
      liabilities. IFRS 7 has been amended to require disclosures that will
      enable users of financial statements to evaluate the effect or potential
      effect of netting arrangements, including rights of set-off associated
      with an entitys recognized financial assets and recognized financial
      liabilities, on the entitys balance sheet. An entity provides information
      including the gross amounts subject to rights of set-off, amounts set off
      in accordance with the offsetting criteria, amounts of financial
      instruments subject to master netting arrangements or similar agreements,
      and the related net amounts to meet the disclosure objective.
      These amendments are effective for annual periods
      beginning on or after January 1, 2013. The Company will adopt the new
      standard, which will not have an impact on the amounts recorded, in its
      fiscal 2014 financial statements.                                                                                                                                                                                                               

- 18 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|4. | New standards and interpretation not yet adopted
      (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | IFRS 9 Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | In November 2009, the IASB issued IFRS 9, Financial
      Instruments(IFRS 9), and in October 2010, the IASB published
      amendments to IFRS 9 (IFRS 9 R).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | IFRS 9 R supersedes IFRS 9 and is effective for annual
      periods beginning on or after January 1, 2015, with early adoption
      permitted. For annual periods beginning before January 1, 2015, either
      IFRS 9 or IFRS 9 R may be applied. This standard provides guidance on the
      classification and measurement of financial liabilities and the
      presentation of gains and losses on financial liabilities designated at
      fair value through profit and loss. When an entity elects to measure a
      financial liability at fair value, gains or losses due to changes in the
      credit risk of the instrument must be recognized in other comprehensive
      income. The Company has not yet begun the process of assessing the impact
      that the new standard will have on its financial statements and does not
      plan to early adopt the new requirement.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | IFRS 13 Fair Value Measurement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | In May 2011, the IASB issued the standard, IFRS 13,
      Fair Value Measurement. IFRS 13 is a comprehensive standard for
      fair value measurement and disclosure requirements for use across all IFRS
      standards. The new standard clarifies that fair value is the price that
      would be received to sell an asset, or paid to transfer a liability in an
      orderly transaction between market participants, at the measurement date.
      It also establishes disclosures about fair value measurement. Under
      existing IFRS, guidance on measuring and disclosing fair value is
      dispersed among the specific standards requiring fair value measurements
      and in many cases does not reflect a clear measurement basis or consistent
      disclosures.                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The new standard is effective for annual periods
      beginning on or after January 1, 2013, with early adoption permitted. The
      Company will adopt the new standard, which will not have an impact on the
      amounts recorded, in its fiscal 2014 financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Amendments to IAS 19 Employee Benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | In June 2011, the IASB published an amended version of
      IAS 19, Employee Benefits. Adoption of the amendment is required
      for annual periods beginning on or after January 1, 2013, with early
      adoption permitted. This standard was amended to:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

- 19 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|4. | New standards and interpretation not yet adopted
      (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The amended standard also incorporates changes to the
      accounting for termination benefits. The amendment will be applied
      retrospectively. The Company estimates that the effect on the consolidated
      balance sheet as at September 28, 2013, would be an increase of the net
      defined benefit liability of $2 million and an increase of the deficit of
      $2 million. The effect on the consolidated statement of net earnings
      (loss) for the year ended September 28, 2013, would be an increase of the
      net finance costs by approximately $18 million and an increase of the
      other comprehensive earnings by the same amount. The Company is still in a
      process of assessing the impact that the new standard will have on the
      income tax expense in the statement of net earnings (loss) and in the
      statement of comprehensive earnings (loss). The Company will adopt the new
      requirements in its fiscal 2014 financial statements.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|5. | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| |                                             |   | 2013 |  |   | 2012 | 
| | ------------------------------------------- | - | ---- |  | - | ---- | 
| | Finished goods                              | $ | 111  |  | $ | 118  | 
| | Logs and wood chips                         |   | 55   |  |   | 61   | 
| | Supplies and materials                      |   | 71   |  |   | 76   | 
| |                                             | $ | 237  |  | $ | 255  | 
| | Inventories carried at net realizable value | $ | 22   |  | $ | 48   | 

For the years ended in September 2013
and 2012, cost of sales consists primarily of inventories recognized as an
expense. Inventories at September 28, 2013, were written down by $4 million
(2012 - $6 million) to reflect net realizable value being lower than cost. The
write-down and reversal, if any, are included in cost of sales.

The provision for net realizable values
relating to logs and finished goods were as follows:

| |                          |   | 2013 |  |   | 2012 | 
| | ------------------------ | - | ---- |  | - | ---- | 
| | Forest Products          | $ | 1    |  | $ | 1    | 
| | Specialty Cellulose Pulp |   | 3    |  |   | 1    | 
| | Paper Pulp               |   | -    |  |   | 4    | 
| | Paper                    |   | -    |  |   | -    | 
| |                          | $ | 4    |  | $ | 6    | 

- 20 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|6. | Property, plant and
equipment
|-- | -----------------------------

| |                                                         |   |      |   |   |           |   |   | Production equipment |   |   | Forest  |   |   | Assets |   |   |              |  
| | ------------------------------------------------------- | - | ---- | - | - | --------- | - | - | -------------------- | - | - | ------- | - | - | ------ | - | - | ------------ | -
| |                                                         |   |      |   |   |           |   |   | Pulp and             |   |   |         |   |   | access |   |   | under        |  
| |                                                         |   | Land |   |   | Buildings |   |   | Paper                |   |   | Sawmill |   |   | roads  |   |   | construction |  
| | Cost                                                    |   |      |   |   |           |   |   |                      |   |   |         |   |   |        |   |   |              |  
| | Balance, September 24, 2011                             | $ | 12   |   | $ | 79        |   | $ | 440                  |   | $ | 92      |   | $ | 17     |   | $ | 37           |  
| |                                                         |   |      |   |   |           |   |   |                      |   |   |         |   |   |        |   |   |              |  
| | Additions                                               |   | -    |   |   | -         |   |   | -                    |   |   | -       |   |   | -      |   |   | 120          |  
| | Transfers                                               |   | -    |   |   | 1         |   |   | 47                   |   |   | 7       |   |   | 3      |   |   | (58          | )
| | Interest capitalized on assets under construction       |   | -    |   |   | -         |   |   | -                    |   |   | -       |   |   | -      |   |   | 2            |  
| | Disposals                                               |   | (1   | ) |   | (4        | ) |   | (4                   | ) |   | (30     | ) |   | (12    | ) |   | (4           | )
| | Effect of foreign
      currency translation            |   | -    |   |   | (1        | ) |   | (8                   | ) |   | -       |   |   | -      |   |   | (1           | )
| | Balance, September 29, 2012                             |   | 11   |   |   | 75        |   |   | 475                  |   |   | 69      |   |   | 8      |   |   | 96           |  
| |                                                         |   |      |   |   |           |   |   |                      |   |   |         |   |   |        |   |   |              |  
| | Additions                                               |   | -    |   |   | -         |   |   | -                    |   |   | -       |   |   | -      |   |   | 137          |  
| | Transfers                                               |   | -    |   |   | 8         |   |   | 38                   |   |   | 3       |   |   | 3      |   |   | (52          | )
| | Interest capitalized on assets under
      construction |   | -    |   |   | -         |   |   | -                    |   |   | -       |   |   | -      |   |   | 9            |  
| | Disposals                                               |   | (1   | ) |   | (21       | ) |   | (135                 | ) |   | (1      | ) |   | -      |   |   | (2           | )
| | Reclassification to assets held for sale                |   | (7   | ) |   | -         |   |   | -                    |   |   | -       |   |   | -      |   |   | -            |  
| | Effect of foreign
      currency translation            |   | -    |   |   | 1         |   |   | 14                   |   |   | -       |   |   | -      |   |   | 1            |  
| | Balance, September 28, 2013                             | $ | 3    |   | $ | 63        |   | $ | 392                  |   | $ | 71      |   | $ | 11     |   | $ | 189          |  
| |                                                         |   |      |   |   |           |   |   |                      |   |   |         |   |   |        |   |   |              |  
| | Depreciation                                            |   |      |   |   |           |   |   |                      |   |   |         |   |   |        |   |   |              |  
| | Balance, September 24, 2011                             | $ | -    |   | $ | 19        |   | $ | 105                  |   | $ | 61      |   | $ | 1      |   | $ | -            |  
| |                                                         |   |      |   |   |           |   |   |                      |   |   |         |   |   |        |   |   |              |  
| | Depreciation                                            |   | -    |   |   | 6         |   |   | 31                   |   |   | 8       |   |   | 1      |   |   | -            |  
| | Impairment loss                                         |   | -    |   |   | -         |   |   | 43                   |   |   | -       |   |   | 1      |   |   | -            |  
| | Disposals                                               |   | -    |   |   | (3        | ) |   | (2                   | ) |   | (19     | ) |   | (1     | ) |   | -            |  
| | Effect of foreign currency translation                  |   | -    |   |   | -         |   |   | (2                   | ) |   | -       |   |   | -      |   |   | -            |  
| | Balance, September 29, 2012                             |   | -    |   |   | 22        |   |   | 175                  |   |   | 50      |   |   | 2      |   |   | -            |  
| |                                                         |   |      |   |   |           |   |   |                      |   |   |         |   |   |        |   |   |              |  
| | Depreciation                                            |   | -    |   |   | 6         |   |   | 27                   |   |   | 7       |   |   | -      |   |   | -            |  
| | Impairment loss                                         |   | -    |   |   | 3         |   |   | 19                   |   |   | -       |   |   | -      |   |   | -            |  
| | Disposals                                               |   | -    |   |   | (10       | ) |   | (70                  | ) |   | (1      | ) |   | -      |   |   | -            |  
| | Effect of foreign currency translation                  |   | -    |   |   | -         |   |   | 3                    |   |   | -       |   |   | -      |   |   | -            |  
| | Balance, September
      28, 2013                       | $ | -    |   | $ | 21        |   | $ | 154                  |   | $ | 56      |   | $ | 2      |   | $ | -            |  
| |                                                         |   |      |   |   |           |   |   |                      |   |   |         |   |   |        |   |   |              |  
| | Carrying amounts                                        |   |      |   |   |           |   |   |                      |   |   |         |   |   |        |   |   |              |  
| |                                                         |   |      |   |   |           |   |   |                      |   |   |         |   |   |        |   |   |              |  
| | At September 29,
      2012                             | $ | 11   |   | $ | 53        |   | $ | 300                  |   | $ | 19      |   | $ | 6      |   | $ | 96           |  
| | At
      September 28, 2013                             | $ | 3    |   | $ | 42        |   | $ | 238                  |   | $ | 15      |   | $ | 9      |   | $ | 189          |  

- 21 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|6. | Property, plant and equipment
(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | On March 16, 2012, the Company announced a $190 million
      capital investment to upgrade its specialty cellulose manufacturing
      facility at Temiscaming, Quebec. During fiscal 2013, the Company completed
      a detailed re-estimation exercise for the project and is now forecasting a
      total estimated cost of $235 million. As at the end of September 2013,
      assets under construction include $137 million (2012 - $59 million) of
      capital expenditures for this project and had $41 million of outstanding
      commitments (see note 14).
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | At the end of September 2013, the Company launched the BC
      Lands Sale Initiative. Accordingly, an amount of $7 million of land was
      classified as held for sale (see note 22).                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | During fiscal 2013, the Company recorded an impairment
      charge of $22 million related to its pulp mill located in Skookumchuck,
      BC. It subsequently sold property, plant and equipment of the latter
      having a net book value of $79 million (see note 16).                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | During fiscal 2012, the Company recorded an impairment
      loss of $44 million related to property, plant and equipment of the
      Chetwynd, BC, high-yield pulp mill. Subsequent to the announced indefinite
      idling of the pulp mill and following a review of its business plan, the
      Company undertook an impairment review and found that the carrying value
      of its assets exceeded their recoverable amount being the fair value less
      cost to sell. The recoverable amount was determined to be
  nominal.                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|7. | Biological assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Companys private timberlands are classified as a
      growing forest, with the standing timber defined and recognized as a
      biological asset at fair value less costs to sell at each reporting date,
      with the underlying land being considered a component of property, plant
      and equipment and recognized at cost.                                                                                                                                                                                                                                  

| | Balance, September 24, 2011             | $ | 4  |  
| | --------------------------------------- | - | -- | -
| |                                         |   |    |  
| | Disposals                               |   | (1 | )
| | Change in fair value less costs to sell |   | 1  |  
| | Balance, September 29, 2012             |   | 4  |  
| |                                         |   |    |  
| | Change in fair value less costs to sell |   | 1  |  
| | Balance, September 28, 2013             | $ | 5  |  

| |             |   | 2013 |  |   | 2012 | 
| | ----------- | - | ---- |  | - | ---- | 
| | Current     | $ | -    |  | $ | -    | 
| | Non-current |   | 5    |  |   | 4    | 
| |             | $ | 5    |  | $ | 4    | 

- 22 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|8. | Other long-term
receivables
|-- | ---------------------------

| |                               |   | 2013 |  |   | 2012 | 
| | ----------------------------- | - | ---- |  | - | ---- | 
| | Loan receivable - Temlam Inc. | $ | 7    |  | $ | 7    | 
| | Long-term loans to employees  |   | 1    |  |   | 2    | 
| | Other                         |   | 2    |  |   | 3    | 
| |                               | $ | 10   |  | $ | 12   | 

|9. | Operating bank loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | On March 4, 2011, the Company entered into a $200 million
      asset-based revolving five-year working capital facility (ABL) expiring in
      March 2016. The facility has a first priority charge over the receivables
      and inventories of the Company`s Canadian operations. On March 25, 2013,
      the Company disclosed that it had reached an agreement with existing ABL
      lenders to amend and extend the facility. The maturity date was extended
      by one year and is now set to expire in March 2017. The Company also
      negotiated a reduction of the aggregate revolving loan commitments from
      $200 million to $175 million and related adjustments to certain thresholds
      due to a reduction in the number of mills it operates.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | As at September 28, 2013, the amount available, based on
      eligible receivables and inventories, was $120 million of which $53
      million was drawn and $56 million was reserved for letters of credit (2012
      - $144 million of which $65 million was drawn and $48 million was reserved
      for letters of credit). Interest is calculated based either on the BA
      Rate, the LIBOR, the Canadian Prime Rate or the U.S. Base Rate, as the
      case may be, plus an applicable margin.                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The French operations are supported by receivable
      factoring agreements. As such, the borrowing base fluctuates
      periodically, depending on shipments and cash receipts. At the end of
      September 2013, the amount available was $28 million of which $4 million
      was drawn (2012 - $20 million of which $3 million was drawn).                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The Companys exposure to liquidity risk is disclosed in
      note 19.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

- 23 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|10. | Long-term debt
|--- | --------------

| |                                                                                                                                                                                                                                                 |   | 2013 |  |   | 2012 | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---- |  | - | ---- | 
| |                                                                                                                                                                                                                                                 |   |      |  |   |      | 
| | Tembec Industries Inc.                                                                                                                                                                                                                          |   |      |  |   |      | 
| | 11.25% senior secured notes US $305 million,
      due December 15, 2018, with semi-annual interest payments due June 15 and
      December 15 of each year                                                                                     | $ | 314  |  | $ | 300  | 
| |                                                                                                                                                                                                                                                 |   |      |  |   |      | 
| | Tembec Energy LP                                                                                                                                                                                                                                |   |      |  |   |      | 
| | 5.5% term loan, secured by a
      second ranking charge, interest payable on a monthly basis, repayable in
      monthly instalments beginning in April 2016 and maturing in March 2028                                                        |   | 40   |  |   | -    | 
| |                                                                                                                                                                                                                                                 |   |      |  |   |      | 
| | 6.35% term loan, secured by a
      first ranking charge, interest payable on a monthly basis, repayable in
      blended monthly instalments beginning July 15, 2014 to June 15, 2022 with
      a balloon payment of $12 million in July 2022 |   | 20   |  |   | 20   | 
| |                                                                                                                                                                                                                                                 |   |      |  |   |      | 
| | Tembec Tartas SAS                                                                                                                                                                                                                               |   |      |  |   |      | 
| | Secured term loans € 4 million (2012 - € 6
      million), bearing interest at EURIBOR plus 2%, repayable in quarterly
      instalments beginning in March 2012 and maturing in December 2017                                                  |   | 6    |  |   | 8    | 
| |                                                                                                                                                                                                                                                 |   |      |  |   |      | 
| | Unsecured term loans € 8 million (2012 - € 11
      million), non-interest bearing, repayable and maturing at various dates
      from June 2014 to September 2020. The effective interest rate on these
      loans is 6%                      |   | 11   |  |   | 14   | 
| |                                                                                                                                                                                                                                                 |   |      |  |   |      | 
| | Kirkland Lake Engineered Wood Products Inc.                                                                                                                                                                                                     |   | 9    |  |   | 8    | 
| |                                                                                                                                                                                                                                                 |   |      |  |   |      | 
| | Tembec Inc.                                                                                                                                                                                                                                     |   | 2    |  |   | 2    | 
| |                                                                                                                                                                                                                                                 |   | 402  |  |   | 352  | 
| |                                                                                                                                                                                                                                                 |   |      |  |   |      | 
| | Less current portion                                                                                                                                                                                                                            |   | 16   |  |   | 16   | 
| | Less unamortized
      financing costs                                                                                                                                                                                                          |   | 17   |  |   | 13   | 
| |                                                                                                                                                                                                                                                 | $ | 369  |  | $ | 323  | 

On February 23, 2012, the Company
completed an add-on offering of US $50 million in aggregate principal amount of
11.25% senior secured notes due December 15, 2018. The add-on offering notes
were offered as additional notes under the indenture dated as of August 17,
2010, pursuant to which the Company had previously issued US $255 million in
aggregate principal amount of 11.25% senior secured notes due December 15, 2018.
The notes are senior obligations secured by a first priority lien on certain of
the property and assets of the Company and the guarantors of the notes, other
than receivables, inventory and certain intangibles upon which the note holders
have a second priority lien. The notes are guaranteed by the Company and certain
of its subsidiaries.

The senior secured notes are registered
with the Securities and Exchange Commission (SEC) and the Company must maintain
their registration throughout the life of the notes. If the obligations under
the registration rights agreement are not satisfied, the Company will be
required to pay additional interest to the holders of the notes up to a maximum
annual amount of US $3 million.

- 24 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|10. | Long-term debt (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | In connection with the specialty cellulose project in
      Temiscaming, Quebec, which is described in more detail in note 14, the
      Company entered into a $75 million term loan facility, bearing interest at
      5.5%. The loan has a 151⁄2-year term consisting of a 42-month construction
      or drawdown period followed by a 12-year amortization period. The term of
      the loan will be shortened by three years if the Company does not complete
      certain future capital expenditures at the Temiscaming specialty cellulose
      mill. The loan is secured by a second ranking charge on the project
      assets. During fiscal 2013, the Company received five advances totalling
      $40 million on the term loan.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | On September 20, 2013, the Company entered into an
      additional loan facility to borrow up to $18 million with the same lender,
      at an interest rate of 5.5%. The loan has a four-year term repayable in
      monthly instalments beginning in April 2016 and maturing in March 2020.
      The additional loan is secured by a second ranking charge on the project
      assets. As at September 28, 2013, no amount was drawn under this
      additional facility.                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | On June 29, 2012, the Company entered into a $30 million
      term loan facility to assist with the financing of the specialty cellulose
      project in Temiscaming, Quebec. On September 20, 2013, the Company has
      entered into an Amended and Restated Credit Agreement, increasing its
      credit facility from $30 million to $40 million. The loan is secured by a
      first ranking charge on the project assets. On July 12, 2012, the Company
      received an advance of $20 million bearing interest at 6.35% repayable in
      blended monthly instalments over a period of eight years beginning in July
      2014, with a balloon payment of $12 million to be repaid in July
      2022.                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Subsequent to the end of the fiscal year, on October 18,
      2013, the Company received the second advance of $20 million bearing
      interest at 6.86%, repayable in blended monthly instalments over a period
      of eight years beginning in November 2014 with a balloon payment of $12
      million to be repaid in October 2022.                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The Companys credit agreements contain terms and
      conditions that could in certain circumstances restrict the ability of the
      Company to incur or guarantee additional indebtedness, to encumber or
      dispose of its assets or make certain payments or distributions.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The Companys exposure to liquidity risk, foreign
      currency, and interest rate risk is disclosed in note
19.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

- 25 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|11. | Provisions
|--- | ----------

| |                                                     |   |                  |   |   |               |   |   |       |  |   | Total      |  
| | --------------------------------------------------- | - | ---------------- | - | - | ------------- | - | - | ----- |  | - | ---------- | -
| |                                                     |   | Site restoration |   |   | Reforestation |   |   | Other |  |   | provisions |  
| |                                                     |   |                  |   |   |               |   |   |       |  |   |            |  
| | Balance, September 24, 2011                         | $ | 4                |   | $ | 15            |   | $ | 5     |  | $ | 24         |  
| |                                                     |   |                  |   |   |               |   |   |       |  |   |            |  
| | Provisions made during the year                     |   | 9                |   |   | 4             |   |   | -     |  |   | 13         |  
| | Paid during the year                                |   | -                |   |   | (1            | ) |   | -     |  |   | (1         | )
| | Sale of BC Sawmills (note 16)                       |   | -                |   |   | (16           | ) |   | -     |  |   | (16        | )
| | Balance, September 29, 2012                         |   | 13               |   |   | 2             |   |   | 5     |  |   | 20         |  
| |                                                     |   |                  |   |   |               |   |   |       |  |   |            |  
| | Provisions made during the year                     |   | 1                |   |   | -             |   |   | -     |  |   | 1          |  
| | Paid during the year                                |   | -                |   |   | (1            | ) |   | -     |  |   | (1         | )
| | Sale of
      Skookumchuck, BC, pulp mill (note 16) |   | (2               | ) |   | -             |   |   | -     |  |   | (2         | )
| | Balance, September 28, 2013                         | $ | 12               |   | $ | 1             |   | $ | 5     |  | $ | 18         |  

| |             |   | 2013 |  |   | 2012 | 
| | ----------- | - | ---- |  | - | ---- | 
| | Current     | $ | 6    |  | $ | 3    | 
| | Non-current |   | 12   |  |   | 17   | 
| |             | $ | 18   |  | $ | 20   | 

Site restoration

In accordance with Canadian law, land
fill sites have a predetermined life and must be restored to their original
condition at the end of their life. Because of the long-term nature of the
liability, the most significant uncertainty in estimating the provision is the
costs that will be incurred. In particular, the Company has assumed that the
land fill sites will be restored using technology and materials that are
currently available. The Company has been provided with a range of reasonably
possible outcomes of the total cost, reflecting different assumptions about
changes in technology and pricing of the individual components of the cost. The
restoration is expected to occur over the next 30 years.

Fiscal 2013 includes charges of $1
million (2012 - $3 million) for other sites for which the Company has a legal
obligation to carry out remediation.

Fiscal 2012 includes a charge of $4
million relating to the Marathon, Ontario, NBSK pulp mill site. An agreement was
reached with the Province of Ontario and other implicated parties as to future
remediation work. As part of the settlement, the Company received $2 million
from a previous owner and agreed to carry out remediation work totalling
approximately $6 million over the next several years.

- 26 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|11. | Provisions (continued)
      Reforestation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | In accordance with British Columbia law, the Company has
      an obligation to perform certain reforestation activities during periods
      of 12 to 15 years following the harvest. Because of the long- term nature
      of the liability, the most significant uncertainty in estimating the
      provision is the costs that will be incurred. In particular, the Company
      has assumed that current reforestation practice will continue to meet
      government policy, that adequate forest fire protection is in place, that
      suitable external funding will be made available to manage incremental
      forest pests and disease issues and that government policy with respect to
      reforestation will not change materially. The provision includes
      reforestation of different harvested areas, which are at different stages
      in the reforestation process. On March 23, 2012, the Company sold its
      British Columbia sawmills and, as part of the agreement, the buyer assumed
      the related reforestation obligation for an amount of $16
  million.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|12. | Employee future benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Defined contribution pension plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The Company contributes to defined contribution pension
      plans, provincial pension plans, group registered retirement savings
      plans, deferred profit sharing plans, and 401(k) plans. The pension
      expense of $7 million (2012  $9 million) under these plans is equal to
      the Companys contribution.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Defined benefit pension plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The Company has several defined benefit pension plans.
      Some of the defined benefit pension plans are contributory. Non-unionized
      employees in Canada joining the Company after January 1, 2000, participate
      in defined contribution pension plans. During fiscal 2013, the majority of
      the new unionized employees in Canada are only participating in defined
      contribution pension plans. The pension expense and the obligation related
      to the defined benefit pension plans are actuarially determined using the
      projected unit credit method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Other benefit plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The Company offers post-employment life insurance,
      healthcare and dental care plans to some of its retirees. The Company
      offers other long-term benefits as healthcare and dental care plans to
      disabled employees. The Company also assumes other long-term benefits as
      life insurance coverage to some of its disabled employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The other benefit plans expenses and the obligations
      related to these plans are actuarially determined using managements most
      probable assumptions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Actuarial valuations of these plans for accounting
      purposes are conducted on a triennial basis unless there are significant
      changes affecting the plans. The latest actuarial valuations were
      conducted either at January 1, 2010, May 1, 2012 or July 1,
2013.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The other benefit plans are
unfunded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

- 27 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|12. | Employee future benefits (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Company contributions for defined benefit pension
      plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Total cash payments for defined benefit pension plans
      consist of cash contributed by the Company to its funded pension plans and
      cash payments directly to beneficiaries for its unfunded benefit plans.
      The Company contributions were $44 million for 2013 (2012  $42 million).
      In 2014, the Company expects to contribute approximately $34 million to
      its defined benefit pension plans in accordance with its normal funding
      policy.                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Description of fund assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The assets of the registered defined benefit 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
      September 28, 2013, the defined benefit pension plan assets were comprised
      of 2% (1% in 2012) in cash and short-term investments, 4% (5% in 2012) in
      real estate, 43% (47% in 2012) in bonds and 51% (47% in 2012) in Canadian,
      U.S. and foreign equity.                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Funding policy                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The Companys funding policy for registered defined
      benefit pension plans 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. Actuarial valuations for funding purposes are
      conducted on a triennial basis, unless required earlier by pension
      legislation or as deemed appropriate by management from time to time. The
      latest funding actuarial valuations were conducted for one plan on January
      1, 2013, 12 plans on December 31, 2012, one plan on December 31, 2011, and
      one plan on December 31, 2010.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Investment policy                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The Company follows a disciplined investment strategy,
      which provides diversification of investments by asset class, foreign
      currency, sector and company. The Corporate Governance and Human Resources
      Committee of the Board of Directors has approved an investment policy that
      establishes long-term asset mix targets based on a review of historical
      returns achieved by world-wide investment markets. Investment managers may
      deviate from these targets to the extent permitted by the investment
      policy. Their performance is evaluated in relation to the market
      performance on the target mix.                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The actual return on plan assets was $73 million for the
      year ended September 28, 2013, and $70 million for the year ended
      September 29, 2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | As at September 28, 2013 and September 29, 2012, the
      assets of the plan do not directly include the Companys own financial
      instruments or any property occupied by, or other assets issued by, the
      Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

- 28 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|12. | Employee future benefits (continued)                                                                                                                                                                                                                                                    
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                         
|    | Information about the Companys defined benefit plans
      in aggregate                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                         
|    | The following tables present the change in the defined
      benefit obligation for the defined benefit plans as calculated by
      independent actuaries and the change in the fair value of plan assets:
      Change in defined benefit obligations for defined benefit
      plans:

| |                                                        |   | Pension plans |   |   | Other benefit plans |  
| | ------------------------------------------------------ | - | ------------- | - | - | ------------------- | -
| |                                                        |   | 2013          |   |   | 2012                |  
| | Defined benefit obligation, at beginning of
      year | $ | 910           |   | $ | 857                 |  
| | Current service cost                                   |   | 10            |   |   | 9                   |  
| | Interest cost                                          |   | 34            |   |   | 37                  |  
| | Employee contributions                                 |   | 2             |   |   | 2                   |  
| | Benefits paid                                          |   | (45           | ) |   | (61                 | )
| | Actuarial loss (gain)                                  |   | (98           | ) |   | 73                  |  
| | Decrease in obligation due to curtailment              |   | (1            | ) |   | (2                  | )
| | Sale of Skookumchuck, BC, pulp mill (note 16)          |   | (3            | ) |   | -                   |  
| | Past service cost                                      |   | 1             |   |   | 1                   |  
| | Effect of foreign
      currency translation           |   | 7             |   |   | (6                  | )
| | Defined benefit obligation, at end of year             | $ | 817           |   | $ | 910                 |  

Change in fair value of plan assets for
defined benefit plans:

| |                                                                       |   | Pension plans |   |   | Other benefit plans |  
| | --------------------------------------------------------------------- | - | ------------- | - | - | ------------------- | -
| |                                                                       |   | 2013          |   |   | 2012                |  
| | Fair value of defined benefit plan assets,
      at beginning of year | $ | 667           |   | $ | 618                 |  
| | Expected return on plan assets                                        |   | 42            |   |   | 39                  |  
| | Actuarial gain                                                        |   | 31            |   |   | 31                  |  
| | Employer contributions                                                |   | 44            |   |   | 42                  |  
| | Employee contributions                                                |   | 2             |   |   | 2                   |  
| | Benefits paid                                                         |   | (45           | ) |   | (61                 | )
| | Effect of foreign currency translation                                |   | 5             |   |   | (4                  | )
| | Fair value of
      defined benefit plan assets, at end of year       | $ | 746           |   | $ | 667                 |  

- 29 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|12. | Employee future benefits (continued)                                                                                                                                                                                                                                                                                       
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                            
|    | Information about the Companys defined benefit plans
      in aggregate (continued)                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                            
|    | The following table presents the difference between the
      fair value of plan assets and the actuarially determined defined benefit
      obligation for defined benefit plans. This difference is also referred to
      as either the deficit or surplus, as the case may be, or the funded status
      of the plans.
|    |                                                                                                                                                                                                                                                                                                                            
|    | Reconciliation of funded status for defined benefit
      plans:                                                                                                                                                                                                                                                           

| |                                                                    |   | Pension plans |  
| | ------------------------------------------------------------------ | - | ------------- | -
| |                                                                    |   | 2013          |  
| | Fair value of plan assets                                          | $ | 746           |  
| | Defined benefit
      obligation, wholly or partially funded plans |   | (780          | )
| | Plan deficit                                                       |   | (34           | )
| |                                                                    |   |               |  
| | Defined benefit obligation, unfunded plans                         |   | (37           | )
| | Unamortized past service costs                                     |   | 2             |  
| | Asset non-recognized due to asset ceiling                          |   | (4            | )
| | Liability arising
      from minimum funding requirement           |   | -             |  
| | Net defined benefit liability                                      | $ | (73           | )

| |                                                                    |   | Other benefit plans |  
| | ------------------------------------------------------------------ | - | ------------------- | -
| |                                                                    |   | 2013                |  
| | Fair value of plan assets                                          | $ | -                   |  
| | Defined benefit
      obligation, wholly or partially funded plans |   | -                   |  
| | Plan deficit                                                       |   | -                   |  
| |                                                                    |   |                     |  
| | Defined benefit obligation, unfunded plans                         |   | (29                 | )
| | Unamortized past service costs                                     |   | -                   |  
| | Asset non-recognized due to asset ceiling                          |   | -                   |  
| | Liability arising
      from minimum funding requirement           |   | -                   |  
| | Net defined benefit liability                                      | $ | (29                 | )

- 30 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|12. | Employee future benefits (continued)                                                  
|--- | --------------------------------------------------------------------------------------
|    |                                                                                       
|    | Amounts recognized in the consolidated balance sheets for
      defined benefit plans:

| |                                 |   | Pension plans |  
| | ------------------------------- | - | ------------- | -
| |                                 |   | 2013          |  
| | Defined benefit asset           | $ | 24            |  
| | Defined benefit
      liability |   | (97           | )
| | Net defined benefit liability   | $ | (73           | )

| |                                 |   | Other benefit plans |  
| | ------------------------------- | - | ------------------- | -
| |                                 |   | 2013                |  
| | Defined benefit asset           | $ | -                   |  
| | Defined benefit
      liability |   | (29                 | )
| | Net defined benefit liability   | $ | (29                 | )

| |                                 |   | Total employee future benefits |  
| | ------------------------------- | - | ------------------------------ | -
| |                                 |   | 2013                           |  
| | Defined benefit asset           | $ | 24                             |  
| | Defined benefit
      liability |   | (126                           | )
| | Net defined benefit liability   | $ | (102                           | )

Components of benefit cost

The following tables present the impact
on net earnings (loss) and other comprehensive earnings (loss) of the Companys
employee future benefits:

Recognized in net earnings (loss)

| |                                                       |   | Pension plans |   |   | Other benefit plans |  
| | ----------------------------------------------------- | - | ------------- | - | - | ------------------- | -
| |                                                       |   | 2013          |   |   | 2012                |  
| | Recognized costs for defined benefit plans:           |   |               |   |   |                     |  
| | Current service cost                                  | $ | 10            |   | $ | 9                   |  
| | Past service cost                                     |   | -             |   |   | -                   |  
| | Total
      included in personnel expenses            |   | 10            |   |   | 9                   |  
| |                                                       |   |               |   |   |                     |  
| | Curtailment gain                                      |   | (1            | ) |   | (2                  | )
| | Total included in other items                         |   | (1            | ) |   | (2                  | )
| |                                                       |   |               |   |   |                     |  
| | Interest cost                                         |   | 34            |   |   | 37                  |  
| | Expected return on plan assets                        |   | (42           | ) |   | (39                 | )
| | Total included in net finance costs                   |   | (8            | ) |   | (2                  | )
| | Total recognized costs for defined benefit plans      |   | 1             |   |   | 5                   |  
| |                                                       |   |               |   |   |                     |  
| | Recognized costs
      for defined contribution plans |   | 7             |   |   | 9                   |  
| | Total expense for employee future benefits            | $ | 8             |   | $ | 14                  |  

- 31 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|12. | Employee future benefits (continued)                   
|--- | -------------------------------------------------------
|    |                                                        
|    | Recognized in other comprehensive earnings
      (loss)

Pension plans
    
    
    Other benefit plans2013
    
    
    2012
    
    
    2011
    
    
    2013
    
    
    2012
    
    
    2011Actuarial gain (loss) - variation in
      assumptions
    $
    99
    
    $
    (77
    )
    $
    (50
    )
    $
    4
    
    $
    (2
    )
    $
    -Actuarial gain (loss) - experience adjustments
    
    (1
    )
    
    4
    
    
    9
    
    
    -
    
    
    6
    
    
    -Actuarial gain (loss) - actual rate of
      return exceeds (is below) expected rate of return
    
    31
    
    
    31
    
    
    (27
    )
    
    -
    
    
    -
    
    
    -Effect of limit on recognition of assets/minimum funding
      requirement
    
    (1
    )
    
    -
    
    
    4
    
    
    -
    
    
    -
    
    
    -Effect of foreign currency translation
    
    (2
    )
    
    2
    
    
    (1
    )
    
    -
    
    
    -
    
    
    -Defined benefit
      plans
    $
    126
    
    $
    (40
    )
    $
    (65
    )
    $
    4
    
    $
    4
    
    $
    -


Since September 26, 2010, date of
transition to IFRS, the cumulative amount of actuarial gains recognized in other
comprehensive earnings (loss) is $30 million (2012  losses of $102 million).

The actuarial gain on variation in
discount rate recognized in the statement of comprehensive earnings (loss) at
September 28, 2013, was based on an increase of the discount rate for pension
plans from 3.69% used at September 29, 2012 to 4.60% at September 28, 2013. For
September 29, 2012, the actuarial loss for pension plans was based on a decrease
of the discount rate from 4.42% at September 24, 2011 to 3.69% at September 29,
2012.

Assumptions

Significant assumptions for defined
benefit pension plans (weighted average):

| |                                            |  | 2013  |  |  | 2012  |  |  | 2011  | 
| | ------------------------------------------ |  | ----- |  |  | ----- |  |  | ----- | 
| |                                            |  |       |  |  |       |  |  |       | 
| | Defined benefit obligation at end of year: |  |       |  |  |       |  |  |       | 
| | Discount rate                              |  | 4.60% |  |  | 3.69% |  |  | 4.42% | 
| | Rate of compensation increase              |  | 2.50% |  |  | 2.50% |  |  | 2.50% | 
| |                                            |  |       |  |  |       |  |  |       | 
| | Net periodic benefit cost for the year:    |  |       |  |  |       |  |  |       | 
| | Discount rate                              |  | 3.69% |  |  | 4.42% |  |  | 4.87% | 
| | Rate of compensation increase              |  | 2.50% |  |  | 2.50% |  |  | 2.50% | 
| | Expected long-term return on assets        |  | 6.28% |  |  | 6.39% |  |  | 6.53% | 

- 32 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|12. | Employee future benefits (continued)
      Assumptions (continued)       
|--- | -------------------------------------------------------------------------
|    |                                                                          
|    | Significant assumptions for other benefit plans (weighted
      average):

| |                                                                     |   | 2013  |   |   | 2012  |   |   | 2011  |  
| | ------------------------------------------------------------------- | - | ----- | - | - | ----- | - | - | ----- | -
| | Defined benefit obligation at end of year:                          |   |       |   |   |       |   |   |       |  
| | Discount rate                                                       |   | 4.29% |   |   | 3.68% |   |   | 4.19% |  
| | Rate of compensation increase                                       |   | 2.50% |   |   | 2.50% |   |   | 2.50% |  
| |                                                                     |   |       |   |   |       |   |   |       |  
| | Net periodic benefit cost for the year:                             |   |       |   |   |       |   |   |       |  
| | Discount rate                                                       |   | 3.68% |   |   | 4.19% |   |   | 4.73% |  
| | Rate of compensation increase                                       |   | 2.50% |   |   | 2.50% |   |   | 2.50% |  
| |                                                                     |   |       |   |   |       |   |   |       |  
| | Assumed healthcare cost trend rate at end
      of year:            |   |       |   |   |       |   |   |       |  
| | Initial healthcare cost trend                                       |   | 6.00% |   |   | 7.00% |   |   | 7.50% |  
| | Annual rate of decline in
      trend rate                          |   | 0.50% |   |   | 0.50% |   |   | 0.50% |  
| | Ultimate healthcare cost trend rate                                 |   | 4.50% |   |   | 5.00% |   |   | 5.00% |  
| | Year ultimate
      rate is reached                                 |   | 2016  |   |   | 2016  |   |   | 2016  |  
| |                                                                     |   |       |   |   |       |   |   |       |  
| | Effect of change in healthcare cost trend
      rate (1% increase): |   |       |   |   |       |   |   |       |  
| | Total of service cost and interest cost                             | $ | -     |   | $ | -     |   | $ | -     |  
| | Defined benefit obligation                                          | $ | 1     |   | $ | 2     |   | $ | 3     |  
| |                                                                     |   |       |   |   |       |   |   |       |  
| | Effect of change in healthcare cost trend
      rate (1% decrease): |   |       |   |   |       |   |   |       |  
| | Total of service cost and interest cost                             | $ | -     |   | $ | -     |   | $ | -     |  
| | Defined benefit obligation                                          | $ | (1    | ) | $ | (2    | ) | $ | (3    | )

|13. | Share capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Authorized                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Unlimited number of common voting shares, without par
      value.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Unlimited number of non-voting Class A preferred shares
      issuable in series without par value, with other attributes to be
      determined at time of issuance.                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | In connection with the $75 million second ranking term
      loan facility, the Company has granted the lender an option to acquire 3
      million common shares of the Corporation at a price of $7 per share. The
      warrants expire on August 30, 2017. During the December 2012 quarter,
      concurrently with the first disbursement under the term loan facility, the
      Company recorded the estimated value of the warrants, which was determined
      to be $3 million.                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | In connection with the $18 million second ranking term
      loan facility (see note 10), the Company has agreed to grant the lender an
      option to acquire 712,000 common shares of the Corporation at a premium of
      30% over the average trading price of the shares over the five business
      days prior to the issuance of the warrants. These warrants will be granted
      on the date of the first advance made under this facility, which has not
      yet occurred, and will expire five years
thereafter.

- 33 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|13. | Share capital (continued)
|--- | -------------------------
|    |                          
|    | Issued and fully paid    

| |                           |   | 2013 |  |   | 2012 | 
| | ------------------------- | - | ---- |  | - | ---- | 
| | 100,000,000 common shares | $ | 564  |  | $ | 564  | 
| | 3,000,000 warrants        |   | 3    |  |   | -    | 
| |                           | $ | 567  |  | $ | 564  | 

Net loss per share

The following table provides the
reconciliation between basic and diluted net loss per share:

| |                                                                    |   | 2013        |   |   | 2012        |  
| | ------------------------------------------------------------------ | - | ----------- | - | - | ----------- | -
| | Net loss                                                           | $ | (34         | ) | $ | (82         | )
| | Weighted average number of common shares outstanding               |   | 100,000,000 |   |   | 100,000,000 |  
| | Dilutive effect of employee share options
      and warrants       |   | -           |   |   | -           |  
| | Weighted average number of diluted common shares
      outstanding |   | 100,000,000 |   |   | 100,000,000 |  
| | Basic and diluted net loss in dollars per share                    | $ | (0.34       | ) | $ | (0.82       | )

The warrants and employees share
options had no dilutive effect for the above periods; however, these securities
could potentially dilute earnings per share in future periods.

Shareholder Rights Plan

At the Annual and Special Meeting of
Shareholders held on January 31, 2013, the Shareholder Rights Plan (the Plan),
which had been previously adopted by the Board of Directors (the Board) of the
Corporation, was approved and ratified by a majority of the Shareholders. The
Plan is designed to encourage the fair treatment of the Companys shareholders
in the event of any take-over bid for the Companys common shares. It provides
the Board with sufficient time to assess and evaluate any unsolicited take-over
bid, and to explore and develop, if appropriate, alternatives that enhance
shareholder value and to give shareholders adequate time to consider any such
transaction. Accordingly, as of the close of business on January 31, 2013, one
right was issued and attached to each common share of the Corporation. Each
right entitles the holder of the right to purchase from the Corporation an
additional share of the Corporation subject to the terms and conditions of the
Plan.

Share-based compensation

Under the prior Long-Term Incentive
Plan, the Company had, from time to time, granted options to its employees. The
plan provided for the issuance of 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. No options have been granted since 2006. No compensation expense was
recorded for the years ended September 28, 2013 and September 29, 2012.

- 34 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|13. | Share capital (continued)                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                           
|    | The following table summarizes the changes in options
      outstanding and the impact on weighted average per share exercise price
      during the year:

| |                            |  | 2013    |   |   | 2012     | 
| | -------------------------- |  | ------- | - | - | -------- | 
| |                            |  |         |   |   | Weighted | 
| |                            |  |         |   |   | average  | 
| |                            |  |         |   |   | exercise | 
| |                            |  | Shares  |   |   | price    | 
| | Balance, beginning of year |  | 104,987 |   | $ | 66.13    | 
| | Options expired            |  | (4,229  | ) | $ | 182.33   | 
| | Options forfeited          |  | (4,906  | ) | $ | 83.98    | 
| | Balance, end of
      year |  | 95,852  |   | $ | 60.09    | 
| | Exercisable, end of year   |  | 95,852  |   | $ | 60.09    | 

The following table summarizes the
weighted average per share exercise price and the weighted remaining contractual
life of the options outstanding as at September 28, 2013:

| |              |  | Outstanding options and
      exercisable options | 
| | ------------ |  | ------------------------------------------------- | 
| |              |  |                                                   | 
| |              |  |                                                   | 
| |              |  | Number of                                         | 
| | Year granted |  | options                                           | 
| | 2004         |  | 4,941                                             | 
| | 2005         |  | 44,787                                            | 
| | 2006         |  | 46,124                                            | 
| |              |  | 95,852                                            | 

Other share-based compensation

Directors of the Company, which are not
employees of the Company, are given the option to receive part of their annual
retainer, meeting fees and awards under the Directors Share Award Plan in the
form of Deferred Share Units (DSU). Each DSU is equivalent in value to a common
share of the Company and is notionally credited with dividends when shareholders
receive dividends from the Company. A DSU is paid to a director upon termination
of Board service and is payable in the form of cash.

- 35 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|13. | Share capital (continued)                                                                            
|--- | -----------------------------------------------------------------------------------------------------
|    |                                                                                                      
|    | The following table summarizes the grant of DSUs issued
      under the Directors Share Awards Plan:

| |                            |  | 2013      |  |  | 2012      | 
| | -------------------------- |  | --------- |  |  | --------- | 
| | Balance, beginning of year |  | 1,119,836 |  |  | 1,119,836 | 
| | Granted                    |  | -         |  |  | -         | 
| | Paid                       |  | -         |  |  | -         | 
| | Balance, end of
      year |  | 1,119,836 |  |  | 1,119,836 | 
| | Vested, end of year        |  | 1,119,836 |  |  | 869,503   | 

On November 15, 2011, the Board
approved the establishment of a Performance-Conditioned Share Unit (PCSU) plan.
Under the PCSU plan, designated senior executives will be granted a specified
number of DSUs or PCSUs annually, which vest over successive three-year periods,
based on total shareholder return over the performance period as determined
relative to a peer group and the increase in value of the Companys weighted
average share price over the performance period.

The following table summarizes the
grant of DSUs issued under the Performance-Conditioned Share Unit Plan:

| |                            |  | 2013     |   |  | 2012    |  
| | -------------------------- |  | -------- | - |  | ------- | -
| | Balance, beginning of year |  | 367,583  |   |  | 373,147 |  
| | Granted                    |  | 751,733  |   |  | -       |  
| | Forfeited                  |  | (130,969 | ) |  | (5,564  | )
| | Balance, end of
      year |  | 988,347  |   |  | 367,583 |  
| | Vested, end of year        |  | -        |   |  | -       |  

During fiscal 2009, the Company
established a Performance-Conditioned Restricted Share Units (PCRSU) plan for
designated senior executives. During the December 2011 quarter, 880,968 PCRSUs
were forfeited as performance conditions attached to it were not achieved, and
the remaining 1,143,039 PCRSUs were paid for a total consideration of $3
million. There are no PCRSUs outstanding and this plan was terminated.

The following table summarizes the
details of share-based compensation expenses (credits) relating to its different
share-based compensation plans:

| |                                                                          |   | 2013 |  |   | 2012 |  
| | ------------------------------------------------------------------------ | - | ---- |  | - | ---- | -
| | Directors' share award plan                                              | $ | 1    |  | $ | (1   | )
| | Performance-conditioned share unit plan                                  |   | -    |  |   | -    |  
| | Performance-conditioned restricted share unit plan                       |   | -    |  |   | -    |  
| |                                                                          | $ | 1    |  | $ | (1   | )
| | Total carrying amount of liabilities for cash-settled
      arrangements | $ | 3    |  | $ | 2    |  

- 36 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|14. | Guarantees, commitments and contingencies
      Guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The Company and certain of its subsidiaries have granted
      irrevocable letters of credit, issued by highly-rated financial
      institutions, to third parties to indemnify them in the event the Company
      does not perform its contractual obligations. The Company has not recorded
      any additional liability with respect to these guarantees, as the Company
      does not expect to make any payments in excess of what is recorded in the
      Companys financial statements. The letters of credit mature at various
      dates in fiscal 2014.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Capital investment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | On March 16, 2012, the Company announced a $190 million
      capital investment to upgrade its specialty cellulose manufacturing
      facility at Temiscaming, Quebec. During fiscal 2013, the Company completed
      a detailed re-estimation exercise for the project and is now forecasting a
      total estimated cost of $235 million. The project involves the replacement
      of three old boilers with a new high- pressure boiler designed to burn
      waste sulphite liquor, a co-product of the specialty cellulose
      manufacturing process, producing steam for use at the facility. The
      project also calls for the installation of a new electrical turbine that
      will increase the Temiscaming facility's electricity production capacity
      from its current 10 megawatts to 60 megawatts. As at the end of September
      2013, the Company had incurred $137 million of capital expenditures for
      this project and had $41 million of outstanding commitments.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The Company has entered into a 25-year power purchase
      contract with Hydro-Quebec that will allow the Company to sell to
      Hydro-Quebec up to 50 megawatts of the incremental electricity generated
      by the new turbine at green energy rates of $106 per MW/hour, indexed
      annually to the consumer price index.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The Company has entered into operating leases for
      expected minimum lease payments of $9 million. Outflows for the years
      following September 28, 2013, are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| | 2014                | $ | 4 | 
| | ------------------- | - | - | 
| | 2015                | $ | 2 | 
| | 2016                | $ | 2 | 
| | 2017                | $ | 1 | 
| | 2018 and thereafter | $ | - | 

Contingencies

The Company is party to claims and
litigations arising in the normal course of operations. The Company does not
expect that the resolution of these matters will have a material effect on the
Companys financial condition, earnings or liquidity.

- 37 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|15. | Analysis of expenses by
nature
|--- | ------------------------------

| |                                             |   | 2013  |  |   | 2012  |  
| | ------------------------------------------- | - | ----- |  | - | ----- | -
| | Wages and salaries                          | $ | 232   |  | $ | 275   |  
| | Employee benefits expense                   |   | 85    |  |   | 97    |  
| | Raw materials and other manufacturing costs |   | 892   |  |   | 1,004 |  
| | Changes in inventories                      |   | 1     |  |   | (37   | )
| | Other expenses                              |   | 21    |  |   | 25    |  
| |                                             | $ | 1,231 |  | $ | 1,364 |  
| |                                             |   |       |  |   |       |  
| | Cost of sales                               | $ | 1,159 |  | $ | 1,290 |  
| | Selling, general and administrative         |   | 72    |  |   | 74    |  
| |                                             | $ | 1,231 |  | $ | 1,364 |  

|16. | Other items                                                                                        
|--- | ---------------------------------------------------------------------------------------------------
|    |                                                                                                    
|    | The following table provides a summary of the other items
      by business segment of the Company:

| |                                                        |   | 2013 |   |   | 2012 |  
| | ------------------------------------------------------ | - | ---- | - | - | ---- | -
| | Forest Products:                                       |   |      |   |   |      |  
| | Gain on sale of BC sawmills                            | $ | -    |   | $ | (24  | )
| | Loss on sale/closure of hardwood flooring
      plants |   | -    |   |   | 2    |  
| |                                                        |   | -    |   |   | (22  | )
| | Paper Pulp:                                            |   |      |   |   |      |  
| | Loss on sale of Skookumchuck, BC, pulp mill            |   | 2    |   |   | -    |  
| | Impairment loss -
      Skookumchuck, BC, pulp mill    |   | 22   |   |   | -    |  
| | Impairment loss - Chetwynd, BC, pulp mill              |   | -    |   |   | 50   |  
| |                                                        |   | 24   |   |   | 50   |  
| | Corporate:                                             |   |      |   |   |      |  
| | Costs for permanently idled
      facilities           |   | 7    |   |   | 10   |  
| | Gain on sale of assets                                 |   | (2   | ) |   | -    |  
| | Impairment loss - Temlam loan
      receivable         |   | -    |   |   | 16   |  
| | Gain
      on sale of minority equity investment       |   | -    |   |   | (4   | )
| |                                                        |   | 5    |   |   | 22   |  
| | Other items                                            | $ | 29   |   | $ | 50   |  

2013

On May 17, 2013, the Company sold its
pulp mill located in Skookumchuck, BC, for proceeds of $97 million. As a result
of the sale, the Company recorded a loss of $2 million in the June 2013 quarter.
The following table provides information related to Balance Sheet items of the
mill at time of sale:

| | Current assets                           | $ | 41  |  
| | ---------------------------------------- | - | --- | -
| | Long-term assets                         |   | 79  |  
| | Current liabilities                      |   | (12 | )
| | Employee future
      benefits and other |   | (9  | )
| |                                          | $ | 99  |  

- 38 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|16. | Other items (continued)
      2013 (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | During the March 2013 quarter, the Company announced that
      it had reached an agreement to sell its pulp mill located in Skookumchuck,
      BC. The Company recorded an impairment charge of $22 million on the
      non-current assets to reflect anticipated net proceeds of sale.                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | During fiscal 2013, the Company recorded a charge of $7
      million relating to several permanently idled facilities. The costs relate
      to custodial, site security, legal and remediation activities.                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | During the December 2012 quarter, the Company recorded a
      gain of $2 million relating to the sale of land and building in Cranbrook,
      BC.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | During the September 2012 quarter, the Company recorded
      an impairment loss of $50 million related to property, plant and
      equipment, including the related supplies and materials of the Chetwynd,
      BC, high-yield pulp mill. Subsequent to the announced indefinite idling of
      the pulp mill and following a review of its business plan, the Company
      undertook an impairment review and found that the carrying value of its
      assets exceeded their recoverable amount being the fair value less costs
      to sell. The recoverable amount was determined to be nominal.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | During fiscal 2012, the Company recorded charges of $10
      million relating to several permanently idled facilities. The costs relate
      to custodial, site security, legal and remediation activities.                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On March 23, 2012, the Company sold its British Columbia
      Southern Interior wood products assets for proceeds of $66 million. The
      sale included the Elko and Canal Flats sawmills and approximately 1.1
      million cubic meters of combined Crown tenures, private land and contract
      annual allowable cut. As a result of the sale, the Company recorded a gain
      of $24 million in the March 2012 quarter. The following table provides
      information related to balance sheet items of the two sawmills at the time
      of sale:                                            

| | Current assets                      | $ | 35  |  
| | ----------------------------------- | - | --- | -
| | Long-term assets                    |   | 28  |  
| | Current liabilities                 |   | (10 | )
| | Long-term reforestation obligations |   | (9  | )
| | Employee future benefits and other  |   | (2  | )
| |                                     | $ | 42  |  

During the March 2012 quarter, the
Company recorded an impairment loss of $16 million related to the loan
receivable from Temlam Inc. The latter is currently under creditor protection
and owns an idled laminated veneer lumber (LVL) facility located in Amos,
Quebec. The Company has a 50% secured interest in the facility. The cutting
rights that were previously attached to the LVL facility were granted to another
company. In the absence of a guaranteed fiber supply, the Company has concluded
that the re-start of the facility is unlikely and has adjusted its carrying
value to the amount anticipated to be realized upon liquidation or sale.

- 39 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|16. | Other items (continued)
      2012 (continued)                                                                                                                                                                                                                                                                                                                                                                         
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | On December 22, 2011, the Company recorded a gain of $4
      million relating to the sale of a minority equity position in two
      dissolving pulp mills located in the Province of New Brunswick.                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | On November 25, 2011, the Company sold its Toronto,
      Ontario, hardwood flooring plant for proceeds of $13 million.
      Concurrently, the Company also announced the closure of its Huntsville,
      Ontario, hardwood flooring plant. The sale of the Toronto plant and the
      closure of the Huntsville plant resulted in a charge of $2 million that
      has been recorded in the December 2011 quarter.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                        
|17. | Net finance costs                                                                                                                                                                                                                                                                                                                                                                                                      

| |                                                                                                      |   | 2013 |   |   | 2012 |  
| | ---------------------------------------------------------------------------------------------------- | - | ---- | - | - | ---- | -
| | Interest on long-term debt                                                                           | $ | 40   |   | $ | 36   |  
| | Interest on short-term debt                                                                          |   | 2    |   |   | 2    |  
| | Bank charges and other financing expenses                                                            |   | 3    |   |   | 2    |  
| | Net foreign exchange loss (gain), excluding exchange on
      long-term debt                         |   | (1   | ) |   | 4    |  
| | Interest income                                                                                      |   | -    |   |   | (1   | )
| | Exchange loss (gain) on long-term debt                                                               |   | 14   |   |   | (13  | )
| | Expected return on plan assets less
      accretion of employee future benefits obligation (note 12) |   | (7   | ) |   | -    |  
| | Interest
      capitalized on assets under construction                                              |   | (9   | ) |   | (2   | )
| |                                                                                                      | $ | 42   |   | $ | 28   |  
| |                                                                                                      |   |      |   |   |      |  
| | Finance costs                                                                                        | $ | 50   |   | $ | 42   |  
| | Finance income                                                                                       |   | (8   | ) |   | (14  | )
| | Net finance costs                                                                                    | $ | 42   |   | $ | 28   |  

- 40 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|18. | Income taxes                                                                                                        
|--- | --------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                     
|    | The reconciliation of income taxes calculated at the
      statutory rate to the actual tax provision is as
follows:

| |                                                                                                             |   | 2013 |   |   | 2012 |  
| | ----------------------------------------------------------------------------------------------------------- | - | ---- | - | - | ---- | -
| | Loss before income taxes                                                                                    | $ | (13  | ) | $ | (60  | )
| |                                                                                                             |   |      |   |   |      |  
| | Income tax recovery based on combined federal and
      provincial income tax rates of 26.3% (2012 - 26.3%) | $ | (3   | ) | $ | (16  | )
| |                                                                                                             |   |      |   |   |      |  
| | Increase (decrease) resulting from:                                                                         |   |      |   |   |      |  
| | Difference in statutory income tax rates                                                                    |   | 1    |   |   | 6    |  
| | Permanent differences                                                                                       |   | 2    |   |   | -    |  
| | Unrecognized tax
      asset arising from current losses and other tax adjustements                         |   | 21   |   |   | 32   |  
| |                                                                                                             |   | 24   |   |   | 38   |  
| | Income tax expense                                                                                          | $ | 21   |   | $ | 22   |  
| |                                                                                                             |   |      |   |   |      |  
| | Income taxes:                                                                                               |   |      |   |   |      |  
| | Current                                                                                                     | $ | 20   |   | $ | 11   |  
| | Deferred                                                                                                    |   | 1    |   |   | 11   |  
| | Income tax expense                                                                                          | $ | 21   |   | $ | 22   |  

Unrecognized deferred tax assets

Deferred tax assets have not been
recognized in respect of the following:

| |                                                                                                               |   | 2013 |  |   | 2012 | 
| | ------------------------------------------------------------------------------------------------------------- | - | ---- |  | - | ---- | 
| | Deferred tax assets:                                                                                          |   |      |  |   |      | 
| | Non-capital loss carry-forwards and pool of
      deductible scientific research and development expenditures | $ | 414  |  | $ | 405  | 
| | Property, plant and equipment                                                                                 |   | 91   |  |   | 66   | 
| | Employee future benefits                                                                                      |   | 29   |  |   | 78   | 
| | Capital loss carry-forwards                                                                                   |   | 1    |  |   | 3    | 
| | Other                                                                                                         |   | 9    |  |   | 9    | 
| |                                                                                                               | $ | 544  |  | $ | 561  | 

Deferred tax assets have not been
recognized in respect of these items because it is not probable that future
taxable profits will be available against which the Company can utilize the
benefits.

- 41 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|18. | Income taxes (continued)                                                                                                                                                                                                               
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                        
|    | Unrecognized deferred tax assets
  (continued)                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                        
|    | As at September 28, 2013, certain subsidiaries have
      accumulated the following losses and deductions 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                                                     | $ | 1,178   |  |  | 2014 to 2033       | 
| | U.S. subsidiaries                                                         | $ | 14      |  |  | 2028 to
      2032 | 
| | Pool of deductible
      scientific research and experimental development | $ | 374     |  |  | Unlimited          | 

Recognized deferred tax assets and
liabilities

| |                                                    |   | Deferred tax assets |   |   | Deferred tax liabilities |   |   |             |  
| | -------------------------------------------------- | - | ------------------- | - | - | ------------------------ | - | - | ----------- | -
| |                                                    |   | Non-capital         |   |   | Property,                |   |   |             |  
| |                                                    |   | loss carry-         |   |   | plant and                |   |   | Other       |  
| |                                                    |   | forwards            |   |   | equipment                |   |   | liabilities |  
| | Balance, September 24, 2011                        | $ | 11                  |   | $ | 5                        |   | $ | (1          | )
| |                                                    |   |                     |   |   |                          |   |   |             |  
| | Through statement of net earnings (loss)           |   | (11                 | ) |   | (1                       | ) |   | 1           |  
| | Balance, September 29, 2012                        |   | -                   |   |   | 4                        |   |   | -           |  
| |                                                    |   |                     |   |   |                          |   |   |             |  
| | Through statement of net earnings (loss)           |   | 6                   |   |   | (3                       | ) |   | (4          | )
| | Through statement of comprehensive earnings (loss) |   | 2                   |   |   | -                        |   |   | -           |  
| | Balance, September
      28, 2013                  | $ | 8                   |   | $ | 1                        |   | $ | (4          | )

|19. | Financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Fair value                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The carrying amount of cash and cash equivalents,
      restricted cash, trade and other receivables, operating bank loans, trade,
      other payables and accrued charges, and interest payable approximates
      their fair values because of the near-term maturity of those instruments.
      The carrying value of the long-term loans receivable and other financial
      long-term liabilities also approximates their fair values.
      The carrying value and the fair value of long-term debt
      are as follows:

| |                |   | 2013 |  |   | 2012 | 
| | -------------- | - | ---- |  | - | ---- | 
| | Carrying value | $ | 385  |  | $ | 339  | 
| | Fair value     | $ | 428  |  | $ | 369  | 

- 42 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|19. | Financial instruments (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Fair value (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The fair value of the senior secured notes was estimated
      using quoted market prices; the fair value of the other long-term debt was
      estimated based on discounted cash flows using year-end market yields of
      similar instruments having the same maturity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Derivative financial instruments are the only financial
      instruments of the Company measured at fair value on a recurring basis and
      have been valued in accordance with Level 1 of the fair value hierarchy,
      which is based on unadjusted quoted prices in an active market. The
      Company had no derivative financial instruments at September 28, 2013 and
      September 29, 2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Financial risk management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Overview                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Company has exposure to the following risks from its
      use of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Board of Directors has overall responsibility for the
      establishment and oversight of the Companys risk management policy. The
      policy defines the method by which the Company manages its risk through
      properly and prudently administering the Companys financial assets,
      liabilities and derivatives. Internal Audit measures the adequacy of the
      business control systems through the execution of an Internal Audit Plan
      approved by the Audit Committee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Exposure to credit risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Credit risk arises from the possibility that entities to
      which the Company sells products may experience financial difficulty and
      be unable to fulfill their contractual obligations. The Company does not
      have a significant exposure to any individual customer or counterparty. As
      required in the Risk Management Policy, the Company reviews a new
      customers credit history before extending credit and conducts regular
      reviews of its existing customers credit performance. All credit limits
      are subject to evaluation and revision at any time based on changes in
      levels of creditworthiness and must be reviewed at least once per year.
      Sales orders cannot be processed unless a credit limit has been properly
      approved. The Company may require payment guarantees, such as letters of
      credit, or obtain credit insurance coverage. Bad debt expense has not been
      significant in the past. The allowance for doubtful accounts for the
      Company, as at September 28, 2013 and September 29, 2012, was
      negligible.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Company also has credit risk relating to cash and
      cash equivalents. The Company manages risk by dealing only with
      highly-rated financial institutions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

- 43 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|19. | Financial instruments (continued)
      Financial risk management (continued)                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                           
|    | The carrying amount of financial assets represents the
      maximum credit exposure. The maximum exposure to credit risk at the
      reporting date was:

| |                                                                                    |   | 2013 |  |   | 2012 | 
| | ---------------------------------------------------------------------------------- | - | ---- |  | - | ---- | 
| | Loans and receivables, other than cash,
      cash equivalents and restricted cash | $ | 167  |  | $ | 212  | 
| | Cash, cash
      equivalents and restricted cash                                   | $ | 74   |  | $ | 92   | 

The maximum exposure to credit risk for
trade accounts receivable as at September 28, 2013 and September 29, 2012, by
geographical region was as follows:

| |                                               |   | 2013 |  |   | 2012 | 
| | --------------------------------------------- | - | ---- |  | - | ---- | 
| | Canada                                        | $ | 19   |  | $ | 19   | 
| | United States                                 |   | 31   |  |   | 51   | 
| | European Union                                |   | 42   |  |   | 42   | 
| | China                                         |   | 4    |  |   | 5    | 
| | Other                                         |   | 15   |  |   | 24   | 
| |                                               |   | 111  |  |   | 141  | 
| | Allowance for doubtful accounts               |   | -    |  |   | -    | 
| | Trade receivables net                         |   | 111  |  |   | 141  | 
| | Other receivables including input tax credits |   | 46   |  |   | 59   | 
| | Accounts
      receivable                     | $ | 157  |  | $ | 200  | 

The aging of trade accounts receivable
was as follows:

| |                     |   | 2013  |  |   | 2012      | 
| | ------------------- | - | ----- |  | - | --------- | 
| |                     |   | Gross |  |   | Allowance | 
| | Not past due        | $ | 102   |  | $ | -         | 
| | Past due 0-30 days  |   | 7     |  |   | -         | 
| | Past due 31-60 days |   | 2     |  |   | -         | 
| |                     | $ | 111   |  | $ | -         | 

The movement in the allowance for
doubtful accounts receivable in respect to trade accounts receivable was
negligible in fiscal 2013 and fiscal 2012.

- 44 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|19. | Financial instruments (continued)
      Financial risk management (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Exposure to liquidity risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Liquidity risk arises from the possibility that the
      Company will not be able to meet its financial obligations as they fall
      due. The Company has an objective of maintaining liquidity equal to 12
      months of maintenance capital expenditures, interest and principal
      repayments, seasonal working capital requirements and general corporate
      purposes, which would require approximately $135 million to $150 million
      of liquidity.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Repayment of amounts due within one year is funded by
      normal collection of current trade accounts receivable. Liquidity in the
      form of cash, cash equivalents and unused revolving credit facilities is
      also maintained to assist in the solvency and financial flexibility of the
      Company. Liquidity as at September 28, 2013, totalled $109 million (2012 -
      $140 million). The decrease in liquidity was anticipated as the Company
      continued with its capital expenditure program. In order to address this
      situation, the Company entered into two secured term loan facilities
      totalling $133 million of which $73 million was undrawn. In addition, the
      Company is assessing several liquidity enhancing initiatives such as
      reducing or delaying capital expenditures, asset sales and seeking other
      sources of financing or funding.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The following are the contractual maturities of financial
      liabilities, including interest payments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

2013Carrying
    
    
    Contractual
    
    
    
    
    
    
    
    
    
    
    
    Afteramount
    
    
    cash flows
    
    
    Year 1
    
    
    Years 2-3
    
    
    Years 4-5
    
    
    5 yearsSecured bank
      loans
    $
    389
    (1)
    $
    602
    
    $
    50
    
    $
    84
    
    $
    87
    
    $
    381Unsecured loans
    
    13
    
    
    14
    
    
    5
    
    
    7
    
    
    1
    
    
    1Operating bank
      loans
    
    57
    
    
    57
    
    
    57
    
    
    -
    
    
    -
    
    
    -Trade and others
    
    205
    
    
    205
    
    
    205
    
    
    -
    
    
    -
    
    
    -$
    664
    
    $
    878
    
    $
    317
    
    $
    91
    
    $
    88
    
    $
    382(1)before financing costs


It is not expected that the cash
outflows included in the maturity analysis could occur significantly earlier,
or, excluding the effects of foreign exchange fluctuations on US dollar
liabilities, at significantly different amounts.

Foreign currency rate risk
management

The Company is exposed to currency risk
on sales, purchases and long-term debt that are denominated in a currency other
than the Canadian dollar. The currencies in which these transactions are
primarily denominated are US dollar and euro.

- 45 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|19. | Financial instruments (continued)
      Financial risk management (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | The Companys revenues for most of its products are
      affected by fluctuations in the relative exchange rates of the Canadian
      dollar with respect to the US dollar and the euro. The Company generates
      approximately $900 million of US $ denominated sales annually from its
      Canadian operations. As a result, any decrease in the value of the US
      dollar and the euro relative to the Canadian dollar reduces the amount of
      revenues realized on sales in local currency. In addition, since business
      units purchase the majority of their production inputs in local currency,
      fluctuations in foreign exchange can significantly affect the units
      relative cost position when compared to competing manufacturing sites in
      other currency jurisdictions.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | To reduce the impact of fluctuations in the value of the
      US dollar, the Company has adopted a policy, which allows for hedging up
      to 50% of its anticipated US $ receipts for up to 36 months in duration.
      As at September 28, 2013 and September 29, 2012, the Company did not hold
      any foreign exchange contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Foreign currency rate sensitivity
  analysis                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Based on 2014 planned sales volumes and prices, the
      following table illustrates the impact of a 1% change in the value of the
      US dollar versus the Canadian dollar and the euro. For illustrative
      purposes, an increase of 1% in the value of the US dollar is assumed. A
      decrease would have the opposite effects of those shown
  below:                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| | Sales
      increase                                  | $ | 10 | 
| | ----------------------------------------------------- | - | -- | 
| | Cost of sales
      increase                          |   | 3  | 
| | Operating earnings and adjusted EBITDA
      increase |   | 7  | 
| | Loss on
      translation of US $ denominated debt    |   | 3  | 
| | Pre-tax earnings increase                             | $ | 4  | 

Direct US $ purchases of raw materials,
supplies and services provided a partial offset to the impact on sales. This
does not include the potential indirect impact of currency on the cost of items
purchased in the local currency. Interest expense on the Companys US $
denominated debt provides a small offset to its US $ exposure.

Interest rate risk management and
sensitivity analysis

Interest rate risk is the risk that the
fair value or future cash flows of a financial instrument will fluctuate because
of changes in market interest rates.

Fluctuations of market interest rates
have little impact on the Companys financial results since the majority of the
Companys debts are fixed rate debts.

- 46 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|19. | Financial instruments (continued)
      Financial risk management (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Commodity price and operational risk
    management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The Companys financial performance is dependent on the
      selling prices of its products. The markets for most lumber, pulp and
      paper products are cyclical and are influenced by a variety of factors.
      These factors include periods of excess product supply due to industry
      capacity additions, periods of decreased demand due to weak general
      economic activity, inventory de-stocking by customers, and fluctuations in
      currency exchange rates. During periods of low prices, the Company is
      subject to reduced revenues and margins, resulting in substantial declines
      in profitability and possibly net losses. The Company may periodically
      purchase lumber, pulp and newsprint price derivative commodity contracts
      to mitigate the impact of price volatility. The Company had no derivative
      financial instruments at September 28, 2013 and September 29,
  2012.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The manufacturing activities conducted by the Companys
      operations are subject to a number of risks, including availability and
      price of fibre and competitive prices for purchased energy and raw
      materials. To mitigate the impact of price fluctuations, the Company may
      periodically purchase derivative commodity contracts. As at September 28,
      2013 and September 29, 2012, the Company did not hold any significant
      derivative commodity contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|20. | Capital management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | It is the Companys objective to manage its capital to
      ensure adequate capital resources exist to support operations while
      maintaining its business growth. The Company sets the amount of capital in
      proportion to risk. The Company manages the capital structure and makes
      adjustments to it in light of changes in economic conditions and the risk
      of characteristics of the underlying assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The Company monitors capital on the basis of net debt to
      total capitalization ratio. Net debt is calculated as a total debt
      (long-term debt plus bank indebtedness and operating bank loans) less
      cash, cash equivalents and restricted cash.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Total capitalization includes net debt plus long-term
      provisions, employee future benefit liabilities, deferred tax liabilities,
      other long-term liabilities, and shareholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The Companys long-term objective is to maintain the net
      debt to total capitalization ratio at 40% or less. A strong balance sheet
      provides the Company with the ability to access capital markets at
      favourable rates. The net debt to total capitalization ratio of the
      Company was 52% as at September 28, 2013 (September 29, 2012  45%). The
      increase was due to a higher debt borrowed primarily to finance the
      Temiscaming specialty cellulose project. The Company anticipates that the
      net debt to total capitalization ratio will remain in excess of its target
      until the Temiscaming project is completed and begins to generate the
      projected incremental adjusted EBITDA.                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | There were no changes in the Companys approach to
      capital management during fiscal 2013.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)   
|                                                         
|Years ended September 28, 2013 and September 29, 2012    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|21. | Related parties                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                             
|    | Key management personnel compensation                                                                                                                                                                       
|    |                                                                                                                                                                                                             
|    | The key management personnel of the Company are the
      members of the Board of Directors and certain executive officers. They
      control less than 1% of the voting shares of the Company.            
|    |                                                                                                                                                                                                             
|    | Key management personnel participate in the Companys
      long-term incentive plans (see note 13).
      Key management personnel compensation is comprised of the
      following for the past two years:

| |                                  |   | 2013 |  |   | 2012 |  
| | -------------------------------- | - | ---- |  | - | ---- | -
| | Short-term compensation benefits | $ | 4    |  | $ | 4    |  
| | Share-based
      compensation   |   | 1    |  |   | (1   | )
| |                                  | $ | 5    |  | $ | 3    |  

|22. | Subsequent events                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | BC Land Sale Initiative                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | On September 30, 2013, the Company announced the BC Lands
      Sale Initiative. As at November 29, 2013, the Company completed the sale
      of various parcels of land for total gross proceeds of $23
  million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Antidumping duties - China                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | On November 6, 2013, China issued its preliminary
      determination to antidumping duties to be applied to viscose grade pulp
      imported from Canada, the United States and Brazil. The Company was
      assigned a duty rate of 13% on viscose shipments to China after November
      6, 2013. The antidumping duties do not apply to the specialty cellulose
      pulp mill located in Tartas, France. The specialty cellulose mill located
      in Temiscaming, Quebec, currently produces and sells approximately 40,000
      tonnes per year of viscose grade pulp into the Chinese market. The balance
      of the mills production is specialty grades, which are not subject to the
      antidumping duties.

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