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|Exhibit 99.2                                                    
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|A GLOBAL LEADER IN 
RESOURCE STEWARDSHIP


Financial report 2011

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Tembec 
Financial Report 2011

1 Message to Shareholders

4 Managements Discussion and Analysis

52 Management Responsibility

53Independent Auditors Report

54Consolidated Financial Statements

95Directors and Officers

96 Shareholder Information





Design: Communications DG4 Inc. 
Printing: Transcontinental Direct Montréal

Cover: Printed on 10pt. FSC-certified
Kallima® Coated 
Cover C1S Plus, manufactured by Tembecs Temiscaming, 
Quebec coated bleached board mill. 
Interior: Printed on 70 lb. text FSC-certified Mohawk® 
Beckett Expression Radiance, manufactured using pulp 
from Tembecs Skookumchuck, British Columbia mill.

TEMBEC INC. 
©2011 All rights reserved 
Printed in Canada

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Message to Shareholders

The financial results for 2011 were below expectations due to
low prices for some of the Companys key products and further strengthening of
the Canadian dollar. Nevertheless, this was an important year as the Company
made important strides toward its ongoing repositioning. The objective of this
process is to raise the overall margins and reduce the volatility of earnings
through a combination of focused capital investments and targeted transactions.
Ultimately, the Company will reduce its dependency on high commodity prices to
generate acceptable rates of return.

|Health and safety performance continued to improve, with
      the Companys Occupational Safety and Health Administration (OSHA)
      incident rate improving by 25% between 2010 and 2011. This reflects an
      ongoing multi-year plan designed to raise levels of awareness,
      communications and accountability. Health and safety is the top priority
      throughout Tembec, from frontline employees to the President and Chief
      Executive Officer. The objective is to be an industry leader in this
      critical area.EBITDA was $95 million for the year versus $132 million for the
      previous year. Market conditions were very favorable for the Companys
      Specialty and Commodity Dissolving Pulp and NBSK businesses. However,
      conditions weakened for the High-Yield Pulp business and remained weak for
      the ForestProducts business. The Paper results strengthened in the year
      with the newsprint business accounting for most of the improvement.
      In the previous year, the Company placed significant focus on the
      balance sheet achieving both an extension of term debt maturities until
      2018 and debt reduction. In 2011, the asset- based loan was replaced with
      maturity in 2016. With the debt portion of the balance sheet in good
      shape, and with strong liquidity, the Company can now focus on the
      repositioning of its asset base.
      Last year, the Company indicated that a Business Improvement Plan (BIP)
      had been developed with the objective of achieving first or second
      quartile cost position for all of its assets. Within the BIP, priorities
      have been established to drive capital investment strategy and a dominant
      theme has emerged. A large portion of the investment will be in the
      Companys specialty dissolving pulp assets where margins are higher and
      more predictable. Also, a large portion of the overall BIP will focus on
      green energy investments, which will involve high return projects with low
      cash flow volatility. Again, the objective is to improve the overall
      margins and returns for shareholders and reduce the vulnerability to
      swings in product prices. |  | INVESTMENTS
      Consistent with the above-mentioned strategy, the Company
      has launched several energy capital projects in 2011. In addition to these
      projects, some basic reinvestment in the existing asset base has taken
      place with the objective of improving equipment reliability and
      productivity. These investments will continue for the next two years and
      will lead to improved operating results beginning in mid-2012.
      The Company commenced a new turbine project at the
      specialty dissolving pulp mill in Tartas, France, to produce approximately
      8 megawatts of green electricity generated by biomass. This $21 million
      project will increase EBITDA at this facility by $8 million per year and
      position the mill to be one of the lowest cost facilities in this sector.
      The project is forecasted to start up in July 2012.
      A $25 million methane biogas reactor project was started
      at the Matane, Quebec, high-yield pulp mill. This project received grants
      from the province of Quebec and the Federal Government totalling $24
      million, making the net capital cost to the Company $1 million. The
      project will eliminate the need to burn oil at this facility to dry pulp,
      improving EBITDA by $6 million per year.This is also forecasted to
      start up in July 2012.
      The Companys Board of Directors has approved a major
      energy investment at its specialty dissolving pulp mill in Temiscaming,
      Quebec, to produce green electricity from waste liquor. This $190 million
      project will involve the installation of a high pressure liquor recovery
      boiler and an electrical turbine, which will result in the production of
      40 megawatts of electricity and 5,000 tonnes of additional specialty
      dissolving pulp. The project should generate $42 million of incremental
      EBITDA and position this facility to also be among the lowest cost
      producers. This project is conditional upon signing a purchase power
      agreement with Hydro Quebec, which is expected to be finalized in the
      March 2012 quarter.
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Tembec Financial Report 2011 1

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Message to Shareholders



|Also under evaluation is the expansion of specialty
      dissolving pulp production in Temiscaming, Quebec. A study is underway to
      determine the feasibility of adding 30,000 tonnes of additional pulp
      capacity and 10 megawatts of additional electricity generation. This study
      is expected to be completed in 2012. Forest Products
      The lumber business remained extremely challenging in 2011. The
      primary reason was the continued slump in housing starts in the U.S.,
      which averaged just over a half million for the year, approximately a
      third of the normalized levels. Declining housing values and highly
      accommodating monetary policy created very affordable housing conditions.
      However, this did very little to stimulate the demand for new homes. Tight
      credit conditions, high unemployment and extremely high foreclosure rates
      persisted throughout the year, stifling demand for new home construction.
      There were some bright spots in the lumber market. Shipments of
      Canadian lumber to China continued at a record pace during the year
      pulling significant volume out of the North American market and providing
      partial relief to the excess supply. Canadian housing starts were robust
      in 2011, providing solid demand conditions in Canada, particularly for
      Eastern Canadian producers. While these two markets provided some
      mitigation for the poor U.S. market, prices remained below profitable
      levels. It is anticipated that the U.S. housing market will take
      several more years to recover to normalized levels. Banks will have to
      process and resell the high volume of homes still in the foreclosure
      pipeline. A meaningful reduction in unemployment will likely take several
      more years to achieve. As conditions improve, it is expected that new home
      construction will follow and demand for lumber will improve.
      Canada and the United States entered into a Softwood Lumber
      Agreement (SLA) in 2006, which imposed an export tax on shipments to the
      U.S., and for some provinces, limitations (quotas) on volumes shipped. The
      majority of both Canadian and U.S. lumber producers believe it is in their
      best interest for the SLA to be extended until October 2015 pursuant to
      the extension clause in the agreement, and as a result, the Canadian and
      U.S. Governments are expected to take steps to ratify this extension.
      Dissolving Pulp Fiscal 2011 was a very good year for
      both the specialty and commodity dissolving pulp markets. Specialty
      dissolving pulp demand was very strong in the previous year and carried
      over into 2011, creating conditions that allowed for significant price
      increases. |  | Specialty dissolving pulp is a highly technical product
      designed for individual customers in very technical applications. There
      are significant barriers to enter into this business that include capital
      costs of equipment and technical expertise. Most of the business in this
      sector is done under long-term contracts with periodic price negotiations.
      In 2011, as prices were negotiated, substantial increases were obtained by
      specialty pulp producers as the prevalent conditions were significantly in
      favor of producers.
      The long-term outlook for specialty dissolving pulp
      appears very positive with various segments of the customer base
      forecasting growth in the range of 2-6% per year. The three largest
      producers are contemplating capacity expansion to meet this growth in
      demand, with some projects officially announced and others under study.
      Normally, growth in supply in a sector of this size can create imbalances
      if too much product is brought into the market too quickly. However, this
      business is in a unique situation where specialty pulp capacity can be
      swung to produce the commodity grade keeping the specialty markets in
      balance. Commodity dissolving pulp mills cannot easily swing into the
      specialty grades.
      Demand for the commodity dissolving pulp also
      dramatically increased during the year due to the convergence of unusual
      global conditions and steady growth in demand. This caused a spike in spot
      prices to record levels.
      Over the last several years, Viscose Staple Fibre (VSF)
      capacity has expanded to satisfy the growing demand for rayon,
      particularly in the emerging markets. The demand for commodity dissolving
      pulp, which is the main raw material for VSF, has grown proportionately.
      Shortages in cotton supply, caused by floods and drought in various
      producing regions around the globe, began in 2010 and carried over into
      mid-2011, causing cotton prices to spike. These high cotton prices,
      coupled with strong demand fundamentals in the VSF market, caused global
      VSF prices to spike, which in turn pushed commodity dissolving prices to
      record highs. In the second half of 2011, the markets for cotton, VSF and
      commodity dissolving pulp have rebalanced and prices have fallen although
      they remain at profitable levels. The medium to long-term demand outlook
      for VSF and commodity dissolving pulp is projected to be positive.
      Significant pulp capacity expansion projects have been announced to supply
      this growing market.
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Tembec Financial Report
20112

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Message to Shareholders



|The near-term and long-term fundamentals for the
      specialty dissolving pulp market are ver y positive, and prices will
      likely increase in 2012. The commodity grade is expected to experience a
      well supplied market over the next year, with prices falling from 2011
      levels. The Company will further reduce its sales into the commodity
      market in 2012 in order to satisfy the growing needs of customers in the
      specialty markets. Paper Pulp The medium and long-term
      demand for paper pulps is forecasted to be very positive, driven by
      growing demand in the emerging markets. Over the past two decades,
      non-integrated paper, paperboard and tissue capacity has been built in
      these markets where there is a significant deficit of wood fiber supply.
      In the case of China, this has caused very large increases in imports of
      pulp, recovered paper and wood chips. Non- integrated paper capacity now
      makes up 32% of the total global production as compared to approximately
      20% two decades ago. The growth in global pulp demand and the increase in
      non-integrated capacity is expected to continue. As a result of
      the growing demand and wood fiber deficit in the emerging markets, cost
      structures are changing around the world. The price of recovered paper in
      the developed market has increased significantly as the emerging markets
      target these supply regions for procurement at the same time while the
      volumes of recovered paper have been declining. Coinciding with this
      trend, the demand for imported hardwood chips into China, as well as
      growing demand in other parts of the world, has driven hardwood chip
      prices to record highs. This is shifting the cost structure of much of the
      global pulp and paper industry, exacerbated by the weakening of the US
      dollar. In the long term, this trend will favor companies with stable
      fiber costs. Slow economic growth in the developed economies and
      global credit issues had an effect on paper pulp demand in 2011. |  | This caused a decline in all paper pulp prices in the
      second half of 2011. It is expected that, due to limitations to growth in
      supply of softwood paper pulp and the cost structure of this sector,
      prices will recover early in 2012.
      Most of the Companys paper pulp capacity is in the
      hardwood high-yield pulp sector. This product experienced a decline
      earlier in 2011 due to the start-up of new capacity in China. This product
      is influenced by the fundamentals of the hardwood markets, which will take
      longer to recover as compared to the softwood pulp market.
      PaperThe Companys focus in the paper sector
      has been in the coated bleached board and newsprint businesses. The North
      American paperboard business has been stable allowing for relatively high
      operating rates and reasonable pricing levels. The weak U.S. economy will
      likely have some effect on demand, but no significant changes are
      anticipated in operating rates or price.
      The newsprint business continues to be a sector in steady
      decline in North America. The decline in demand has been mitigated by a
      combination of temporary and permanent capacity closures and increased
      offshore exports. However, these measures have not been enough to raise
      prices to a profitable level for a large number of North American
      operations. This has been evident by the severe financial challenges faced
      by large producers in this sector. Further capacity reductions will be
      required to restore the profitability of this business to sustainable
      levels.
      SUMMARY
      The Companys Management and Board of Directors are
      focused on the implementation of the Strategic Plan. While a number of
      initiatives have been completed, significant steps remain in the
      repositioning of Tembec to reach our goal of higher margins and more
      stable earnings. While this is occurring, the Company will remain focused
      on cost reductions, operational excellence and becoming a world class
      health and safety organization.
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|                                      |  |                      
|------------------------------------- |  | ---------------------
|JAMES M . LOPEZ                       |  | JAMES V. CONTINENZA  
|President and Chief Executive Officer |  | Chairman of the Board

Tembec Financial Report 2011
3

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ManagementsDiscussion
and Analysisas at November 30, 2011

The Managements Discussion and Analysis (MD&A) section
provides a review of the significant developments and issues that influenced
Tembec Inc.s financial performance during the fiscal year ended September 24,
2011, as compared to the fiscal year ended September 25, 2010. The MD&A
should be read in conjunction with the audited consolidated financial statements
for the fiscal year ended September 24, 2011. All references to quarterly or
Company information relate to Tembec Inc.s fiscal quarters. EBITDA, net debt,
total capitalization, free cash flow and certain other financial measures
utilized in the MD&A are non-GAAP (Generally Accepted Accounting Principles)
financial measures. As they have no standardized meaning prescribed by GAAP,
they may not be comparable to similar measures presented by other
companies.

The MD&A includes forward-looking statements within the
meaning of securities laws. Such statements relate, without limitation, to the
Companys or managements objectives, projections, estimates, expectations or
predictions of the future and can be identified by words such as may, will,
could, anticipate, estimate, expect, and project, the negative or
variations thereof, and expressions of similar nature. Forward-looking
statements are based on certain assumptions and analyses made by the Company in
light of its experience, information available to it and its perception of
future developments. Such statements are subject to a number of risks and
uncertainties, including, but not limited to, changes in foreign exchange rates,
product selling prices, raw material and operating costs and other factors
identified in the Companys periodic filings with securities regulatory
authorities. Many of these risks are beyond the control of the Company and,
therefore, may cause actual actions or results to materially differ from those
expressed or implied herein. The forward-looking statements contained herein
reflect the Companys expectations as of the date hereof and are subject to
change after such date. The Company disclaims any intention to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise, unless required by applicable securities legislation. The
information in this MD&A is as at November 30, 2011. Disclosure contained in
this document is current to that date, unless otherwise stated.

Throughout the MD& A, Tembec or Company means
Tembec Inc. and its consolidated subsidiaries. Prior to December 2010, Tembecs
operations consisted of five reportable business segments: Forest Products,
Pulp, Paper, Chemicals and Corporate. During the December 2010 quarter, the
Company reorganized its internal reporting structure. Subsequent to the
organizational changes, the Pulp segment was divided into two segments:
Dissolving and Chemical Pulp, and High-Yield Pulp. Each segment includes three
pulp mills. As well, the Chemicals segment is now part of the Dissolving and
Chemical Pulp segment. A significant portion of Chemicals sales are related to
by-products generated by the two dissolving pulp mills. The Forest Products,
Paper and Corporate segments were unaffected by the organizational changes.
Comparative prior year segment information has been restated to conform with the
new segment presentation. On September 24, 2011, the Company had approximately
4,250 employees, as compared to 4,300 at the end of the prior fiscal year. The
Company operated manufacturing facilities in Quebec, Ontario, British Columbia,
the state of Ohio as well as in Southern France. Principal facilities are
described in the subsequent sections of the MD&A.

4Tembec Financial Report 2011

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Managements Discussion and Analysis

2011 vs. 2010

|FINANCIAL SUMMARY                                               |  |       |   |  |       |  
|--------------------------------------------------------------- |  | ----- | - |  | ----- | -
|(in millions of dollars, unless otherwise noted)                |  |       |   |  |       |  
|                                                                |  | 2010  |   |  | 2011  |  
|Sales                                                           |  | 1,877 |   |  | 1,743 |  
|Freight and sales deductions                                    |  | 234   |   |  | 237   |  
|Lumber export taxes                                             |  | 10    |   |  | 13    |  
|Cost of sales                                                   |  | 1,426 |   |  | 1,324 |  
|SG&A                                                            |  | 73    |   |  | 72    |  
|Share-based
      compensation                                  |  | 2     |   |  | 2     |  
|EBITDA                                                          |  | 132   |   |  | 95    |  
|Depreciation and amortization                                   |  | 56    |   |  | 45    |  
|Other items                                                     |  | 13    |   |  | 1     |  
|Operating earnings                                              |  | 63    |   |  | 49    |  
|Interest, foreign exchange and other                            |  | 51    |   |  | 32    |  
|Exchange
      loss (gain) on long-term debt                    |  | (27   | ) |  | 1     |  
|Earnings before
      income taxes and non-controlling interest |  | 39    |   |  | 16    |  
|Income tax expense (recovery)                                   |  | (15   | ) |  | 19    |  
|Non-controlling interest                                        |  | 2     |   |  |      |  
|Net earnings
      (loss) and comprehensive earnings (loss)     |  | 52    |   |  | (3    | )
|Basic and diluted
      earnings (loss) in dollars per share    |  | 0.52  |   |  | (0.03 | )
|                                                                |  |       |   |  |       |  
|Total assets (at
      year-end)                                |  | 1,104 |   |  | 1,107 |  
|Total long-term
      debt (at year-end) (1)                    |  | 288   |   |  | 289   |  
|Total long-term
      financial liabilities (at year-end)       |  | 480   |   |  | 459   |  
|(1)includes current portion                                     |  |       |   |  |       |  

|CONSOLIDATED SALES       | CONSOLIDATED SALES BY SEGMENT
|------------------------ | -----------------------------
|(in millions of dollars) | (in millions of dollars)     
|                         |                              

Tembec Financial Report 2011 5

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Managements Discussion and Analysis

|EBITDA BY SEGMENT        | FINANCIAL PERFORMANCE
|------------------------ | ---------------------
|(in millions of dollars) |                      
|                         |                      

SALES(in millions of dollars)Total
    
    
    Price
    
    
    Volume & mix2010
    
    
    2011
    
    
    variance
    
    
    variance
    
    
    varianceForest Products
    
    434
    
    
    471
    
    
    37
    
    
    (10
    )
    
    47Dissolving and Chemical Pulp
    
    830
    
    
    693
    
    
    (137
    )
    
    71
    
    
    (208
    )High-Yield Pulp
    
    395
    
    
    378
    
    
    (17
    )
    
    (53
    )
    
    36Paper
    
    348
    
    
    339
    
    
    (9
    )
    
    6
    
    
    (15
    )Corporate
    
    5
    
    
    7
    
    
    2
    
    
    
    
    
    22,012
    
    
    1,888
    
    
    (124
    )
    
    14
    
    
    (138
    )Less: internal
      sales
    
    (135
    )
    
    (145
    )
    
    (10
    )Sales
    
    1,877
    
    
    1,743
    
    
    (134
    )


Sales decreased by $134 million as compared to fiscal 2010.
Currency was unfavourable as the Canadian dollar averaged US $1.013, a 5.5%
increase from US $0.960 in the prior year. Forest Products segment sales
increased by $37 million primarily as a result of higher shipments. Dissolving
and Chemical Pulp segment sales declined by $137 million due to significantly
lower shipments, partially offset by higher prices. High-Yield Pulp segment
sales decreased by $17 million due to lower prices, as higher shipments
partially offset the decline. Paper segment sales decreased by $9 million due to
lower shipments, partially offset by higher prices.

In terms of geographical distribution, the U.S. remained the
Companys principal market with 34% of consolidated sales in fiscal 2011, as
compared to 31% in the prior year. Canadian sales represented 18% of sales, as
compared to 20% in the prior year. Sales outside of the U.S. and Canada
represented the remaining 48% in fiscal 2011, as compared to 49% a year ago.

6Tembec Financial Report 2011

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Managements Discussion and Analysis

EBITDA(in millions of dollars)Total
    
    
    Price
    
    
    Cost & volume2010
    
    
    2011
    
    
    variance
    
    
    variance
    
    
    varianceForest Products
    
    (10
    )
    
    (46
    )
    
    (36
    )
    
    (10
    )
    
    (26
    )Dissolving and Chemical Pulp
    
    120
    
    
    138
    
    
    18
    
    
    71
    
    
    (53
    )High-Yield Pulp
    
    47
    
    
    (4
    )
    
    (51
    )
    
    (53
    )
    
    2Paper
    
    (2
    )
    
    28
    
    
    30
    
    
    6
    
    
    24Corporate
    
    (23
    )
    
    (21
    )
    
    2
    
    
    
    
    
    2132
    
    
    95
    
    
    (37
    )
    
    14
    
    
    (51
    )


EBITDA declined by $37 million over the prior year. Forest
Products segment EBITDA declined by $36 million due to higher costs and lower
prices. Dissolving and Chemical Pulp segment EBITDA increased by $18 million due
to higher prices, partially offset by higher costs. High-Yield Pulp segment EBITDA decreased by $51 million due to lower prices. Paper
segment EBITDA increased by $30 million on a combination of higher prices and
lower costs. Corporate expenses for the current year include a charge of $2
million relating to share-based compensation, unchanged from the prior year.

OPERATING EARNINGS (LOSS)(in millions of dollars)Depreciation &
    
    
    OtherTotal
    
    
    EBITDA
    
    
    amortization
    
    
    items2010
    
    
    2011
    
    
    variance
    
    
    variance
    
    
    variance
    
    
    varianceForest Products
    
    (24
    )
    
    (63
    )
    
    (39
    )
    
    (36
    )
    
    3
    
    
    (6
    )Dissolving and Chemical Pulp
    
    105
    
    
    120
    
    
    15
    
    
    18
    
    
    9
    
    
    (12
    )High-Yield Pulp
    
    37
    
    
    (14
    )
    
    (51
    )
    
    (51
    )
    
    
    
    
    Paper
    
    (12
    )
    
    25
    
    
    37
    
    
    30
    
    
    
    
    
    7Corporate
    
    (43
    )
    
    (19
    )
    
    24
    
    
    2
    
    
    (1
    )
    
    2363
    
    
    49
    
    
    (14
    )
    
    (37
    )
    
    11
    
    
    12


The Company generated operating earnings of $49 million
compared to operating earnings of $63 million in fiscal 2010.

The Forest Products segment generated an operating loss of $63
million in fiscal 2011, compared to an operating loss of $24 million in fiscal
2010. In addition to the previously noted decline in EBITDA, the segments
current year results include a charge of $3 million relating to the permanent closure of the
Taschereau, Quebec, SPF sawmill. It also includes a charge of $1 million related
to severance payments at the idled planer facility in Cranbrook, British
Columbia. The prior year included a $2 million gain related to land sales.
Depreciation expense declined by $3 million as the continued difficult market
conditions led to relatively low capital expenditures.

Tembec Financial Report 2011 7

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Management’s Discussion and Analysis

The Dissolving and Chemical Pulp segment generated operating earnings of $120 million during the most recently completed fiscal year, compared to operating earnings of $105million a year ago. In addition to the previously noted $18
million improvement in EBITDA, depreciation expense decreased by $9 million, primarily as a result of the sale of two pulp mills that occurred in early May of fiscal 2010. In the prior year, this segment had recorded a gain of $12 million
relating to the sale of the aforementioned pulp mills.

The High-Yield Pulp segment generated an operating loss of $14 million during the most recently completed fiscal year, compared to operating earnings of $37 million a year ago. The decline in EBITDA accounted for the weaker operating
results.

The Paper segment generated operating earnings of $25million compared to an operating loss of $12 million in the prior year. Besides the previously noted increase in EBITDA, the segment’s prior year results had absorbed a charge of
$7million relating to the permanent closure of the Pine Falls, Manitoba, newsprint facility.

Corporate expenses decreased by $24 million. The prior year  results included a non-recurring charge of $12 million relating  to the St. Francisville, Louisiana, coated paper mill. The mill  property and equipment were sold in April 2009. A
portion of  the consideration included two US $5 million interest-bearing  notes. In January 2010, the purchaser filed for protection under  the U.S. Bankruptcy Code. Subsequently, the assets were  sold at auction. Based on the amount of the
winning bid, it was unlikely that the Company would recover any portion of the interest-bearing notes. As a result, the Company recorded  a charge of $12 million. The aforementioned amount included  accrued interest as well as certain other
unsecured claims. The  current year results include a gain of $8 million related to the  filing of Tembec USA LLC under Chapter 7 of the Bankruptcy Code of the United States. The Company reduced its accrued  benefit obligation by this amount. It
also includes a $3million  gain related to the sale of its hydro-electric generating facilities  located in Smooth Rock Falls, Ontario.

8Tembec Financial Report 2011

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Managements Discussion and Analysis

Segment Review  2011 vs. 2010

|FOREST PRODUCTS                      |  |      |    |  |      |   
|------------------------------------ |  | ---- | -- |  | ---- | --
|(in millions of dollars)             |  |      |    |  |      |   
|                                     |  | 2010 |    |  | 2011 |   
|Total sales                          |  | 434  |    |  | 471  |   
|Consolidated sales                   |  | 346  |    |  | 375  |   
|EBITDA                               |  | (10  | )  |  | (46  | ) 
|EBITDA margin on total sales         |  | (2.3 | )% |  | (9.8 | )%
|Depreciation and amortization        |  | 16   |    |  | 13   |   
|Other items                          |  | (2   | )  |  | 4    |   
|Operating loss                       |  | (24  | )  |  | (63  | ) 
|Identifiable assets (excluding cash) |  | 241  |    |  | 264  |   

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

The Forest Resource Management group is responsible for
managing all of the Companys Canadian forestry operations. This includes the
harvesting of timber, either directly or by contractual agreements, and all
silviculture and regeneration work required to ensure a sustainable supply for
the manufacturing units. The group is also responsible for third party timber
purchases, which are needed to supplement total requirements. The groups main
objective is the optimization of the flow of timber into various manufacturing
units. As the Companys forest activity in Canada is conducted primarily on
Crown lands, the Forest Resource Management group works closely with provincial
governments to ensure harvesting plans and operations comply with established
regulations and that stumpage charged by the provinces is reasonable and
reflects the fair value of the timber being harvested. During fiscal
2011, the Companys operations harvested and delivered 3.9 million cubic metres
of timber versus 3.2 million cubic metres in 2010. Additional supply of
approximately 0.9 million cubic metres was secured mainly through purchases and
exchanges with third parties, compared to 0.7 million cubic metres in the prior
year.

The Forest Products segment includes operations located in
Quebec, Ontario and British Columbia. The segment focuses on three main product
areas: SPF lumber, specialty wood and engineered wood. The SPF lumber operations
can produce approximately 1.6 billion board feet of lumber. The specialty wood
operations can annually produce 30 million board feet of hardwood lumber and 20
million square feet of hardwood flooring. The Companys engineered wood
operations consist of two finger joint lumber operations, which were idle for
all of fiscal 2010 and fiscal 2011.

Tembec Financial Report 2011 9

---

Managements Discussion and Analysis

The following summarizes the annual operating level or capacity
of each facility by product group:

|SPF
      LUMBER                                   |  | mbf                 | 
|-------------------------------------------------- |  | ------------------- | 
|Stud lumber - La Sarre, QC                         |  | 160,000             | 
|Stud lumber - Senneterre, QC                       |  | 150,000             | 
|Stud lumber - Cochrane, ON                         |  | 170,000             | 
|Stud lumber - Kapuskasing, ON                      |  | 105,000             | 
|Random lumber - Béarn, QC                          |  | 110,000             | 
|Random lumber - Chapleau, ON                       |  | 135,000             | 
|Random lumber - Timmins, ON                        |  | 100,000             | 
|Random lumber - Hearst, ON                         |  | 160,000             | 
|Random lumber - Canal Flats, BC
      (1)          |  | 180,000             | 
|Random lumber - Elko, BC (1)                       |  | 270,000             | 
|Finger joint lumber - Cranbrook, BC                |  | 25,000              | 
|                                                   |  | 1,565,000           | 
|                                                   |  |                     | 
|                                                   |  |                     | 
|SPECIALTY WOOD                                     |  | mbf                 | 
|Hardwood lumber - Huntsville, ON                   |  | 30,000              | 
|                                                   |  |                     | 
|                                                   |  |                     | 
|                                                   |  | thousand square ft. | 
|Flooring - Huntsville, ON / Toronto, ON            |  | 20,000              | 
|                                                   |  |                     | 
|                                                   |  |                     | 
|ENGINEERED WOOD                                    |  | mbf                 | 
|Engineered finger joint lumber - La Sarre, QC      |  | 60,000              | 
|Engineered finger joint lumber - Kirkland Lake, ON |  | 30,000              | 
|                                                   |  | 90,000              | 

(1) The Elko and Canal Flats sawmills rely on the Cranbrook
planer mill to dry and dress 80,000 mbf of lumber.

10Tembec Financial Report 2011

---

Managements Discussion and Analysis

The segment is dominated by SPF lumber, which represented 85%
of building material sales in fiscal 2011, compared to 83% in the prior year.
The volume of SPF lumber sold in fiscal 2011 increased by 121 million board feet
or 15%. Shipments were equal to 57% of capacity, up from 49% in fiscal 2010. In
response to very low lumber demand, the Company continued to reduce production
by curtailing operations at several facilities for either indefinite or
temporary periods. The split between Eastern/Western shipments was 62/38 as
compared to 56/44 a year ago. The Eastern sawmills produced more lumber in
fiscal 2011. US $ reference prices for random lumber were up by US $23 per mbf
while stud lumber decreased by US $1 per mbf. Currency more than offset the
increase in selling prices as the Canadian dollar averaged US $1.013, a 5.5%
increase from US $0.960 in fiscal 2010. The net result was a $12 per mbf price
decrease from a year ago.

Specialty wood represented 15% of building material sales in
fiscal 2011, down from 17% in the prior year. The decline was due to higher SPF
sales as absolute levels of specialty wood sales were relatively unchanged.
Prices were also unchanged year-over-year.

There were no engineered wood sales in fiscal 2011. The two
finger joint facilities were idle for all of fiscal 2010 and fiscal 2011.

The Forest Products segment produced and shipped approximately
1.1 million tonnes of wood chips in fiscal 2011, 85% of which were directed to
the Companys pulp and paper operations. In 2010, the segment produced 1.1
million tonnes and shipped 91% of this volume to the pulp and paper mills. The
internal transfer price of wood chips is based on current and expected market
transaction prices.

Total sales for this segment reached $471 million, an increase
of $37 million over the prior year. After eliminating internal sales, the Forest
Products segment generated 22% of Company consolidated sales, up from 18% in the
prior year. The segments main market is North America, which represented 94% of
consolidated sales in fiscal 2011, compared to 98% in the prior year.

Sales
    
    
    
    
    
    Shipments
    
    
    
    
    
    Selling prices($ millions)
    
    
    
    
    
    (000 units
    )
    
    
    
    
    ($ / unit)2010
    
    
    2011
    
    
    2010
    
    
    2011
    
    
    2010
    
    
    2011SPF
      lumber (mbf)
    
    255
    
    
    283
    
    
    786.8
    
    
    907.9
    
    
    324
    
    
    312Specialty woodPine and hardwood (mbf)
    
    6
    
    
    6
    
    
    9.4
    
    
    9.5
    
    
    638
    
    
    632Hardwood flooring (000 square ft)
    
    47
    
    
    45
    
    
    9.5
    
    
    9.1
    
    
    4,947
    
    
    4,94553
    
    
    51Engineered woodEngineered finger joint lumber (mbf)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total building materials
    
    308
    
    
    334Wood chips, logs and by-products
    
    126
    
    
    137Total sales
    
    434
    
    
    471Internal wood chips and other sales
    
    (88
    )
    
    (96
    )Consolidated sales
    
    346
    
    
    375


Tembec Financial Report 2011 11

---

Managements Discussion and Analysis

|QUARTERLY PRICES  WESTERN SPF MILL NET | QUARTERLY PRICES  EASTERN SPF DELIVERED
|--------------------------------------- | ----------------------------------------
|(US $ per mbf)                          | (US $ per mbf)                          
|                                        |                                         

MARKETS

The benchmark random length Western SPF (#2 and better) lumber
net price averaged US $263 per mbf in 2011, an increase from US $240 per mbf in
2010. In the East, the random length Eastern SPF average lumber price (delivered
Great Lakes) increased from US $327 per mbf to US $350 per mbf in 2011. The
Company considers these to be relatively low levels, approximately US $40 to US
$50 below normal trend line prices for random lumber. The reference price for
stud lumber decreased slightly with the Eastern average lumber price (delivered
Great Lakes) down from US $315 per mbf to US $314 per mbf, a level approximately
US $70 to US $80 per mbf below trend line prices. The low prices were driven by a very weak U.S. housing market. Housing starts in the U.S.,
on a seasonally adjusted basis, averaged 577,000 units in fiscal 2011, a
decrease over the 592,000 units in fiscal 2010. These remain well below the 2
million unit mark experienced in the 2004-2006 period and the +1.0 million
average that would be more indicative of normal market conditions. While the
Company recognized several years ago that U.S. housing starts could not maintain
the 2 million unit per year run rate, and that a degree of market correction
would likely occur at some point, the severity and extent of the correction had
not been anticipated. The negative effects of the sub-prime mortgage
difficulties, the latter having fuelled the strong demand in 2004-2006, have
been much greater in terms of impact and duration than originally foreseen.

12Tembec Financial Report 2011

---

Managements Discussion and Analysis

In addition to difficult market conditions, the Companys
financial performance continued to be impacted by export taxes on lumber shipped
to the U.S. Effective October 12, 2006, the governments of Canada and the United
States implemented an agreement for the settlement of the softwood lumber
dispute. The Softwood Lumber Agreement (SLA) requires that an export tax be
collected by the Government of Canada, which is based on the price and volume of
lumber shipped. Beginning on that date, the Companys Eastern Canadian sawmills,
located in Quebec and Ontario, were subject to export quota limitations and 5%
export tax on lumber shipped to the U.S. In April2009, the effective tax on
Eastern lumber shipments increased from 5% to 15% as a result of an arbitration
decision relating to alleged over-shipments of lumber between January2007 and
June2007. During fiscal2010, the Eastern Canadian sawmills export tax rate
declined to 10% in the month of June and returned to 15% in the month of August.
The SLA provides that during periods of relatively high prices, as was the case
during the early summer months, the export tax rate declines. In fiscal2010, the
average rate on all shipments to the U.S. was 14.1% and the total cost was
$4million. During fiscal2011, a second arbitration penalty of approximately 1%
was imposed on Eastern lumber shipments beginning in March2011. However, the
first arbitration penalty of 10% expired in June2011. Overall, the average rate
on all Eastern lumber shipments to the U.S. was 11.7% and the total cost was $6
million. The increase in cost was caused by higher shipments to the U.S., which
more than doubled year-over-year.

As to the Companys two Western sawmills, which are both
located in British Columbia, they are currently subject to a 15% export tax, but
shipments are not quota limited. Under certain circumstances, the tax may be
increased to 22.5%, which was not the case in either fiscal 2010 or fiscal 2011.
During fiscal 2010, the Western Canadian sawmills export tax rate declined to
0% in the month of June and returned to 15% in the month of August. Similarly to
what had occurred for the Eastern Canadian sawmills, higher prices led to the
reduction in the export tax rate. In fiscal 2010, the average rate on shipments
to the U.S. was 11.6% and the total cost was $6 million. During fiscal 2011, the
average rate on shipments to the U.S was 15% and the total cost was $7
million.

Tembec Financial Report 2011 13

---

Managements Discussion and Analysis

OPERATING RESULTS

The following summarizes EBITDA variances by major element:

Variance - favourable (unfavourable)Export
    
    
    Mill
    
    
    Inventory NRV(in
      millions of dollars)
    
    Price
    
    
    taxes
    
    
    costs
    
    
    adjustments
    
    
    Other
    
    
    TOTALSPF lumber
    
    (10
    )
    
    (3
    )
    
    (12
    )
    
    (10
    )
    
    1
    
    
    (34
    )Specialty wood
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    (1
    )Engineered wood
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other segment items
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    (1
    )(10
    )
    
    (3
    )
    
    (13
    )
    
    (10
    )
    
    
    
    
    (36
    )


In fiscal 2011, EBITDA was negative $46 million compared to
negative EBITDA of $10 million in the prior year. SPF lumber EBITDA declined by
$34 million. In addition to the previously noted decrease in selling prices and
higher export taxes on lumber shipped to the U.S., the sawmills absorbed
significantly higher cost of sales. Sawmill manufacturing costs increased by $11
million. The current year absorbed higher costs of $12 million, primarily for
timber. In the prior year, the segment had benefited from an $11 million
favourable adjustment to the carrying values of logs and lumber inventories
compared to a favourable adjustment of $1 million in the current year. Specialty
wood EBITDA decreased by $1 million due to higher costs. Engineered wood results
were unchanged as both plants remained idle for the entire year. The EBITDA
margin to total sales was negative 9.8% compared to negative 2.3% in the prior
year.

The following summarizes operating results variances by major
element:

|                               |  |      |   |  |      |   |  | Variance       |  
|------------------------------ |  | ---- | - |  | ---- | - |  | -------------- | -
|                               |  |      |   |  |      |   |  | favourable     |  
|(in
      millions of dollars) |  | 2010 |   |  | 2011 |   |  | (unfavourable) |  
|EBITDA                         |  | (10  | ) |  | (46  | ) |  | (36            | )
|Depreciation and amortization  |  | 16   |   |  | 13   |   |  | 3              |  
|Other items                    |  | (2   | ) |  | 4    |   |  | (6             | )
|Operating loss                 |  | (24  | ) |  | (63  | ) |  | (39            | )

The Forest Products segment generated an operating loss of $63
million in fiscal 2011, compared to an operating loss of $24million in fiscal
2010. Depreciation expense continued to trend downwards primarily as a result of
relatively low fixed asset additions. In view of operating rates that are
approximately 50%, capital expenditures have only averaged $8million per year
over the last three years. The segments current year results include a charge
of $3 million relating to the permanent closure of the Taschereau, Quebec, SPF
sawmill. It also includes a charge of $1 million related to severance payments
at the idled planer facility in Cranbrook, British Columbia. The prior year
included a $2million gain related to land sales.

14Tembec Financial Report 2011

---

Managements Discussion and Analysis

|DISSOLVING AND
      CHEMICAL PULP         |  |       |   |  |       | 
|------------------------------------------ |  | ----- | - |  | ----- | 
|(in millions of dollars)                   |  |       |   |  |       | 
|                                           |  | 2010  |   |  | 2011  | 
|Total sales - Pulp                         |  | 737   |   |  | 600   | 
|Total sales -
      Chemicals              |  | 93    |   |  | 93    | 
|Total sales                                |  | 830   |   |  | 693   | 
|Consolidated sales                         |  | 816   |   |  | 681   | 
|EBITDA                                     |  | 120   |   |  | 138   | 
|EBITDA margin on
      total sales         |  | 14.4% |   |  | 19.9% | 
|Depreciation and amortization              |  | 27    |   |  | 18    | 
|Other items                                |  | (12   | ) |  |      | 
|Operating earnings                         |  | 105   |   |  | 120   | 
|Identifiable
      assets (excluding cash) |  | 444   |   |  | 437   | 

The Dissolving and Chemical Pulp segment consists of three
market pulp manufacturing facilities. The facilities are divided into two main
types. Two dissolving pulp mills produce specialty and commodity dissolving
pulps. The remaining facility produces chemical softwood kraft paper pulp
(NBSK). During fiscal 2010, the Company also owned two kraft paper pulp mills
located in Southern France. The two pulp mills, with an annual capacity of
565,000 tonnes, were sold in May 2010.

The two dissolving pulp mills can produce approximately 310,000
tonnes per year. The softwood kraft mill has an annual capacity of 270,000
tonnes. The specialty dissolving pulp produced at the two dissolving pulp mills
is a high purity cellulose utilized in a wide variety of specialized products
such as pharmaceuticals, food additives, and industrial chemicals. T he
Temiscaming dissolving pulp mill also produces commodity dissolving pulp,
which is utilized in the production of viscose staple fibre, which in turn is
used to produce rayon for the textile industry. The Tartas mill also produced
specialized fluff pulp, which is utilized in the production of sanitary
products. The production of specialized fluff pulp was discontinued in September
2011.

The two dissolving pulp mills generate lignin as a by-product
of the sulphite process, which is sold to third parties. The Temiscaming mill
also includes a facility that produces ethanol as a by-product that is also sold
to third parties.

The segment also includes a stand-alone resin business, which
produces powder and liquid phenolic resins at three operating sites in Quebec:
Temiscaming, Longueuil, and Trois-Pistoles. The Company also operates a fourth
facility located in Toledo, Ohio, which manufactures powder and liquid
amino-resins. The chemical business also purchases and resells pulp mill
by-product chemicals from third parties.

The following summarizes the annual operating level or capacity
of each facility:

|DISSOLVING PULP                                  | tonnes 
|------------------------------------------------ | -------
|Specialty and commodity dissolving pulp          |        
|- Temiscaming, QC                                | 160,000
|Specialty
      dissolving pulp - Tartas, France | 150,000
|                                                 | 310,000
|                                                 |        
|SOFTWOOD KRAFT
      PULP                        |        
|Softwood kraft -
      Skookumchuck, BC          | 270,000
|                                                 |        
|CHEMICALS                                        |        
|Resin and related products                       | 170,000
|Lignin                                           | 190,000
|Ethanol (million
      litres)                   | 12.1   

Tembec Financial Report 2011 15

---

Managements Discussion and Analysis

Dissolving pulp shipments represented 53% of segment shipments
in fiscal 2011, compared to 35% in the prior year. The increase in percentage
was not due to higher shipments, but rather to a decline in chemical paper pulp
shipments as a result of the sale of two kraft pulp mills. Dissolving pulp sales
as a percentage of total segment pulp sales increased from 48% to 68% due to
previously noted shipment impact and significant price increase.

Chemical paper pulp represented 47% of segment shipments in
fiscal 2011, compared to 65% in the prior year. The volume of chemical paper
pulp shipped in fiscal 2011 declined by 278,700 tonnes. In May 2010, the Company
completed the sale of two kraft pulp mills and related operations located in
Southern France. In the prior fiscal year, the two mills had shipped 272,500
tonnes of pulp, generating sales of $191million and EBITDA of $19 million.

Total 2011 pulp shipments of 507,300 tonnes include 15,300
tonnes of softwood kraft pulp consumed by the Companys paperboard operations as
compared to 17,700 tonnes in the prior year.

Total sales for the Dissolving and Chemical Pulp segment were
$693 million, a decrease of $137 million from the prior year. After eliminating
internal sales, the Dissolving and Chemical Pulp segment generated 39% of
Company consolidated sales, down from 43% in the prior year. The Dissolving and
Chemical Pulp segment is a global business. In 2011, 64% of consolidated pulp
sales were generated outside of Canada and the U.S., as compared to 66% in the
prior year.

Sales
    
    
    
    
    
    Shipments
    
    
    
    
    
    Selling prices($ millions)
    
    
    
    
    
    (000 units
    )
    
    
    
    
    ($ / unit)2010
    
    
    2011
    
    
    2010
    
    
    2011
    
    
    2010
    
    
    2011Dissolving pulpsSpecialty dissolving (tonnes)
    
    238
    
    
    311
    
    
    189.2
    
    
    209.5
    
    
    1,258
    
    
    1,484Commodity dissolving (tonnes)
    
    83
    
    
    85
    
    
    62.1
    
    
    52.4
    
    
    1,337
    
    
    1,622Specialty fluff (tonnes)
    
    28
    
    
    9
    
    
    35.1
    
    
    8.1
    
    
    798
    
    
    1,111349
    
    
    405
    
    
    286.4
    
    
    270.0Chemical paper pulpsSoftwood kraft (tonnes)
    
    293
    
    
    195
    
    
    381.4
    
    
    237.3
    
    
    768
    
    
    822Hardwood kraft (tonnes)
    
    91
    
    
    
    
    
    134.6
    
    
    
    
    
    676
    
    
    384
    
    
    195
    
    
    516.0
    
    
    237.3Total dissolving and chemical pulp sales
    
    733
    
    
    600
    
    
    802.4
    
    
    507.3ChemicalsResin and related products (tonnes)
    
    54
    
    
    55
    
    
    58.8
    
    
    55.2
    
    
    918
    
    
    996Lignin (tonnes)
    
    30
    
    
    29
    
    
    123.3
    
    
    131.5
    
    
    243
    
    
    221Ethanol (000 litres)
    
    8
    
    
    7
    
    
    9.9
    
    
    8.9
    
    
    808
    
    
    78792
    
    
    91Other sales
    
    5
    
    
    2Total sales
    
    830
    
    
    693Internal pulp sales
    
    (14
    )
    
    (12
    )
    
    (17.7
    )
    
    (15.3
    )Consolidated sales
    
    816
    
    
    681


16Tembec Financial Report 2011

---

Managements Discussion and Analysis

MARKETS

The Company markets its pulp on a world-wide basis, primarily
through its own sales force. Sales offices are maintained in Toronto, Canada;
Dax, France; and Beijing, China.

The shipments to capacity ratio for dissolving pulp was at 87%
in fiscal 2011 versus 89% in the prior year. These are relatively high
percentages, which reflect strong demand and favourable market conditions. The
decrease in shipment ratio was due to a decrease of 16,400 tonnes in dissolving
pulp shipments. This was due to the Companys objective of focusing on
specialty or higher purity dissolving pulps and reducing its exposure to
commodity and fluff pulps. Specialty dissolving pulps have a lesser yield, which
in turn reduces the production capacity of the two mills. During fiscal 2010 and
2011, both mills operated at full rates and no downtime was taken for market
conditions. The strong market conditions led to higher US dollar and euro
prices, which more than offset the negative currency impact of a weaker US
dollar. Pricing for specialty dissolving increased by $226 per tonne, commodity
grade dissolving increased by $285 per tonne and specialty fluff increased by
$313 per tonne on average. The favourable market conditions also kept inventory
levels of finished pulp below 30 days for most of the year and ending fiscal
2011 at only 22 days of supply.

The shipments to capacity ratio for chemical paper pulp was 88%
in fiscal 2011 versus 84% in the prior year. The 88% level is also reflective of
favourable market conditions, as the mill operated at full capacity and no
downtime was taken for market conditions. The strong market led to higher US
dollar prices as the benchmark NBSK pulp price (delivered U.S.) increased by US
$66 per tonne and the benchmark NBSK pulp price (delivered China) increased by
US $77 per tonne. This more than offset the negative impact of the weaker US
dollar and prices increased by $27 per tonne year-over-year. The $54 per tonne
increase for softwood kraft shown in the table includes a positive mix variance
as fiscal 2011 no longer includes sales from the French mills, which had
traditionally sold their pulp for less than the Skookumchuck mill. The
favourable market conditions also kept inventory levels of finished pulp below
20days for most of the year. Fiscal 2011 inventory of NBSK ended the year at
only six days, as year-end coincided with the annual maintenance shutdown. This
level does not allow for effective customer service and will need to be
increased in the first quarter of fiscal 2012.

|QUARTERLY PRICES  DISSOLVING PULP | QUARTERLY PRICES  NBSK
|---------------------------------- | -----------------------
|(US $ per tonne)                   | (US $ per tonne)       
|                                   |                        

Tembec Financial Report 2011 17

---

Managements Discussion and Analysis

OPERATING RESULTS

The following summarizes EBITDA variances by major element:

Variance - favourable (unfavourable)ForeignInventory
    
    
    exchangeMill
    
    
    NRV
    
    
    impact(in millions of dollars)
    
    Price
    
    
    Freight
    
    
    costs
    
    
    adjustments
    
    
    on costs
    
    
    Other
    
    
    TOTALDissolving pulps
    
    66
    
    
    (1
    )
    
    (33
    )
    
    2
    
    
    3
    
    
    4
    
    
    41Chemical paper pulps
    
    6
    
    
    (3
    )
    
    
    
    
    (1
    )
    
    
    
    
    (3
    )
    
    (1
    )Chemicals
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Other segment costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    (21
    )71
    
    
    (4
    )
    
    (33
    )
    
    1
    
    
    3
    
    
    (20
    )
    
    18


Fiscal 2011 EBITDA was $138 million compared to $120million in
the prior year. The previously noted increases in pulp selling prices increased
EBITDA by $72 million. Higher freight and shipping costs reduced EBITDA by $4
million. Manufacturing costs at the two dissolving pulp mills increased by
$33million. Higher fibre, chemicals and supplies costs caused the majority of
the increase. The mills produced more specialty dissolving pulp grades, which
have lower yields and are more costly to produce. Costs were also impacted by an
increase in maintenance downtime. During fiscal 2011, the three pulp mills
incurred 30,200 tonnes of maintenance downtime compared to 14,100 tonnes in the
prior year. The translation of the euro costs of the French dissolving pulp mill
decreased the Canadian dollar equivalent costs by $3 million. The $21million
unfavourable variance in the Other category relates to the sale of two kraft
pulp mills and related operations located in Southern France. The mills were
sold part way through the prior year and had contributed $19 million to fiscal
2010 reported EBITDA.

The two North American pulp mills purchased approximately
845,000 bone dry tonnes of wood chips in fiscal 2011, down from 873,000 in the
prior year. Of this amount, approximately 67% was supplied by the Forest
Products segment, compared to 69% in the prior year. The remaining requirements
were purchased from third parties under contracts and agreements of various
durations. The pulp mill located in Southern France purchased 308,000 bone dry
tonnes of wood in fiscal 2011 as compared to 307,000 tonnes in the prior year.
The fibre is sourced from many private landowners.

Overall, higher pr ices were partially offset by higher
manufacturing costs, which led to EBITDA margins of 19.9% compared to 14.4% in
the prior year.

The following summarizes operating results variances by major
element:

|                               |  |      |   |  |      |  |  | Variance       |  
|------------------------------ |  | ---- | - |  | ---- |  |  | -------------- | -
|                               |  |      |   |  |      |  |  | favourable     |  
|(in
      millions of dollars) |  | 2010 |   |  | 2011 |  |  | (unfavourable) |  
|EBITDA                         |  | 120  |   |  | 138  |  |  | 18             |  
|Depreciation and amortization  |  | 27   |   |  | 18   |  |  | 9              |  
|Other items                    |  | (12  | ) |  |     |  |  | (12            | )
|Operating earnings             |  | 105  |   |  | 120  |  |  | 15             |  

The Dissolving and Chemical Pulp segment generated operating
earnings of $120 million during the most recently completed fiscal year,
compared to operating earnings of $105 million in the prior year. In addition to
the previously noted increase in EBITDA, the segment depreciation expense
declined by $9 million. The sale of two pulp mills located in Southern France in
May 2010 accounted for a significant portion of the decline in depreciation
expense. In the prior year, the Company had recorded a gain of $12 million
related to the sale of the aforementioned pulp mills.

18Tembec Financial Report 2011

---

Managements Discussion and Analysis

|HIGH-YIELD
      PULP                      |  |       |  |  |      |   
|------------------------------------------ |  | ----- |  |  | ---- | --
|(in millions of dollars)                   |  |       |  |  |      |   
|                                           |  | 2010  |  |  | 2011 |   
|Total sales                                |  | 395   |  |  | 378  |   
|Consolidated sales                         |  | 367   |  |  | 348  |   
|EBITDA                                     |  | 47    |  |  | (4   | ) 
|EBITDA margin on
      total sales         |  | 11.9% |  |  | (1.1 | )%
|Depreciation and
      amortization        |  | 10    |  |  | 10   |   
|Operating earnings
      (loss)            |  | 37    |  |  | (14  | ) 
|Identifiable
      assets (excluding cash) |  | 213   |  |  | 174  |   

The High-Yield Pulp segment consists of three market pulp
manufacturing facilities. High-yield pulps are produced with a combination of
mechanical and chemical processes. The Company produces hardwood grades made
from maple, aspen and birch. High-yield pulps have a lower tensile and tear
strength than kraft pulps, but they offer advantages on bulk and opacity. They
compete against other hardwood or short fibre grades, with Bleached Eucalyptus
Kraft (BEK) being the most prominent.

The following summarizes the annual operating level or capacity
of each facility:

|HIGH-YIELD PULP                          |  | tonnes  | 
|---------------------------------------- |  | ------- | 
|Hardwood high-yield - Temiscaming, QC    |  | 315,000 | 
|Hardwood high-yield - Matane, QC         |  | 250,000 | 
|Hardwood
      high-yield - Chetwynd, BC |  | 240,000 | 
|TOTAL                                    |  | 805,000 | 

Total 2011 shipments of 664,300 tonnes include 57,500 tonnes of
high-yield pulp consumed by the Companys paperboard operations as compared to
56,700 tonnes in the prior year.

Total sales for the High-Yield Pulp segment were $378 million,
a decrease of $17 million from the prior year. After eliminating internal sales,
the High-Yield Pulp segment generated 20% of Company consolidated sales,
unchanged from the prior year. The High-Yield Pulp segment is more export
oriented than the other business segments within the Company. In 2011, 99% of
consolidated pulp sales were generated outside of Canada and the U.S., as
compared to 98% in the prior year. China alone accounted for 49% of sales
compared to 57% in the prior year.

Sales
    
    
    
    
    
    Shipments
    
    
    
    
    
    Selling prices($ millions)
    
    
    
    
    
    (000 units
    )
    
    
    
    
    ($ / unit)2010
    
    
    2011
    
    
    2010
    
    
    2011
    
    
    2010
    
    
    2011Hardwood high-yield
    
    395
    
    
    378
    
    
    615.6
    
    
    664.3
    
    
    642
    
    
    569Internal sales
    
    (28
    )
    
    (30
    )
    
    (56.7
    )
    
    (57.5
    )
    
    494
    
    
    522Consolidated sales
    
    367
    
    
    348
    
    
    558.9
    
    
    606.8
    
    
    657
    
    
    573


Tembec Financial Report 2011 19

---

Managements Discussion and Analysis

MARKETS

The Company markets its pulp on a world-wide basis, primarily
through its own sales force. Sales offices are maintained in Toronto, Canada;
Dax, France; and Beijing, China.

The shipments to capacity ratio for high-yield pulp was at 83%
versus 76% in the prior year. These are relatively low percentages, which are
not indicative of a strong market. Fiscal2010 began with weak prices and demand.
As a result, the Company idled the Chetwynd mill for 110 days, resulting in
67,200 tonnes of market downtime. The mill was restarted in January 2010 as
demand and pricing were on an upturn. By summer, prices were more than $100 per
tonne higher than at the beginning of the fiscal year. The average selling price
for third party sales was $657 per tonne. Inventory levels of finished goods
ended the prior fiscal year at 26 days, indicative of a relatively balanced
market. However, as fiscal 2011 began, new high-yield pulp capacity was started
in China, which had a negative impact on the market in terms of pricing. The
effect was grade specific to high-yield pulp as other hardwood grades, such as
BEK, were not as severely impacted. As the fiscal year progressed, prices
continued to decline, compounded by a stronger Canadian dollar, which averaged
US $1.013 in fiscal2011, a 5.5% increase versus the prior year. The combined
effect reduced prices by approximately $100 per tonne during the fiscal year.
The average selling price for third party sales was $573 per tonne, a decrease
of $84 per tonne from the prior year average. Inventory levels ended the year at
15days of supply. The abnormally low level of inventory was related to a labour
strike that occurred at the Matane mill in the second half of fiscal 2011. The
impact of the strike is analysed in the section that follows.

QUARTERLY PRICES  HIGH-YIELD(US $ per
tonne)



20Tembec Financial Report 2011

---

Managements Discussion and Analysis

OPERATING RESULTS

The following summarizes EBITDA variances by major element:

Variance - favourable (unfavourable)InventoryMix &
    
    
    Freight
    
    
    Mill
    
    
    NRV(in
      millions of dollars)
    
    Price
    
    
    volume
    
    
    and SGA
    
    
    costs
    
    
    adjustments
    
    
    Other
    
    
    TOTALHigh-yield pulps
    
    (53
    )
    
    (6
    )
    
    5
    
    
    5
    
    
    (4
    )
    
    2
    
    
    (51
    )


Fiscal 2011 EBITDA was negative $4 million compared to positive
$47million in the prior year. The previously noted decrease in pulp selling
prices decreased EBITDA by $53million. While costs were relatively unchanged
across the combined three mills, there were significant variances at individual
mills. At Chetwynd, the mill had experienced significant downtime in the prior
year. In addition to the previously noted 110-day market curtailment, the mill
lost 29days in June2010 related to a fire at the mill site. In fiscal2011, the
mill experienced full operations and production increased by 85,600 tonnes.
Cost of manufacturing improved by $18 million year-over-year. The opposite
effect occurred at the Matane mill. In the prior year, the mill had experienced
fulloperations. In the most recent year, a labour strike began in May 2011 and
resulted in 127days of downtime before the mill resumed operations in
mid-September 2011. The mill produced 102,200tonnes less than in the prior year
and its costs increased by $12 million.

The three pulp mills purchased approximately 682,800 bone dry
tonnes of wood chips in fiscal 2011, up from 621,100 in the prior year. Of this
amount, approximately 19% was supplied by the Forest Products segment, compared
to 14% in the prior year. The remaining requirements were purchased from third
parties under contracts and agreements of various durations.

Overall, lower prices reduced profitability with a negative
EBITDA margin of 1.1% compared to a positive margin of 11.9% in the prior
year.

The following summarizes operating results variances by major
element: Variance

|                               |  |      |  |  |      |   |  | favourable     |  
|------------------------------ |  | ---- |  |  | ---- | - |  | -------------- | -
|(in
      millions of dollars) |  | 2010 |  |  | 2011 |   |  | (unfavourable) |  
|EBITDA                         |  | 47   |  |  | (4   | ) |  | (51            | )
|Depreciation and amortization  |  | 10   |  |  | 10   |   |  |               |  
|Operating earnings (loss)      |  | 37   |  |  | (14  | ) |  | (51            | )

The High-Yield Pulp segment generated an operating loss of $14
million during the most recently completed fiscal year, compared to operating
earnings of $37 million in the prior year. The previously noted decrease in
EBITDA led to the weaker operating results.

Tembec Financial Report 2011 21

---

Managements Discussion and Analysis

|PAPER                                |  |      |    |  |      | 
|------------------------------------ |  | ---- | -- |  | ---- | 
|(in millions of dollars)             |  |      |    |  |      | 
|                                     |  | 2010 |    |  | 2011 | 
|Consolidated sales                   |  | 348  |    |  | 339  | 
|EBITDA                               |  | (2   | )  |  | 28   | 
|EBITDA margin                        |  | (0.6 | )% |  | 8.3% | 
|Depreciation and amortization        |  | 3    |    |  | 3    | 
|Other items                          |  | 7    |    |  |     | 
|Operating earnings (loss)            |  | (12  | )  |  | 25   | 
|Identifiable assets (excluding cash) |  | 123  |    |  | 119  | 

The Paper segment currently includes two paper manufacturing
facilities with a total of three paper machines. The mill located in
Kapuskasing, Ontario, produces newsprint on two machines. The facility located
in Temiscaming, Quebec, produces multiply coated bleached board on one machine.
The board mill is partially integrated with a high-yield pulp mill and also
consumes pulp manufactured by the Company at its British Columbia paper pulp
mill. In late fiscal2010, the Company announced the permanent closure of the
Pine Falls, Manitoba, newsprint mill, removing 185,000tonnes of newsprint
capacity. A third newsprint machine at the Kapuskasing mill with an annual
capacity of 90,000tonnes has been idle for several years and is no longer
included in the capacity figures. The total capacity of the Paper segment is now
420,000tonnes. Prior to April2010, the Paper segment also included the financial
results of a hydro-electric dam located in Smooth Rock Falls, Ontario. The dam
was sold on March 29, 2011.

The following summarizes the products and operating level or
capacity of each facility:

|COATED BLEACHED BOARD |  | tonnes  | 
|--------------------- |  | ------- | 
|Temiscaming, QC       |  | 180,000 | 
|                      |  |         | 
|NEWSPRINT             |  |         | 
|Kapuskasing, ON       |  | 240,000 | 
|                      |  |         | 
|TOTAL                 |  | 420,000 | 

Coated bleached board shipments represented 42% of Paper
segment shipments in fiscal 2011, unchanged from the prior year. As a percentage
of total segment sales, coated bleached board represented 57% of sales compared
to 59% in the prior year.

Newsprint shipments represented 58% of Paper segment shipments
in fiscal 2011, unchanged from the prior year. In terms of total segment sales,
newsprint represented 42% of sales compared to 40% in the prior year.

Sales for the Paper segment totalled $339 million, as compared
to $348 million in the prior year. The segment generated 19% of Company
consolidated sales, the same as in fiscal 2010. The focus of the paper business
is North America, which accounted for 92% of consolidated sales in 2011,
compared to 95% in the prior year. The U.S. alone accounted for 74% of sales in
fiscal 2011, unchanged from the prior year.

22Tembec Financial Report 2011

---

Managements Discussion and Analysis

Sales
    
    
    
    
    
    Shipments
    
    
    
    
    
    Selling prices($ millions)
    
    
    
    
    
    (000 units
    )
    
    
    
    
    ($ / unit)2010
    
    
    2011
    
    
    2010
    
    
    2011
    
    
    2010
    
    
    2011Coated bleached board (rolls and sheets)
    
    204
    
    
    194
    
    
    173.0
    
    
    165.2
    
    
    1,179
    
    
    1,174Newsprint
    
    141
    
    
    143
    
    
    236.0
    
    
    228.5
    
    
    597
    
    
    626Electricity sales
    
    3
    
    
    2Consolidated sales
    
    348
    
    
    339
    
    
    409.0
    
    
    393.7


MARKETS

The benchmark for coated bleached board (16 point) averaged US
$1,150 per short ton in fiscal 2011, a US $98 per short ton increase over the
prior year. A favourable pricing trend was supported by good market demand. The
benchmark began the year at US $1,110 per short ton. It increased to US $1,150
in October 2010 and remained at that level for the next 12months. The shipments
to capacity ratio for coated bleached board was 92% in fiscal 2011 compared to
96% in the prior year. These high percentages reflect the very strong market
fundamentals of the North American coated bleached board market over the last
two years. The small decrease in ratio was due to inventory reduction in the
prior year as production volumes cannot sustain a ratio above 95%. The board
mill operated at full capacity in both fiscal 2010 and fiscal 2011, with no
market downtime taken in either year. While US $ reference prices increased, the
impact was offset by the negative currency impact of the stronger Canadian
dollar. As a result, Canadian dollar prices were relatively unchanged
year-over-year. Inventory levels at year-end were at 52 days. This is a normal
level given the product sales mix, which includes both rolls and sheets.

The benchmark newsprint grade (48.8 gram  East Coast) averaged
US $640 per tonne in fiscal 2011, a US $67 per tonne increase over the prior year. The increase was due to
improved pricing that occurred in the latter half of fiscal 2010. The benchmark
began the current year at US $638 per tonne. It increased to US $640 per tonne
in October 2010 and remained at that level for the next 12 months. The shipments
to capacity ratio for newsprint was 69% as compared to 46% in the prior year.
The increase in the ratio was not due to increased shipments as they declined by
7,500 tonnes year-over-year. It was caused by a 185,000 tonnes capacity
reduction related to the permanent closure of the Pine Falls newsprint mill that
was announced at the end of the prior fiscal year. The relatively low ratios are
a reflection of the relatively weak North American newsprint market. In response
to continued declines in demand, the Company continued to curtail production. A
newsprint machine at the Kapuskasing mill remained idle for the entire year,
removing approximately 91,000tonnes of production. This compares to 273,000
tonnes in the prior year, which included the same machine in Kapuskasing and the
entire capacity of the idled mill in Pine Falls, which was removed from the
current year figures as a result of its closure. While US $ reference prices
increased by US $67 per tonne, the impact was partially offset by the negative
impact of the stronger Canadian dollar. As a result, Canadian dollar prices
increased by $29 per tonne. Inventory levels at year-end were at 14 days, a
normal level for the newsprint mill.

|QUARTERLY PRICES  COATED BLEACHED BOARD | QUARTERLY PRICES  NEWSPRINT
|---------------------------------------- | ----------------------------
|(US $ per short ton)                     | (US $ per tonne)            
|                                         |                             

Tembec Financial Report 2011 23

---

Managements Discussion and Analysis

OPERATING RESULTS

The following summarizes EBITDA variances by major element:

Variance - favourable (unfavourable)InventoryMill
    
    
    Mix &
    
    
    NRV(in millions of
      dollars)
    
    Price
    
    
    costs
    
    
    volume
    
    
    adjustments
    
    
    Other
    
    
    TOTALCoated bleached board
    
    -
    
    
    (1
    )
    
    (3
    )
    
    
    
    
    1
    
    
    (3
    )Newsprint
    
    6
    
    
    17
    
    
    
    
    
    (2
    )
    
    1
    
    
    22Other segment
      items
    
    -
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    116
    
    
    16
    
    
    (3
    )
    
    (2
    )
    
    13
    
    
    30


Fiscal 2011 EBITDA was $28 million compared to negative $2
million in the prior year. Higher newsprint prices increased EBITDA by $6
million. Manufacturing costs at the newsprint mill also declined by $17 million,
primarily as a result of lower energy costs. The operation benefited from lower
electricity costs as new industrial user rates were implemented at the beginning
of the 2011 calendar year. The favourable $11 million variance in other segment
items relates to the permanent closure of the Pine Falls newsprint mill, which
had negative EBITDA of $11 million in the prior year. Custodial and legacy costs
for the facility were $3 million in fiscal 2011 and were included in the
Corporate segment.

The coated bleached board mill utilizes a combination of
chemical kraft and high-yield pulps to produce a three-ply sheet. During fiscal
2011, the mill utilized 15,300 tonnes of NBSK supplied by the Companys
Skookumchuck pulp mill as compared to 17,700 tonnes in the prior year. The mill
also consumed 57,500 tonnes of high-yield pulp supplied by the Temiscaming mill
versus 56,700 tonnes in fiscal 2010. The balance of pulp requirements is
purchased from third parties.

The newsprint mill utilizes virgin fibre, primarily in the form
of wood chips. During fiscal 2011, the operations purchased 257,400 bone dry
tonnes of virgin fibre, of which approximately 81% was internally sourced. In
the prior year, 244,200 bone dry tonnes of virgin fibre were purchased, with 68%
being sourced internally.

Overall, the higher news print prices and the lower costs
increased EBITDA margins from negative 0.6% to positive 8.3%.

The following summarizes operating results variances by major
element:

|                               |  |      |   |  |      |  |  | Variance       | 
|------------------------------ |  | ---- | - |  | ---- |  |  | -------------- | 
|                               |  |      |   |  |      |  |  | favourable     | 
|(in
      millions of dollars) |  | 2010 |   |  | 2011 |  |  | (unfavourable) | 
|EBITDA                         |  | (2   | ) |  | 28   |  |  | 30             | 
|Depreciation and amortization  |  | 3    |   |  | 3    |  |  |               | 
|Other items                    |  | 7    |   |  |     |  |  | 7              | 
|Operating earnings (loss)      |  | (12  | ) |  | 25   |  |  | 37             | 

The Paper segment generated operating earnings of $25 million
compared to an operating loss of $12 million in the prior year. In addition to
the previously noted improvement in EBITDA, the segment was impacted by other
items. In the prior year, the Company had absorbed a charge of $7 million
related to the permanent closure of the Pine Falls newsprint mill.

24Tembec Financial Report 2011

---

Managements Discussion and Analysis

|CORPORATE                           |  |      |  |  |      |  
|----------------------------------- |  | ---- |  |  | ---- | -
|(in millions of dollars)            |  |      |  |  |      |  
|                                    |  | 2010 |  |  | 2011 |  
|General and administrative expenses |  | 21   |  |  | 19   |  
|Share-based compensation            |  | 2    |  |  | 2    |  
|Other items                         |  | 20   |  |  | (3   | )
|Depreciation and amortization       |  |     |  |  | 1    |  
|Operating expenses                  |  | 43   |  |  | 19   |  

The Company incurred a $2 million share-based compensation
expense in the current year, unchanged from the prior year. The expense relates
to two long-term incentive programs maintained by the Company. Senior executives
participate in a Performance Conditioned Restricted Share Unit (PCRSU) plan.
The PCRSUs have a defined vesting period and performance conditions that will
ultimately determine the amount of PCRSUs that will vest and be paid to
participating employees. Non-executive members of the Board of Directors receive
a portion of their fees in the form of Deferred Share Units (DSU). The DSUs
vest at specified dates. Details regarding both of these plans can be found in
note 9 of the 2011 annual audited financial statements and in the Management
Information Circular. The period expense for these two plans consists of normal
periodic variation in the number of units based on anticipated or normal
vesting, but is also impacted by the changes in the value of the Companys share
price, as the PCRSUs and DSUs have the same value as one common share.

The Corporate segments other items include expenses relating
to several permanently idled facilities. The costs include legal costs, site
security and custodial. These legacy costs totalled $8 million in fiscal 2011,
unchanged from the prior year. The current year other items also includes a
gain of $8million related to the filing of Tembec USA LLC under Chapter 7 of the
Bankruptcy Code of the United States. The Company reduced its accrued benefit
obligation by this amount. It also includes a $3 million gain related to the
sale of its hydro-electric generating facilities located in Smooth Rock Falls,
Ontario. The prior year included a non-recurring charge of $12 million relating
to the St. Francisville, Louisiana, coated paper mill. The mill property and
equipment were sold in April 2009. A portion of the consideration included two
US $5 million interest-bearing notes. In January 2010, the purchaser filed for
protection under the U.S. Bankruptcy Code. Subsequently, the assets were sold at
auction. Based on the amount of the winning bid, it was unlikely that the
Company would recover any portion of the interest-bearing notes. As a result,
the Company recorded a charge of $12 million. The aforementioned amount included
accrued interest as well as certain other unsecured claims.

Tembec Financial Report 2011 25

---

Managements Discussion and Analysis

Non-operating Items

|INTEREST, FOREIGN EXCHANGE AND OTHER |  |      |  |  |      |  
|------------------------------------ |  | ---- |  |  | ---- | -
|(in millions of dollars)             |  |      |  |  |      |  
|                                     |  | 2010 |  |  | 2011 |  
|Interest on indebtedness             |  | 30   |  |  | 32   |  
|Fees - new working capital facility  |  |     |  |  | 2    |  
|Debt prepayment premium              |  | 6    |  |  |     |  
|Foreign exchange items               |  | 14   |  |  | (1   | )
|Bank
      charges and other         |  | 2    |  |  | (1   | )
|                                     |  | 52   |  |  | 32   |  

There were no significant interest variances. The major portion
of the prior year interest on debt related to a US $300 million term loan. This
credit facility was repaid in August 2010. The Company incurred a $6 million
debt prepayment premium. The Company issued US $255 million of senior secured
notes maturing in December 2018. In March 2011, the Company entered into a new
working capital facility and incurred $2million in expenses. Foreign exchange
items relate primarily to gains or losses on the translation of US $ net
monetary assets. When the Canadian dollar strengthens versus the US dollar, as
was the case during the prior year, losses are generated.

|TRANSLATION OF FOREIGN DEBT
|---------------------------

During fiscal 2011, the Company recorded a loss of $1 million
on the translation of its US $ denominated debt as the relative value of the
Canadian dollar decreased from US $0.975 to US $0.971. There was no gain or loss
on the translation of euro-denominated debt as the value of the euro versus the
Canadian dollar was relatively unchanged.

During fiscal 2010, the Company recorded a gain of $19 million
on the translation of its US $ denominated debt as the relative value of the
Canadian dollar increased from US $0.916 to US$0.975. The Company recorded a
gain of $8 million on the translation of its euro-denominated debt as the
relative value of the euro versus the Canadian dollar decreased from C $1.602 to
C $1.384.

|INCOME TAXES
|------------

During fiscal 2011, the Company recorded an income tax expense
of $19 million on earnings before income taxes and non-controlling interest of
$16 million. The income tax expense reflected a $15 million unfavourable
variance versus an anticipated tax expense of $4 million based on the Companys
effective tax rate of 27.8%. The current year absorbed an $11million unfavourable change in valuation allowance. Based on past financial performance,
future income tax assets of the Companys Canadian operations have not been
recognized as it has not been determined that the future realization of these
assets is more likely than not to occur.

During fiscal 2010, the Company recorded an income tax recovery
of $15 million on earnings before income taxes and non-controlling interest of
$39 million. This income tax recovery reflected a $27 million favourable
variance versus an anticipated income tax expense of $12 million based on the
Companys effective tax rate of 29.8%. The change in valuation allowance
increased the recovery by $20 million. The most significant item included in the
above was a $19 million favourable adjustment relating to the recognition of
future tax assets of the Companys remaining operations in France as it was
determined that the future realization of these assets was more likely than
not to occur. The non-taxable portion of the gain on consolidation of foreign
integrated subsidiaries increased the income tax recovery by $10 million.

26Tembec Financial Report 2011

---

Managements Discussion and Analysis

Net Earnings (Loss)

The Company generated a net loss of $3 million or $0.03 per
share for the year ended September 24, 2011, compared to net earnings of $52
million or $0.52 per share for the year ended September 25, 2010. As noted
previously, the Companys financial results were impacted by certain specific
items. The following table summarizes the impact of these items on the reported
financial results. The Company believes it is useful supplemental information as
it provides an indication of results excluding the specific items. This
supplemental information is not intended as an alternative measure for net earnings as
determined by Canadian GAAP. The table below contains one recurring item, namely
the gain or loss on translation of foreign debt. Because the Company has a
substantial amount of US$ denominated debt, relatively minor changes in the
value of the Canadian dollar versus the US dollar can lead to large unrealized
periodic gains or losses. As well, this item receives capital gain/loss tax
treatment and is not tax-affected at regular business income rates.

|                                                  |  | Year ended         |   |  | Year ended         |  
|------------------------------------------------- |  | ------------------ | - |  | ------------------ | -
|                                                  |  | September 25, 2010 |   |  | September 24, 2011 |  
|                                                  |  | $ millions         |   |  | $ per share        |  
|Net earnings (loss) as reported                   |  |                    |   |  |                    |  
|- in accordance with GAAP                         |  | 52                 |   |  | 0.52               |  
|Specific items (after-tax):                       |  |                    |   |  |                    |  
|Gain on translation of foreign debt               |  | (23                | ) |  | (0.23              | )
|Gain on derivative financial
      instruments    |  |                   |   |  |                   |  
|Gain on sale of land                              |  | (1                 | ) |  | (0.01              | )
|Write-down of notes receivable                    |  | 10                 |   |  | 0.10               |  
|Sale of French pulp mills                         |  | (16                | ) |  | (0.16              | )
|Recognition of future tax asset                   |  |                    |   |  |                    |  
|- French operations                               |  | (19                | ) |  | (0.19              | )
|Pine Falls closure charge                         |  | 6                  |   |  | 0.06               |  
|Debt prepayment premium                           |  | 4                  |   |  | 0.04               |  
|Taschereau sawmill closure charge                 |  |                   |   |  |                   |  
|Cranbrook planer mill severance charge            |  |                   |   |  |                   |  
|Gain on Tembec USA LLC filing                     |  |                   |   |  |                   |  
|Gain on sale of Smooth Rock Falls hydro
      dam |  |                   |   |  |                   |  
|Costs for permanently idled facilities            |  | 6                  |   |  | 0.06               |  
|Net earnings (loss) excluding specific items      |  |                    |   |  |                    |  
|- not in accordance with GAAP                     |  | 19                 |   |  | 0.19               |  

Tembec Financial Report 2011 27

---

Managements Discussion and Analysis

Quarterly Financial Information(in
millions of dollars, except per share amounts)

2010
    
    
    2011Dec. 09
    
    
    March 10
    
    
    June 10
    
    
    Sept. 10
    
    
    Dec. 10
    
    
    March 11
    
    
    June 11
    
    
    Sept. 11Sales
    
    412
    
    
    476
    
    
    545
    
    
    444
    
    
    422
    
    
    452
    
    
    448
    
    
    421EBITDA
    
    4
    
    
    32
    
    
    60
    
    
    36
    
    
    11
    
    
    33
    
    
    32
    
    
    19Depreciation and amortization
    
    15
    
    
    15
    
    
    14
    
    
    12
    
    
    12
    
    
    11
    
    
    11
    
    
    11Other items
    
    (1
    )
    
    15
    
    
    (10
    )
    
    9
    
    
    3
    
    
    6
    
    
    (10
    )
    
    2Operating earnings (loss)
    
    (10
    )
    
    2
    
    
    56
    
    
    15
    
    
    (4
    )
    
    16
    
    
    31
    
    
    6Net earnings (loss) and comprehensive
      earnings (loss)
    
    (9
    )
    
    
    
    
    59
    
    
    2
    
    
    (12
    )
    
    7
    
    
    19
    
    
    (17
    )Basic and fully diluted net earnings (loss) in dollars per
      share
    
    (0.09
    )
    
    
    
    
    0.59
    
    
    0.02
    
    
    (0.12
    )
    
    0.07
    
    
    0.19
    
    
    (0.17
    )


|FOURTH QUARTER ANALYSIS
|-----------------------

The Company reported a net loss of $17 million or $0.17 per
share in the fourth quarter ended September 24, 2011, compared to net earnings
of $2 million or $0.02 per share in the same quarter of fiscal 2010. The
weighted average number of common shares outstanding was 100 million, unchanged
from the prior year.

Sales decreased by $23 million as compared to the same quarter
a year ago. Currency was unfavourable as the Canadian dollar averaged US $1.023,
a 6.3% increase from US $0.962 in the prior year quarter. Forest Products
segment sales increased by $8 million primarily as a result of higher shipments.
Dissolving and Chemical Pulp segment sales increased by $14 million due to
significantly higher prices. High-Yield Pulp segment sales decreased by $28
million due to lower shipments and prices. Paper segment sales decreased by $12
million due to lower shipments and prices.

EBITDA declined by $17 million over the prior year quarter.
Forest Products segment EBITDA declined by $5 million due primarily to higher
costs. Dissolving and Chemical Pulp segment EBITDA was unchanged, with higher
prices offsetting higher costs. High-Yield Pulp segment EBITDA declined by $22
million due mainly to lower prices. Paper segment EBITDA increased by $2 million because of lower costs. Corporate
expenses for the current quarter include a credit of $6 million relating to
share-based compensation. There was no charge for share-based compensation in
the prior year quarter.

The Company generated operating earnings of $6 million compared
to operating earnings of $15 million in the same quarter a year ago. The
previously noted decline in EBITDA was the main cause of the reduction in
operating earnings. The prior year quarter other items included a charge of
$7million related to the permanent closure of the Pine Falls, Manitoba,
newsprint mill. It also included a $2 million charge relating to legal costs,
site security and custodial costs for several permanently idled facilities. The
current year other items of $2million were also for costs related to
permanently idled facilities.

There were no significant interest variances. The expense
relates primarily to interest on the US $255 million senior secured notes
maturing in December 2018. Foreign exchange items relate primarily to gains or
losses on the translation of US$ net monetary assets. When the Canadian dollar
weakens versus the US dollar, as was the case during the current quarter, gains
are generated.

28Tembec Financial Report 2011

---

Managements Discussion and Analysis

During the September 2011 quarter, the Company recorded a loss
of $11 million on the translation of its US $ denominated debt as the relative
value of the Canadian dollar decreased from US $1.013 to US $0.971. The Company
did not record a gain or loss on the translation of its euro-denominated debt as
the relative value of the euro versus the Canadian dollar decreased from C
$1.399 to C $1.392.

During the September 2010 quarter, the Company recorded a gain
of $3 million on the translation of its US $ denominated debt as the relative
value of the Canadian dollar increased from US $0.965 to US $0.975. The Company
recorded a loss of $2million on the translation of its euro-denominated debt as
the relative value of the euro versus the Canadian dollar increased from C
$1.283 to C $1.384.

During the September 2011 quarter, the Company recorded an
income tax expense of $7 million on a loss before income taxes and
non-controlling interest of $10 million. The income tax expense reflected a $10
million unfavourable variance versus an anticipated income tax recovery of $3
million based on the Companys effective tax rate of 27.8%. The current quarter
absorbed a $6 million unfavourable change in valuation allowance. Based on past
financial performance, future income tax assets of the Companys Canadian
operations have not been recognized as it has not been determined that the
future realization of these assets is more likely than not to occur.

During the September 2010 quarter, the Company recorded an
income tax expense of $4 million on earnings before income taxes and
non-controlling interest of $6 million. The income tax expense reflected a $2
million unfavourable variance versus an anticipated income tax expense of $2
million based on the Companys effective tax rate of 29.8%. The prior year
quarter absorbed a $2 million unfavourable change in valuation allowance.

The fourth quarter 2011 interim MD&A issued on November15,
2011, provides a more extensive analysis of items having impacted the Companys
fourth quarter financial results.

|SUMMARY OF QUARTERLY RESULTS
|----------------------------

On a sequential quarterly basis, sales and margins were
negatively impacted by lower lumber prices. While US$ lumber reference prices
were fairly stable, the strengthening of the Canadian dollar versus the US
dollar, increasing from US$0.945 in the December 2009 quarter to US$1.023 in the
September 2011 quarter, resulted in declining prices and margins for the
Companys Forest Products segment. Demand remained weak and the lumber shipments
to capacity ratio ranged from 44% to 59% over the last eight quarters. By
contrast, the Dissolving and Chemical Pulp segment experienced price increases
over the last eight quarters, resulting in improved profitability and margins.
The High-Yield Pulp segment saw prices increase over the four quarters of
fiscal 2010 and then decline over the four quarters of fiscal 2011. Here again,
currency was a negative factor. High-yield pulp margins were negative in the
last two quarters of fiscal 2011. The Paper segment had improving results driven
by higher newsprint prices and lower manufacturing costs.

The Companys financial performance and that of its
Forest Products segment for the last eight quarters were negatively impacted by
export taxes on lumber shipped to the U.S. Total amount incurred over the last
two years was $23 million.

The Company generated EBITDA of $227 million in the last eight
quarters. This represents a margin of approximately 6% on sales of $3.6 billion.
Financial performance was adversely affected by the difficult lumber market.
Depreciation and amortization expense totalled $101 million during this period.
The Company recorded other items having a net unfavourable impact of $14 million
over the last eight quarters.

Due to the stronger Canadian dollar, the Company recorded a
gain of $26 million on the translation of its foreign-denominated debt over the
last two years. However, the impact of the quarterly debt translation gains and
losses added considerable volatility to the financial results, with the impact
ranging from a gain of $16 million in the December 2009 quarter to a loss of $11
million in the September 2011 quarter.

Tembec Financial Report 2011 29

---

Managements Discussion and Analysis

Financial Position and Liquidity

|FREE
      CASH FLOW                                           |  |      |   |  |      |  
|-------------------------------------------------------------- |  | ---- | - |  | ---- | -
|(in millions of dollars)                                       |  |      |   |  |      |  
|                                                               |  | 2010 |   |  | 2011 |  
|Cash flow from operations before working
      capital changes |  | 58   |   |  | 20   |  
|Net
      fixed asset additions                                |  | (25  | ) |  | (55  | )
|Free
      cash flow (negative)                                |  | 33   |   |  | (35  | )

Cash flow from operations before working capital changes in
fiscal 2011 was $20 million, compared to $58 million from the prior year. The
decline in EBITDA accounted for the decline in cash flow. In fiscal 2011,
non-cash working capital items generated $49 million as compared to $20 million generated in
the prior year. After allowing for net fixed asset additions of $55million, free
cash flow in fiscal 2011 was negative $35million compared to positive $33
million in the prior year.

|CAPITAL SPENDING                         |  |      |  |  |      | 
|---------------------------------------- |  | ---- |  |  | ---- | 
|(in millions of dollars)                 |  |      |  |  |      | 
|                                         |  | 2010 |  |  | 2011 | 
|Forest Products                          |  | 7    |  |  | 10   | 
|Dissolving and Chemical Pulp             |  | 12   |  |  | 38   | 
|High-Yield Pulp                          |  | 3    |  |  | 3    | 
|Paper                                    |  | 3    |  |  | 4    | 
|Net
      fixed asset additions          |  | 25   |  |  | 55   | 
|As a % of total sales                    |  | 1.2% |  |  | 2.9% | 
|As a
      % of fixed asset depreciation |  | 45%  |  |  | 122% | 

In response to relatively low EBITDA and operating losses in
certain business segments brought on by challenging market conditions, the
Company has continued to limit capital expenditures. The Company estimates that
annual capital expenditures of $35 million to $40 million are required to
adequately maintain its current facilities. During fiscal 2011, net fixed asset
additions totalled $55 million compared to $25 million in the prior year. The
focus of the Companys capital expenditures was in the Dissolving and
Chemical Pulp segment, with all three mills benefiting from increased investment.
A total of $10 million was spent at the Tartas dissolving pulp mill to begin the installation of an 8-megawatt
electrical turbine. An additional $11 million will be spent in fiscal2012 to
complete the installation. Current start-up date is June2012. An amount of $6
million was spent at the Skookumchuck NBSK mill to effect a major repair on the
recovery boiler. The repairs are now complete and will result in higher
productivity at the mill in fiscal 2012. A further $4million was spent at the
Temiscaming dissolving pulp mill to erect a new brown stock tank. An estimated
$3 million will be spent in the first half of fiscal 2012 to complete the
project, with a forecast start-up date of April 2012.

30Tembec Financial Report 2011

---

Managements Discussion and Analysis

In October 2009, the Company was advised that it had qualified
for $24 million of credits under the federal governments Pulp and Paper Green
Transformation Program. The credits can be used to finance
capital projects that generate environmental benefits, including investments in
energy efficiency or the production of renewable energy from forest biomass. To
date, the Company has obtained approval for projects that will utilize the entire
$24million of available credits. The Company anticipates that it will spend the
full $24million within the programs specified time limits.

|ACQUISITIONS, INVESTMENTS AND DIVESTITURES
|------------------------------------------

On May 7, 2010, the Company announced that its European
subsidiary, Tembec SAS, had completed the sale of two kraft pulp mills located
in Tarascon and Saint-Gaudens, France. The purchaser paid the equivalent of
$86million in cash including preliminary working capital adjustments and assumed
$41million of debt, for total consideration of $127million. As a result of the
sale, the Company recorded a pre-tax gain of $12million in the fiscal2010
financial results.

On September 2, 2010, the Company announced the permanent
closure of its Pine Falls, Manitoba, newsprint mill. As a result, a charge of $7
million was recorded in the fiscal2010 financial results.

O n February 21, 2011, the Company announced the permanent
closure of its Taschereau, Quebec, SPF sawmill. As a result, a charge of $3
million was recorded in the fiscal 2011 financial results.

On March 29, 2011, the Company announced the sale of its
hydro-electric generating assets located in Smooth Rock Falls, Ontario. The
purchaser paid $16 million in cash for the assets. As a result, the Company
recorded a gain of $3 million in the fiscal 2011 financial results.

On April 25, 2011, the Company announced that its non-operating
U.S. subsidiary, Tembec USA LLC, had filed a petition seeking relief under
Chapter 7 of the Bankruptcy Code of the United States. As a result of the
filing, the Company recorded a gain of $8 million relating to the reduction in
its consolidated accrued benefit obligation in the fiscal 2011 financial
results.

On November 25, 2011, the Company sold its Toronto, Ontario,
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 will result in
a charge of $2 million that w ill be recorded in the Company s December 2011
quarterly financial results.

On November 28, 2011, the Company announced that it had reached
an agreement to sell its British Columbia sawmills and related forestry
operations for proceeds of $60 million. The transaction is expected to close in
the March 2012 quarter, at which time an estimated gain of $16 million will be
recorded.

|FINANCING ACTIVITIES
|--------------------

NET DEBT TO TOTAL CAPITALIZATION



Net debt to total capitalization stood at 27% at September2011,
a decrease of 1% from 28% at September 2010. As part of its long-term strategy,
the Company has resolved to maintain its percentage of net debt to total
capitalization to 40% or less. The objective of the plan is to keep a strong
balance sheet and maintain the ability of the Company to access capital markets
at favourable rates. The Company remains committed to this strategy.

Tembec Financial Report 2011 31

---

Managements Discussion and Analysis

|LONG-TERM DEBT                                                  |  |      |  |  |      | 
|--------------------------------------------------------------- |  | ---- |  |  | ---- | 
|(in millions of dollars)                                        |  |      |  |  |      | 
|                                                                |  | 2010 |  |  | 2011 | 
|Tembec Industries - US $255 million 11.25%
      senior secured |  |      |  |  |      | 
|notes due December 2018                                         |  | 261  |  |  | 262  | 
|Tembec Inc. - 6% unsecured notes - September
      2012         |  | 9    |  |  | 5    | 
|Tembec French operations                                        |  | 21   |  |  | 25   | 
|Kirkland Lake Engineered Wood Products Inc.                     |  | 8    |  |  | 8    | 
|Other debt                                                      |  | 2    |  |  | 2    | 
|Total long-term debt                                            |  | 301  |  |  | 302  | 
|Less
      unamortized financing costs                          |  | 13   |  |  | 13   | 
|                                                                |  | 288  |  |  | 289  | 
|Current portion included in above                               |  | 17   |  |  | 18   | 

As part of the financial recapitalization that occurred in
February 2008, the Company entered into a loan agreement with various lenders
for a non-revolving term loan of US $300million due February 28, 2012. The
facility was secured by a charge on the assets of the Companys material North
American operations, including a first priority charge on all assets except
receivables and inventories, where it had a second priority charge. In August
2010, the Company completed a private offering of US $255 million of 11.25%
senior secured notes maturing in December 2018. The notes were sold in a private
offering to qualified institutional buyers as defined in Rule 144A under the
U.S. Securities Act of 1933 and outside the U.S. in reliance on Regulation S
under the Securities Act. The notes were subsequently registered with the SEC on
March31, 2011. The notes are senior secured obligations of the Company, secured
by a first priority lien on the majority of the property and fixed assets of the
Company. They are secured by a second priority lien on accounts receivable,
inventories and certain intangibles. The net proceeds of the offering, together
with cash on hand, were used to repay all outstanding indebtedness under the
Companys existing US $300 million term loan facility maturing in February 2012,
including related fees, expenses and a 2% prepayment premium.

As part of the financial recapitalization of 2008, the Company
issued $18 million of 6% unsecured notes having a maturity of September 30,
2012. These notes are subject to an amortization schedule and an amount of $4
million was repaid in fiscal 2011, compared to $3 million in the prior year.

The debt of the French operations relates to the Companys
dissolving pulp mill. The increase in debt relates to new borrowings to install
an electrical turbine at the facility. The project was discussed previously in
the capital spending section.

Pursuant to the previously noted issuance of the 2018 senior
secured notes, Moodys Investors Service (Moodys) assigned a B3 rating to the
new long-term debt and the same level for the Companys corporate credit rating.
Standard and Poors (S&P) assigned a B- rating to the senior secured notes
as well as the Companys corporate credit rating. Both Moodys and S&P have
a stable outlook with respect to their ratings. There was no change in the
ratings in fiscal 2011.

At the end of September 2011, the Company had total cash of
$105 million (including cash held in trust) plus unused operating lines of $124
million. At the end of September 2010, the Company had total cash of $74 million
and unused operating lines of $100 million. The Company defines operating
lines to include loans of various durations, which are secured by charges on
accounts receivable and/or inventories. Operating lines are used primarily to
fund short-term requirements associated with both seasonal and cyclical
inventory increases, which can occur in the Companys business segments. The
Company would not normally draw on the operating lines to fund capital
expenditures or normal average working capital requirements. The operating lines
are established across multiple entities and jurisdictions to ensure they meet
the needs of the various operating units.

32Tembec Financial Report 2011

---

Managements Discussion and Analysis

The following table summarizes the unused operating lines at
the end of the last two fiscal years:

|OPERATING
      LINES            |  |      |   |  |      |  
|-------------------------------- |  | ---- | - |  | ---- | -
|(in millions of dollars)         |  |      |   |  |      |  
|                                 |  | 2010 |   |  | 2011 |  
|Borrowing base                   |  | 212  |   |  | 186  |  
|Less: availability
      reserve |  | (76  | ) |  | (22  | )
|Net availability                 |  | 136  |   |  | 164  |  
|Outstanding letters of credit    |  | (35  | ) |  | (34  | )
|Amount drawn                     |  | (1   | ) |  | (6   | )
|Unused amount                    |  | 100  |   |  | 124  |  

As part of the financial recapitalization that occurred in
February 2008, the Company negotiated a $205 million revolving working capital
or asset-based loan (ABL) facility maturing in December 2011. The ABL was
subject to a permanent availability reserve of $25 million. This amount would
increase to $35 million if the Companys trailing 12-month EBITDA fell below $80
million. The facility had a first priority charge over the receivables and
inventories and a second priority charge over the remainder of the assets of the
Companys significant North American operations. As part of the long-term debt
refinancing that occurred in August 2010, the ABL lenders sought and obtained an
increase of US$50million to the availability reserve. In March 2011, the Company
entered into a new five-year $200million ABL expiring in February 2016. The new
ABL effectively replaced the previously noted $205 million ABL. The new ABL has
a first priority charge over the receivables and inventories of the Companys
Canadian operations. The facility is subject to a permanent availability reserve
of $15 million. This amount is increased to $25 million if the Companys
trailing 12-month EBITDA falls below $60 million. There is also a variable
reserve, which totalled $7 million as at the end of fiscal 2011.

The outstanding letters of credit constitute security for
various operating items, principally the unfunded portion of supplementary
retirement plans, future landfill closure liabilities and performance guarantees
related to electricity generation agreements. The Company does not have any
other significant off-balance sheet arrangements.

The French operations are supported by receivable factoring
agreements. As such, the borrowing base fluctuates periodically, depending on
shipments and cash receipts.

|COMMON SHARES                      |      |     
|---------------------------------- | ---- | ----
|(in millions)                      |      |     
|                                   | 2010 | 2011
|Shares outstanding
      - opening | 100  | 100 
|Shares outstanding
      - ending  | 100  | 100 

There were no shares issued in fiscal 2010 and fiscal 2011.

There are currently 11,093,943 outstanding warrants
(unchanged from the prior year). The warrants are convertible into an equal
amount of common shares expiring February 29, 2012. They shall be deemed to be
exercised and shall be automatically converted into common shares of the Company
when the 20-day volume-weighted average trading price of a single common share
reaches or exceeds $12.00 or immediately prior to any transaction that would
constitute a change of control at a purchase price per common share equal to at
least $12.00.

In addition to the previously noted warrants, an additional
122,020 shares may be issued pursuant to options granted under the prior
Long-Term Incentive Plan (LTIP). The exercise price of the options ranges from
$16.61 per share to $248.29 per share with expiry dates from 2012 to 2016. As at
September 24, 2011, all of the options were exercisable.

Tembec Financial Report 2011 33

---

Managements Discussion and Analysis

Financial Instruments and Contractual
Obligations

|FINANCIAL ASSETS
      AND LIABILITIES          |  |                    |  |  |            | 
|----------------------------------------------- |  | ------------------ |  |  | ---------- | 
|(in millions of dollars)                        |  |                    |  |  |            | 
|                                                |  | September 24, 2011 | 
|                                                |  | Carrying value     |  |  | Fair value | 
|Financial assets                                |  |                    |  |  |            | 
|Cash and cash equivalents                       |  | 99                 |  |  | 99         | 
|Cash held in trust                              |  | 6                  |  |  | 6          | 
|Accounts receivable                             |  | 182                |  |  | 182        | 
|Loans receivable                                |  | 24                 |  |  | 24         | 
|Financial liabilities                           |  |                    |  |  |            | 
|Operating bank loans                            |  | 6                  |  |  | 6          | 
|Accounts payable and accrued charges            |  | 254                |  |  | 254        | 
|Interest payable                                |  | 8                  |  |  | 8          | 
|Long-term debt (including current portion)      |  | 289                |  |  | 294        | 
|Pension and other
      benefit net liabilities |  | 153                |  |  | 208        | 

The carrying values for cash, cash equivalents, cash held in
trust, accounts receivable, loans receivable, operating bank loans, accounts
payable and accrued charges, and interest payable approximate their fair values
due to the near-term maturity of these instruments.

The fair value of the long-term debt is $5 million higher than
its carrying value. Unamortized financing costs increased the fair value by $13
million. This was partially offset by an $8 million decrease as the Companys US
$255 million senior secured notes were trading below par at year-end.

The $55 million difference in net liabilities of pension and
other benefit plans relates to $41 million of unamortized net actuarial losses,
$5 million of unamortized past service costs and $9million of employer
contributions made after June 30, 2011, the measurement date.

|FINANCIAL RISKS
|---------------

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. 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. Bad debt
expense has not been significant in the past. The allowance for doubtful
accounts at September 2011 was nil, compared to $1 million at the end of the
prior year. The Company may require payment guarantees, such as letters of
credit, or obtain credit insurance coverage.

34Tembec Financial Report 2011

---

Managements Discussion and Analysis

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 and seasonal working
capital requirements, which would require approximately $150 million to $200
million of liquidity. As noted previously, the Company had total cash of $105
million plus unused operating lines of $124 million as at September 24,
2011.

Foreign currency risk

This item is discussed in detail in a subsequent section of the
MD&A, Significant Risks and Uncertainties.

Interest rate risk

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. This will have little impact on the Companys financial results
since the majority of the Companys debts are at fixed interest rates.

Commodity price and operational risk

These items are discussed in detail in a subsequent section of
the MD&A, Significant Risks and Uncertainties.

CONTRACTUAL
      OBLIGATIONS(in millions of dollars)Total
    
    
    Within 1
    
    
    2 - 3
    
    
    4 - 5
    
    
    After 5year
    
    
    years
    
    
    years
    
    
    yearsLong-term debt
    
    302
    
    
    9
    
    
    12
    
    
    12
    
    
    269Interest on long-term debt
    
    219
    
    
    31
    
    
    61
    
    
    60
    
    
    67Operating leases
    
    14
    
    
    5
    
    
    5
    
    
    3
    
    
    1Purchase obligations
    
    172
    
    
    78
    
    
    59
    
    
    31
    
    
    4Pension obligations:Normal cost
    
    116
    
    
    7
    
    
    14
    
    
    14
    
    
    81Contractual
    
    149
    
    
    30
    
    
    55
    
    
    33
    
    
    31972
    
    
    160
    
    
    206
    
    
    153
    
    
    453


The table above shows the Companys contractual obligations as
at September 24, 2011. The Company has long-term debt with contractual
maturities and applicable interest. The operating lease obligations relate
primarily to property and equipment rentals entered into in the normal course of
business. Purchase obligations relate to ongoing normal commercial commitments
to purchase timber, wood chips, energy, chemicals and other operating inputs. They also include
outstanding obligations relating to capital expenditures. Pension obligations
have two components. The normal cost obligations are limited to a 16-year period
and are based on estimated future employee service for existing registered
defined benefit plans. Contractual pension obligations include estimated
solvency and going concern amortization payments.

Tembec Financial Report 2011 35

---

Managements Discussion and Analysis

2010 vs. 2009

|FINANCIAL SUMMARY                                            |  |       |   |  |       | 
|------------------------------------------------------------ |  | ----- | - |  | ----- | 
|(in millions of dollars, unless otherwise noted)             |  |       |   |  |       | 
|                                                             |  | 2009  |   |  | 2010  | 
|Sales                                                        |  | 1,786 |   |  | 1,877 | 
|EBITDA                                                       |  | (108  | ) |  | 132   | 
|Depreciation and amortization                                |  | 73    |   |  | 56    | 
|Other items                                                  |  | (3    | ) |  | 12    | 
|Operating earnings
      (loss)                              |  | (178  | ) |  | 64    | 
|Net earnings
      (loss)                                    |  | (214  | ) |  | 52    | 
|Basic and diluted
      earnings (loss) in dollars per share |  | (2.14 | ) |  | 0.52  | 
|Total assets (at
      year-end)                             |  | 1,366 |   |  | 1,104 | 
|Total long-term
      debt (at year-end) (1)                 |  | 402   |   |  | 288   | 

(1)includes current portion

Sales increased by $91 million as compared to fiscal 2009. The
increase was driven by higher pulp prices and shipments. Currency was
unfavourable as the Canadian dollar averaged US $0.960, a 13% increase from US
$0.850 in the prior year. Forest Products segment sales increased by $27 million
as a result of higher prices and shipments. Pulp segment sales increased by $142
million as a result of higher prices and shipments. Paper segment sales
decreased by $104 million due to lower shipments and prices.

EBITDA improved by $240 million over fiscal 2009. The
Forest Products segment EBITDA improved by $57 million because of lower costs and
improved pricing. The Pulp segment EBITDA increased by $218 million due to lower
manufacturing costs and higher prices. The Paper segment EBITDA decreased by $29
million due to lower selling prices, with lower costs providing a partial
offset.

36Tembec Financial Report 2011

---

Managements Discussion and Analysis

OPERATING EARNINGS
      (LOSS)(in millions of dollars)Depreciation &
    
    
    OtherTotal
    
    
    EBITDA
    
    
    amortization
    
    
    items2009
    
    
    2010
    
    
    variance
    
    
    variance
    
    
    variance
    
    
    varianceForest Products
    
    (88
    )
    
    (24
    )
    
    64
    
    
    57
    
    
    8
    
    
    (1
    )Pulp
    
    (101
    )
    
    134
    
    
    235
    
    
    218
    
    
    9
    
    
    8Paper
    
    22
    
    
    (12
    )
    
    (34
    )
    
    (29
    )
    
    
    
    
    (5
    )Chemicals
    
    7
    
    
    8
    
    
    1
    
    
    
    
    
    
    
    
    1Corporate
    
    (18
    )
    
    (42
    )
    
    (24
    )
    
    (6
    )
    
    
    
    
    (18
    )(178
    )
    
    64
    
    
    242
    
    
    240
    
    
    17
    
    
    (15
    )


The Company generated operating earnings of $64 million
compared to an operating loss of $178 million in fiscal 2009. The previously
noted improvement in EBITDA generated the majority of the increase in operating
results. The Pulp segment results included a $12 million gain relating to the
sale of two paper pulp mills located in Southern France. The Paper segment
results included a charge of $7 million related to the permanent closure of the
Pine Falls newsprint facility.

The fiscal 2010 Corporate segment results absorbed a charge of
$12 million relating to the write-down of notes receivable. As well, the Company
incurred expenses of $7 million covering legal costs, site security, and remedial actions relating to
the idled Marathon, Ontario, NBSK pulp mill. The Marathon mill was previously
owned by Marathon Pulp Inc., a joint venture in which the Company held a 50%
interest. In February 2009, the joint venture sought creditor protection and a
trustee in bankruptcy was appointed. The latter continued to operate the
facility for a period of time to liquidate inventories. In June2009, the
Ministry of Environment (MOE) of the province of Ontario directed the Company to
undertake certain actions on the site. While the Company contested the basis on
which the order was given, it complied with the various directives.

|INTEREST, FOREIGN
      EXCHANGE AND OTHER |  |      |   |  |      | 
|------------------------------------------ |  | ---- | - |  | ---- | 
|(in millions of dollars)                   |  |      |   |  |      | 
|                                           |  | 2009 |   |  | 2010 | 
|Interest on long-term debt                 |  | 33   |   |  | 27   | 
|Interest on operating bank loans           |  | 4    |   |  | 3    | 
|Debt prepayment premium                    |  |     |   |  | 6    | 
|Foreign exchange items                     |  | (16  | ) |  | 14   | 
|Bank charges and
      other               |  | 1    |   |  | 2    | 
|                                           |  | 22   |   |  | 52   | 

The $6 million decline in interest expense was primarily
foreign exchange related as the Canadian dollar averaged 13% higher versus the
US dollar. A term loan credit facility was repaid on August 17, 2010, and
required that the Company pay a debt prepayment premium of 2%. The Company
issued US$255million of senior secured notes maturing in December 2018. Foreign exchange items relate primarily to gains
or losses on the translation of US $ net monetary assets. When the Canadian
dollar strengthens versus the US dollar, as was the case during fiscal 2010,
losses are generated. If the Canadian dollar weakens, as was the case in fiscal
2009, gains are generated.

Tembec Financial Report 2011 37

---

Managements Discussion and Analysis

During fiscal 2010, the Company recorded a gain of $19 million
on the translation of its US $ denominated debt as the relative value of the
Canadian dollar increased from US $0.916 to US$0.975. The Company recorded a
gain of $8 million on the translation of its euro-denominated debt as the
relative value of the euro versus the Canadian dollar decreased from C $1.602 to
C $1.384.

During fiscal 2009, the Company recorded a loss of $18 million
on the translation of its US $ denominated debt as the relative value of the
Canadian dollar decreased from US $0.968 to US$0.916. The Company recorded a
loss of $3 million on the translation of its euro-denominated debt as the
relative value of the euro versus the Canadian dollar increased from C $1.509 to
C $1.602.

During fiscal 2010, the Company recorded an income ta x recover
y of $15 million on earnings from continuing operations before income taxes and
non-controlling interests of $39 million. This income tax recovery reflected a
$27million favourable variance versus an anticipated income tax expense of $12
million based on the Companys effective tax rate of 29.8%. The change in
valuation allowance increased the recovery by $20 million. The most significant
item included in the above was a $19 million favourable adjustment relating to
the recognition of future tax assets of the Companys remaining operations in
France as it has been determined that the future realization of these assets is
more likely than not to occur. The non-taxable gain on consolidation of
foreign integrated subsidiaries increased the income tax recovery by $10
million.

During fiscal 2009, the Company recorded an income tax recovery
of $1 million on a loss from continuing operations before income ta xes and
non-controlling interests of $221million. The income tax recovery reflected a
$67 million unfavourable variance versus an anticipated income tax recovery of
$68million based on the Companys effective tax rate of 30.9%. The
non-recognition of period losses reduced the income tax recovery by $62 million.
Based on past financial performance, future income tax assets of the Companys
operations have been limited to the amount that is more likely than not to be
realized. The non-deductible portion of the loss on translation of
foreign-denominated debt reduced the income tax recovery by $2 million. The
non-deductible loss on consolidation of foreign integrated subsidiaries also
reduced the income tax recovery by $3 million.

The financial results of the St. Francisville paper mill have
been classified as discontinued operations. During fiscal 2010, the operations
did not impact the Companys financial results. A $2 million charge for pension
and post-retirement healthcare benefits was offset by a $2 million gain on the
translation of the US $ carrying values of the pension and post-retirement
healthcare obligations. Fiscal 2009 earnings of $5 million included a $12
million after-tax gain on the sale of the mill site and production equipment, a
$2 million loss on translation of the US $ carrying values of liabilities and a
charge of $5 million for custodial and legacy costs.

The Company generated net earnings of $52 million or $0.52 per
share for the year ended September 25, 2010, compared to a net loss of $214
million or $2.14 per share for the year ended September 26, 2009.

38Tembec Financial Report 2011

---

Managements Discussion and Analysis

Critical Accounting Policies and
Estimates

Fixed asset depreciation

The Company records its fixed assets, primarily production
buildings and equipment, at cost. Interest costs are capitalized for projects in
excess of $1 million that have a duration in excess of one year. Investment tax
credits or capital assistance received reduce the cost of the related assets.
Fixed assets acquired as a result of a business acquisition are recorded at
their estimated fair value. Depreciation of fixed assets is provided over their
estimated useful lives, generally on a straight-line basis. The estimated useful
lives of fixed assets are based on judgement and the best currently available
information. Changes in circumstances can result in the actual useful lives
differing from our estimates. Revisions to the estimated useful lives of fixed
assets constitute a change in accounting estimate and are dealt with
prospectively by amending the amount of future depreciation expense. There were
no significant revisions to the estimated useful lives of fixed assets in fiscal
2011 and fiscal 2010.

Impairment of long-lived assets

The Company must review the carrying value of long-lived assets
when events or changes in circumstances indicate that the value may have been
impaired and is not recoverable through future operations and cash flows. To
estimate future cash flows, the Company uses operating and financial
assumptions, primarily those contained in its most recent multi-year operating
plan. This ensures that the assumptions are supported, where available, by
relevant independent information. There were no fixed asset impairment charges
in fiscal 2011 and fiscal 2010.

Employee future benefits

The Company contributes to several defined benefit pension
plans, primarily related to employees covered by collective bargaining
agreements. The Company also provides post-retirement benefits to retirees,
primarily healthcare related. For post-retirement benefits, funding of
disbursements is done on a pay as you go basis. The Company uses independent
actuarial firms to quantify the amount of pension and post-retirement
obligations. The Company, based on its own experience and recommendations from
its actuarial firms, evaluates the underlying assumptions on an annual basis.

Changes in estimates or assumptions can have a substantial
impact on the amount of pension and post-retirement benefit expense, the
carrying values on the balance sheet, and, in the case of defined benefit plans,
the amount of plan surplus or deficit. At June 30, 2011, (the measurement
date), the fair value of defined benefit plan assets was $641 million, an amount
equal to 80% of the estimated accrued benefit obligation of $804 million,
generating a deficit of $163 million. The plan deficit was $206 million at the
prior measurement date, June 30, 2010. The deficit decrease of $43 million that
occurred over the 12-month period was due to several items. The deficit was
decreased by $38 million as the return on plan assets exceeded the assumed rate
of return. The deficit was further reduced by $23 million as employer
contributions of $31million exceeded the current service cost of $8 million.
These favourable items were partially offset by an actuarial loss of $16 million
that increased the obligations at the measurement date. This item was caused by
a decrease in the applicable discount rate from 5.12% to 4.94%. The discount
rate is tied to rates applicable to high-quality corporate bonds (AA or higher)
in effect at the measurement date. Pension expense in fiscal 2011 was $11
million, as compared to nil in the prior year. Based on current assumptions
under IFRS, employer contributions and pension expense in fiscal 2012 are
expected to be approximately $44 million and $5 million, respectively. There is
no assurance that current assumptions will materialize in future periods. The
defined benefit pension plans may be unable to earn the assumed rate of return.
Market driven changes to discount rates and other variables may result in
changes to anticipated Company contribution amounts.

With regard to other employee future benefit plans, the accrued
benefit obligation at the measurement date was $45million, a decrease from $49
million in the prior year. Employer contributions were $2 million, compared to
$3 million in the prior year. In fiscal 2011, the Company recognized an expense
of $3 million, unchanged from the prior year. Based on current assumptions under
IFRS, the amount of employer contributions and the amount of expense to be
recognized in fiscal 2012 are expected to be approximately $2 million and
$4million, respectively.

Tembec Financial Report 2011 39

---

Managements Discussion and Analysis

Future income taxes

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

Use of Non-GAAP Financial Measures

The following summarizes non-GAAP financial measures utilized
in the MD&A. As there is no generally accepted method of calculating these
financial measures, they may not be comparable to similar measures reported by
other companies.

EBITDA refers to earnings before interest, income taxes,
depreciation and amortization. EBITDA does not have any standardized meaning
according to GAAP. The Company defines EBITDA as sales less cost of sales and
selling, general and administrative expenses, meaning it represents operating
earnings before depreciation, amortization and other specific or non-recurring
items. The Company considers EBITDA to be a useful indicator of the financial
performance of the Company, the business segments and the individual business
units. The most comparable Canadian GAAP financial measure is operating
earnings. The following table is a reconciliation of operating earnings to the
Companys definition of EBITDA.

|(in millions of
      dollars) |  | 2010 |  |  | 2011 | 
|------------------------------ |  | ---- |  |  | ---- | 
|Operating earnings             |  | 64   |  |  | 49   | 
|Depreciation and amortization  |  | 56   |  |  | 45   | 
|Other items                    |  | 12   |  |  | 1    | 
|EBITDA                         |  | 132  |  |  | 95   | 

Free cash flow refers to cash provided by operating activities
before changes in non-cash working capital balances less net fixed asset
additions. Working capital changes are excluded as they are often seasonal and
temporary in nature. The Company considers free cash flow to be a useful
indicator of its ability to generate discretionary cash flow, thereby improving
its overall liquidity position.

Net debt refers to debt less cash, cash equivalents and cash
held in trust.

Total capitalization refers to net debt plus future income
taxes, other long-term liabilities and credits, and shareholders equity.

Net debt to total capitalization is used by the Company to
measure its financial leverage.

|(in millions of
      dollars)               |  | 2010 |   |  | 2011 |  
|-------------------------------------------- |  | ---- | - |  | ---- | -
|Long-term debt                               |  | 271  |   |  | 271  |  
|Unamortized financing costs                  |  | 13   |   |  | 13   |  
|Current portion of long-term debt            |  | 17   |   |  | 18   |  
|Operating bank loans                         |  | 1    |   |  | 6    |  
|Less: total cash                             |  | (74  | ) |  | (105 | )
|Net debt                                     |  | 228  |   |  | 203  |  
|Other long-term liabilities and credits      |  | 209  |   |  | 188  |  
|Shareholders
      equity                   |  | 365  |   |  | 362  |  
|Total
      capitalization                   |  | 802  |   |  | 753  |  
|Net debt to total
      capitalization ratio |  | 28%  |   |  | 27%  |  

40Tembec Financial Report 2011

---

Managements Discussion and Analysis

Changes in Accounting Policies and
Estimates

During the year ended September 24, 2011, there have been no
new standards issued by the CICA that had an impact on the Companys
consolidated financial statements.

Impact of Accounting Pronouncementson Future Reporting Periods

International Financial Reporting Standards (IFRS) will replace
Canadian GAAP for publicly accountable entities for financial periods beginning
on or after January 1, 2011. Accordingly, the conversion from Canadian GAAP to
IFRS will be applicable to the Companys reporting for the first quarter of
fiscal2012 for which current and comparative information will be prepared
under IFRS. The Company has evaluated the impact of the conversion to IFRS and
presented its evaluation under Conversion to International Financial Reporting
Standards below.

Conversion to International Financial Reporting
Standards

|CONVERSION PROGRESS
|-------------------

In 2005, the Accounting Standards Board of Canada (AcSB)
announced that accounting standards in Canada are to converge with International
Financial Reporting Standards (IFRS). On February 13, 2008, the AcSB confirmed
that publicly accountable entities will be required to prepare financial
statements in accordance with IFRS, in full and without modification, for
interim and annual financial statements for fiscal years beginning on or after
January 1, 2011, which in the case of the Company, represents interim and fiscal
year-end periods beginning on or after September 25, 2011 (the Changeover
date). In the Companys reporting for those periods following the Changeover
date, comparative data for equivalent periods in the previous fiscal year will
be required, making September 26, 2010, the Transition date for the
Company.

The Companys transition to full implementation of IFRS
consists of five phases:

| | Preliminary study phase  This phase involves performing
      a high-level assessment to identify key areas of accounting differences
      and their impact (high, medium or low priority) that may arise from the
      transition to IFRS.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Project set-up phase  This phase includes the
      identification of a project team and IFRS Steering Committee, the
      development of a detailed conversion plan, a change management plan, as
      well as other key conversion processes and tools.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Component evaluations and issues resolution phase  In
      this phase, the Company completes a detailed assessment of all accounting
      differences, including those identified in the preliminary study phase,
      and their impact on the Company. It involves specification of changes
      required to existing accounting policies, information systems and business
      processes, together with an analysis of policy alternatives allowed under
      IFRS and impacts on drafting of financial statements under IFRS. The
      analysis and decisions made during this phase are included in IFRS
      Accounting Policy Choice Memos challenged and approved by the IFRS
      Steering Committee and External Auditors, which are then submitted to the
      Audit Committee.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Conversion phase  This phase includes execution of
      changes to information systems, business processes and accounting
      policies. It also involves the development of a communication and training
      program for the Companys finance and other staff, as
  necessary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Tembec Financial Report 2011 41

---

Managements Discussion and Analysis

| | Embedding phase  The project will culminate in the
      collection of financial information necessary to compile IFRS-compliant
      financial statements, embedding IFRS in business processes, eliminating
      unnecessar y data collection processes and submitting IFRS financial statements to the Audit
      Committee for approval.
      Implementation also involves further training of staff as revised systems
      begin to take effect.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

To ensure adequate management of this process, the Company has
established a project team and an IFRS Steering Committee, both of which are
comprised of finance and accounting senior management as well as representatives
from various areas of the organization, as deemed appropriate. Progress
reporting to the Audit Committee on the status of the IFRS implementation
project has been instituted. The Company completed the Preliminary Study Phase
in July 2008, the Project Set-up Phase in January 2009, the Component
Evaluations and Issues Resolution Phase in September 2009 and the Conversion
Phase in September 2010. The IFRS team is currently completing the Embedding
Phase.

|POTENTIAL
      IMPACT OF IMPLEMENTATION ON THE COMPANY
|-------------------------------------------------------

The transition to IFRS requires the Company to apply IFRS1,

First-Time Adoption of International Financial Repor ting
Standards, which applies only at the time of changeover and includes a
requirement for retrospective application of each IFRS standard. IFRS 1 also
mandates certain exceptions to retrospective application and provides a series
of optional exemptions from retrospective application to ease the transition to
the full set of IFRSs.

IFRS 1  Mandatory exceptions

The mandatory IFRS 1 exception that is relevant to the Company
relates to the use of estimates. Specifically, hindsight cannot be used to
create or revise estimates previously made under Canadian GAAP, except where
necessary to reflect any difference in accounting policies or where there is
objective evidence that those estimates were in error.

IFRS 1  Optional exemptions

IFRS 1, First-Time Adoption of International Financial
Reporting Standards, provides entities adopting IFRS for the first time with
a number of optional exemptions and mandatory exceptions, in certain areas, to
the general requirement for full retrospective application of IFRS. Following a
detailed analysis of the various optional exemptions, the Company has elected to
apply the following:

| | Business combinations exemption  IFRS 1 provides the
      option to apply IFRS 3, Business Combinations,retrospectively or
      prospectively  either from the Transition date or a particular date prior
      to the Transition date. The Company has elected to apply IFRS 3
      prospectively on business combinations that occur after the Transition
      date. Accordingly, business combinations prior to this date have not been
      restated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Event driven fair value of property, plant and equipment
      as deemed cost  IFRS does not provide specific guidance on the accounting
      by entities subject to a financial reorganization. Instead, usual
      requirements of IFRS apply. In particular, fresh start accounting is not
      permitted in such circumstances. In order to mitigate the impact of this
      accounting difference, IFRS 1 provides the choice of recording assets and
      liabilities based on a deemed cost, which can be an event driven valuation
      where some or all of the assets and liabilities were valued and recognized
      at fair value. The Company has elected to apply this exemption and
      therefore, the difference between Canadian GAAP and IFRS regarding fresh
      start accounting is not expected to impact the accounting measurement of
      the assets and liabilities that were revalued on February 29,
  2008.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Employee benefits exemption  IFRS 1 provides the option
      to retrospectively apply International Accounting Standard (IAS) 19,
      Employee Benefits,for the recognition of unamortized actuarial
      gains and losses, past service costs and transitional obligations and
      assets or to recognize these balances previously deferred under Canadian
      GAAP in opening retained earnings at the Transition date. The Company has
      elected to recognize all unamortized cumulative actuarial losses and past
      ser vice costs at the Transition date as an adjustment to opening retained
      earnings for all of its employee benefit plans.                                                                                                                                                                                                                                                                          

42Tembec Financial Report 2011

---

Managements Discussion and Analysis

| | Share-based payment transaction exemption  IFRS1
      provides an optional exemption to the application of IFRS2, Share-based
      Payment,for those share options granted subsequent to November 7,
      2002, that have fully vested as at September 26, 2010. The Company has
      elected this exemption and will exclude all such share options from the
      application of IFRS 2.                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Borrowing costs  IAS 23, Borrowing Costs,requires an entity to capitalize borrowing costs related to all
      qualifying assets for which the commencement date for capitalization is on
      or after January 1, 2009. IFRS 1 permits all borrowing costs prior to its
      Transition date to be expensed. The Company has elected to apply this
      exemption and will expense all borrowing costs on qualifying assets prior
      to September 26, 2010.

There are additional optional exemptions under IFRS 1. However,
the Company does not expect any other exemptions to be significant to the
Companys adoption of IFRS.

|IFRS ACCOUNTING POLICIES
|------------------------

While the conceptual framework of IFRS is similar to
Canadian GAAP, significant differences exist in certain matters of recognition,
measurement and disclosure. The Company has identified specific areas where
changes in accounting policies are expected to impact the Companys consolidated
balance sheet and statement of comprehensive income. The adoption of IFRS is not
expected to have a material impact on the Companys cash flow from operations.
The significant IFRS accounting policies to be applied by the Company upon
adoption of IFRS and which are expected to have a significant impact on its
balance sheet and comprehensive income are as follows:

|(a) | Property, plant and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Consistent with Canadian GAAP, IFRS requires separable
      components of property, plant and equipment to be recognized initially at
      cost. Under IAS 16, Property, Plant and Equipment,an entity is
      required to choose to account for each class of property, plant and
      equipment, using either the cost model or the revaluation model. The cost
      model is generally consistent with Canadian GAAP where an
  item of property, plant and equipment is carried at its cost
      less accumulated depreciation and accumulated impairment losses. Under the
      revaluation model, an item of property, plant and equipment is carried at
      its revalued amount, being its fair value at the date of the revaluation
      less any accumulated depreciation and accumulated impairment losses. The
      Company expects to use the cost model to account for all classes of
      property, plant and equipment.

|    | Unlike Canadian GAAP, which is silent on these matters,
      IFRS specifically requires capitalization of major replacement costs,
      major inspection costs and borrowing costs of qualifying assets.
      Management is currently quantifying the effects of additional
      capitalization required and expects an increase in proper ty, plant and
      equipment and a corresponding decrease of the accumulated deficit as at
      September 26, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(b) | Actuarial gains and losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | IAS 19, Employee Benefits,permits an entity to
      recognize actuarial gains and losses in profit or loss, or alternatively
      immediately in other comprehensive income. Under Canadian GAAP, the
      Company recognized actuarial gains and losses in profit or loss using the
      corridor approach where an entity recognizes amortization of actuarial
      gains and losses in a period in which, as of the beginning of the period,
      the unamortized net actuarial gain or loss exceeded 10% of the greater of:
      (a) the accrued benefit obligation at the beginning of the year; and (b) the
      fair value, or market-related value, of the plan assets at the beginning
      of the year. The Company has selected a policy to recognize the actuarial
      gains and losses immediately in other comprehensive income, thereby
      allowing pension assets and liabilities to be reflected at their fair
      values. The election of IFRS1 to clear all unamortized actuarial gains and
      losses against retained earnings results in an increase of the accumulated
      deficit of approximately $67 million on September 26,
2010.

Tembec Financial Report 2011 43

---

Management’s Discussion and Analysis

|(c) | Biological assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | IAS 41, Agriculture,specifically addresses biological assets. The timber component of the Company’s private timberlands (freeholds) will qualify as a biological asset under the scope of IAS 41. This timber will be
recorded at fair value less cost to sell and shown as a separate line item on the Company’s balance sheet. The fair value of biological assets for the Company will be measured by discounting expected cash flows from the sale of standing timber
at a current market determined rate. This value will include not only the harvest value, but would also include a value for potential future growth. All gains and losses from changes in fair value are recognized in profit and loss. The agricultural
produce (logs) from the biological asset are measured at fair value less costs to sell, which becomes the deemed cost for the purpose of subsequent accounting under the IAS 2, Inventories,standard.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The Company currently expects an increase to this asset category of approximately $7 million at September 26, 2010, with a corresponding decrease of the accumulated deficit. Future changes in fair value of these biological
assets will be recognized in the Company’s profit and loss going forward.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(d) | Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | IAS 32, Financial Instruments: Presentation,requires an entity to classify a financial instrument as a financial liability if the Company does not have the unconditional right to avoid delivering cash or another financial
asset on settlement. Although Canadian GAAP classified the warrants as equity, the contingent settlement provision of the warrants requires the Company to classify them as financial liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The classification of the warrants as a financial liability will result in an increase of $5 million to long-term debt with a decrease of $6 million to share capital. The difference represents a change in fair value of the
warrants from their date of issue to the Transition date and will reduce the accumulated deficit by $1 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|(e) | Provisions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | IAS 37, Provisions, Contingent Liabilities and Contingent Assets,requires a provision to be recognized when: there is a present obligation as a result of a past transaction or event; it is probable that an outflow of
resources will be required to settle the obligation; and a reliable estimate can be made of the obligation. “Probable” in this context means more likely than not. Under Canadian GAAP, the criterion for recognition in the financial
statements is “likely”, which is a higher threshold than “probable”. Therefore, it is possible that there may be some provisions or contingent liabilities, which would meet the recognition criteria under IFRS that were not
recognized under Canadian GAAP. Other differences between IFRS and Canadian GAAP exist in relation to the measurement of provisions, such as the methodology for determining the best estimate where there is a range of equally possible outcomes (IFRS
uses the mid-point of the range, whereas Canadian GAAP uses the low-end of the range), and the requirement under IFRS for provisions to be discounted where material.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | As a result of the discounting requirement, the Company expects a decrease to the reforestation provision as calculated under Canadian GAAP at the Transition date of approximately $2 million with a corresponding decrease of
the accumulated deficit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(f) | Contributed surplus                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Canadian GAAP requires that a future income tax asset that was not recognized at the date of a comprehensive revaluation as a result of a financial reorganization be subsequently recognized first as a reduction of any unamortized
intangible asset and then in a manner consistent with the revaluation adjustment recorded at the date of the comprehensive revaluation. Under IFRS, this recognition of a future income tax asset is adjusted to profit and loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Consequently, the Company expects to eliminate contributed surplus of $5 million with a corresponding decrease of the accumulated deficit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

The Company will continue to review all proposed and ongoing projects of the International Accounting Standards Board (IASB) and assess their impact on its conversion process.

44Tembec Financial Report 2011

---

Managements Discussion and Analysis

Reconciliation tables

The following tables provide a reconciliation of the
shareholders equity and the balance sheet as at September 26, 2010:

|SHAREHOLDERS
      EQUITY RECONCILIATION
|-----------------------------------------
|$ millions (unaudited)                   

|                                                 |  |       |  |  | As at              |  
|------------------------------------------------ |  | ----- |  |  | ------------------ | -
|                                                 |  |       |  |  | September 26, 2010 |  
|                                                 |  | Notes |  |  | (Transition date)  |  
|Equity reported under Canadian GAAP              |  |       |  |  | 365                |  
|Opening balance sheet adjustments                |  |       |  |  |                    |  
|Property, plant and equipment
      amortization |  | (a)   |  |  | (2                 | )
|Employee future benefits                         |  | (b)   |  |  | (67                | )
|Biological assets                                |  | (c)   |  |  | 7                  |  
|Warrants                                         |  | (d)   |  |  | (5                 | )
|Reforestation provision                          |  | (e)   |  |  | 2                  |  
|Deferred taxes on above items                    |  |       |  |  |                   |  
|                                                 |  |       |  |  | (65                | )
|Equity reported under IFRS                       |  |       |  |  | 300                |  

Tembec Financial Report 2011 45

---

Managements Discussion and Analysis

Estimated adjustments to the balance sheet on adoption of IFRS
as at September 26, 2010:

|BALANCE SHEET RECONCILIATION               |  |       |  |  |       |   |  |            |   |  |       |  
|------------------------------------------ |  | ----- |  |  | ----- | - |  | ---------- | - |  | ----- | -
|$ millions (unaudited)                     |  |       |  |  |       |   |  |            |   |  |       |  
|                                           |  |       |  |  |       |   |  |            |   |  |       |  
|                                           |  | Notes |  |  | GAAP  |   |  | Adjustment |   |  | IFRS  |  
|Assets                                     |  |       |  |  |       |   |  |            |   |  |       |  
|Current assets:                            |  |       |  |  |       |   |  |            |   |  |       |  
|Cash and cash equivalents                  |  |       |  |  | 68    |   |  |           |   |  | 68    |  
|Cash held in trust                         |  |       |  |  | 6     |   |  |           |   |  | 6     |  
|Trade and other receivables                |  |       |  |  | 209   |   |  |           |   |  | 209   |  
|Inventories                                |  |       |  |  | 255   |   |  |           |   |  | 255   |  
|Biological assets                          |  | (c)   |  |  |      |   |  | 1          |   |  | 1     |  
|Prepaid expenses                           |  |       |  |  | 7     |   |  |           |   |  | 7     |  
|                                           |  |       |  |  | 545   |   |  | 1          |   |  | 546   |  
|Property, plant and equipment              |  | (a)   |  |  | 498   |   |  | (2         | ) |  | 496   |  
|Biological assets                          |  | (c)   |  |  |      |   |  | 6          |   |  | 6     |  
|Other assets                               |  | (b)   |  |  | 34    |   |  | (6         | ) |  | 28    |  
|Deferred income taxes                      |  |       |  |  | 27    |   |  |           |   |  | 27    |  
|Total assets                               |  |       |  |  | 1,104 |   |  | (1         | ) |  | 1,103 |  
|                                           |  |       |  |  |       |   |  |            |   |  |       |  
|Liabilities and Shareholders Equity       |  |       |  |  |       |   |  |            |   |  |       |  
|Current liabilities:                       |  |       |  |  |       |   |  |            |   |  |       |  
|Operating bank loans                       |  |       |  |  | 1     |   |  |           |   |  | 1     |  
|Trade and other payables                   |  |       |  |  | 233   |   |  |           |   |  | 233   |  
|Interest payable                           |  |       |  |  | 3     |   |  |           |   |  | 3     |  
|Provisions                                 |  |       |  |  | 5     |   |  |           |   |  | 5     |  
|Current portion of long-term debt          |  |       |  |  | 17    |   |  |           |   |  | 17    |  
|                                           |  |       |  |  | 259   |   |  |           |   |  | 259   |  
|Long-term debt                             |  | (d)   |  |  | 271   |   |  | 5          |   |  | 276   |  
|Provisions                                 |  | (e)   |  |  | 13    |   |  | (2         | ) |  | 11    |  
|Accrued benefit liability                  |  | (b)   |  |  | 187   |   |  | 61         |   |  | 248   |  
|Other long-term liabilities and credits    |  |       |  |  | 9     |   |  |           |   |  | 9     |  
|                                           |  |       |  |  | 480   |   |  | 64         |   |  | 544   |  
|Shareholders equity:                      |  |       |  |  |       |   |  |            |   |  |       |  
|Share capital                              |  | (d)   |  |  | 570   |   |  | (6         | ) |  | 564   |  
|Contributed surplus                        |  |       |  |  | 5     |   |  | (5         | ) |  |      |  
|Deficit                                    |  |       |  |  | (210  | ) |  | (54        | ) |  | (264  | )
|Total shareholders equity                 |  |       |  |  | 365   |   |  | (65        | ) |  | 300   |  
|Total liabilities and shareholders equity |  |       |  |  | 1,104 |   |  | (1         | ) |  | 1,103 |  

46Tembec Financial Report 2011

---

Managements Discussion and Analysis

Disclosure of entity-specific Internal Control over
Financial Reporting and Disclosure Controls and Procedures

Management has made the appropriate changes to ensure the
integrity of internal control over financial reporting (ICFR) and disclosure
controls and procedures (DC&P). The changes address accounting policies
required for first-time adoption as well as ongoing IFRS reporting. Management
has not identified any significant changes to ICFR or DC&P.

Disclosure of entity-specific Financial Reporting
Expertise

The Company has identified the resource requirements to
establish appropriate IFRS financial reporting expertise at all levels of the
business. Training of finance and other staff has been completed.

The IFRS Conversion Project Manager meets with the Audit
Committee quarterly and informs the Committee on specifics of the project as
well as developments in IFRS. The Committee members follow the progress very
closely and have been informed of the timeline for implementation, expected
impacts of different accounting policies as well as costs of conversion.

Disclosure of entity-specific Business Activities

The Company is party to many contracts with suppliers and
customers. Following a detailed review of all contracts, it is not expected that
the conversion to IFRS will have a significant impact on any of these contracts.
The Company has no significant contracts, which include financial covenants.

As previously mentioned, IAS 21, The Effects of Changes in
Foreign Exchange Rates, will have an impact on the translation of the
Companys foreign operations to the presentation currency. Under Canadian GAAP,
certain foreign operations situated in Europe and the U.S. were considered to be
fully integrated entities with the Canadian dollar as their functional currency.
Under IFRS, the Company has determined that these foreign operations functional
currency is the euro or the US dollar. The change in functional currency will
have an impact on the consolidated balance sheet and statement of
operations.

Disclosure of entity-specific Information Technology and
Data Systems

The Company completed a detailed assessment of its IT systems
and has determined that the current systems are adequate for proper reporting
under IFRS. The systems allow the Company to track and report on all financial
information required under Canadian GAAP (required until September 24, 2011),
under IFRS (required as of September 25, 2011) and for the compilation of a
comparative year of financial information beginning September 26, 2010.

Tembec Financial Report 2011 47

---

Managements Discussion and Analysis

Significant Risks and Uncertainties

|PRODUCT PRICES
|--------------

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.

Based on 2012 planned sales volumes, the following table
illustrates the approximate annual impact of changes to average Canadian dollar
selling prices on after-tax earnings:

|SELLING
      PRICE SENSITIVITY                   |  |                    |  | 
|------------------------------------------------- |  | ------------------ |  | 
|                                                  |  | Impact on          |  | 
|                                                  |  | after-tax earnings |  | 
|                                                  |  | ($ millions)       |  | 
|                                                  |  |                    |  | 
|Pulp - $25/tonne                                  |  | 22                 |  | 
|SPF lumber - $10/mbf                              |  | 8                  |  | 
|Paper and coated
      bleached board - $25/tonne |  | 7                  |  | 

The Companys strategy is to mitigate price volatility by
maintaining operations in three core sectors, namely wood products, pulp and
paper; maintaining low cost, high-quality flexible production facilities;
establishing and developing long-term relationships with its customers;
developing specialty niche products where possible. In addition, the Company may
periodically purchase lumber, pulp and newsprint derivative commodity contracts
to mitigate the impact of price volatility. At September 24, 2011, the Company
did not hold any significant product derivative commodity contracts, unchanged
from the prior year-end.

|FOREIGN EXCHANGE
|----------------

The Companys revenues for most of its products are affected by
fluctuations in the relative exchange rates of the Canadian dollar, the US dollar
and the euro. The prices for many products, including those sold in Canada and
Europe are generally driven by US $ reference prices of similar products. The
Company generates approximately $1.3 billion of US$ denominated sales annually
from its Canadian operations. As a result, any decrease in the value of the US
dollar relative to the Canadian dollar and the euro reduces the amount of
revenues 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.

Based on 2012 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:

|FOREIGN EXCHANGE
      SENSITIVITY  |  |    | 
|----------------------------------- |  | -- | 
|(in millions of dollars)            |  |    | 
|Sales increase                      |  | 13 | 
|Cost of sales
      increase        |  | 3  | 
|EBITDA increase                     |  | 10 | 
|Interest expense
      increase     |  |   | 
|Cash flow increase                  |  | 10 | 
|Loss on US $ debt
      translation |  | 3  | 
|Pre-tax earnings increase           |  | 7  | 
|Tax expense
      increase          |  | 2  | 
|Net earnings
      increase         |  | 5  | 

48Tembec Financial Report 2011

---

Managements Discussion and Analysis

Direct US $ purchases of raw materials, supplies and services
provide 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.

To potentially further reduce the impact of fluctuations in the
value of the US dollar, the Company has a policy, which permits hedging up to
50% of its anticipated US $ receipts for up to 36months in duration. At
September 24, 2011 and September 25, 2010, the Company did not hold any foreign
exchange contracts.

|OPERATIONAL RISKS
|-----------------

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

Fibre represents the Companys major raw material in the
production of wood products, pulp and paper. In Canada, virgin fibre or timber
is sourced primarily by agreements with provincial governments. The agreements
are granted for various terms from five to 25 years and are generally subject to
regular renewals every five years. The agreements incorporate commitments with
respect to sustainable forest management, silvicultural work, forest and soil
renewal, as well as cooperation with other forest users. In addition, the
Company has undertaken, on a voluntary basis, to have its timber harvesting
certified by the Forest Stewardship Council (FSC). The Company expects the
agreements to be extended as they come up for renewal. Aboriginal groups have
claimed substantial portions of land in various provinces over which they claim
aboriginal title or in which they have a traditional interest and for which they
are seeking compensation from various levels of government. The Company has
taken a proactive approach to enhance the economic participation of First Nations in its operations wherever feasible. The
Companys operation in France sources its fibre requirements from various
private sources, primarily through long-term supply arrangements.

Energy is an important component of mill costs, especially for
high-yield pulp mills and newsprint mills. In 2011, purchased energy costs
totalled approximately $130 million, 62% of which was electricity. Electrical
purchases are made primarily from large public utilities, at rates set by
regulating bodies. In certain jurisdictions, electricity is deregulated, which
can lead to greater price volatility. To mitigate the effect of price
fluctuations on its financial performance, the Company employs several tactics,
including the securing of longer term supply agreements, the purchase of
derivative commodity contracts and operational curtailments in periods of high
prices (load shedding). At September 2011 and September 2010, the Company did
not hold any derivative commodity contracts relating to purchased electricity.
Fossil fuels, primarily natural gas, are purchased at market rates. The Company
periodically purchases derivative commodity contracts to reduce its exposure. At
September 24, 2011 and September 25, 2010, the Company did not hold any natural
gas derivative commodity contracts.

Nearly all the Companys manufacturing units have a unionized
workforce. Over the past 30 years, the Company has successfully negotiated new
collective agreements in nearly all instances, with relatively few work
stoppages. At many of the Companys facilities, as well as those of the North
American industry as a whole, we have seen reductions in employment levels
resulting from technological and process improvements resulting in a workforce
with more years of service. This increases the relative costs of pensions and
benefits. At September 2011, the Company had approximately 3,250employees
covered by collective bargaining agreements. At September 24, 2011, there were
15 agreements covering 975employees that had expired. During fiscal2012, a total
of three agreements covering 375employees will expire. The remaining contracts
expire at various dates up to February2016. The Company anticipates it will
reach satisfactory agreements on contracts currently under active negotiations
and those expiring in the future.

Tembec Financial Report 2011 49

---

Managements Discussion and Analysis

The Companys operations are subject to industry-specific
environmental regulations relating to air emissions, wastewater (effluent)
discharges, solid waste, landfill operations, forestry practices, and site
remediation. The Company has made significant progress in reducing the
environmental impact of its operations over the last 15 years. This has occurred
as a result of changes in manufacturing processes, the installation of
specialized equipment to treat/eliminate the materials being discharged and the
implementation of standardized practices such as ISO 14001.

The production of lumber, pulp and paper is capital intensive.
The Company estimates that it must invest approximately $35million to $40
million per year on capital expenditures to avoid degradation of its current
operations. As the majority of the funding is provided by cash flow from
operations, there can be no assurance that the funds will be available to meet
all of the Companys capital expenditure needs. Failure to reinvest can lead to
older equipment that is less productive, less reliable and more costly to
maintain and operate. The risk of technological obsolescence also increases.
Capital expenditure projects can be large in scale, requiring the Company to
maintain and/or acquire expertise in the design, planning and execution of major
capital projects. There are inherent risks in the capital expenditure process,
including the potential for project cost overruns, new equipment that does not
perform to anticipated or projected levels, a lengthy start-up period and
disruptions to normal operations. Due to relatively low operating cash flow
generation over the last several years, the Company has limited capital
expenditures. This has led to a backlog of capital expenditure projects in
many operating facilities. The Company recently unveiled a large and
comprehensive capital expenditure program of approximately $500 million to be
spent over the next four to five years to modernize its facilities. As the
majority of the funding for the program is to be provided by operating cash
flows, there is a risk that the Company may experience delays in executing the
various projects or may not be able to complete all the projects included in the
program.

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

|TRADE RESTRICTIONS / LUMBER EXPORT TAXES
|----------------------------------------

The Companys manufacturing operations are located primarily in
Canada. However, sales into the Canadian market represented only 18% of
consolidated sales in 2011. As such, the Companys financial results are highly
dependent on its ability to sell its products into the export markets. Tariffs
and trade barriers that reduce or prohibit the movement of our products across
international borders constitute an ongoing risk. The agreement between Canada
and the United States over softwood lumber is a case in point. On October 12,
2006, Canada and the United States entered into an agreement to govern the
shipment of Canadian softwood lumber into the United States. The outcome was
less than satisfactory. Through a combination of quotas and export taxes, the
agreement will ensure that Canadian producers of softwood lumber will remain at
a competitive disadvantage versus U.S. producers when it comes to accessing the
U.S. market.

|FINANCIAL RISKS / DEBT SERVICE
|------------------------------

Of the total long-term debt of $302 million, 87% relates to the
US $255 million senior secured notes maturing December2018. The notes do not
require periodic payments for principal amortization. Since the entire principal
amount will become due on the maturity date, it is possible the Company will not
have the required funds/liquidity to repay the principal due. The Company may
require access to the public or private debt markets to issue new debt
instruments to replace or partially replace the notes. There is no assurance
that the Company will be able to refinance the notes on commercially acceptable
terms. The Companys objective is to maintain a relatively low debt level.

50Tembec Financial Report 2011

---

Managements Discussion and Analysis

Evaluation of Disclosure Controls and
Procedures

The Companys President and Chief Executive Officer and the
Companys Executive Vice President, Finance and Chief Financial Officer have
designed, or caused to be designed under their supervision, disclosure controls
and procedures to provide reasonable assurance that material information
relating to the Company has been made known to them and that information
required to be disclosed in the Companys annual filings, interim filings or
other reports filed by it or submitted by it under securities legislation is
recorded, processed, summarized and reported within the time periods specified by
applicable securities legislation. The Companys President and Chief Executive
Officer and the Companys Executive Vice President, Finance and Chief Financial
Officer have evaluated, or caused to be evaluated under their supervision, the
effectiveness of the Companys disclosure controls and procedures and have
determined, based on that evaluation, that such disclosure controls and
procedures are effective at the financial year-end.

Internal Control Over Financial
Reporting

The Companys President and Chief Executive Officer and the
Companys Executive Vice President, Finance and Chief Financial Officer have
designed, or have caused to be designed under their supervision, internal
control over financial reporting as defined under National Instrument 52-109 
Certification of Disclosure in Issuers Annual and Interim Filings, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
GAAP. The Companys President and Chief Executive Officer and the Companys Executive Vice
President, Finance and Chief Financial Officer have evaluated, or caused to be
evaluated under their super vision, the effectiveness of the Companys internal
control over financial reporting and have determined, based on the criteria
established in Enterprise Risk Management  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and on this
evaluation, that such internal controls over financial reporting are effective
at the financial year-end.

Changes in Internal Controls

During the period covered by this report, there have been no
changes that have materially affected, or are reasonably likely to materially
affect Tembecs internal control over financial reporting.

Oversight Role of Audit Committee and Board of
Directors

The Audit Committee reviews the Companys annual MD&A and
related financial statements with management and the external auditors, and
recommends their approval to the Board. Management and the internal auditor of
the Company also present periodically to the committee a report of their
assessment of the Companys internal controls and procedures for financial
reporting. The external auditor reports any internal control weaknesses
identified during the quarterly reviews and the annual audit to the Audit
Committee.

Additional Information

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

Tembec Financial Report 2011 51

---

ManagementResponsibility

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

A system of internal accounting and administrative controls is
maintained by management in order to provide reasonable assurance that
transactions are appropriately authorized, assets are safeguarded and financial
records are properly maintained to provide accurate and reliable financial
statements.

The Companys external auditors are responsible for auditing
the consolidated financial statements and giving an opinion thereon. The
external auditor also reports any internal control weaknesses identified during
the course of the quarterly reviews and the annual audit. In addition, the
Company employs internal auditors to evaluate the effectiveness of its systems,
policies and procedures.

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

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

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

November 29, 2011



52Tembec Financial Report 2011

---

IndependentAuditors
Report

To the Shareholders

We have audited the accompanying consolidated financial
statements of Tembec Inc., which comprise the consolidated balance sheets as at
September 24, 2011 and September 25, 2010, the consolidated statements of
operations and deficit 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 the Consolidated Financial
StatementsManagement is responsible for the preparation and fair
presentation of these consolidated financial statements in accordance with
Canadian generally accepted accounting principles, 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 ResponsibilityOur 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 consolidated financial
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.

OpinionIn our opinion, the consolidated financial
statements present fairly, in all material respects, the consolidated financial
position of Tembec Inc. as at September 24, 2011 and September 25, 2010, and its
consolidated results of operations and its consolidated cash flows for the years
then ended in accordance with Canadian generally accepted accounting
principles.

Chartered Accountants*

Montreal, Canada November 29, 2011

* CA Auditor permit no. 14114

Tembec Financial Report 2011 53

---

Consolidated Financial Statements

|CONSOLIDATED
      BALANCE SHEETS              
|-----------------------------------------------
|As at September 24, 2011 and September 25, 2010
|(in millions of Canadian dollars)              



|                                                 |   | 2011  |   |   | 2010  |  
|------------------------------------------------ | - | ----- | - | - | ----- | -
|ASSETS                                           |   |       |   |   |       |  
|Current assets:                                  |   |       |   |   |       |  
|Cash and cash equivalents                        | $ | 99    |   | $ | 68    |  
|Cash held in trust (note 11)                     |   | 6     |   |   | 6     |  
|Accounts receivable (notes 6 and 15)             |   | 182   |   |   | 209   |  
|Inventories (notes 3 and 6)                      |   | 261   |   |   | 255   |  
|Prepaid expenses                                 |   | 6     |   |   | 7     |  
|                                                 |   | 554   |   |   | 545   |  
|                                                 |   |       |   |   |       |  
|Fixed assets (note 4)                            |   | 493   |   |   | 498   |  
|Other assets (note 5)                            |   | 44    |   |   | 34    |  
|Future income
      taxes (note 13)              |   | 16    |   |   | 27    |  
|                                                 | $ | 1,107 |   | $ | 1,104 |  
|                                                 |   |       |   |   |       |  
|LIABILITIES AND SHAREHOLDERS EQUITY             |   |       |   |   |       |  
|Current liabilities:                             |   |       |   |   |       |  
|Operating bank loans (note 6)                    | $ | 6     |   | $ | 1     |  
|Accounts payable and accrued charges             |   | 254   |   |   | 238   |  
|Interest payable                                 |   | 8     |   |   | 3     |  
|Current portion of
      long-term debt (note 7) |   | 18    |   |   | 17    |  
|                                                 |   | 286   |   |   | 259   |  
|                                                 |   |       |   |   |       |  
|Long-term debt (note 7)                          |   | 271   |   |   | 271   |  
|Other long-term liabilities and credits (note 8) |   | 188   |   |   | 209   |  
|                                                 |   |       |   |   |       |  
|Shareholders equity:                            |   |       |   |   |       |  
|Share capital (note 9)                           |   | 570   |   |   | 570   |  
|Contributed surplus                              |   | 5     |   |   | 5     |  
|Deficit                                          |   | (213  | ) |   | (210  | )
|                                                 |   | 362   |   |   | 365   |  
|                                                 | $ | 1,107 |   | $ | 1,104 |  

Guarantees, commitments and contingencies (note 10)
Subsequent events (note 18) See accompanying notes to consolidated
financial statements.

On behalf of the Board:

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

54Tembec Financial Report 2011

---

Consolidated Financial Statements

|CONSOLIDATED
      STATEMENTS OF OPERATIONS AND DEFICIT  
|---------------------------------------------------------
|Years ended September 24, 2011 and September 25, 2010    
|(in millions of Canadian dollars, unless otherwise noted)



|                                                                      |   | 2011  |   |   | 2010  |  
|--------------------------------------------------------------------- | - | ----- | - | - | ----- | -
|Sales                                                                 | $ | 1,743 |   | $ | 1,877 |  
|                                                                      |   |       |   |   |       |  
|Freight and other deductions                                          |   | 237   |   |   | 234   |  
|Lumber export taxes (note 10)                                         |   | 13    |   |   | 10    |  
|Cost of sales (excluding depreciation and amortization)               |   | 1,324 |   |   | 1,426 |  
|Selling, general and administrative                                   |   | 72    |   |   | 73    |  
|Share-based compensation (note 9)                                     |   | 2     |   |   | 2     |  
|Depreciation and amortization                                         |   | 45    |   |   | 56    |  
|Other items (note
      11)                                           |   | 1     |   |   | 13    |  
|Operating earnings                                                    |   | 49    |   |   | 63    |  
|                                                                      |   |       |   |   |       |  
|Interest, foreign exchange and other (note 12)                        |   | 32    |   |   | 51    |  
|                                                                      |   |       |   |   |       |  
|Exchange loss
      (gain) on long-term debt                          |   | 1     |   |   | (27   | )
|Earnings before income taxes and non-controlling interest             |   | 16    |   |   | 39    |  
|                                                                      |   |       |   |   |       |  
|Income tax expense (recovery) (note 13)                               |   | 19    |   |   | (15   | )
|                                                                      |   |       |   |   |       |  
|Non-controlling
      interest                                        |   |      |   |   | 2     |  
|Net earnings (loss) and comprehensive earnings (loss)                 |   | (3    | ) |   | 52    |  
|                                                                      |   |       |   |   |       |  
|Deficit, beginning
      of year                                      |   | (210  | ) |   | (262  | )
|Deficit, end of
      year                                            | $ | (213  | ) | $ | (210  | )
|Basic and diluted
      earnings (loss) in dollars per share (note 9) | $ | (0.03 | ) | $ | 0.52  |  

See accompanying notes to consolidated financial
statements.

Tembec Financial Report 2011 55

---

Consolidated Financial Statements

|CONSOLIDATED
      STATEMENTS OF CASH FLOWS          
|-----------------------------------------------------
|Years ended September 24, 2011 and September 25, 2010
|(in millions of Canadian dollars)                    



|                                                             |   | 2011 |   |   | 2010 |  
|------------------------------------------------------------ | - | ---- | - | - | ---- | -
|Cash flows from operating activities:                        |   |      |   |   |      |  
|Net earnings (loss)                                          | $ | (3   | ) | $ | 52   |  
|Adjustments for:                                             |   |      |   |   |      |  
|Depreciation and amortization                                |   | 45   |   |   | 56   |  
|Unrealized foreign exchange and other                        |   | (2   | ) |   | (1   | )
|Exchange loss (gain) on long-term debt                       |   | 1    |   |   | (27  | )
|Future income tax expense (recovery) (note 13)               |   | 11   |   |   | (15  | )
|Other items (note 11)                                        |   | (11  | ) |   | 13   |  
|Excess cash contributions over pension expense               |   | (20  | ) |   | (20  | )
|Other                                                        |   | (1   | ) |   |     |  
|                                                             |   | 20   |   |   | 58   |  
|Changes in non-cash working capital:                         |   |      |   |   |      |  
|Accounts receivable                                          |   | 33   |   |   | (41  | )
|Inventories                                                  |   | (6   | ) |   | 16   |  
|Prepaid expenses                                             |   | 1    |   |   | 5    |  
|Accounts payable,
      accrued charges and interest payable |   | 21   |   |   | 40   |  
|                                                             |   | 49   |   |   | 20   |  
|                                                             |   | 69   |   |   | 78   |  
|Cash flows from investing activities:                        |   |      |   |   |      |  
|Additions to fixed assets                                    |   | (55  | ) |   | (25  | )
|Proceeds on land sales and other                             |   | 17   |   |   | 7    |  
|Proceeds on sale of French mills (note 11)                   |   |     |   |   | 86   |  
|Other                                                        |   | (5   | ) |   | (1   | )
|                                                             |   | (43  | ) |   | 67   |  
|Cash flows from financing activities:                        |   |      |   |   |      |  
|Change in operating bank loans                               |   | 5    |   |   | (117 | )
|Cash held in trust (note 11)                                 |   |     |   |   | (6   | )
|Increase in long-term debt                                   |   | 8    |   |   | 272  |  
|Repayments of long-term debt                                 |   | (8   | ) |   | (318 | )
|Change in other long-term liabilities                        |   | (1   | ) |   | 2    |  
|Financing costs
      and other                              |   | 1    |   |   | (15  | )
|                                                             |   | 5    |   |   | (182 | )
|Net increase (decrease) in cash and cash equivalents         |   | 31   |   |   | (37  | )
|Cash and cash
      equivalents, beginning of year           |   | 68   |   |   | 105  |  
|Cash and cash
      equivalents, end of year                 | $ | 99   |   | $ | 68   |  

Interest paid in 2011 totalled $25 million ($29 million in
2010) and income taxes paid amounted to $1 million (nil in 2010). See
accompanying notes to consolidated financial statements.

56Tembec Financial Report 2011

---

Consolidated Financial Statements

|CONSOLIDATED
      BUSINESS SEGMENT INFORMATION      
|-----------------------------------------------------
|Years ended September 24, 2011 and September 25, 2010
|(in millions of Canadian dollars)                    



2011Forest
    
    
    Dissolving &
    
    
    High-Yield
    
    
    
    
    
    CorporateProducts
    
    
    Chemical Pulp
    
    
    Pulp
    
    
    Paper
    
    
    & Other
    
    
    ConsolidatedSales:External
    $
    375
    
    $
    681
    
    $
    348
    
    $
    339
    
    $
    
    
    $
    1,743Internal
    
    96
    
    
    12
    
    
    30
    
    
    
    
    
    7
    
    
    145471
    
    
    693
    
    
    378
    
    
    339
    
    
    7
    
    
    1,888Earnings (loss) before the following:
    
    (46
    )
    
    138
    
    
    (4
    )
    
    28
    
    
    (21
    )
    
    95Depreciation and amortization
    
    13
    
    
    18
    
    
    10
    
    
    3
    
    
    1
    
    
    45Other items (note
      11)
    
    4
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    1Operating earnings
      (loss)
    
    (63
    )
    
    120
    
    
    (14
    )
    
    25
    
    
    (19
    )
    
    49Net fixed asset
      additions
    
    10
    
    
    38
    
    
    3
    
    
    4
    
    
    
    
    
    55Identifiable assets  excluding cash and cash equivalents
    
    264
    
    
    437
    
    
    174
    
    
    119
    
    
    14
    
    
    1,008Cash and cash
      equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,107




2010Forest
    
    
    Dissolving &
    
    
    High-Yield
    
    
    
    
    
    CorporateProducts
    
    
    Chemical Pulp
    
    
    Pulp
    
    
    Paper
    
    
    & Other
    
    
    ConsolidatedSales:External
    $
    346
    
    $
    816
    
    $
    367
    
    $
    348
    
    $
    
    
    $
    1,877Internal
    
    88
    
    
    14
    
    
    28
    
    
    
    
    
    5
    
    
    135434
    
    
    830
    
    
    395
    
    
    348
    
    
    5
    
    
    2,012Earnings (loss) before the following:
    
    (10
    )
    
    120
    
    
    47
    
    
    (2
    )
    
    (23
    )
    
    132Depreciation and amortization
    
    16
    
    
    27
    
    
    10
    
    
    3
    
    
    
    
    
    56Other items (note
      11)
    
    (2
    )
    
    (12
    )
    
    
    
    
    7
    
    
    20
    
    
    13Operating earnings
      (loss)
    
    (24
    )
    
    105
    
    
    37
    
    
    (12
    )
    
    (43
    )
    
    63Net fixed asset
      additions
    
    7
    
    
    12
    
    
    3
    
    
    3
    
    
    
    
    
    25Identifiable assets  excluding cash and cash equivalents
    
    241
    
    
    444
    
    
    213
    
    
    123
    
    
    15
    
    
    1,036Cash and cash
      equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,104


Tembec Financial Report 2011 57

---

Consolidated Financial Statements

|CONSOLIDATED
      GEOGRAPHIC AREA INFORMATION       
|-----------------------------------------------------
|Years ended September 24, 2011 and September 25, 2010
|(in millions of Canadian dollars)                    



2011Forest
    
    
    Dissolving &
    
    
    High-YieldProducts
    
    
    Chemical Pulp
    
    
    Pulp
    
    
    Paper
    
    
    ConsolidatedSales (by final destination):Canada
    $
    208
    
    $
    52
    
    $
    2
    
    $
    59
    
    $
    321United States
    
    146
    
    
    191
    
    
    2
    
    
    252
    
    
    591China
    
    15
    
    
    158
    
    
    170
    
    
    
    
    
    343European Union
    
    1
    
    
    195
    
    
    55
    
    
    11
    
    
    262Other
    
    5
    
    
    85
    
    
    119
    
    
    17
    
    
    226$
    375
    
    $
    681
    
    $
    348
    
    $
    339
    
    $
    1,743




2010Forest
    
    
    Dissolving &
    
    
    High-YieldProducts
    
    
    Chemical Pulp
    
    
    Pulp
    
    
    Paper
    
    
    ConsolidatedSales (by final destination):Canada
    $
    212
    
    $
    81
    
    $
    4
    
    $
    70
    
    $
    367United States
    
    126
    
    
    193
    
    
    4
    
    
    259
    
    
    582China
    
    4
    
    
    93
    
    
    211
    
    
    
    
    
    308European Union
    
    1
    
    
    338
    
    
    59
    
    
    6
    
    
    404Other
    
    3
    
    
    111
    
    
    89
    
    
    13
    
    
    216$
    346
    
    $
    816
    
    $
    367
    
    $
    348
    
    $
    1,8772011
    
    
    2010Fixed assets:Canada
    
    
    
    
    
    
    
    
    
    $
    402
    
    $
    419France
    
    
    
    
    
    
    
    
    
    
    89
    
    
    76Other
    
    
    
    
    
    
    
    
    
    
    2
    
    
    3$
    493
    
    $
    498


58Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements (in millions of
Canadian dollars, unless otherwise noted)

BUSINESS OF THE COMPANY

The Company operates an integrated forest products business.
The performance of each segment is evaluated by the management of the Company
against short-term and long-term financial objectives as well as environmental,
safety and other key criteria. During the December 2010 quarter, the Company
reorganized its internal reporting structure. Prior to the changes, the Company
had reported its financial results based on five reportable segments: Forest
Products, Pulp, Paper, Chemicals, and Corporate. The Pulp segment included six
pulp mills. Subsequent to the organizational changes, the Pulp segment has been
divided into two segments: Dissolving and Chemical Pulp and High-Yield Pulp.
Each segment includes three pulp mills. As well, the Chemicals segment is now
part of the Dissolving and Chemical Pulp segment. A significant portion of
chemical product sales are related to byproducts generated by the two dissolving
pulp mills. The Forest Products, Paper and Corporate segments were unaffected by
the organizational changes. The Forest Products segment consists primarily of
forest and sawmill operations, which produce lumber and building materials. The
Dissolving and Chemical Pulp segment consists primarily of manufacturing and
marketing activities of dissolving and chemical pulps including the
transformation and sale of resins and pulp by-products. The High-Yield Pulp
segment includes the manufacturing and marketing activities of high-yield 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 accounting policies used in these
business segments are the same as those described in Note 1. Comparative prior
period segment information has been restated to conform with the new segment
presentation.

|1. SIGNIFICANT ACCOUNTING POLICIES
|----------------------------------

BASIS OF CONSOLIDATION

These consolidated financial statements are prepared in
accordance with Canadian Generally Accepted Accounting Principles (GAAP) and
include the accounts of the Company, Tembec Inc. (the Corporation), and all
its subsidiaries (collectively Tembec or the Company). Investments over
which the Corporation has effective control are fully consolidated.

USE OF ESTIMATES

The preparation of financial statements in conformity with
Canadian GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the period. Significant areas requiring
the use of management estimates are: useful lives of fixed assets, value of
long-term receivables, impairment of long-lived assets, employee future
benefits, income taxes, asset retirement obligations and environmental accruals.
Actual results could differ from those estimates.

REVENUE

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

Tembec Financial Report 2011 59

---

Notes to Consolidated Financial Statements

|1. SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
|---------------------------------------------

FINANCIAL INSTRUMENTS

The Company classifies its cash and cash equivalents as
held-for-trading. Accounts receivable and long-term receivables are classified
as loans and receivables. Bank indebtedness, operating bank loans, accounts
payable and accrued charges, interest payable and long-term debt are classified
as other liabilities, all of which are measured at amortized cost. The Company
measures all derivatives and embedded derivatives at fair value and the Company
has maintained its policy not to use hedge accounting.

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.

In establishing the fair value of financial assets and
liabilities measured at fair value on a recurring basis, the Company uses a
hierarchy based on the following levels:

| | Level 1: defined as observable inputs such as quoted prices in active
  markets.                                                                         
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                          
| | Level 2: defined as inputs other than quoted prices in active markets that
  are either directly or indirectly observable.                               
| |                                                                                                                                                          
| | Level 3: defined as inputs that are based on little or no observable
  market data and, therefore, requiring entities to develop their own
  assumptions.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents, including cash on hand, demand
deposits, bankers acceptances and commercial paper with maturities of three
months or less from date of purchase, are recorded at fair value.

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. 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 cost and net realizable value.

60Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|1. SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
|---------------------------------------------

FIXED ASSETS AND GOVERNMENT ASSISTANCE

Fixed assets are recorded at cost after deducting investment
tax credits and government assistance. Depreciation and amortization are
provided over their estimated useful lives, generally on a straight-line basis,
as follows:

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.

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

IMPAIRMENT OF LONG-LIVED ASSETS

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

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.

ASSET RETIREMENT OBLIGATIONS

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

Tembec Financial Report 2011 61

---

Notes to Consolidated Financial Statements

|1. SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
|---------------------------------------------

EMPLOYEE FUTURE BENEFITS

Employee future benefits include pension plans and other
employee future benefit plans. Other employee future benefit plans include
post-retirement life insurance programs, healthcare and dental care benefits as
well as certain post-employment benefits provided to disabled employees.
Registered pension plans are funded in accordance with applicable legislation
and their assets are held by an independent trustee. The obligations of
non-registered pension plans and other employee future benefit plans are funded
by the Company as they become due.

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

| | The cost of employee future benefits provided in exchange for employees
  services rendered during the year;                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The interest cost on employee future benefit obligations;                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The expected return on pension fund assets based on the fair value of plan
  assets;                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Gains or losses on settlements or curtailments where, when the
  restructuring of a defined benefit plan gives rise to both a curtailment and a
  settlement of obligations, the curtailment is accounted for prior to the
  settlement;                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The straight-line amortization of past service costs and plan amendments
  over the average remaining service period to full eligibility of the active
  employee group covered by the defined benefit plans or the average remaining
  lifetime of those entitled to benefits for plans covering only inactive
  participants; and                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The amortization of cumulative unrecognized net actuarial gains and losses
  in excess of 10% of the greater of the accrued benefit obligation or fair
  value of plan assets at the beginning of the year, over the average remaining
  service period of the active employee group covered by the defined benefit
  plans or the average remaining lifetime of those entitled to benefits for
  plans covering only inactive participants.

The employee future benefit obligations are determined in
accordance with the projected benefit method prorated on services, which
incorporates managements best estimate of future salary levels, other cost
escalations, retirement ages of employees and actuarial factors.

TRANSLATION OF FOREIGN CURRENCIES

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

62Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|1. SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
|---------------------------------------------

INCOME TAXES

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

INVESTMENT TAX CREDITS 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.

SHARE-BASED COMPENSATION PLANS

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 awarded. DSUs are remeasured at each
reporting period, until settlement, using the trading price of the common shares
of the Company.

Performance Conditioned Restricted Share Units (PCRSU) 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, until settlement, using the trading price
of the common shares of the Company.

Tembec Financial Report 2011 63

---

Notes to Consolidated Financial Statements

|1. SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
|---------------------------------------------

DERIVATIVE FINANCIAL INSTRUMENTS

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

The Company does not currently apply hedge accounting for these
derivative financial instruments. These are measured at fair value, with changes
in fair value recognized in earnings.

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 statements of operations and
deficit.

|2. TRANSITION TO INTERNATIONAL FINANCIAL REPORTING
      STANDARDS
|------------------------------------------------------------------

On February 13, 2008, the Accounting Standards Board of Canada
(AcSB) confirmed that publicly accountable entities would be required to apply,
and report in accordance with International Financial Reporting Standards
(IFRS), in full and without modification, effective in fiscal years beginning on
or after January 1, 2011, which, in the case of the Company, represents interim
and fiscal year-end periods beginning on September 25, 2011 (the Changeover
date). In the Companys reporting in those periods following the Changeover
date, the Company will be required to present comparative data for equivalent
periods in the previous fiscal year, making September 26, 2010, the Transition
date for the Company.

The Company has identified those areas that will be impacted by
changes in accounting policy and made policy electionswhere they are
required to be made either specifically at the Transition date or on a
prospective basis. The areas that are most impacted for the Company are:
property, plant, and equipment; employee future benefits; biological assets;
warrants; provisions; and contributed surplus.

Management is finalizing the determination of the impact of the
application of IFRS on the financial statements.

64Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|3. INVENTORIES
|--------------



|                             |   | 2011 |  |   | 2010 | 
|---------------------------- | - | ---- |  | - | ---- | 
|Finished goods               | $ | 112  |  | $ | 111  | 
|Logs and wood chips          |   | 66   |  |   | 64   | 
|Supplies and
      materials |   | 83   |  |   | 80   | 
|                             | $ | 261  |  | $ | 255  | 

Cost of sales consists primarily of inventories recognized as
an expense for fiscal 2011 and fiscal 2010.

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

|                             |   | 2011 |  |   | 2010 | 
|---------------------------- | - | ---- |  | - | ---- | 
|Forest Products              | $ | 3    |  | $ | 4    | 
|Dissolving and Chemical Pulp |   |     |  |   |     | 
|High-Yield Pulp              |   | 1    |  |   |     | 
|Paper                        |   |     |  |   |     | 
|                             | $ | 4    |  | $ | 4    | 



|4. FIXED ASSETS
|---------------



2011
    
    
    
    
    
    
    
    
    2010Accumulated
    
    
    Net
    
    
    
    
    
    Accumulated
    
    
    NetCost
    
    
    depreciation
    
    
    book value
    
    
    Cost
    
    
    depreciation
    
    
    book valueLand
    $
    12
    
    $
    
    
    $
    12
    
    $
    12
    
    $
    
    
    $
    12Buildings
    
    79
    
    
    19
    
    
    60
    
    
    76
    
    
    13
    
    
    63Production equipment:Pulp and paper
    
    439
    
    
    102
    
    
    337
    
    
    441
    
    
    81
    
    
    360Sawmill
    
    92
    
    
    61
    
    
    31
    
    
    91
    
    
    50
    
    
    41Forest access roads
    
    17
    
    
    1
    
    
    16
    
    
    11
    
    
    
    
    
    11Assets under
      construction
    
    37
    
    
    
    
    
    37
    
    
    11
    
    
    
    
    
    11$
    676
    
    $
    183
    
    $
    493
    
    $
    642
    
    $
    144
    
    $
    498


Tembec Financial Report 2011 65

---

Notes to Consolidated Financial Statements

|5. OTHER ASSETS
|---------------



|                                 |   | 2011 |  |   | 2010 | 
|-------------------------------- | - | ---- |  | - | ---- | 
|Loan receivable  Temlam         | $ | 23   |  | $ | 23   | 
|Deferred pension costs (note 14) |   | 16   |  |   | 6    | 
|Long-term loans to employees     |   | 1    |  |   | 2    | 
|Notes receivable                 |   |     |  |   | 2    | 
|Other                            |   | 4    |  |   | 1    | 
|                                 | $ | 44   |  | $ | 34   | 

In October 2008, the Company assumed the rank of secured lender
to the Temlam LVL mill by effecting a payment of $22 million plus $1 million of
custodial fees. The Company retains a 50% ownership position in the LVL mill
that remains idle. Improvements in the U.S. housing market will be required
before operations can resume or the Company can monetize the loan.

|6. OPERATING BANK LOANS
|-----------------------

On March 4, 2011, the Company entered into a new $200 million
asset-based revolving five-year working capital facility expiring in February
2016. The new facility effectively replaces the prior $205 million revolving
working capital facility due to expire in December 2011. The new facility has a
first priority charge over the receivables and inventories of the Companys
Canadian operations. As at September 24, 2011, the amount available and unused,
based on eligible receivables and inventories, was $140million of which $34
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 2011, the amount available
was $18 million (2010 - $25million) net of borrowings of $6 million (2010 - $1
million).

66Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|7. LONG-TERM DEBT
|-----------------



|                                                                                                                                                                          |   | 2011 |  |   | 2010 | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---- |  | - | ---- | 
|Tembec Inc.                                                                                                                                                               |   |      |  |   |      | 
|6% unsecured notes, repayable in semi-annual instalments of
      $2 million beginning March 30, 2008, with the balance due on September 30,
      2012                   | $ | 5    |  | $ | 9    | 
|Other                                                                                                                                                                     |   | 2    |  |   | 2    | 
|                                                                                                                                                                          |   |      |  |   |      | 
|Tembec Industries Inc.                                                                                                                                                    |   |      |  |   |      | 
|11.25% senior secured notes US $255 million, due December
      15, 2018, with semi-annual interest payments due June 15 and December 15
      of each year               |   | 262  |  |   | 261  | 
|                                                                                                                                                                          |   |      |  |   |      | 
|Tembec Tartas SAS                                                                                                                                                         |   |      |  |   |      | 
|Secured term loans € 5 million, bearing interest at EURIBOR
      plus 2%, repayable in quarterly instalments beginning in March 2012 and
      maturing in December 2017 |   | 7    |  |   |     | 
|Unsecured term loans € 12 million, non-interest bearing,
      repayable and maturing at various dates from June 2014 to September 2020                                   |   | 17   |  |   | 12   | 
|Other                                                                                                                                                                     |   | 1    |  |   | 2    | 
|                                                                                                                                                                          |   |      |  |   |      | 
|Tembec Envirofinance SAS                                                                                                                                                  |   |     |  |   | 7    | 
|                                                                                                                                                                          |   |      |  |   |      | 
|Kirkland Lake
      Engineered Wood Products Inc.                                                                                                                         |   | 8    |  |   | 8    | 
|                                                                                                                                                                          | $ | 302  |  | $ | 301  | 
|                                                                                                                                                                          |   |      |  |   |      | 
|Less current portion                                                                                                                                                      |   | 18   |  |   | 17   | 
|Less unamortized
      financing costs                                                                                                                                    |   | 13   |  |   | 13   | 
|                                                                                                                                                                          | $ | 271  |  | $ | 271  | 

On August 17, 2010, the Company completed a private offering of
US $255 million in aggregate principal amount of 11.25% senior secured notes
(the 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 proceeds from
the offering, together with cash on hand, were used to permanently repay all
outstanding indebtedness under the previous US $300 million term loan facility,
to pay prepayment premiums in connection therewith and to pay fees and expenses
related to the offering.

The Company entered into a registration rights agreement with
the initial purchasers pursuant to which they have agreed to use commercially
reasonable efforts to register with the SEC, new notes having substantially
identical terms as the Notes. The exchange offer and the registration of the new
notes with the SEC were completed on March 31, 2011.

Tembec Financial Report 2011 67

---

Notes to Consolidated Financial Statements

|7. LONG-TERM DEBT(CONTINUED)
|----------------------------

Instalments on consolidated long-term debt for the five years
following September 24, 2011, are as follows:

|2012 | $ | 18 | 
|---- | - | -- | 
|2013 | $ | 6  | 
|2014 | $ | 5  | 
|2015 | $ | 5  | 
|2016 | $ | 4  | 



|8. OTHER LONG-TERM LIABILITIES AND CREDITS
|------------------------------------------



|                                                            |   | 2011 |  |   | 2010 | 
|----------------------------------------------------------- | - | ---- |  | - | ---- | 
|Accrued benefit liability - pension benefit plans (note 14) | $ | 119  |  | $ | 130  | 
|Accrued benefit liability - other benefit plans (note 14)   |   | 50   |  |   | 57   | 
|Reforestation                                               |   | 9    |  |   | 9    | 
|Environmental and other asset retirement obligations        |   | 4    |  |   | 4    | 
|Other                                                       |   | 6    |  |   | 9    | 
|                                                            | $ | 188  |  | $ | 209  | 



|9. 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.

11,111,111 warrants convertible in equal amount of common
shares and expiring February 29, 2012. The warrants shall be deemed to be
exercised and shall be automatically converted into new common shares when the
20-day volume-weighted average trading price of a single common share reaches or
exceeds $12.00 or immediately prior to any transaction that would constitute a
change of control at a purchase price per common share equal to at least
$12.00.

|(a) | Common shares and warrants
issued
|--- | ---------------------------------



| |                           |   | 2011 |  |   | 2010 | 
| | ------------------------- | - | ---- |  | - | ---- | 
| | Issued and fully paid:    |   |      |  |   |      | 
| | 100,000,000 common shares | $ | 564  |  | $ | 564  | 
| | 11,093,943
      warrants |   | 6    |  |   | 6    | 
| |                           | $ | 570  |  | $ | 570  | 

68Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|9. SHARE CAPITAL(CONTINUED)
|---------------------------



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



| |                                                                    |   | 2011        |   |   | 2010        | 
| | ------------------------------------------------------------------ | - | ----------- | - | - | ----------- | 
| | Net earnings (loss)                                                | $ | (3          | ) | $ | 52          | 
| | 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
      earnings (loss) in dollars per share       | $ | (0.03       | ) | $ | 0.52        | 



|    | 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.                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(c) | 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 24, 2011 and
      September25, 2010.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The following table summarizes the changes in options
      outstanding and the impact on weighted average per share exercise price
      during the year:                                                                                                                                                                                                                                                                                                                                                                                               



| |                                |  |         |   |   | 2011           |  |  |         |   |   | 2010           | 
| | ------------------------------ |  | ------- | - | - | -------------- |  |  | ------- | - | - | -------------- | 
| |                                |  |         |   |   | Weighted       |  |  |         |   |   | Weighted       | 
| |                                |  |         |   |   | average        |  |  |         |   |   | average        | 
| |                                |  | Options |   |   | exercise price |  |  | Options |   |   | exercise price | 
| | Balance, beginning of year     |  | 161,123 |   | $ | 89.01          |  |  | 185,031 |   | $ | 105.17         | 
| | Options cancelled              |  | (39,103 | ) |   | 132.67         |  |  | (23,908 | ) |   | 214.07         | 
| | Balance, end of
      year     |  | 122,020 |   | $ | 75.01          |  |  | 161,123 |   | $ | 89.01          | 
| | Exercisable, end
      of year |  | 122,020 |   | $ | 75.01          |  |  | 151,470 |   | $ | 92.83          | 

Of the total 39,103 (2010  23,908)
options cancelled, 4,001 (2010  17,495) expired and 35,102 (2010  6,413) were
forfeited.

Tembec Financial Report 2011 69

---

Notes to Consolidated Financial Statements

|9. SHARE CAPITAL(CONTINUED)
|---------------------------



|(c) | Share-based compensation(continued)                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                          
|    | The following table summarizes the weighted average per
      share exercise price and the weighted remaining contractual life of the
      options outstanding as at September 24, 2011:



| |              |  | Outstanding options and exercisable options | 
| | ------------ |  | ------------------------------------------- | 
| |              |  |                                             | 
| |              |  | Number of                                   | 
| | Year granted |  | options                                     | 
| | 2002         |  | 5,790                                       | 
| | 2003         |  | 4,696                                       | 
| | 2004         |  | 5,772                                       | 
| | 2005         |  | 57,792                                      | 
| | 2006         |  | 47,970                                      | 
| |              |  | 122,020                                     | 



|(d) | Other share-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | During fiscal 2009, the Company established a
      Performance-Conditioned Restricted Share Units (PCRSU) plan for designated
      senior executives. Each PCRSU is equivalent in value to a common share of
      the Company and is notionally credited with dividends when shareholders
      receive dividends from the Company. Vesting of the PCRSUs is based on the
      attainment of performance objectives over a three-year period. PCRSUs will
      be settled in the form of cash.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The following table summarizes the grant of PCRSUs that
      has occurred over the past two years:                                                                                                                                                                                                                                                                                                                                                                                                



| |                            |  | 2011      |   |  | 2010      |  
| | -------------------------- |  | --------- | - |  | --------- | -
| | Balance, beginning of year |  | 1,563,000 |   |  | 1,116,000 |  
| | Grants                     |  | 732,201   |   |  | 536,000   |  
| | Forfeitures                |  | (271,194  | ) |  | (89,000   | )
| | Balance, end of
      year |  | 2,024,007 |   |  | 1,563,000 |  
| | Vested, end of
      year  |  | 622,940   |   |  |          |  

Directors 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.

70Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|9. SHARE CAPITAL(CONTINUED)
|---------------------------



|(d) | Other share-based compensation(continued)                                                        
|--- | -------------------------------------------------------------------------------------------------
|    |                                                                                                  
|    | The following table summarizes the grant of DSUs that has
      occurred over the past two years:



| |                            |  | 2011      |   |  | 2010    | 
| | -------------------------- |  | --------- | - |  | ------- | 
| | Balance, beginning of year |  | 411,222   |   |  | 411,222 | 
| | Grants                     |  | 750,999   |   |  |        | 
| | Paid                       |  | (42,385   | ) |  |        | 
| | Balance, end of
      year |  | 1,119,836 |   |  | 411,222 | 
| | Vested, end of
      year  |  | 619,170   |   |  | 411,222 | 

On November 17, 2010, under the
Directors Share Award Plan, non-executive members of the Board were granted
655,175DSUs, and on January 27, 2011, 95,824 additional DSUs were granted. These
DSUs are vesting in three equal amounts over the next three Annual General
Shareholders meetings beginning on January 27, 2011.

During fiscal 2006, the Predecessor of
the Company established a performance share units (PSU) plan for designated
senior executives. Under the terms of this plan, senior executives may be
eligible to an annual incentive remuneration paid to them in the form of PSUs.
Each PSU 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 PSU is paid to an executive following a three-year vesting period and
is payable in the form of cash. As at September 24, 2011, no PSUs (2010 
40,523) were outstanding.

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

| |                                                    |   | 2011 |  |   | 2010 | 
| | -------------------------------------------------- | - | ---- |  | - | ---- | 
| | Performance-conditioned restricted share unit plan | $ | 2    |  | $ | 1    | 
| | Directors share award plan                        |   |     |  |   | 1    | 
| | Performance share
      unit plan                  |   |     |  |   |     | 
| |                                                    | $ | 2    |  | $ | 2    | 

Tembec Financial Report 2011 71

---

Notes to Consolidated Financial Statements

|10. GUARANTEES, COMMITMENTS AND CONTINGENCIES
|---------------------------------------------

GUARANTEES

The Company and certain of its subsidiaries have granted
irrevocable letters of credit, issued by high 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 2012.

LUMBER EXPORT TAXES

Effective October 12, 2006, the governments of Canada and the
United States implemented an agreement for the settlement of the softwood lumber
dispute. The Softwood Lumber Agreement (SLA) requires that an export tax be
collected by the Government of Canada, which is based on the price and volume of
lumber shipped. The SLA had an effective date of October 12, 2006, at which time
the U.S. Department of Commerce (USDOC) revoked all existing countervailing and
antidumping duty orders on softwood lumber shipped to the U.S. from Canada.

COMMITMENTS

The Company has entered into operating leases for expected cash
outflows of $14 million. Outflows for the five years following September 24,
2011, are as follows:

|2012 | $ | 5 | 
|---- | - | - | 
|2013 | $ | 3 | 
|2014 | $ | 2 | 
|2015 | $ | 2 | 
|2016 | $ | 1 | 

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 adverse effect on the Companys financial
condition, earnings or liquidity.

72Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|11. OTHER ITEMS
|---------------

2011

During the September 2011 quarter, the Company recorded a
charge of $2 million relating to several permanently idled facilities. The costs
relate to pension and healthcare benefits, legal costs, site security and
custodial costs. For the year ended September24, 2011, these charges amount to
$8 million.

During the June 2011 quarter, the Company finalized the sale of
its hydro-electric generating assets located in Smooth Rock Falls, Ontario, and
recorded a pre-tax gain of $3 million. Total consideration for the assets, which
had a capacity of 7.4 megawatts, was $16 million paid in cash.

During the June 2011 quarter, the Company announced that its
non-operating U.S. subsidiary, Tembec USA LLC, had filed a petition seeking
relief under Chapter 7 of the Bankruptcy Code of the United States. As a result
of the filing, the Company determined that it no longer exercised control over
this investment. The Company recorded a gain of $8 million relating to the
deconsolidation of this subsidiary, arising primarily from the reduction in its
consolidated accrued benefit obligation.

During the March 2011 quarter, the Company announced the
permanent closure of the Taschereau, Quebec, sawmill. The facility had been
idled since October 2009. The Company recorded a charge of $3 million relating
to severance and other items.

During the March 2011 quarter, the Company recorded a charge of
$1 million for severance relating to the Cranbrook, British Columbia, planer mill
operation. The mill has been indefinitely idled since November 2007.

2010

During the September 2010 quarter, the Company incurred a net
charge of $7 million relating to the permanent closure of its newsprint mill
located in Pine Falls, Manitoba. The write-down of assets for $13 million and
the accrual for severances and other for $10 million were partially offset by
the recognition of a curtailment gain in employee future benefits totalling $16
million.

On May 7, 2010, the Company finalized the sale of the kraft
pulp mills located in Tarascon and Saint-Gaudens, France, to Paper Excellence
B.V. and recorded a gain of $12 million. Proceeds amounted to 66 million euros
($88 million) for the shares.Total proceeds of $88 million were reduced
by $2 million for cash balance left in the two mills. Approximately 4 million
euros ($6million) of this amount will be held in escrow with the Companys
counsel until May 2012 (changed from May 2011 under the terms of the escrow
agreement) to secure certain undertakings made by the Company. Paper Excellence
B.V. also assumed 31million euros ($41 million) of debt.

As a result of an order issued by the Ontario Ministry of the
Environment, the Company has had to undertake the removal ofblack liquor
from storage tanks and pipelines of the bankrupt Marathon, Ontario, pulp
facility. Costs for the September, June and March 2010 quarters amounted to $2
million, $2 million and $3 million, respectively.

Tembec Financial Report 2011 73

---

Notes to Consolidated Financial Statements

|11. OTHER ITEMS(CONTINUED)
|--------------------------

2010 (CONTINUED)

In April 2009, the Company sold the St. Francisville,
Louisiana, coated paper mill facility and related equipment to West Feliciana
Acquisition, LLC (WFA). The paper mill had been idle since July 2007. A portion
of the consideration received by the Company included two US $5 million interest
bearing notes. Principal payments on the notes were due on various dates
beginning in March2011 and ending in March 2016. On January 17, 2010, WFA filed
for relief under Chapter 11 of the U.S. Bankruptcy Code. It was unlikely that
the Company would recover any portion of the interest-bearing notes and, as a
result, a charge of $12million relating to these notes was recorded during the
March 2010 quarter. During the June 2010 quarter, the Company recorded a charge
of $1million relating to pension and healthcare benefits, which the Company has
continued to incur following the sale.

During the December 2009 and March 2010 quarters, the Company
completed the sale of a number of land properties and recorded a gain of $2
million.

The following table provides an analysis of the other items by
business segment of the Company:

2011Forest
    
    
    Dissolving &
    
    
    High-Yield
    
    
    
    
    
    CorporateProducts
    
    
    Chemical Pulp
    
    
    Pulp
    
    
    Paper
    
    
    & Other
    
    
    ConsolidatedGain on sale of assets
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    (3
    )
    $
    (3
    )Other
    
    1
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    9Severance, other
      labour-related and idling costs
    
    3
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    (5
    )$
    4
    
    $
    
    
    $
    
    
    $
    
    
    $
    (3
    )
    $
    1




2010Forest
    
    
    Dissolving &
    
    
    High-Yield
    
    
    
    
    
    CorporateProducts
    
    
    Chemical Pulp
    
    
    Pulp
    
    
    Paper
    
    
    & Other
    
    
    ConsolidatedGain on sales of assets
    $
    (2
    )
    $
    (12
    )
    $
    
    
    $
    
    
    $
    12
    
    $
    (2
    )Other
    
    
    
    
    
    
    
    
    
    
    11
    
    
    7
    
    
    18Severance, other
      labour-related and idling costs
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    1
    
    
    (3
    )$
    (2
    )
    $
    (12
    )
    $
    
    
    $
    7
    
    $
    20
    
    $
    13


74Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|12. INTEREST, FOREIGN EXCHANGE AND OTHER
|----------------------------------------



|                                                                                  |   | 2011 |   |   | 2010 |  
|--------------------------------------------------------------------------------- | - | ---- | - | - | ---- | -
|Interest on long-term debt                                                        | $ | 31   |   | $ | 27   |  
|Interest on
      operating bank loan                                             |   | 1    |   |   | 3    |  
|                                                                                  |   | 32   |   |   | 30   |  
|Exchange gain on conversion of integrated foreign
      subsidiaries              |   | (2   | ) |   | (1   | )
|Other foreign exchange items                                                      |   | 1    |   |   | 14   |  
|Fees - new revolving working capital facility                                     |   | 2    |   |   |     |  
|Term loan prepayment premium                                                      |   |     |   |   | 6    |  
|Bank charges and
      other                                                      |   | (1   | ) |   | 2    |  
|                                                                                  |   |     |   |   | 21   |  
|                                                                                  | $ | 32   |   | $ | 51   |  
|                                                                                  |   |      |   |   |      |  
|Foreign exchange items included in the financial statements
      are as follows: |   |      |   |   |      |  
|                                                                                  |   | 2011 |   |   | 2010 |  
|Exchange loss (gain) on long-term debt                                            | $ | 1    |   | $ | (27  | )
|Exchange gain on conversion of integrated foreign
      subsidiaries              |   | (2   | ) |   | (1   | )
|Other foreign
      exchange items                                                |   | 1    |   |   | 14   |  
|                                                                                  | $ |     |   | $ | (14  | )



|13. INCOME TAXES
|----------------

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

|                                                                                                              |   | 2011 |   |   | 2010 |  
|------------------------------------------------------------------------------------------------------------- | - | ---- | - | - | ---- | -
|Future income tax assets:                                                                                     |   |      |   |   |      |  
|Non-capital loss carry-forwards and pool of deductible
      scientific research and development expenditures | $ | 403  |   | $ | 386  |  
|Fixed assets                                                                                                  |   | 41   |   |   | 34   |  
|Employee future benefits                                                                                      |   | 41   |   |   | 49   |  
|Capital loss carry-forwards                                                                                   |   | 3    |   |   | 7    |  
|Financing charges                                                                                             |   |     |   |   | 7    |  
|Other                                                                                                         |   | 16   |   |   | 18   |  
|Valuation
      allowance                                                                                     |   | (486 | ) |   | (472 | )
|                                                                                                              |   | 18   |   |   | 29   |  
|Future income tax liabilities:                                                                                |   |      |   |   |      |  
|Other                                                                                                         |   | (2   | ) |   | (2   | )
|Net future income
      tax assets                                                                            | $ | 16   |   | $ | 27   |  

Tembec Financial Report 2011 75

---

Notes to Consolidated Financial Statements

|13. INCOME TAXES(CONTINUED)
|---------------------------

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:

|                                                                          |   | Amounts |  |  | Expiring dates | 
|------------------------------------------------------------------------- | - | ------- |  |  | -------------- | 
|Non-capital loss carried forward for:                                     |   |         |  |  |                | 
|Canadian subsidiaries                                                     | $ | 1,106   |  |  | 2014 to 2031   | 
|U.S. subsidiaries                                                         | $ | 18      |  |  | 2028 to 2031   | 
|French subsidiaries                                                       | $ | 32      |  |  | Unlimited      | 
|Pool of deductible
      scientific research and experimental development | $ | 370     |  |  | Unlimited      | 

The reconciliation of income taxes calculated at the statutory
rate to the actual tax provision is as follows:

|                                                                                                                 |   | 2011 |   |   | 2010 |  
|---------------------------------------------------------------------------------------------------------------- | - | ---- | - | - | ---- | -
|Earnings before
      income taxes and non-controlling interest                                                  | $ | 16   |   | $ | 39   |  
|Income tax expense
      based on combined federal and provincial income tax rates of 27.8% (2010 
      29.8%) | $ | 4    |   | $ | 12   |  
|Increase (decrease) resulting from:                                                                              |   |      |   |   |      |  
|Future income tax adjustment due to rate enactments                                                              |   |     |   |   | 2    |  
|Change in valuation allowance                                                                                    |   | 11   |   |   | (20  | )
|Difference in statutory income tax rate                                                                          |   | 5    |   |   | 4    |  
|Permanent differences:                                                                                           |   |      |   |   |      |  
|Non-taxable portion of exchange gain on long-term debt                                                           |   |     |   |   | (3   | )
|Non-taxable exchange gain on conversion of integrated
      foreign subsidiaries                                 |   |     |   |   | (10  | )
|Other permanent
      differences                                                                                |   | (1   | ) |   |     |  
|                                                                                                                 |   | 15   |   |   | (27  | )
|Income tax expense
      (recovery)                                                                              | $ | 19   |   | $ | (15  | )
|Income taxes                                                                                                     |   |      |   |   |      |  
|Current                                                                                                          | $ | 8    |   | $ |     |  
|Future                                                                                                           |   | 11   |   |   | (15  | )
|Income tax expense
      (recovery)                                                                              | $ | 19   |   | $ | (15  | )

76Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|14. EMPLOYEE FUTURE BENEFITS
|----------------------------

DEFINED CONTRIBUTION PENSION PLANS

The Company contributes to defined contribution pension plans,
provincial and labour sponsored pension plans, group registered retirement
savings plans, deferred profit sharing plans, and 401(k) plans. The pension
expense of $11 million (2010  $9 million) under these plans is equal to the
Companys contribution.

DEFINED BENEFIT PENSION PLANS

The Company has several defined benefit pension plans.
Non-unionized employees in Canada joining the Company after January1, 2000,
participate in defined contribution pension plans. Some of the defined benefit
pension plans are contributory. The pension expense and the obligation related
to the defined benefit pension plans are actuarially determined using
managements most probable assumptions.

OTHER FUTURE BENEFIT PLANS

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

The post-retirement and post-employment benefit expenses and
the obligations related to other future benefit 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 as at January 1, 2010
or May 1, 2009.

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

COMPANY CONTRIBUTIONS

Total cash payments for employee future benefits consist of
cash contributed by the Company to its funded pension plans, cash payments
directly to beneficiaries for its unfunded benefit plans and cash contributed to
its defined contribution plans including multi-employer pension plans. The
Company contributions were $44 million for fiscal 2011 and 2010.

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 June 30, 2011, the
defined benefit pension plan assets were comprised of 1% (1% in 2010) in cash
and short-term investments, 5% (5% in 2010) in real estate, 44% (45% in 2010) in
bonds and 50% (49% in 2010) in Canadian, U.S. and foreign equity.

Tembec Financial Report 2011 77

---

Notes to Consolidated Financial Statements

|14. EMPLOYEE FUTURE BENEFITS(CONTINUED)
|---------------------------------------

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 two plans on January 1, 2011, 10 plans on December 31, 2010, one
plan on December 31, 2009, and three plans on December 31, 2008.

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.

INFORMATION ABOUT THE COMPANYS DEFINED BENEFIT PLANS IN
AGGREGATE

The Company measures its accrued benefit obligation and the
fair value of plan assets for accounting purposes as at June 30 of each
year.

During fiscal 2011, significant lump sum payments to employees
were paid from the Pine Falls and Taschereau pension plans having for effect of
reducing benefit obligations (obligations being settled) by $4 million and
benefit plan assets (settlement payments) by $3 million. In fiscal 2010,
significant lump sum payments to employees were paid from the Pine Falls pension
plans having for effect of reducing benefit obligations by $18 million and
benefit plan assets by $15 million. In fiscal 2010, benefit obligations were
also reduced by $45 million relating to the purchase of annuities for a partial
windup group. As a result, benefit plan assets were reduced by $42 million.

78Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|14. EMPLOYEE FUTURE BENEFITS(CONTINUED)
|---------------------------------------

INFORMATION ABOUT THE COMPANYS DEFINED BENEFIT PLANS IN
AGGREGATE(CONTINUED)

The following tables present the change in the accrued benefit
obligation for the defined benefit plans as calculated by independent actuaries
and the change in the fair value of plan assets:

Change in accrued benefit obligations for defined benefit
plans:

|                                                   |   | Pension plans |   |   | Other benefit plans |  
|-------------------------------------------------- | - | ------------- | - | - | ------------------- | -
|                                                   |   | 2011          |   |   | 2010                |  
|Accrued benefit obligation, at beginning of year   | $ | 786           |   | $ | 828                 |  
|Current service cost                               |   | 8             |   |   | 11                  |  
|Interest cost                                      |   | 39            |   |   | 46                  |  
|Employee contributions                             |   | 2             |   |   | 2                   |  
|Benefits paid                                      |   | (44           | ) |   | (48                 | )
|Divestitures                                       |   |              |   |   | (9                  | )
|Plan amendments                                    |   | 1             |   |   | 1                   |  
|Actuarial loss (gain)                              |   | 16            |   |   | 54                  |  
|Foreign exchange rate changes and other adjusments |   | 1             |   |   | (9                  | )
|Decrease in obligation due to curtailment          |   |              |   |   | (24                 | )
|Obligations being
      settled                    |   | (5            | ) |   | (66                 | )
|Accrued benefit
      obligation, at end of year   | $ | 804           |   | $ | 786                 |  

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

|                                                                      |   | Pension plans |   |   | Other benefit plans |  
|--------------------------------------------------------------------- | - | ------------- | - | - | ------------------- | -
|                                                                      |   | 2011          |   |   | 2010                |  
|Fair value of defined benefit plan assets, at beginning of
      year | $ | 580           |   | $ | 606                 |  
|Actual return on plan assets                                          |   | 75            |   |   | 57                  |  
|Employer contributions                                                |   | 31            |   |   | 28                  |  
|Employee contributions                                                |   | 2             |   |   | 2                   |  
|Benefits paid                                                         |   | (44           | ) |   | (48                 | )
|Foreign exchange rate changes and other adjusments                    |   | 1             |   |   | (5                  | )
|Settlement
      payments                                             |   | (4            | ) |   | (60                 | )
|Fair value of
      defined benefit plan assets, at end of year       | $ | 641           |   | $ | 580                 |  

Tembec Financial Report 2011 79

---

Notes to Consolidated Financial Statements

|14. EMPLOYEE FUTURE BENEFITS(CONTINUED)
|---------------------------------------

FUNDED STATUS

The following table presents the difference between the fair
value of plan assets and the actuarially determined accrued benefit obligation
as at June 30, 2011 and June 30, 2010, 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.

The table further reconciles the amount of the surplus or
deficit (funded status) to the net amount recognized in the consolidated balance
sheets. The difference between the funded status and the net amount recognized
in the consolidated balance sheets, in accordance with Canadian GAAP, represents
the portion of the surplus or deficit not yet recognized for accounting
purposes. This approach allows for a gradual recognition of changes in accrued
benefit obligations and plan performance as described in Note 1.

Reconciliation of funded status for defined benefit plans:

|                                                       |   | Pension plans |   |   | Other benefit plans |  
|------------------------------------------------------ | - | ------------- | - | - | ------------------- | -
|                                                       |   | 2011          |   |   | 2010                |  
|Fair value of plan assets                              | $ | 641           |   | $ | 580                 |  
|Accrued benefit
      obligation                       |   | (804          | ) |   | (786                | )
|Plan deficit                                           |   | (163          | ) |   | (206                | )
|Employer contribution after measurement date (June 30) |   | 9             |   |   | 8                   |  
|Unamortized past service costs                         |   | 2             |   |   | 1                   |  
|Unamortized net
      actuarial loss (gain)            |   | 49            |   |   | 73                  |  
|Net benefit
      liability                            | $ | (103          | ) | $ | (124                | )

Amounts recognized in the consolidated balance sheets for
defined benefit plans:

|                                |   | Pension plans |   |   | Other benefit plans |  
|------------------------------- | - | ------------- | - | - | ------------------- | -
|                                |   | 2011          |   |   | 2010                |  
|Deferred pension costs          | $ | 16            |   | $ | 6                   |  
|Accrued benefit
      liability |   | (119          | ) |   | (130                | )
|Net benefit
      liability     | $ | (103          | ) | $ | (124                | )

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

|                                 |   | Pension plans |   |   | Other benefit plans |  
|-------------------------------- | - | ------------- | - | - | ------------------- | -
|                                 |   | 2011          |   |   | 2010                |  
|Fair value of plan assets        | $ | 636           |   | $ | 579                 |  
|Accrued benefit
      obligation |   | (800          | ) |   | (785                | )
|Plan deficit                     | $ | (164          | ) | $ | (206                | )

80Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|14. EMPLOYEE FUTURE BENEFITS(CONTINUED)
|---------------------------------------

COMPONENTS OF NET PERIODIC BENEFIT COST FOR DEFINED BENEFIT
PENSION PLANS

|                                                                                                                       |   | 2011 |   |   | 2010 |  
|---------------------------------------------------------------------------------------------------------------------- | - | ---- | - | - | ---- | -
|Current service cost                                                                                                   | $ | 8    |   | $ | 11   |  
|Interest cost                                                                                                          |   | 39   |   |   | 46   |  
|Actual return on plan assets                                                                                           |   | (75  | ) |   | (57  | )
|Actuarial loss                                                                                                         |   | 16   |   |   | 54   |  
|Curtailment gain                                                                                                       |   |     |   |   | (15  | )
|Settlement gain                                                                                                        |   | (1   | ) |   | (2   | )
|Plan amendments
      and other                                                                                        |   | 1    |   |   | 1    |  
|                                                                                                                       |   |      |   |   |      |  
|Net expense (income) before adjustments to recognize the
      long-term nature of the plans                           |   | (12  | ) |   | 38   |  
|                                                                                                                       |   |      |   |   |      |  
|Difference between expected and actual return on plan
      assets                                                     |   | 38   |   |   | 17   |  
|Difference between net actuarial gain and actuarial gain                                                               |   | (14  | ) |   | (54  | )
|Difference between
      amortization of past service costs for the year and actual plan amendments
      for the year |   | (1   | ) |   | (1   | )
|Net periodic
      benefit cost                                                                                        | $ | 11   |   | $ |     |  

COMPONENTS OF NET PERIODIC BENEFIT COST FOR OTHER FUTURE
BENEFIT PLANS

|                                                                                                                 |   | 2011 |   |   | 2010 |  
|---------------------------------------------------------------------------------------------------------------- | - | ---- | - | - | ---- | -
|Current service cost                                                                                             | $ | 1    |   | $ | 1    |  
|Interest cost                                                                                                    |   | 2    |   |   | 3    |  
|Curtailment gain                                                                                                 |   |     |   |   | (1   | )
|Actuarial gain                                                                                                   |   | (2   | ) |   | (3   | )
|Net expense before adjustments to recognize the long-term
      nature of the plans                              |   | 1    |   |   |     |  
|                                                                                                                 |   |      |   |   |      |  
|Difference between amortization of past service costs for
      the year and actual plan amendments for the year |   | 1    |   |   | 1    |  
|Difference between
      net actuarial loss and actuarial loss                                                   |   | 1    |   |   | 2    |  
|Net periodic
      benefit cost                                                                                  | $ | 3    |   | $ | 3    |  

Tembec Financial Report 2011 81

---

Notes to Consolidated Financial Statements

|14. EMPLOYEE FUTURE BENEFITS(CONTINUED)
|---------------------------------------

ASSUMPTIONS

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

|                                                                                 |   | 2011  |   |   | 2010  |  
|-------------------------------------------------------------------------------- | - | ----- | - | - | ----- | -
|Accrued benefit obligation at end of year:                                       |   |       |   |   |       |  
|Discount rate                                                                    |   | 4.94% |   |   | 5.12% |  
|Rate of compensation increase                                                    |   | 2.50% |   |   | 2.50% |  
|                                                                                 |   |       |   |   |       |  
|Net periodic benefit cost for the year:                                          |   |       |   |   |       |  
|Discount rate                                                                    |   | 5.12% |   |   | 5.73% |  
|Rate of compensation increase                                                    |   | 2.50% |   |   | 2.61% |  
|Expected long-term
      return on assets                                        |   | 6.52% |   |   | 6.88% |  
|                                                                                 |   |       |   |   |       |  
|Significant assumptions for other future benefit plans
      (weighted average): |   |       |   |   |       |  
|                                                                                 |   |       |   |   |       |  
|                                                                                 |   | 2011  |   |   | 2010  |  
|Accrued benefit obligation at end of year:                                       |   |       |   |   |       |  
|Discount rate                                                                    |   | 4.91% |   |   | 5.12% |  
|Rate of compensation increase                                                    |   | 2.50% |   |   | 2.50% |  
|                                                                                 |   |       |   |   |       |  
|Net periodic benefit cost for the year:                                          |   |       |   |   |       |  
|Discount rate                                                                    |   | 5.12% |   |   | 5.48% |  
|Rate of compensation increase                                                    |   | 2.50% |   |   | 2.50% |  
|                                                                                 |   |       |   |   |       |  
|Assumed healthcare cost trend rate at end of year:                               |   |       |   |   |       |  
|Initial healthcare cost trend                                                    |   | 7.50% |   |   | 8.00% |  
|Annual rate of decline in trend rate                                             |   | 0.50% |   |   | 0.50% |  
|Ultimate healthcare cost trend rate                                              |   | 5.00% |   |   | 5.00% |  
|                                                                                 |   |       |   |   |       |  
|Effect of change in healthcare cost trend rate (1%
      increase):              |   |       |   |   |       |  
|Total of service cost and interest cost                                          | $ |      |   | $ |      |  
|Accrued benefit obligation                                                       | $ | 3     |   | $ | 3     |  
|                                                                                 |   |       |   |   |       |  
|Effect of change in healthcare cost trend rate (1%
      decrease):              |   |       |   |   |       |  
|Total of service cost and interest cost                                          | $ |      |   | $ |      |  
|Accrued benefit
      obligation                                                 | $ | (3    | ) | $ | (3    | )

82Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|15. FINANCIAL INSTRUMENTS
|-------------------------

FAIR VALUE

The carrying amount of cash and cash equivalents, cash held in
trust, derivative financial instruments, accounts receivable, bank indebtedness,
operating bank loans, accounts payable 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 also
approximates their fair values.

The carrying value and the fair value of long-term debt are as
follows:

|               |   | 2011 |  |   | 2010 | 
|-------------- | - | ---- |  | - | ---- | 
|Carrying value | $ | 289  |  | $ | 288  | 
|Fair value     | $ | 294  |  | $ | 301  | 

Cash and cash equivalents, cash held in trust and the
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.

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.

CREDIT RISK MANAGEMENT

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 24, 2011, was nil (2010  $1 million).

Tembec Financial Report 2011 83

---

Notes to Consolidated Financial Statements

|15. FINANCIAL INSTRUMENTS(CONTINUED)
|------------------------------------

EXPOSURE TO CREDIT RISK

The carrying amount of financial assets represents the maximum
credit exposure. The maximum exposure to credit risk at the reporting date
was:

|                                                    |   | 2011 |  |   | 2010 | 
|--------------------------------------------------- | - | ---- |  | - | ---- | 
|Loans and receivables                               | $ | 206  |  | $ | 236  | 
|Cash, cash
      equivalents and cash held in trust | $ | 105  |  | $ | 74   | 

The maximum exposure to credit risk for trade accounts
receivable as at September 24, 2011 and September 25, 2010, by geographical
region was as follows:

|                                                    |   | 2011 |  |   | 2010 |  
|--------------------------------------------------- | - | ---- |  | - | ---- | -
|Canada                                              | $ | 27   |  | $ | 23   |  
|United States                                       |   | 69   |  |   | 65   |  
|Pacific Rim and India                               |   | 19   |  |   | 27   |  
|United Kingdom,
      Europe and other              |   | 18   |  |   | 48   |  
|                                                    |   | 133  |  |   | 163  |  
|Allowance for
      doubtful accounts               |   |     |  |   | (1   | )
|Net trade receivables                               |   | 133  |  |   | 162  |  
|Other receivables
      including input tax credits |   | 49   |  |   | 47   |  
|Accounts
      receivable                           | $ | 182  |  | $ | 209  |  

The aging of trade accounts receivable was as follows:

|                    |   |       |  |   | 2011      |  |   |       |  |   | 2010      | 
|------------------- | - | ----- |  | - | --------- |  | - | ----- |  | - | --------- | 
|                    |   | Gross |  |   | Allowance |  |   | Gross |  |   | Allowance | 
|Not past due        | $ | 125   |  | $ |          |  | $ | 150   |  | $ |          | 
|Past due 030 days  |   | 6     |  |   |          |  |   | 8     |  |   |          | 
|Past due 3160 days |   | 2     |  |   |          |  |   |      |  |   |          | 
|Past due 6190 days |   |      |  |   |          |  |   | 3     |  |   |          | 
|More than 90 days   |   |      |  |   |          |  |   | 2     |  |   | 1         | 
|                    | $ | 133   |  | $ |          |  | $ | 163   |  | $ | 1         | 

The movement in the allowance for doubtful accounts receivable
in respect to trade accounts receivable was as follows:

|                           |   | 2011 |   |   | 2010 |  
|-------------------------- | - | ---- | - | - | ---- | -
|Balance, beginning of year | $ | 1    |   | $ | 2    |  
|Bad debt written
      off |   | (1   | ) |   | (1   | )
|Balance, end of
      year | $ |     |   | $ | 1    |  

84Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|15. FINANCIAL INSTRUMENTS(CONTINUED)
|------------------------------------

LIQUIDITY RISK MANAGEMENT

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, and seasonal working
capital requirements, which would require approximately $150 million to $200
million of liquidity.

EXPOSURE TO LIQUIDITY RISK

A liquidity reserve in the form of cash and undrawn revolving
credit facilities is maintained to assist in the solvency and financial
flexibility of the Company. Liquidity reserves as at September 24, 2011,
totalled $229 million (2010  $174 million). Repayment of amounts due within one
year may also be funded by normal collection of current trade accounts
receivable and cash on hand.

The following are the contractual maturities of financial
liabilities, including interest payments and excluding the impact of netting
agreements:

2011Carrying
    
    
    **Contractual**
    
    
    6 months
    
    
    612
    
    
    12
    
    
    25
    
    
    More thanamount
    
    
    cash flows
    
    
    or less
    
    
    months
    
    
    years
    
    
    years
    
    
    5 yearsSecured bank loans
    $
    278
    
    $
    494
    
    $
    15
    
    $
    16
    
    $
    31
    
    $
    98
    
    $
    334Unsecured loans
    
    24
    
    
    27
    
    
    4
    
    
    5
    
    
    5
    
    
    11
    
    
    2Operating bank loans
    
    6
    
    
    6
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    Trade and others
    
    262
    
    
    262
    
    
    262
    
    
    
    
    
    
    
    
    
    
    
    $
    570
    
    $
    789
    
    $
    287
    
    $
    21
    
    $
    36
    
    $
    109
    
    $
    336


The Company had no derivative financial liabilities at
September 24, 2011. It is not expected that the cash flows 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
Canadian dollar, US dollar and euro.

The Companys revenues for most of its products are affected by
fluctuations in the relative exchange rates of the Canadian dollar, the US
dollar and the euro. The prices for many products, including those sold in
Canada and Europe, are generally driven by US$ reference prices of similar
products. The Company generates approximately $1.3 billion 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.

Tembec Financial Report 2011 85

---

Notes to Consolidated Financial Statements

|15. FINANCIAL INSTRUMENTS(CONTINUED)
|------------------------------------

FOREIGN CURRENCY RATE SENSITIVITY ANALYSIS

Based on 2012 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                           | $ | 13 | 
|---------------------------------------- | - | -- | 
|Cost of sales
      increase             |   | 3  | 
|Gross margin                             |   | 10 | 
|Loss on US dollar
      debt translation |   | 3  | 
|Pre-tax earnings
      increase          | $ | 7  | 

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. To further 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 24, 2011, the Company does not hold any
foreign exchange contracts.

INTEREST RATE RISK MANAGEMENT

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.

INTEREST RATE SENSITIVITY ANALYSIS

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.

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 did not hold
any significant product price derivative commodity contracts at September 24,
2011 and September 25, 2010.

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. The Company does not currently hold any
significant derivative commodity contracts.

86Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|16. 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
cash held in trust. Total capitalization includes net debt plus future income
taxes, other long-term liabilities and credits, and shareholders equity.

The Companys strategy is to maintain the net debt to total
capitalization ratio at 40% or less. The objective is to keep a strong balance
sheet and maintain the ability of the Company to access capital markets at
favourable rates. The net debt to total capitalization ratio for the Company as
at September 24, 2011 and September 25, 2010, were at 27% and 28%,
respectively.

|17. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL
      INFORMATION
|--------------------------------------------------------------------

The following condensed consolidating financial information has
been included in these consolidated financial statements in compliance with
National Instrument 51-102  Continuous Disclosure Obligations under
Canadian securities laws.

The senior secured notes (the Notes) of Tembec Industries
Inc. (the Subsidiary Issuer) are fully and unconditionally guaranteed on a
joint and several basis by Tembec Inc. (the Parent Company) and most of the
Subsidiary Issuers subsidiaries located in Canada (the Guarantor
Subsidiaries). The Subsidiary Issuer and each of the Guarantor Subsidiaries are
100% owned by the Parent Company. The Notes are not guaranteed by the Companys
other subsidiaries (the Other Subsidiaries).

The following supplemental condensed consolidating financial
information sets forth, on an unconsolidated basis, the balance sheets as at
September 24, 2011 and September 25, 2010, and the statements of operations and
deficit, and the statement of cash flows for the years ended September 24, 2011
and September 25, 2010, for the Parent Company and for the Subsidiary Issuer. It
also provides the same information on a combined basis for the Guarantor
Subsidiaries and the Other Subsidiaries.

The supplemental condensed consolidating financial information,
which has been prepared in accordance with Canadian GAAP, reflects the
investments of the Parent Company in the Subsidiary Issuer using the equity
method. Investments of the Subsidiary Issuer in the Guarantor Subsidiaries and
Other Subsidiaries are also accounted for using this method.

Tembec Financial Report 2011 87

---

Notes to Consolidated Financial Statements

|17. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL
      INFORMATION(CONTINUED)
|-------------------------------------------------------------------------------

CONDENSED CONSOLIDATED BALANCE SHEETS UNDER CANADIAN
GAAP

Year ended September 24, 2011Parent
    
    
    **Subsidiary**
    
    
    Guarantor
    
    
    Other
    
    
    **Consolidation**Company
    
    
    Issuer
    
    
    **Subsidiaries**
    
    
    **Subsidiaries**
    
    
    Adjustments
    
    
    **Consolidated**ASSETSCurrent assets:Cash and cash equivalents
    $
    
    
    $
    
    
    $
    40
    
    $
    59
    
    $
    
    
    $
    99Cash held in trust
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    6Accounts receivable
    
    35
    
    
    299
    
    
    140
    
    
    49
    
    
    (341
    )
    
    182Inventories
    
    
    
    
    
    
    
    232
    
    
    29
    
    
    
    
    
    261Prepaid expenses
    
    
    
    
    1
    
    
    5
    
    
    
    
    
    
    
    
    635
    
    
    300
    
    
    417
    
    
    143
    
    
    (341
    )
    
    554Investments
    
    333
    
    
    647
    
    
    
    
    
    
    
    
    (980
    )
    
    Fixed assets
    
    
    
    
    5
    
    
    389
    
    
    99
    
    
    
    
    
    493Other assets
    
    
    
    
    29
    
    
    13
    
    
    2
    
    
    
    
    
    44Future income
      taxes
    
    1
    
    
    
    
    
    
    
    
    15
    
    
    
    
    
    16$
    369
    
    $
    981
    
    $
    819
    
    $
    259
    
    $
    (1,321
    )
    $
    1,107LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Operating bank loans
    $
    
    
    $
    
    
    $
    
    
    $
    6
    
    $
    
    
    $
    6Accounts payable and accrued charges
    
    
    
    
    194
    
    
    319
    
    
    88
    
    
    (347
    )
    
    254Interest payable
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Current portion of
      long-term debt
    
    5
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    185
    
    
    202
    
    
    319
    
    
    107
    
    
    (347
    )
    
    286Long-term debt
    
    2
    
    
    249
    
    
    
    
    
    26
    
    
    (6
    )
    
    271Other long-term liabilities and credits
    
    
    
    
    127
    
    
    46
    
    
    15
    
    
    
    
    
    188Future income taxes
    
    
    
    
    61
    
    
    (60
    )
    
    (1
    )
    
    
    
    
    Shareholders equity:Share capital
    
    570
    
    
    555
    
    
    668
    
    
    34
    
    
    (1,257
    )
    
    570Contributed surplus
    
    5
    
    
    5
    
    
    
    
    
    5
    
    
    (10
    )
    
    5Retained earnings
      (deficit)
    
    (213
    )
    
    (218
    )
    
    (154
    )
    
    73
    
    
    299
    
    
    (213
    )362
    
    
    342
    
    
    514
    
    
    112
    
    
    (968
    )
    
    362$
    369
    
    $
    981
    
    $
    819
    
    $
    259
    
    $
    (1,321
    )
    $
    1,107


88Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|17. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL
      INFORMATION(CONTINUED)
|-------------------------------------------------------------------------------

CONDENSED CONSOLIDATED BALANCE SHEETS UNDER CANADIAN GAAP(CONTINUED)

Year
      ended September 25, 2010Parent
    
    
    Subsidiary
    
    
    Guarantor
    
    
    Other
    
    
    ConsolidationCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    $
    
    
    $
    1
    
    $
    24
    
    $
    43
    
    $
    
    
    $
    68Cash held in trust
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    6Accounts receivable
    
    38
    
    
    350
    
    
    175
    
    
    41
    
    
    (395
    )
    
    209Inventories
    
    
    
    
    
    
    
    231
    
    
    24
    
    
    
    
    
    255Prepaid expenses
    
    
    
    
    1
    
    
    5
    
    
    1
    
    
    
    
    
    738
    
    
    352
    
    
    435
    
    
    115
    
    
    (395
    )
    
    545Investments
    
    337
    
    
    565
    
    
    
    
    
    
    
    
    (902
    )
    
    Fixed assets
    
    
    
    
    5
    
    
    404
    
    
    89
    
    
    
    
    
    498Other assets
    
    
    
    
    27
    
    
    6
    
    
    1
    
    
    
    
    
    34Future income taxes
    
    1
    
    
    
    
    
    
    
    
    26
    
    
    
    
    
    27$
    376
    
    $
    949
    
    $
    845
    
    $
    231
    
    $
    (1,297
    )
    $
    1,104LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Operating bank loans
    $
    
    
    $
    
    
    $
    
    
    $
    1
    
    $
    
    
    $
    1Accounts payable and accrued charges
    
    
    
    
    170
    
    
    305
    
    
    157
    
    
    (394
    )
    
    238Interest payable
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Current portion of long-term debt
    
    5
    
    
    
    
    
    
    
    
    12
    
    
    
    
    
    175
    
    
    173
    
    
    305
    
    
    170
    
    
    (394
    )
    
    259Long-term debt
    
    6
    
    
    248
    
    
    
    
    
    23
    
    
    (6
    )
    
    271Other long-term liabilities and credits
    
    
    
    
    133
    
    
    48
    
    
    28
    
    
    
    
    
    209Future income taxes
    
    
    
    
    54
    
    
    (53
    )
    
    (1
    )
    
    
    
    
    Shareholders equity:Share capital
    
    570
    
    
    551
    
    
    669
    
    
    (27
    )
    
    (1,193
    )
    
    570Contributed surplus
    
    5
    
    
    5
    
    
    
    
    
    5
    
    
    (10
    )
    
    5Retained earnings (deficit)
    
    (210
    )
    
    (215
    )
    
    (124
    )
    
    33
    
    
    306
    
    
    (210
    )365
    
    
    341
    
    
    545
    
    
    11
    
    
    (897
    )
    
    365$
    376
    
    $
    949
    
    $
    845
    
    $
    231
    
    $
    (1,297
    )
    $
    1,104


Tembec Financial Report 2011 89

---

Notes to Consolidated Financial Statements

|17. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL
      INFORMATION(CONTINUED)
|-------------------------------------------------------------------------------

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
UNDER CANADIAN GAAP

Year ended September 24, 2011Parent
    
    
    **Subsidiary**
    
    
    Guarantor
    
    
    Other
    
    
    **Consolidation**Company
    
    
    Issuer
    
    
    **Subsidiaries**
    
    
    **Subsidiaries**
    
    
    Adjustments
    
    
    **Consolidated**Sales
    $
    
    
    $
    3
    
    $
    1,503
    
    $
    255
    
    $
    (18
    )
    $
    1,743Freight and other deductions
    
    
    
    
    
    
    
    224
    
    
    19
    
    
    (6
    )
    
    237Lumber export taxes
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    13Cost of sales
    
    
    
    
    
    
    
    1,176
    
    
    160
    
    
    (12
    )
    
    1,324Selling, general and administrative
    
    (1
    )
    
    10
    
    
    56
    
    
    7
    
    
    
    
    
    72Share-based compensation
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Depreciation and amortization
    
    
    
    
    1
    
    
    38
    
    
    6
    
    
    
    
    
    45Other items
    
    
    
    
    4
    
    
    4
    
    
    (7
    )
    
    
    
    
    1Operating earnings (loss)
    
    1
    
    
    (14
    )
    
    (8
    )
    
    70
    
    
    
    
    
    49Interest, foreign exchange and other
    
    
    
    
    1
    
    
    29
    
    
    2
    
    
    
    
    
    32Exchange loss
      (gain) on long-term debt
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Earnings (loss) before income taxes and non-controlling
      interest
    
    1
    
    
    (16
    )
    
    (37
    )
    
    68
    
    
    
    
    
    16Income tax expense (recovery)
    
    
    
    
    7
    
    
    (7
    )
    
    19
    
    
    
    
    
    19Share of results of significantly influenced companies
    
    4
    
    
    (20
    )
    
    
    
    
    
    
    
    16
    
    
    Non-controlling
      interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings (loss) and comprehensive earnings (loss)
    
    (3
    )
    
    (3
    )
    
    (30
    )
    
    49
    
    
    (16
    )
    
    (3
    )Wind-up of subsidiary
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    9
    
    
    Retained earnings
      (deficit), beginning of period
    
    (210
    )
    
    (215
    )
    
    (124
    )
    
    33
    
    
    306
    
    
    (210
    )Retained earnings
      (deficit), end of period
    $
    (213
    )
    $
    (218
    )
    $
    (154
    )
    $
    73
    
    $
    299
    
    $
    (213
    )Basic and diluted
      earnings (loss) in dollars per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (0.03
    )


90Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|17. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL
      INFORMATION(CONTINUED)
|-------------------------------------------------------------------------------

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
UNDER CANADIAN GAAP(CONTINUED)

Year
      ended September 25, 2010Parent
    
    
    Subsidiary
    
    
    Guarantor
    
    
    Other
    
    
    ConsolidationCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    ConsolidatedSales
    $
    
    
    $
    1
    
    $
    1,484
    
    $
    409
    
    $
    (17
    )
    $
    1,877Freight and other deductions
    
    
    
    
    
    
    
    210
    
    
    30
    
    
    (6
    )
    
    234Lumber export taxes
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    10Cost of sales
    
    
    
    
    
    
    
    1,132
    
    
    305
    
    
    (11
    )
    
    1,426Selling, general and administrative
    
    
    
    
    5
    
    
    58
    
    
    10
    
    
    
    
    
    73Share-based compensation
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Depreciation and amortization
    
    
    
    
    
    
    
    43
    
    
    13
    
    
    
    
    
    56Other items
    
    
    
    
    19
    
    
    6
    
    
    (12
    )
    
    
    
    
    13Operating earnings (loss)
    
    
    
    
    (25
    )
    
    25
    
    
    63
    
    
    
    
    
    63Interest, foreign exchange and other
    
    1
    
    
    35
    
    
    31
    
    
    (16
    )
    
    
    
    
    51Exchange loss
      (gain) on long-term debt
    
    
    
    
    (19
    )
    
    
    
    
    (8
    )
    
    
    
    
    (27
    )Earnings (loss) before income taxes and non-controlling
      interest
    
    (1
    )
    
    (41
    )
    
    (6
    )
    
    87
    
    
    
    
    
    39Income tax expense (recovery)
    
    (1
    )
    
    15
    
    
    (15
    )
    
    (14
    )
    
    
    
    
    (15
    )Share of results of significantly influenced companies
    
    (52
    )
    
    (101
    )
    
    
    
    
    
    
    
    153
    
    
    Non-controlling
      interest
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    2Net earnings (loss) and comprehensive earnings (loss)
    
    52
    
    
    45
    
    
    9
    
    
    99
    
    
    (153
    )
    
    52Wind-up of subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Retained earnings
      (deficit), beginning of period
    
    (262
    )
    
    (260
    )
    
    (133
    )
    
    (66
    )
    
    459
    
    
    (262
    )Retained earnings
      (deficit), end of period
    $
    (210
    )
    $
    (215
    )
    $
    (124
    )
    $
    33
    
    $
    306
    
    $
    (210
    )Basic and diluted
      earnings (loss) in dollars per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.52


Tembec Financial Report 2011 91

---

Notes to Consolidated Financial Statements

|17. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL
      INFORMATION(CONTINUED)
|-------------------------------------------------------------------------------

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNDER
CANADIAN GAAP

Year ended September 24, 2011Parent
    
    
    **Subsidiary**
    
    
    Guarantor
    
    
    Other
    
    
    ConsolidationCompany
    
    
    Issuer
    
    
    **Subsidiaries**
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    **Consolidated**Cash flows from operating activities:Net earnings (loss)
    $
    (3
    )
    $
    (3
    )
    $
    (30
    )
    $
    49
    
    $
    (16
    )
    $
    (3
    )Adjustments for:Depreciation and amortization
    
    
    
    
    1
    
    
    38
    
    
    6
    
    
    
    
    
    45Unrealized foreign exchange and other
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    (2
    )Exchange loss (gain) on long-term debt
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Future income tax expense (recovery)
    
    
    
    
    7
    
    
    (7
    )
    
    11
    
    
    
    
    
    11Other items
    
    
    
    
    
    
    
    (3
    )
    
    (8
    )
    
    
    
    
    (11
    )Excess cash contributions over pension expense
    
    
    
    
    (8
    )
    
    (8
    )
    
    (4
    )
    
    
    
    
    (20
    )Share of results of significantly influenced companies
    
    4
    
    
    (20
    )
    
    
    
    
    
    
    
    16
    
    
    Other
    
    
    
    
    1
    
    
    (2
    )
    
    
    
    
    
    
    
    (1
    )1
    
    
    (21
    )
    
    (12
    )
    
    52
    
    
    
    
    
    20Changes in non-cash working capital:Accounts receivable
    
    3
    
    
    25
    
    
    43
    
    
    (38
    )
    
    
    
    
    33Inventories
    
    
    
    
    
    
    
    (2
    )
    
    (4
    )
    
    
    
    
    (6
    )Prepaid expenses
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    1Accounts payable,
      accrued charges and interest payable
    
    
    
    
    (8
    )
    
    12
    
    
    17
    
    
    
    
    
    213
    
    
    17
    
    
    53
    
    
    (24
    )
    
    
    
    
    494
    
    
    (4
    )
    
    41
    
    
    28
    
    
    
    
    
    69Cash flows from investing activities:Additions to fixed assets
    
    
    
    
    
    
    
    (37
    )
    
    (18
    )
    
    
    
    
    (55
    )Proceeds on land sales and other
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    17Proceeds on sale of French mills
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    4
    
    
    (5
    )
    
    (4
    )
    
    
    
    
    (5
    )
    
    
    4
    
    
    (25
    )
    
    (22
    )
    
    
    
    
    (43
    )Cash flows from financing activities:Change in operating bank loans
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    5Cash held in trust
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Increase in long-term debt
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    8Repayments of long-term debt
    
    (4
    )
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    (8
    )Change in other long-term liabilities
    
    
    
    
    (2
    )
    
    
    
    
    1
    
    
    
    
    
    (1
    )Other
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1(4
    )
    
    (1
    )
    
    
    
    
    10
    
    
    
    
    
    5Net increase (decrease) in cash and cash equivalents
    
    
    
    
    (1
    )
    
    16
    
    
    16
    
    
    
    
    
    31Cash and cash
      equivalents, beginning of period
    
    
    
    
    1
    
    
    24
    
    
    43
    
    
    
    
    
    68Cash and cash
      equivalents, end of period
    $
    
    
    $
    
    
    $
    40
    
    $
    59
    
    $
    
    
    $
    99Supplemental information:Interest paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25Income tax paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1


92Tembec Financial Report 2011

---

Notes to Consolidated Financial Statements

|17. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL
      INFORMATION(CONTINUED)
|-------------------------------------------------------------------------------

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNDER
CANADIAN GAAP(CONTINUED)

Year
      ended September 25, 2010Parent
    
    
    Subsidiary
    
    
    Guarantor
    
    
    Other
    
    
    ConsolidationCompany
    
    
    Issuer
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    ConsolidatedCash flows from operating activities:Net earnings (loss)
    $
    52
    
    $
    45
    
    $
    9
    
    $
    99
    
    $
    (153
    )
    $
    52Adjustments for:Depreciation and amortization
    
    
    
    
    
    
    
    43
    
    
    13
    
    
    
    
    
    56Unrealized foreign exchange and other
    
    
    
    
    1
    
    
    
    
    
    (2
    )
    
    
    
    
    (1
    )Exchange loss (gain) on long-term debt
    
    
    
    
    (19
    )
    
    
    
    
    (8
    )
    
    
    
    
    (27
    )Future income tax expense (recovery)
    
    
    
    
    15
    
    
    (15
    )
    
    (15
    )
    
    
    
    
    (15
    )Other items
    
    
    
    
    19
    
    
    6
    
    
    (12
    )
    
    
    
    
    13Excess cash contributions over pension expense
    
    
    
    
    (9
    )
    
    (3
    )
    
    (8
    )
    
    
    
    
    (20
    )Share of results of significanlty influenced companies
    
    (52
    )
    
    (101
    )
    
    
    
    
    
    
    
    153
    
    
    Other
    
    
    
    
    (1
    )
    
    (1
    )
    
    2
    
    
    
    
    
    
    
    
    (50
    )
    
    39
    
    
    69
    
    
    
    
    
    58Changes in non-cash working capital:Accounts receivable
    
    4
    
    
    97
    
    
    (37
    )
    
    (105
    )
    
    
    
    
    (41
    )Inventories
    
    
    
    
    
    
    
    12
    
    
    4
    
    
    
    
    
    16Prepaid expenses
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    5Accounts payable,
      accrued charges and interest payable
    
    
    
    
    (3
    )
    
    34
    
    
    9
    
    
    
    
    
    404
    
    
    94
    
    
    14
    
    
    (92
    )
    
    
    
    
    204
    
    
    44
    
    
    53
    
    
    (23
    )
    
    
    
    
    78Cash flows from investing activities:Additions to fixed assets
    
    
    
    
    
    
    
    (18
    )
    
    (7
    )
    
    
    
    
    (25
    )Proceeds on land sales and other
    
    
    
    
    3
    
    
    2
    
    
    2
    
    
    
    
    
    7Proceeds on sale of French mills
    
    
    
    
    
    
    
    
    
    
    86
    
    
    
    
    
    86Other
    
    
    
    
    
    
    
    2
    
    
    (3
    )
    
    
    
    
    (1
    )
    
    
    3
    
    
    (14
    )
    
    78
    
    
    
    
    
    67Cash flows from financing activities:Change in operating bank loans
    
    
    
    
    
    
    
    (96
    )
    
    (21
    )
    
    
    
    
    (117
    )Cash held in trust
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    (6
    )Increase in long-term debt
    
    
    
    
    263
    
    
    
    
    
    9
    
    
    
    
    
    272Repayments of long-term debt
    
    (4
    )
    
    (309
    )
    
    
    
    
    (5
    )
    
    
    
    
    (318
    )Change in other long-term liabilities
    
    
    
    
    
    
    
    1
    
    
    1
    
    
    
    
    
    2Other
    
    
    
    
    (14
    )
    
    (3
    )
    
    2
    
    
    
    
    
    (15
    )(4
    )
    
    (60
    )
    
    (98
    )
    
    (20
    )
    
    
    
    
    (182
    )Net increase (decrease) in cash and cash equivalents
    
    
    
    
    (13
    )
    
    (59
    )
    
    35
    
    
    
    
    
    (37
    )Cash and cash
      equivalents, beginning of period
    
    
    
    
    14
    
    
    83
    
    
    8
    
    
    
    
    
    105Cash and cash
      equivalents, end of period
    $
    
    
    $
    1
    
    $
    24
    
    $
    43
    
    $
    
    
    $
    68Supplemental information:Interest paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    29Income tax paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    


Tembec Financial Report 2011 93

---

Notes to Consolidated Financial Statements

|18. SUBSEQUENT EVENTS
|---------------------

On November 25, 2011, the Company sold its Toronto, Ontario,
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 will result in
a charge of $2 million that will be recorded in the Companys December 2011
quarterly financial results.

On November 28, 2011, the Company announced that it had reached
an agreement to sell its British Columbia sawmills and related forestry
operations for proceeds of $60 million. The transaction is expected to close in
the March 2012 quarter, at which time an estimated gain of $16 million will be
recorded.

|19. COMPARATIVE FIGURES
|-----------------------

Certain comparative figures have been reclassified to conform
with the financial statement presentation adopted in the current year.

94Tembec Financial Report 2011

---

|Directors JAMES V. CONTINENZA(1) (4)Chairman of the Board, Tembec Inc.
      JAMES M. LOPEZ(3) (4)President
      and Chief Executive Officer, Tembec Inc. NORMAN M. BETTS(2)Associate Professor, Faculty of Administration,
      University of New Brunswick JAMES E. BRUMM(1) (5)Company Director JAMES N. CHAPMAN(1) (4)Company Director MICHEL
      J. DUMAS(3)Executive Vice President, Finance and
      Chief Financial Officer JACQUES LEDUC(2)Company Director PIERRE LORTIE(3)Company Director FRANCIS M . SCRICCO(1) (5)Company Director DAVID J. STEUART(3) (5)Company Director LORIE
      WAISBERG(2) (5)Company Director |  | Officers
      JAMES V. CONTINENZAChairman of the Board
      JAMES M. LOPEZPresident and Chief Executive
      Officer
      CHRIS BLACKExecutive Vice
      President,President, Paper and High-Yield Pulp Group
      MICHEL J. DUMASExecutive Vice President,
      Finance and Chief Financial Officer
      PATRICK LEBELVice President,General
      Counsel and Corporate Secretary
      STEPHEN J. NORRISTreasurer
      YVON PELLETIERExecutive Vice President,
      President, Specialty Cellulose and Chemical Group
      DENNIS ROUNSVILLEExecutive Vice President,
      President, Forest Products Group
      RÉGINALD BASTIENCorporate Controller
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|    |                                                                       
|--- | ----------------------------------------------------------------------
|(1) | Member of the Corporate Governance and Human Resources
      Committee
|(2) | Member of the Audit Committee                                         
|(3) | Member of the Environment, Health and Safety
      Committee          
|(4) | Member of the Special Committee for Strategic
    Purposes            
|(5) | Member of the improvement Business Plan
  Committee                   

Tembec Financial Report 2011   
 95

---

Shareholder Information

|STOCK EXCHANGE LISTING The common shares and
      the warrants of Tembec Inc. are listed on the Toronto Stock Exchange under
      the symbols TMB and TMB.WT, respectively. NUMBER OF SHARES
      As at September 24, 2011, there were 100,000,000 Tembec common shares
      outstanding. TRANSFER AGENT AND REGISTRAR Our transfer
      agent, Computershare Trust Company of Canada, can assist you with a
      variety of shareholder related services, including changes of address and
      lost share certificates. Computershare Trust Company of Canada
      Customer Service 1500 University Street Suite 700
      Montreal, Quebec H3A 3S8 Canada Tel.: 1-800-564-6253
      ANNUAL GENERAL MEETING The Annual General Meeting of
      Shareholders of Tembec Inc. will be held on Thursday, January 26, 2012, at
      11:00 a.m., Eastern time, at: Fairmont The Queen Elizabeth
      Duluth/McKenzie Rooms 900 René-Lévesque Blvd West Montreal,
      Quebec H3B 4A5 Canada Tel.: 514-861-3511 An archived
      version of the webcast of the Annual General Meeting of Shareholders will
      be available on Tembecs website after the Meeting. Additional
      copies of the following documents and other 
      information can also be
      obtained at the above address or on 
      Tembecs and SEDARs websites.
         2011 Financial Report    Quarterly
      Reports    Management Information Circular
         Annual Information Form |  | ADDITIONAL INFORMATION MAY BE OBTAINED FROM
      Tembec Inc.Communications and Public Affairs Department 10
      chemin Gatineau P.O. Box 5000 Temiscaming, Quebec J0Z 3R0
      Canada Tel.: 819-627-4387 Fax: 819-627-1178Tembec files all
      mandatory information with Canadian securities regulatory authorities and
      this information is available from Tembec upon request.HEAD OFFICETembec Inc.800 René-Lévesque
      Blvd. West Suite 1050 Montreal, Quebec H3B 1X9 Canada
      Tel.: 514-871-0137 Fax: 514-397-0896
      www.tembec.comCORPORATE OFFICETembec Inc.10 chemin
      Gatineau P.O. Box 5000Temiscaming, Quebec J0Z 3R0 Canada
      Tel.: 819-627-4387 Fax: 819-627-1178 www.tembec.com
      Pour obtenir un exemplaire de la version française du
      rapport financier, veuillez vous adresser au Service des communications et
      des affaires publiques.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|www.tembec.com
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