---

Exhibit 99.3

MD&AMANAGEMENTS DISCUSSION AND ANALYSISas at
November 30, 2012

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 29,
2012, as compared to the fiscal year ended September 24, 2011. The MD&A
should be read in conjunction with the audited consolidated financial statements
for the fiscal year ended September 29, 2012. Financial data has been prepared
in accordance with International Financial Reporting Standards (IFRS) as issued
by the International Accounting Standards Board (IASB). Effective September 25,
2011, Tembec adopted IFRS as the Companys basis for financial reporting
commencing with the interim financial statements for the three-month period
ended December 24, 2011, and using September 26, 2010, as the transition date.
Except where otherwise noted, all prior period comparative figures have been
restated for IFRS. All financial references are stated in Canadian dollars,
unless otherwise noted. All references to quarterly information relate to
Tembecs fiscal quarters. Adjusted EBITDA, net debt, total capitalization, free
cash flow and certain other financial measures utilized in the MD&A are
non-IFRS financial measures. As they have no standardized meaning prescribed by
IFRS, 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, 2012. 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. Tembecs operations consist of five
reportable business segments: Forest Products, Specialty Cellulose and Chemical
Pulp, High-Yield Pulp, Paper and Corporate. On September 29, 2012, the Company
had approximately 3,700 employees, as compared to 4,250 at the end of the prior
fiscal year. The Company operates 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.

| | - 1 - | TEMBEC 2012 MD&A
| | ----- | ----------------

---

2012 vs. 2011

|FINANCIAL SUMMARY                                             |  |       |   |  |       |  
|------------------------------------------------------------- |  | ----- | - |  | ----- | -
|(in millions of dollars, unless otherwise noted)              |  | 2011  |   |  | 2012  |  
|Sales                                                         |  | 1,743 |   |  | 1,666 |  
|Freight and other deductions                                  |  | 237   |   |  | 232   |  
|Lumber export taxes                                           |  | 13    |   |  | 7     |  
|Cost of sales (excluding
      depreciation and amortization) |  | 1,321 |   |  | 1,290 |  
|SG&A                                                          |  | 72    |   |  | 74    |  
|Share-based compensation                                      |  | 2     |   |  | (1    | )
|Adjusted EBITDA                                               |  | 98    |   |  | 64    |  
|Depreciation and amortization                                 |  | 48    |   |  | 46    |  
|Other items                                                   |  | 3     |   |  | 50    |  
|Operating earnings (loss)                                     |  | 47    |   |  | (32   | )
|Interest, foreign exchange and
      other                    |  | 31    |   |  | 41    |  
|Exchange loss (gain) on long-term debt                        |  | 1     |   |  | (13   | )
|Earnings (loss) before income taxes                           |  | 15    |   |  | (60   | )
|Income tax expense                                            |  | 20    |   |  | 22    |  
|Net
      loss                                                |  | (5    | ) |  | (82   | )
|Basic and diluted net loss in dollars per share               |  | (0.05 | ) |  | (0.82 | )
|Net
      comprehensive loss                                  |  | (67   | ) |  | (131  | )
|Total assets (at year-end)                                    |  | 1,093 |   |  | 1,059 |  
|Total long-term debt (at year-end) (1)                        |  | 289   |   |  | 339   |  
|Total long-term financial liabilities (at year-end)           |  | 574   |   |  | 627   |  
|(1)includes current portion                                   |  |       |   |  |       |  

| | - 2 - | TEMBEC 2012 MD&A
| | ----- | ----------------

---

|SALES                                 | 
|------------------------------------- | 
|                                      | 
|(in millions of dollars)              | 
|Forest Products                       | 
|Specialty Cellulose and Chemical Pulp | 
|High-Yield Pulp                       | 
|Paper                                 | 
|Corporate                             | 
|                                      | 
|Less: intersegment sales              | 
|Sales                                 | 

Sales decreased by $77 million as compared to fiscal 2011.
Currency was favourable as the Canadian dollar averaged US $0.992, a 2.1%
decrease from US $1.013 in the prior year. Forest Products segment sales
decreased by $39 million as a result of lower shipments, partially offset by
higher prices. Specialty Cellulose and Chemical Pulp segment sales decreased by
$31 million due to lower shipments and prices. High-Yield Pulp segment sales
decreased by $26 million due to lower shipments and prices. Paper segment sales
increased by $7 million due primarily to higher prices.

In terms of geographical distribution, the U.S. remained the
Companys principal market with 37% of consolidated sales in fiscal 2012, as
compared to 34% in the prior year. Canadian sales represented 18% of sales,
unchanged from the prior year. Sales outside of the U.S. and Canada represented
the remaining 45% in fiscal 2012, as compared to 48% a year ago.

|ADJUSTED EBITDA                       | 
|------------------------------------- | 
|                                      | 
|(in millions of dollars)              | 
|Forest Products                       | 
|Specialty Cellulose and Chemical Pulp | 
|High-Yield Pulp                       | 
|Paper                                 | 
|Corporate                             | 
|                                      | 

Adjusted EBITDA of $64 million was $34 million lower than the
prior year. Forest Products segment adjusted EBITDA was up $31 million from the
prior year primarily as a result of higher prices. Specialty Cellulose and
Chemical Pulp segment adjusted EBITDA declined by $48 million due to higher
costs and lower prices. High-Yield Pulp segment adjusted EBITDA declined by $26
million due to higher costs and lower prices. Paper segment adjusted EBITDA
improved by $8 million due to higher prices and lower costs.

| | - 3 - | TEMBEC 2012 MD&A
| | ----- | ----------------

---

|OPERATING EARNINGS (LOSS)             | 
|------------------------------------- | 
|                                      | 
|                                      | 
|(in millions of dollars)              | 
|Forest Products                       | 
|Specialty Cellulose and Chemical Pulp | 
|High-Yield Pulp                       | 
|Paper                                 | 
|Corporate                             | 
|                                      | 

The Company generated an operating loss of $32 million compared
to operating earnings of $47 million in fiscal 2011.

The Forest Products segment generated an operating loss of $4
million, as compared to an operating loss of $64 million in fiscal 2011. In
addition to the previously noted improvement in adjusted EBITDA, the sale of the
British Columbia (BC) sawmills and the hardwood flooring operations led to lower
depreciation expense. During the most recent fiscal year, the Company recorded a
gain of $24 million related to the sale of the BC sawmills. The Company also
sold its Toronto, Ontario, hardwood flooring plant and concurrently closed its
Huntsville, Ontario, hardwood flooring plant. The combined effect was a charge
of $2 million. In the prior year period, the segment recorded a charge of $2
million relating to the permanent closure of the Taschereau, Quebec, sawmill.
The charge was for severance and other closure costs. The Company also absorbed
a charge of $1 million related to severance payments at an idled planer mill in
Cranbrook, BC.

The Specialty Cellulose and Chemical Pulp segment generated
operating earnings of $71 million compared to operating earnings of $121 million
in the prior year. The previously noted decline in adjusted EBITDA led to the
lower operating earnings.

The High-Yield Pulp segment generated an operating loss of $92
million compared to an operating loss of $14 million in the prior year. In
addition to the previously noted decline in adjusted EBITDA, the segment
absorbed an impairment charge of $50 million relating to the property, plant and
equipment, including supplies and materials, of the Chetwynd, BC, pulp mill.

The Paper segment generated operating earnings of $35 million
compared to operating earnings of $26 million in the prior year. The previously
noted improvement in adjusted EBITDA led to the higher operating earnings.

Corporate expenses increased by $20 million primarily due to
other items. The current year includes a $16 million charge relating to the
write-down of the loan receivable from Temlam Inc. The latter is currently under
creditor protection and owns an idled laminated veneer lumber (LVL) facility
located in Amos, Quebec. The Company has a 50% secured interest in the facility.
The cutting rights that were previously attached to the LVL facility were
granted to another company. In the absence of a guaranteed fibre supply, the
Company concluded that the re-start of the facility is unlikely and has adjusted
its carrying value to the amount anticipated to be realized upon liquidation or
sale. The current year also includes a gain of $4 million relating to the sale
of a minority equity interest in two dissolving pulp mills. The prior year
includes a gain of $4 million related to the filing of Tembec USA LLC under
Chapter 7 of the Bankruptcy Code of the United States. The gain was generated by
a reduction in the Companys accrued benefit obligation. The period also
included a gain of $3 million related to the sale of hydro-electric generating
assets located in Smooth Rock Falls, Ontario.

| | - 4 - | TEMBEC 2012 MD&A
| | ----- | ----------------

---

SEGMENT REVIEW  2012 vs. 2011

|FOREST PRODUCTS                                            |  |       |    |  |      |   
|---------------------------------------------------------- |  | ----- | -- |  | ---- | --
|(in millions of dollars)                                   |  | 2011  |    |  | 2012 |   
|Sales (1)                                                  |  | 471   |    |  | 432  |   
|Freight and other deductions                               |  | 47    |    |  | 41   |   
|Lumber export taxes                                        |  | 13    |    |  | 7    |   
|Cost of sales (1)                                          |  | 441   |    |  | 385  |   
|SG&A                                                       |  | 17    |    |  | 15   |   
|Adjusted EBITDA                                            |  | (47   | )  |  | (16  | ) 
|Adjusted EBITDA margin on sales                            |  | (10.0 | )% |  | (3.7 | )%
|Depreciation and amortization                              |  | 14    |    |  | 10   |   
|Other items:                                               |  |       |    |  |      |   
|Gain on sale of BC sawmills                                |  | -     |    |  | (24  | ) 
|Loss on sale/closure of flooring
      assets              |  | -     |    |  | 2    |   
|Taschereau sawmill closure
      charge                    |  | 2     |    |  | -    |   
|Cranbrook planer mill closure
      charge                 |  | 1     |    |  | -    |   
|Operating loss                                             |  | (64   | )  |  | (4   | ) 
|                                                           |  |       |    |  |      |   
|Identifiable assets (excluding cash)                       |  | 267   |    |  | 216  |   
|(1)Includes intersegment sales eliminated on
consolidation |  |       |    |  |      |   

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 2012, the
Companys operations harvested and delivered 3.9 million cubic metres of timber,
unchanged from the prior year. Additional supply of approximately 0.8 million
cubic metres was secured mainly through purchases and exchanges with third
parties, compared to 0.9 million cubic metres in the prior year.

The Forest Products segment includes operations located in
Quebec and Ontario. At the end of the March 2012 quarter, the Company sold its
two BC sawmills. The sawmills had a capacity of 450 million board feet of
lumber, which represented approximately 29% of the Companys total SPF lumber
capacity at that time. The SPF lumber operations can produce approximately 930
million board feet of lumber. The specialty wood operations can annually produce
30 million board feet of hardwood lumber. During the December 2011 quarter, the
Company sold its Toronto, Ontario, hardwood flooring plant and announced the
closure of its Huntsville, Ontario, hardwood flooring plant. The two operations
had a combined capacity of 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 2011 and fiscal 2012.

| | - 5 - | TEMBEC 2012 MD&A
| | ----- | ----------------

---

The following summarizes the current annual capacity of each
facility by product group:

|SPF LUMBER                                               |  | mbf     | 
|-------------------------------------------------------- |  | ------- | 
|Stud lumber - La Sarre, QC                               |  | 135,000 | 
|Stud lumber - Senneterre, QC                             |  | 150,000 | 
|Stud lumber - Cochrane, ON                               |  | 110,000 | 
|Stud lumber - Kapuskasing, ON                            |  | 105,000 | 
|Random lumber - Béarn, QC                                |  | 110,000 | 
|Random lumber - Chapleau, ON                             |  | 135,000 | 
|Random lumber - Hearst, ON                               |  | 160,000 | 
|Finger joint lumber - Cranbrook, BC                      |  | 25,000  | 
|                                                         |  | 930,000 | 
|                                                         |  |         | 
|SPECIALTY WOOD                                           |  | mbf     | 
|Hardwood lumber - Huntsville, ON                         |  | 30,000  | 
|                                                         |  |         | 
|ENGINEERED WOOD                                          |  | mbf     | 
|Engineered finger joint lumber - La Sarre, QC            |  | 60,000  | 
|Engineered finger joint lumber - Kirkland
      Lake, ON |  | 30,000  | 
|                                                         |  | 90,000  | 

The segment is dominated by SPF lumber, which represented 94%
of building material sales in fiscal 2012, compared to 85% in the prior year.
The volume of SPF lumber sold in fiscal 2012 decreased by 72 million board feet
or 8%. The sale of the Companys two BC sawmills at the end of the March 2012
quarter had a significant impact on shipments and volumes. Shipments of lumber
from the two sawmills during the first two quarters of fiscal 2012 totalled 172
million board feet as compared to 343 million board feet in the full 12-month
period of fiscal 2011, a decrease of 171 million board feet. Shipments from the
Companys Eastern sawmills increased by 99 million board feet, partially
offsetting the previously noted decrease. Shipments were equal to 62% of
capacity, up from 57% in fiscal 2011. In response to relatively 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 79/21 as compared to 62/38 a year ago. US $
reference prices for random lumber were up by US $16 per mbf on average while
stud lumber increased by US $39 per mbf. Currency was favourable as the Canadian
dollar averaged US $0.992, a 2.1% decrease from US $1.013 in the prior year. The
combined result was a $35 per mbf price increase from a year ago.

Specialty wood represented 6% of building material sales in
fiscal 2012, down from 15% in the prior year. The decline was due to the sale of
the Toronto, Ontario, hardwood flooring plant and the closure of the Huntsville,
Ontario, hardwood flooring plant.

There were no engineered wood sales in fiscal 2011 and 2012.
The two finger joint facilities were idle for all of fiscal 2011 and fiscal
2012.

The Forest Products segment produced and shipped approximately
1.0 million tonnes of wood chips in fiscal 2012, 80% of which were directed to
the Companys pulp and paper operations. In 2011, the segment produced 1.1
million tonnes and shipped 85% 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.

| | - 6 - | TEMBEC 2012 MD&A
| | ----- | ----------------

---

Total sales for this segment reached $432 million, a decrease
of $39 million over the prior year. After eliminating internal sales, the Forest
Products segment generated 21% of Company consolidated sales, down from 22% in
the prior year. The segments main market is North America, which represented
97% of consolidated sales in fiscal 2012, compared to 94% in the prior year.

|                                     |  | Sales        |   |  | Shipments  |   |  | Selling prices | 
|------------------------------------ |  | ------------ | - |  | ---------- | - |  | -------------- | 
|                                     |  | ($ millions) |   |  | (000 units | ) |  | ($ / unit)     | 
|                                     |  | 2011         |   |  | 2012       |   |  | 2011           | 
|SPF lumber (mbf)                     |  | 283          |   |  | 282        |   |  | 907.9          | 
|Specialty wood                       |  |              |   |  |            |   |  |                | 
|Pine and hardwood (mbf)              |  | 6            |   |  | 8          |   |  | 9.5            | 
|Hardwood flooring (000 square ft)    |  | 45           |   |  | 10         |   |  | 9.1            | 
|                                     |  | 51           |   |  | 18         |   |  |                | 
|Engineered Wood                      |  |              |   |  |            |   |  |                | 
|Engineered finger joint lumber (mbf) |  | -            |   |  | -          |   |  | -              | 
|Total building materials             |  | 334          |   |  | 300        |   |  |                | 
|Wood chips, logs and by-products     |  | 137          |   |  | 132        |   |  |                | 
|Total sales                          |  | 471          |   |  | 432        |   |  |                | 
|Internal wood chips and other sales  |  | (96          | ) |  | (84        | ) |  |                | 
|Consolidated sales                   |  | 375          |   |  | 348        |   |  |                | 

| | - 7 - | TEMBEC 2012 MD&A
| | ----- | ----------------

---

Markets

The Company markets its lumber with its own internal sales
force.

The benchmark random length Western SPF (#2 and better) lumber
net price averaged US $275 per mbf in 2012, an increase from US $263 per mbf in
2011. In the East, the random length Eastern SPF average lumber price (delivered
Great Lakes) increased from US $350 per mbf to US $370 per mbf in 2012. The
Company considers these to be relatively low levels, approximately US $30 to US
$40 below normal trend line prices for random lumber. The reference price for
stud lumber increased with the Eastern average lumber price (delivered Great
Lakes) up from US $314 per mbf to US $353 per mbf, a level approximately US $30
to US $40 per mbf below trend line prices. The prices were driven by a
relatively weak U.S. housing market. Housing starts in the U.S. on a seasonally
adjusted basis averaged 729,000 units in fiscal 2012, an increase over the
578,000 units in fiscal 2011. However, these remain well below the 2 million
unit mark experienced in the 2004-2006 period and the +1.2 million average that
would be 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.

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. Since that date, the Companys Eastern Canadian sawmills,
located in Quebec and Ontario, have been subject to export quota limitations and
5% export tax on lumber shipped to the U.S. In April 2009, 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 January 2007 and
June 2007. The SLA provides that during periods of relatively high prices, as
was the case during the early summer months, the export tax rate declines.
During fiscal 2011, a second arbitration penalty of approximately 1% was imposed
on Eastern lumber shipments beginning in March 2011. However, the first
arbitration penalty of 10% expired in June 2011. Overall, the average rate on
all Eastern lumber shipments to the U.S. was 11.7% and the total cost was $6
million in the prior year. In fiscal 2012, the average tax rate on Eastern
lumber shipments to the U.S. was 4.8% and the total cost was $4 million. The
decrease in rate was caused by the previously noted expiration of the 10%
arbitration penalty. The decrease in rate was partially offset by an increase in
the volume and price of lumber shipped to the U.S.

During fiscal 2012, the Company sold its two British Columbia
sawmills in March 2012. As such, the MD&A data reflects the mills financial
results for six months in fiscal 2012 as compared to 12 months in fiscal 2011.
The BC sawmills were subject to a 15% export tax, but shipments were not quota
limited. Under certain circumstances, the tax could be increased to 22.5%, which
was not the case in either fiscal 2011 or the first six months of fiscal 2012.
During fiscal 2011, the average rate on shipments to the U.S was 15% and the
total cost was $7 million. In fiscal 2012, the average rate on shipments was
also 15% and the total cost was $3 million. The reduction in cost relates to the
shorter period of ownership.

| | - 8 - | TEMBEC 2012 MD&A
| | ----- | ----------------

---

Operating Results

The following summarizes adjusted EBITDA variances by major
element:

|                         |  | Variance -
      favourable (unfavourable) |  
|------------------------ |  | ------------------------------------------ | -
|                         |  |                                            |  
|                         |  |                                            |  
|(in millions of dollars) |  | Price                                      |  
|SPF lumber               |  | 27                                         |  
|Specialty wood           |  | (1                                         | )
|Engineered wood          |  | -                                          |  
|Other segment items      |  | -                                          |  
|                         |  | 26                                         |  

In fiscal 2012, adjusted EBITDA was negative $16 million
compared to negative adjusted EBITDA of $47 million in the prior year. SPF
lumber adjusted EBITDA improved by $31 million. The previously noted higher
selling prices for lumber increased adjusted EBITDA by $27 million. The higher
prices were assisted by currency as the Canadian dollar averaged US $0.992, a
2.1% decrease from US $1.013 in the prior year. The previously noted decline in
export taxes on lumber shipped to the U.S. increased adjusted EBITDA by a
further $6 million. Sawmill manufacturing costs declined by $2 million,
primarily in the Eastern sawmills, which produced 16% more lumber versus 2011.
In the prior year, the segment had benefited from a $1 million favourable
adjustment to the carrying values of logs and lumber inventories compared to a
favourable adjustment of $2 million in the current year. The $5 million negative
variance in Other includes a $4 million negative volume variance due to
selling a higher volume of lumber at negative margins as well as a negative
variance of $1 million related to freight costs. Specialty wood adjusted EBITDA
was unchanged year-over-year. Engineered wood results were also unchanged as
both plants remained idle for both years. The adjusted EBITDA margin to total
sales was negative 3.7% compared to negative 10.0% in the prior year.

The following summarizes operating results variances by major
element:

|                              |  |      |   |  |      |   |  | Variance       | 
|----------------------------- |  | ---- | - |  | ---- | - |  | -------------- | 
|                              |  |      |   |  |      |   |  | favourable     | 
|(in millions of dollars)      |  | 2011 |   |  | 2012 |   |  | (unfavourable) | 
|Adjusted EBITDA               |  | (47  | ) |  | (16  | ) |  | 31             | 
|Depreciation and amortization |  | 14   |   |  | 10   |   |  | 4              | 
|Other items (gain)            |  | 3    |   |  | (22  | ) |  | 25             | 
|Operating loss                |  | (64  | ) |  | (4   | ) |  | 60             | 

The Forest Products segment generated an operating loss of $4
million, as compared to an operating loss of $64 million in fiscal 2011. In
addition to the previously noted improvement in adjusted EBITDA, the sale of the
BC sawmills and the hardwood flooring operations led to lower depreciation
expense. During the most recent fiscal year, the Company recorded a gain of $24
million related to the sale of the BC sawmills. The Company sold its Toronto,
Ontario, hardwood flooring plant and concurrently closed its Huntsville,
Ontario, hardwood flooring plant. The combined effect was a charge of $2
million. In the prior year period, the segment recorded a charge of $2 million
relating to the permanent closure of the Taschereau, Quebec, sawmill. The charge
was for severance and other closure costs. The Company also absorbed a charge of
$1 million related to severance payments at an idled planer mill in Cranbrook,
BC.

| | - 9 - | TEMBEC 2012 MD&A
| | ----- | ----------------

---

|SPECIALTY CELLULOSE AND CHEMICAL PULP                       |  |       |  |  |       | 
|----------------------------------------------------------- |  | ----- |  |  | ----- | 
|(in millions of dollars)                                    |  | 2011  |  |  | 2012  | 
|Sales - Pulp (1)                                            |  | 600   |  |  | 562   | 
|Sales - Chemicals                                           |  | 93    |  |  | 100   | 
|                                                            |  | 693   |  |  | 662   | 
|Freight and other deductions                                |  | 66    |  |  | 68    | 
|Cost of sales (1)                                           |  | 464   |  |  | 481   | 
|SG&A                                                        |  | 23    |  |  | 21    | 
|Adjusted EBITDA                                             |  | 140   |  |  | 92    | 
|Adjusted EBITDA margin on sales                             |  | 20.2% |  |  | 13.9% | 
|Depreciation and amortization                               |  | 19    |  |  | 21    | 
|Operating earnings                                          |  | 121   |  |  | 71    | 
|Identifiable assets (excluding cash)                        |  | 491   |  |  | 544   | 
|(1) Includes intersegment sales eliminated on
consolidation |  |       |  |  |       | 

The Specialty Cellulose and Chemical Pulp segment consists of
three market pulp manufacturing facilities. The facilities are divided into two
main types. Two pulp mills produce specialty cellulose pulps. The remaining
facility produces chemical softwood kraft paper pulp (NBSK).

The two specialty cellulose pulp mills have an annual capacity
of 310,000 tonnes per year. The softwood kraft mill has an annual capacity of
270,000 tonnes. The specialty cellulose pulp produced at the two pulp mills is a
high purity cellulose utilized in a wide variety of specialized products such as
pharmaceuticals, food additives, and industrial chemicals. The Temiscaming mill
also produces viscose grade 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 as the mill transitioned to 100%
specialty cellulose grades.

The two specialty cellulose 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 periodically purchases and re-sells third
party pulp mill by-product chemicals.

| | - 10 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

The following summarizes the annual operating capacity of each
facility:

|SPECIALTY CELLULOSE                                                            |  | tonnes  | 
|------------------------------------------------------------------------------ |  | ------- | 
|Specialty cellulose and commodity dissolving
      pulp - Temiscaming, QC      |  | 160,000 | 
|Specialty cellulose - Tartas, France                                           |  | 150,000 | 
|                                                                               |  | 310,000 | 
|                                                                               |  |         | 
|CHEMICAL PULP                                                                  |  |         | 
|NBSK - Skookumchuck, BC                                                        |  | 270,000 | 
|                                                                               |  |         | 
|CHEMICALS                                                                      |  |         | 
|Resin and related products - Temiscaming and
      Longueuil, QC; Toledo, Ohio |  | 170,000 | 
|Lignin - Temiscaming, QC; Tartas, France                                       |  | 190,000 | 
|Ethanol - Temiscaming, QC (million litres)                                     |  | 12.1    | 

Specialty cellulose shipments represented 54% of segment
shipments in fiscal 2012, compared to 53% in the prior year. Specialty cellulose
sales as a percentage of total segment pulp sales increased from 68% to 72% due
to lower prices for NBSK pulp.

Chemical pulp NBSK represented 46% of segment pulp shipments in
fiscal 2012, compared to 47% in the prior year. Based on sales dollars, NBSK
pulp sales as a percentage of total segment pulp sales decreased from 32% to 28%
due to a decline in selling prices.

Total 2012 pulp shipments of 479,900 tonnes include 17,300
tonnes of NBSK pulp consumed by the Companys paperboard operations as compared
to 15,300 tonnes in the prior year.

Total sales for the Specialty Cellulose and Chemical Pulp
segment were $662 million, a decrease of $31 million from the prior year. After
eliminating internal sales, the Specialty Cellulose and Chemical Pulp segment
generated 39% of Company consolidated sales, unchanged from the prior year. The
Specialty Cellulose and Chemical Pulp segment is a global business. In 2012, 61%
of consolidated pulp sales were generated outside of Canada and the U.S., as
compared to 64% in the prior year.

| | - 11 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

|                                                  |  | Sales        |   |  | Shipments  |   |  | Selling prices |  
|------------------------------------------------- |  | ------------ | - |  | ---------- | - |  | -------------- | -
|                                                  |  | ($ millions) |   |  | (000 units | ) |  | ($ / unit)     |  
|                                                  |  | 2011         |   |  | 2012       |   |  | 2011           |  
|Specialty pulp                                    |  |              |   |  |            |   |  |                |  
|Specialty cellulose (tonnes)                      |  | 311          |   |  | 353        |   |  | 209.5          |  
|Viscose grade (tonnes)                            |  | 85           |   |  | 54         |   |  | 52.4           |  
|Specialty fluff (tonnes)                          |  | 9            |   |  | -          |   |  | 8.1            |  
|                                                  |  | 405          |   |  | 407        |   |  | 270.0          |  
|Chemical paper pulps (tonnes)                     |  | 195          |   |  | 155        |   |  | 237.3          |  
|Total specialty cellulose and chemical pulp sales |  | 600          |   |  | 562        |   |  | 507.3          |  
|Chemicals                                         |  |              |   |  |            |   |  |                |  
|Resin and related products
      (tonnes)         |  | 55           |   |  | 55         |   |  | 55.2           |  
|Lignin (tonnes)                                   |  | 29           |   |  | 29         |   |  | 131.5          |  
|Ethanol (000 litres)                              |  | 7            |   |  | 9          |   |  | 8.9            |  
|                                                  |  | 91           |   |  | 93         |   |  |                |  
|Other sales                                       |  | 2            |   |  | 7          |   |  |                |  
|Total sales                                       |  | 693          |   |  | 662        |   |  |                |  
|Internal pulp sales                               |  | (12          | ) |  | (12        | ) |  | (15.3          | )
|Consolidated sales                                |  | 681          |   |  | 650        |   |  |                |  

Markets

The Company markets its pulp on a world-wide basis, primarily
through its own sales force. Permanent sales offices are maintained in Toronto,
Canada; Dax, France; and Beijing, China. Contractual arrangements with third
party representatives are also utilized.

The shipments to capacity ratio for specialty pulp was 83% in
fiscal 2012 versus 87% in the prior year. The decrease in shipment ratio was due
to a decrease of 10,100 tonnes in viscose grade pulp shipments and 8,100 tonnes
in specialty fluff shipments, which the Company no longer manufactures. This was
due to the Companys objective of focusing on specialty or higher purity
grades and reducing its exposure to viscose and fluff grades. Specialty
cellulose pulps have a lesser yield, which in turn reduces the productivity of
the two mills. During fiscal 2011 and 2012, both mills operated at full rates
and no downtime was taken for market conditions. The strong market conditions
for specialty grades led to higher US dollar and euro prices. Pricing for
specialty cellulose increased by $157 per tonne. The increase in Canadian dollar
selling prices would have been higher if not for the weaker euro, which averaged
5.1% lower and reduced average prices by $37 per tonne. Market conditions in the
viscose grade weakened from the record levels reached in 2011 and prices
declined by $369 per tonne. The favourable specialty cellulose market conditions
also led to low inventory levels of finished pulp, ending fiscal 2012 at 27 days
of supply compared to 22 days at the end of 2011.

| | - 12 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

The shipments to capacity ratio for chemical paper pulp or NBSK
was 82% in fiscal 2012 versus 88% in the prior year. The decline in shipment
ratio was due to a combination of lower productivity and inventory movement.
Market conditions for NBSK pulp were significantly weaker during the most recent
year. The benchmark price (delivered China) declined by US $183 per tonne. With
a weaker Canadian dollar and a higher sales mix factor providing a partial
offset, the net effect was a reduction of $125 per tonne. Fiscal 2012 inventory
of NBSK ended the year at only nine days, as year-end coincided with the annual
maintenance shutdown. This level does not allow for effective customer service
and will be increased in the first quarter of fiscal 2013.

Operating Results

The following summarizes adjusted EBITDA variances by major
element:

|                           |  | Variance - favourable (unfavourable) |  
|-------------------------- |  | ------------------------------------ | -
|                           |  |                                      |  
|                           |  |                                      |  
|(in millions of dollars)   |  | Price                                |  
|Specialty cellulose        |  | 18                                   |  
|Chemical paper pulp (NBSK) |  | (28                                  | )
|Chemicals                  |  | 4                                    |  
|Other segment items        |  | -                                    |  
|                           |  | (6                                   | )

Fiscal 2012 adjusted EBITDA was $92 million compared to $140
million in the prior year. Specialty grades of cellulose pulp increased in price
and more than offset declines in viscose grades, increasing adjusted EBITDA by
$18 million. Manufacturing costs at the two specialty pulp mills increased by
$28 million, primarily for chemicals, supplies and fiber. The mills produced
more specialty grades of cellulose pulp, which have lower yields and are more
costly to produce than viscose grades. The weaker euro versus the Canadian
dollar, which reduced the Tartas mill selling prices by $10 million, also
reduced their Canadian dollar equivalent costs by $7 million leaving a net
adjusted EBITDA impact of $3 million. The remaining $5 million negative variance
is primarily related to volume as shipments declined by 4.7% year-over-year.

As noted previously, market conditions for NBSK were
significantly weaker during 2012. The decline in prices reduced adjusted EBITDA
by $28 million. Mill manufacturing costs increased by $6 million, primarily for
fiber and chemicals.

The $4 million favourable chemicals price variance was due to
higher resin prices. However, raw material costs increased by a similar amount
and resin profitability was relatively unchanged. The decline of $3 million in
chemicals adjusted EBITDA was due to the Canadian lignin business, which
experienced lower prices and higher costs.

The two North American mills purchased approximately 852,000
bone dry tonnes of wood chips in fiscal 2012, up from 845,000 in the prior year.
Of this amount, approximately 49% was supplied by the Forest Products segment,
compared to 67% in the prior year. The decline in internal fiber percentage was
due to the sale of the two BC sawmills in March 2012. While the Skookumchuck
NBSK mill continues to utilize the wood chip output of the two sawmills from the
new owner, they are now classified as external supply. The remaining
requirements were purchased from third parties under contracts and agreements of
various durations. The pulp mill located in Southern France purchased 287,000
bone dry tonnes of wood in fiscal 2012 as compared to 308,000 bone dry tonnes in
the prior year. The fibre is sourced from many private landowners.

| | - 13 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

Overall, lower NBSK prices and higher manufacturing costs
reduced adjusted EBITDA margins from 20.2% in 2011 to 13.9% in 2012.

The following summarizes operating results variances by major
element:

|                              |  |      |  |  |      |  |  | Variance       |  
|----------------------------- |  | ---- |  |  | ---- |  |  | -------------- | -
|                              |  |      |  |  |      |  |  | favourable     |  
|(in millions of dollars)      |  | 2011 |  |  | 2012 |  |  | (unfavourable) |  
|Adjusted EBITDA               |  | 140  |  |  | 92   |  |  | (48            | )
|Depreciation and amortization |  | 19   |  |  | 21   |  |  | (2             | )
|Operating earnings            |  | 121  |  |  | 71   |  |  | (50            | )

The Specialty Cellulose and Chemical Pulp segment generated
operating earnings of $71 million during the most recently completed fiscal
year, compared to operating earnings of $121 million in the prior year. The
previously noted decline in adjusted EBITDA led to the lower operating earnings.

| | - 14 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

|HIGH-YIELD PULP                                             |  |      |    |  |      |   
|----------------------------------------------------------- |  | ---- | -- |  | ---- | --
|(in millions of dollars)                                    |  | 2011 |    |  | 2012 |   
|Sales (1)                                                   |  | 378  |    |  | 352  |   
|Freight and other deductions                                |  | 79   |    |  | 77   |   
|Cost of sales (1)                                           |  | 299  |    |  | 298  |   
|SG&A                                                        |  | 3    |    |  | 6    |   
|Adjusted EBITDA                                             |  | (3   | )  |  | (29  | ) 
|Adjusted EBITDA margin on sales                             |  | (0.8 | )% |  | (8.2 | )%
|Depreciation and amortization                               |  | 11   |    |  | 13   |   
|Other item:                                                 |  |      |    |  |      |   
|Chetwynd impairment charge                                  |  | -    |    |  | 50   |   
|Operating loss                                              |  | (14  | )  |  | (92  | ) 
|Identifiable assets (excluding cash)                        |  | 173  |    |  | 156  |   
|(1) Includes intersegment sales eliminated on
consolidation |  |      |    |  |      |   

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 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 2012 shipments of 640,700 tonnes include 60,000 tonnes of
high-yield pulp consumed by the Companys paperboard operations as compared to
57,500 tonnes in the prior year.

Total sales for the High-Yield Pulp segment were $352 million,
a decrease of $26 million from the prior year. After eliminating internal sales,
the High-Yield Pulp segment generated 19% of Company consolidated sales, as
compared to 20% in the prior year. The High-Yield Pulp segment is more export
oriented than the other business segments within the Company. In 2012, 99% of
consolidated pulp sales were generated outside of Canada and the U.S., unchanged
from the prior year. China alone accounted for 36% of sales compared to 49% in
the prior year.

| | - 15 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

|                    |  | Sales        |   |  | Shipments   |   |  | Selling prices |  
|------------------- |  | ------------ | - |  | ----------- | - |  | -------------- | -
|                    |  | ($ millions) |   |  | (000 tonnes | ) |  | ($ / tonne)    |  
|                    |  | 2011         |   |  | 2012        |   |  | 2011           |  
|Hardwood high-yield |  | 378          |   |  | 352         |   |  | 664.3          |  
|Internal sales      |  | (30          | ) |  | (30         | ) |  | (57.5          | )
|Consolidated sales  |  | 348          |   |  | 322         |   |  | 606.8          |  

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. Contractual arrangements with third party
representatives are also utilized.

The shipments to capacity ratio for high-yield pulp was at 80%
versus 83% in the prior year. These are relatively low percentages, which are
not indicative of a strong market. The US $ reference price for BEK decreased by
US $120 per tonne compared to the prior year period. However, the drop in US $
pricing for high-yield pulp was less pronounced. Currency was slightly
favourable as the Canadian dollar averaged US $0.992, a 2.1% decrease from US
$1.013 in the prior year. The net effect reduced prices by approximately $20 per
tonne during the fiscal year. The average selling price for third party sales
was $555 per tonne, a decrease of $18 per tonne from the prior year average. In
response to the weak market conditions, the Company indefinitely curtailed
production at the Chetwynd pulp mill in September 2012. Inventory levels ended
the year at 35 days of supply as compared to 15 days at the end of 2011. The
abnormally low level of inventory at the end of the prior year was related to a
labour strike that occurred at the Matane mill.

Operating Results

The following summarizes adjusted EBITDA variances by major
element:

|                         |  | Variance - favourable (unfavourable) |  
|------------------------ |  | ------------------------------------ | -
|                         |  |                                      |  
|(in millions of dollars) |  | Price                                |  
|High-yield pulps         |  | (12                                  | )

Fiscal 2012 adjusted EBITDA was negative $29 million compared
to negative $3 million in the prior year. The previously noted decrease in pulp
selling prices decreased adjusted EBITDA by $12 million. Mill costs increased by
$6 million, primarily for fiber and chemicals. This was partially offset by
improved fixed cost absorption as the mills produced 6.9% more tonnes in 2012.
Freight and SG&A costs increased by $3 million. The current year costs
include a charge of $3 million relating to the decrease in the carrying values
of finished goods raw material inventory as compared to a charge of $1 million
in the prior year.

The three pulp mills purchased approximately 707,600 bone dry
tonnes of wood chips in fiscal 2012, up from 682,800 in the prior year. Of this
amount, approximately 24% was supplied by the Forest Products segment, compared
to 19% in the prior year. The remaining requirements were purchased from third
parties under contracts and agreements of various durations.

Overall, lower prices and higher costs reduced profitability
with a negative adjusted EBITDA margin of 8.2% compared to negative 0.8% in the
prior year.

| | - 16 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

The following summarizes operating results variances by major
element:

|                              |  |      |   |  |      |   |  | Variance       |  
|----------------------------- |  | ---- | - |  | ---- | - |  | -------------- | -
|                              |  |      |   |  |      |   |  | favourable     |  
|(in millions of dollars)      |  | 2011 |   |  | 2012 |   |  | (unfavourable) |  
|Adjusted EBITDA               |  | (3   | ) |  | (29  | ) |  | (26            | )
|Depreciation and amortization |  | 11   |   |  | 13   |   |  | (2             | )
|Other items                   |  | -    |   |  | 50   |   |  | (50            | )
|Operating loss                |  | (14  | ) |  | (92  | ) |  | (78            | )

The High-Yield Pulp segment generated an operating loss of $92
million during the most recently completed fiscal year, compared to an operating
loss of $14 million in the prior year. In addition to the previously noted
decline in adjusted EBITDA, the segment absorbed an impairment charge of $50
million relating to the property, plant and equipment, including supplies and
materials, of the Chetwynd, BC, pulp mill.

| | - 17 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

|PAPER                                |  |      |  |  |       | 
|------------------------------------ |  | ---- |  |  | ----- | 
|(in millions of dollars)             |  | 2011 |  |  | 2012  | 
|Sales                                |  | 339  |  |  | 346   | 
|Freight and other deductions         |  | 45   |  |  | 46    | 
|Cost of sales                        |  | 255  |  |  | 252   | 
|SG&A                                 |  | 10   |  |  | 11    | 
|Adjusted EBITDA                      |  | 29   |  |  | 37    | 
|Adjusted EBITDA margin on sales      |  | 8.6% |  |  | 10.7% | 
|Depreciation and amortization        |  | 3    |  |  | 2     | 
|Operating earnings                   |  | 26   |  |  | 35    | 
|Identifiable assets (excluding cash) |  | 122  |  |  | 120   | 

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 multi-ply 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 NBSK pulp
mill. The total capacity of the Paper segment is 420,000 tonnes. Prior to April
2011, 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 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 44% of Paper
segment shipments in fiscal 2012, as compared to 42% in the prior year. As a
percentage of total segment sales, coated bleached board represented 59% of
sales compared to 57% in the prior year.

Newsprint shipments represented 56% of Paper segment shipments
in fiscal 2012, as compared to 58% in the prior year. In terms of total segment
sales, newsprint represented 41% of sales compared to 42% in the prior year.

Sales for the Paper segment totalled $346 million, as compared
to $339 million in the prior year. The segment generated 21% of Company
consolidated sales, as compared to 19% in fiscal 2011. The focus of the paper
business is North America, which accounted for 94% of consolidated sales in
2012, compared to 92% in the prior year. The U.S. alone accounted for 77% of
sales in fiscal 2012, up from 74% the prior year.

| | - 18 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

|                                         |  | Sales        |  |  | Shipments   |   |  | Selling prices | 
|---------------------------------------- |  | ------------ |  |  | ----------- | - |  | -------------- | 
|                                         |  | ($ millions) |  |  | (000 tonnes | ) |  | ($ / tonne)    | 
|                                         |  | 2011         |  |  | 2012        |   |  | 2011           | 
|Coated bleached board (rolls and sheets) |  | 194          |  |  | 204         |   |  | 165.2          | 
|Newsprint                                |  | 143          |  |  | 142         |   |  | 228.5          | 
|Electricity sales                        |  | 2            |  |  | -           |   |  |                | 
|Consolidated sales                       |  | 339          |  |  | 346         |   |  | 393.7          | 

Markets

The benchmark price for coated bleached board (16 point)
averaged US $1,132 per short ton in fiscal 2012, an US $18 per short ton
decrease over the prior year. Relatively stable pricing was supported by good
market demand. The shipments to capacity ratio for coated bleached board was 95%
in fiscal 2012 compared to 92% in the prior year. These percentages reflect the
good market fundamentals of the North American coated bleached board market over
the last two years. The board mill operated at full capacity in both fiscal
2011 and fiscal 2012, with no market downtime taken in either year. The small
decline in US $ prices was offset by favourable currency as the Canadian dollar
averaged $0.992, a 2.1% decrease from US $1.013 in the prior year. The inventory
level at year-end was at 50 days, compared to 52 days at the end of the prior
year. These are normal levels given the product sales mix, which includes both
rolls and sheets.

The benchmark newsprint price (48.8 gram  East Coast) averaged
US $640 per tonne in fiscal 2012, unchanged from the prior year. The shipments
to capacity ratio for newsprint was 92% as compared to 95% in the prior year,
while these ratios would normally be indicative of a stable market, that was not
the case for North American newsprint, as demand continued to decline. Despite
flat US $ prices, the Companys average selling price increased by $14 due to
the previously noted weaker Canadian dollar. Inventory levels at year-end were
at 14 days, unchanged from the prior year, which is a normal level for the
newsprint mill.

Operating Results

The following summarizes adjusted EBITDA variances by major
element:

|                         |  | Variance - favourable (unfavourable) | 
|------------------------ |  | ------------------------------------ | 
|                         |  |                                      | 
|(in millions of dollars) |  | Price                                | 
|Coated bleached board    |  | 3                                    | 
|Newsprint                |  | 3                                    | 
|Other segment items      |  | -                                    | 
|                         |  | 6                                    | 

Fiscal 2012 adjusted EBITDA was $37 million compared to $29
million in the prior year. Higher coated bleached board prices added $3 million
to adjusted EBITDA. Costs at the mill declined by $2 million with lower fiber
costs offsetting increases in other areas. Higher newsprint prices increased
adjusted EBITDA by $3 million. Manufacturing costs at the newsprint mill also
declined by $5 million, primarily as a result of lower energy costs.

The coated bleached board mill utilizes a combination of
chemical kraft and high-yield pulps to produce a three-ply sheet. During fiscal
2012, the mill utilized 17,300 tonnes of NBSK supplied by the Companys
Skookumchuck NBSK pulp mill as compared to 15,300 tonnes in the prior year. The
mill also consumed 60,000 tonnes of high-yield pulp supplied by the Temiscaming
mill versus 57,500 tonnes in fiscal 2011. The balance of pulp requirements is
purchased from third parties.

| | - 19 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

The newsprint mill utilizes virgin fibre, primarily in the form
of wood chips. During fiscal 2012, the operations purchased 238,500 bone dry
tonnes of virgin fibre, of which approximately 80% was internally sourced. In
the prior year, 257,400 bone dry tonnes of virgin fibre were purchased, with 81%
being sourced internally.

Overall, the higher prices and the lower costs increased
adjusted EBITDA margins from 8.6% to 10.7% .

The following summarizes operating results variances by major
element:

|                              |  |      |  |  |      |  |  | Variance       | 
|----------------------------- |  | ---- |  |  | ---- |  |  | -------------- | 
|                              |  |      |  |  |      |  |  | favourable     | 
|(in millions of dollars)      |  | 2011 |  |  | 2012 |  |  | (unfavourable) | 
|Adjusted EBITDA               |  | 29   |  |  | 37   |  |  | 8              | 
|Depreciation and amortization |  | 3    |  |  | 2    |  |  | 1              | 
|Operating earnings            |  | 26   |  |  | 35   |  |  | 9              | 

The Paper segment generated operating earnings of $35 million
compared to operating earnings of $26 million in the prior year. The previously
noted improvement in adjusted EBITDA led to the higher operating earnings.

| | - 20 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

|CORPORATE                                      |  |      |   |  |      |  
|---------------------------------------------- |  | ---- | - |  | ---- | -
|(in millions of dollars)                       |  | 2011 |   |  | 2012 |  
|General and administrative expenses            |  | 19   |   |  | 21   |  
|Share-based compensation                       |  | 2    |   |  | (1   | )
|Depreciation                                   |  | 1    |   |  | -    |  
|Other items:                                   |  |      |   |  |      |  
|Custodial - idled facilities                   |  | 7    |   |  | 10   |  
|Write-down of Temlam loan
      receivable     |  | -    |   |  | 16   |  
|Gain on sale of minority equity
      interest |  | -    |   |  | (4   | )
|Gain on Tembec USA LLC filing                  |  | (4   | ) |  | -    |  
|Gain on sale of Smooth Rock Falls hydro dam    |  | (3   | ) |  | -    |  
|Operating expenses                             |  | 22   |   |  | 42   |  

The Company recorded a $1 million credit for share-based
compensation in the current year, compared to a $2 million charge last year.
Senior executives currently participate in a long-term incentive plan which
entitles participants to potentially receive units that are equal in value to
one common share. The units have a defined vesting period and are subject to
performance conditions that ultimately determine the amount of units that vest
and are earned by plan participants. 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. The period credit/expense consists of
normal periodic variation in the number of units based on anticipated or normal
vesting and the changes in the value of the Companys share price.

The Corporate segments other items include expenses relating
to several permanently idled facilities. The costs relate to custodial, site
security, legal and remediation activities. These legacy costs totalled $10
million in the most recent year, as compared to $7 million in the prior
year.

The current year includes a $16 million charge relating to the
write-down of the loan receivable from Temlam Inc. The latter is currently under
creditor protection and owns an idled laminated veneer lumber (LVL) facility
located in Amos, Quebec. The Company has a 50% secured interest in the facility.
The cutting rights that were previously attached to the LVL facility were
granted to another company. In the absence of a guaranteed fibre supply, the
Company concluded that the re-start of the facility is unlikely and has adjusted
its carrying value to the amount anticipated to be realized upon liquidation or
sale. The current year also includes a gain of $4 million relating to the sale
of a minority equity interest in two dissolving pulp mills.

The prior year includes a gain of $4 million related to the
filing of Tembec USA LLC under Chapter 7 of the Bankruptcy Code of the United
States. The gain was generated by a reduction in the Companys accrued benefit
obligation. The period also included a gain of $3 million related to the sale of
hydro-electric generating assets located in Smooth Rock Falls, Ontario.

| | - 21 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

NON-OPERATING ITEMS

|INTEREST, FOREIGN EXCHANGE AND OTHER    |  |      |   |  |      |  
|--------------------------------------- |  | ---- | - |  | ---- | -
|(in millions of dollars)                |  | 2011 |   |  | 2012 |  
|Interest on debt                        |  | 32   |   |  | 38   |  
|Interest income                         |  | (1   | ) |  | (1   | )
|Capitalized interest                    |  | -    |   |  | (2   | )
|Fees - new working capital facility     |  | 2    |   |  | -    |  
|Foreign exchange items                  |  | -    |   |  | 4    |  
|Change in fair value of warrants (gain) |  | (5   | ) |  | -    |  
|Bank
      charges and other            |  | 3    |   |  | 2    |  
|                                        |  | 31   |   |  | 41   |  

The increase in the interest expense relates primarily to the
issue of a US $50 million additional tranche of 11.25% senior secured notes in
February 2012. This brought the total amount outstanding of 11.25% senior
secured notes to US $305 million, which constitutes the bulk of the Companys
annual interest expense. 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, losses are generated. This was the case in the
current year. Prior to February 29, 2012, there were 11,093,943 outstanding
warrants convertible into common shares of the Company. They expired on that
date and were not converted into common shares of the Company.

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

During fiscal 2012, the Company recorded a gain of $13 million
on the translation of its US $ denominated debt as the relative value of the
Canadian dollar increased from US $0.971 to US $1.017.

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.

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

During fiscal 2012, the Company recorded an income tax expense
of $22 million on a loss before income taxes of $60 million. The income tax
expense reflected a $38 million unfavourable variance versus an anticipated
income tax recovery of $16 million based on the Companys effective tax rate of
26.3% . The current year absorbed $32 million unfavourable variance related to
period losses for which no deferred tax asset was recognized. Based on past
financial performance, deferred income tax assets of the Companys Canadian
operations have not been recognized as it has not been determined that future
realization of these assets is probable. The expense was also increased by $6
million due to higher statutory income tax rates in France.

During fiscal 2011, the Company recorded an income tax expense
of $20 million on earnings before income taxes of $15 million. The income tax
expense reflected a $16 million unfavourable variance versus an anticipated tax
expense of $4 million based on the Companys effective tax rate of 27.8% . The
prior year absorbed a $10 million unfavourable variance related to period losses
for which no deferred tax asset was recognized. The expense was also increased
by $6 million due to higher statutory income tax rates in France.

| | - 22 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

NET LOSS

The Company generated a net loss of $82 million or $0.82 per
share for the year ended September 29, 2012, compared to a net loss of $5
million or $0.05 per share for the year ended September 24, 2011. 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 IFRS. The table below contains the gain or loss on
translation of foreign debt, which is a recurring item. 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 24, 2011 |   |  | September 29, 2012 |  
|                                                                      |  | $ millions         |   |  | $ per share        |  
|Net loss as reported - in accordance with
      IFRS                  |  | (5                 | ) |  | (0.05              | )
|Specific items (after-tax):                                           |  |                    |   |  |                    |  
|Loss (gain) on translation of
      foreign debt                      |  | 1                  |   |  | 0.01               |  
|Gain on derivative financial
      instruments                        |  | (1                 | ) |  | (0.01              | )
|Gain on sale of BC sawmills                                           |  | -                  |   |  | -                  |  
|Loss on sale/closure of flooring
      assets                         |  | -                  |   |  | -                  |  
|Write-down of Temlam loan
      receivable                            |  | -                  |   |  | -                  |  
|Gain on sale of minority
      interest                               |  | -                  |   |  | -                  |  
|Asset impairment - Chetwynd pulp
      mill                           |  | -                  |   |  | -                  |  
|Taschereau sawmill closure
      charge                               |  | 2                  |   |  | 0.02               |  
|Cranbrook planer mill severance
      charge                          |  | 1                  |   |  | 0.01               |  
|Gain on Tembec USA LLC filing                                         |  | (4                 | ) |  | (0.04              | )
|Gain on sale of Smooth Rock
      Falls hydro dam                     |  | (2                 | ) |  | (0.02              | )
|Costs for permanently idled
      facilities                          |  | 5                  |   |  | 0.05               |  
|Unrecognized deferred tax assets
      on above items                 |  | 1                  |   |  | 0.01               |  
|Net loss excluding specific items - not
      in accordance with IFRS |  | (2                 | ) |  | (0.02              | )

COMPREHENSIVE LOSS

The following table summarizes the impact of items affecting
the reported total comprehensive loss during the last two fiscal years:

|                                                                     |  | $ millions |  
|-------------------------------------------------------------------- |  | ---------- | -
|                                                                     |  | September  |  
|                                                                     |  | 2011       |  
|Net loss                                                             |  | (5         | )
|Defined benefit pension plans
      loss                             |  | (64        | )
|Other benefit plans gain                                             |  | -          |  
|Foreign currency translation gain (loss) on
      foreign operations |  | 2          |  
|Total comprehensive loss                                             |  | (67        | )

| | - 23 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

During fiscal 2012, the Company recognized a charge of $42
million relating to the net increase in defined pension plan liabilities. This
was the result of several items. A decline in the discount rate used to
calculate the pension obligation generated an actuarial loss of $77 million.
This unfavourable item was partially offset by a higher than expected return on
plan assets, which generated a gain of $31 million. The Company also generated
an experience gain of $4 million on its defined benefit pension plans. In the
prior year, the Company had recognized a charge of $64 million relating to the
net increase in defined benefit plan liabilities. A decline in the discount rate
used to calculate the pension obligation generated an actuarial loss of $44
million. A lower than expected return on plan assets added a further $27 million
to net liability. Several other favourable items totalling $7 million provided a
partial offset. During the most recent year, the Company generated an experience
gain of $6 million, partially offset by a $2 million increase in obligations due
to a decline in discount rate, on its other benefit plans obligations. There was
no comparable gain or loss in the prior year.

Comprehensive items also include gains or losses related to the
currency translation of the assets and liabilities of the Companys French and
U.S. operations. The gains or losses are generated by the changes in the end of
period exchange rates. During fiscal 2012, the currency translation of the
French operations generated a loss of $12 million, partially offset by a gain of
$1 million relating to the U.S. operations. In the prior year, the currency
translation of the French and U.S. operations generated a gain of $1 million
each.

| | - 24 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

QUARTERLY FINANCIAL INFORMATION

|(in millions of dollars, except
      per share amounts)               | 
|---------------------------------------------------------------------- | 
|                                                                       | 
|                                                                       | 
|Sales                                                                  | 
|Adjusted EBITDA                                                        | 
|Depreciation and amortization                                          | 
|Other items                                                            | 
|Operating earnings (loss)                                              | 
|Net
      earnings (loss)                                              | 
|Basic and fully diluted net earnings (loss) in dollars per
      share | 
|Comprehensive earnings (loss)                                          | 

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

The Company reported a net loss of $47 million or $0.47 per
share in the fourth quarter ended September 29, 2012, compared to a net loss of
$17 million or $0.17 per share in the same quarter of fiscal 2011. The weighted
average number of common shares outstanding was 100 million, unchanged from the
prior year.

Sales increased by $22 million as compared to the same quarter
a year ago. Currency was favourable as the Canadian dollar averaged US $1.003, a
2.0% decrease from US $1.023 in the prior year quarter. Forest Products segment
sales decreased by $13 million as a result of lower shipments, partially offset
by higher prices. Specialty Cellulose and Chemical Pulp segment sales decreased
by $13 million due to lower prices. High-Yield Pulp segment sales increased by
$24 million due to higher shipments. Paper segment sales increased by $12
million due to higher shipments.

Adjusted EBITDA increased by $4 million from the prior year
quarter. Forest Products segment adjusted EBITDA improved by $18 million from
the prior year quarter due to higher prices and lower costs. Specialty Cellulose
and Chemical Pulp segment adjusted EBITDA decreased by $14 million due primarily
to lower prices. High-Yield Pulp segment adjusted EBITDA decreased by $1 million
due to lower prices, partially offset by lower costs. Paper segment adjusted
EBITDA increased by $8 million because of lower costs.

The Company generated an operating loss of $41 million compared
to operating earnings of $5 million in the same quarter a year ago. The
previously noted improvement in adjusted EBITDA was more than offset by the
impact of other items. During the September 2012 quarter, the Company absorbed
an impairment charge of $50 million relating to the property, plant and
equipment, including supplies and materials, of the Chetwynd, BC, pulp mill.

The interest expense relates primarily to interest on the
11.25% senior secured notes maturing in December 2018. In the prior year
quarter, the amount of outstanding notes was US $255 million as compared to US
$305 million during the most recent quarter. 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 in the
prior year quarter, gains are generated. When the Canadian dollar strengthens
versus the US dollar, as was the case in the most recent quarter, losses are
generated.

During the September 2012 quarter, the Company recorded a gain
of $13 million on the translation of its US $ denominated debt as the relative
value of the Canadian dollar increased from US $0.976 to US $1.017.

| | - 25 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

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.

During the September 2012 quarter, the Company recorded an
income tax expense of $5 million on a loss before income taxes of $42 million.
The income tax expense reflected a $16 million unfavourable variance versus an
anticipated income tax recovery of $11 million based on the Companys effective
tax rate of 26.3% . The September 2012 quarter absorbed a $16 million
unfavourable variance related to period losses for which no deferred tax asset
was recognized. Based on past financial performance, deferred income tax assets
of the Companys Canadian operations have not been recognized as it has not been
determined that future realization of these assets is probable.

During the September 2011 quarter, the Company recorded an
income tax expense of $8 million on a loss before income taxes of $9 million.
The income tax expense reflected an $11 million unfavourable variance versus an
anticipated income tax recovery of $3 million based on the Companys effective
tax rate of 27.8% . The September 2011 quarter absorbed a $7 million
unfavourable variance related to period losses for which no deferred tax asset
was recognized.

During the September 2012 quarter, the Company recognized a
charge of $42 million in comprehensive loss relating to the net increase in
defined pension plan liabilities. This was the result of several items. A
decline in the discount rate used to calculate the pension obligation generated
an actuarial loss of $77 million. This unfavourable item was partially offset by
a higher than expected return on plan assets, which generated a gain of $31
million. The Company also generated an experience gain of $4 million on its
defined benefit pension plans. In the prior year quarter, the Company had
recognized a charge of $64 million relating to the net increase in defined
benefit pension plan liabilities. A decline in the discount rate used to
calculate the pension obligation generated an actuarial loss of $44 million. A
lower than expected return on plan assets added a further $27 million to net
liability. Several other favourable items totalling $7 million provided a
partial offset. During the most recent quarter, the Company generated an
experience gain of $6 million, partially offset by a $2 million increase in
obligations due to a decline in discount rate, on its other benefit plan
obligations. There was no comparable gain or loss in the year ago period.

Comprehensive earnings (loss) also include gains or losses
related to the currency translation of the assets and liabilities of the
Companys French and U.S. operations. The gains or losses are generated by the
changes in the end of period exchange rates. During the September 2012 quarter,
the currency translation of the French operations generated a loss of $2
million, partially offset by a gain of $1 million relating to the U.S.
operations. In the prior year quarter, the currency translation of the U.S.
operations generated a loss of $2 million.

The fourth quarter 2012 interim MD&A issued on November 15,
2012, provides a more extensive analysis of items having impacted the Companys
fourth quarter financial results.

| | - 26 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

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

On a quarterly basis, sales and margins were negatively
impacted by relatively low lumber and paper pulp prices. Currency did not impact
Canadian operations significantly as the Canadian dollar was close to parity
over the last eight quarters, averaging US $1.003 with a quarterly average high
of US $1.033 and a low of US $0.977. However, the weakening of the relative
value of the euro versus the Canadian dollar that occurred over the last three
quarters did reduce the adjusted EBITDA of the French specialty cellulose mill.
The euro ended fiscal 2012 at C $1.263, a 9.3% decrease versus C $1.392 at the
end of fiscal 2011.

The Forest Products segment generated negative adjusted EBITDA
of $63 million during the last eight quarters. This represents an average
negative margin of 7.0% on sales of $903 million. The U.S. lumber and housing
market was very weak during the last two years and the Companys lumber
shipments to capacity ratio ranged from 54% to 70%. The U.S. market has recently
improved and lumber prices have followed this trend. In the September 2012
quarter, the Forest Products segment generated adjusted EBITDA of $8 million and
a positive margin of 7.4%, the first positive quarterly results of the last two
years. The financial performance was negatively impacted by export taxes on
lumber shipped to the United States. The total amount incurred over the last two
years was $20 million.

The Specialty Cellulose and Chemical Pulp segment generated
adjusted EBITDA of $232 million during the last eight quarters. This represents
an average margin of 17.1% on sales of $1,355 million. The margins averaged
20.2% in fiscal 2011 when both specialty cellulose and NBSK pulp prices were
relatively high. A weakening of NBSK pulp prices in fiscal 2012 resulted in
weaker results and average margins declined to 13.9% .

The High-Yield Pulp segment generated negative adjusted EBITDA
of $32 million during the last eight quarters. This represents a negative margin
of 4.4% on sales of $730 million. The market for high-yield pulp has been
relatively weak over the last two years, and like NBSK pulp, was weaker in
fiscal 2012 versus fiscal 2011, and margins dropped to negative 8.2% .

The Paper segment generated adjusted EBITDA of $66 million over
the last eight quarters. This represents an average margin of 9.6% on sales of
$685 million. Prices for coated bleached board and newsprint have not fluctuated
significantly over the last two years and segment financial results have been
relatively stable.

Corporate general and administrative expenses of the Company
have averaged approximately $5 million per quarter over the last two years and
there has been no significant changes in the composition of those expenses.

Overall, the Company generated adjusted EBITDA of $162 million
in the last eight quarters. This represents an average margin of approximately
4.8% on sales of $3.4 billion.

Other items reduced the Companys operating earnings by $53
million during the last eight quarters. While there were several offsetting
favourable and unfavourable items, the most significant unfavourable item was a
$50 million asset impairment charge taken in the September 2012 quarter.

Due to the strengthening Canadian dollar versus the US dollar,
the Company recorded a gain of $12 million on the translation of its
foreign-denominated debt over the last two years. However, the impact of the
quarterly US debt translation gains and losses added considerable volatility to
the financial results, with the impact ranging from a gain of $13 million in the
September 2012 quarter to a loss of $11 million in the September 2011
quarter.

During the last two years, the Company has recorded an income
tax expense of $42 million. The expense relates primarily to its French
operations as the Canadian operations have significant amounts of unrecognized
tax losses.

| | - 27 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

FINANCIAL POSITION AND LIQUIDITY

|FREE CASH FLOW                                                 |  |      |   |  |      |  
|-------------------------------------------------------------- |  | ---- | - |  | ---- | -
|(in millions of dollars)                                       |  | 2011 |   |  | 2012 |  
|Cash flow from operations before working
      capital changes |  | 64   |   |  | 13   |  
|                                                               |  |      |   |  |      |  
|Less:                                                          |  |      |   |  |      |  
|Additions to property, plant and
      equipment               |  | 58   |   |  | 120  |  
|Interest on debt                                               |  | 32   |   |  | 38   |  
|Free
      cash flow (negative)                                |  | (26  | ) |  | (145 | )

Cash flow from operations before working capital changes in
fiscal 2012 was $13 million, compared to $64 million in the prior year. The
decline in cash flow was due to lower adjusted EBITDA, income taxes paid
relating to the French operations and an increase in excess cash contributions
for employee future benefit plans. After allowing for capital expenditures of
$120 million and interest on debt of $38 million, free cash flow in fiscal 2012
was negative $145 million compared to negative $26 million in the prior year. In
fiscal 2012, non-cash working capital items used $85 million. The majority of
the increase in working capital was related to increased trade receivables in
the Forest Products and High-Yield Pulp segments as well as higher inventories
in the Specialty Cellulose and Chemical Pulp and the High-Yield Pulp segments.
As a result, cash flow from operations declined from positive $99 million in
fiscal 2011 to negative $72 million in fiscal 2012.

|CAPITAL SPENDING                      |  |      |  |  |      | 
|------------------------------------- |  | ---- |  |  | ---- | 
|(in millions of dollars)              |  | 2011 |  |  | 2012 | 
|Forest Products                       |  | 10   |  |  | 12   | 
|Specialty Cellulose and Chemical Pulp |  | 38   |  |  | 91   | 
|High-Yield Pulp                       |  | 5    |  |  | 8    | 
|Paper                                 |  | 5    |  |  | 7    | 
|Corporate                             |  | -    |  |  | 2    | 
|Net
      capital expenditures        |  | 58   |  |  | 120  | 
|As a % of consolidated sales          |  | 3.3% |  |  | 7.2% | 
|As a
      % of depreciation          |  | 121% |  |  | 261% | 

During fiscal 2012, capital expenditures totalled $120 million
compared to $58 million in the prior year. The Company estimates that annual
capital expenditures of $35 million to $40 million are required to adequately
maintain its facilities. The increase in capital expenditures in fiscal 2012
relates to one relatively large capital project. In March 2012, the Company
announced a $190 million capital investment to upgrade its specialty cellulose
mill in Temiscaming, Quebec. The project involves the replacement of three
low-pressure boilers with a single new high-pressure boiler designed to burn
waste sulphite liquor generated by the specialty cellulose manufacturing
process. The project also includes the installation of a new 50 megawatt
electrical turbine. During the year, $56 million was spent on the project,
bringing total cumulative project expenditures to $59 million. It is currently
estimated that the project will increase annual adjusted EBITDA by $40 million
to $45 million once it becomes fully operational in the spring of 2014.

| | - 28 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

While the cost of major equipment purchases related to the
Temiscaming specialty cellulose project have been in line with expectations,
recent quotes provided by potential vendors for construction labour have
significantly exceeded the budgeted amounts. The Company is currently reviewing
quotes to assess the underlying causes of these discrepancies. Preliminary
indications are that the high quotes are due in large part to the overheated
construction market in the Province of Quebec and the resulting scarcity of
qualified contractors and related labour. The Companys desire to complete
certain elements prior to the onset of the winter months is likely contributing
to the cost pressures. Given these circumstances, the Company has decided to
reduce construction activity over the winter months.

As a result, the boiler start-up, initially scheduled for
December 2013, will likely be delayed by approximately three months. The impact
on the start-up of the turbine, scheduled for May 2014, is still under review.
The Companys view is that these actions are necessary and prudent under the
circumstances.

The Company completed the installation of a new electrical
turbine at the Tartas specialty cellulose mill at a total estimated cost of $21
million. During the year, $11 million was spent to complete the project. The
turbine was commissioned in June 2012 and became operational in the September
2012 quarter. Current forecasts are that the turbine will increase mill adjusted
EBITDA by $8 million per year.

On October 9, 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 were used to finance capital
projects that generate environmental benefits, including investments in energy
efficiency or the production of renewable energy from forest biomass. The
Company has utilized its full allotment of credits.

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

On February 21, 2011, the Company announced the permanent
closure of its Taschereau, Quebec, SPF sawmill. As a result, a charge of $2
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 November 25, 2011, the Company sold its Toronto, Ontario,
hardwood flooring plant for proceeds of $13 million. Concurrently, the Company
also announced the closure of its Huntsville, Ontario, hardwood flooring plant.
The sale of the Toronto plant and the closure of the Huntsville plant resulted
in a charge of $2 million that was recorded in the Companys fiscal 2012
financial results.

On March 23, 2012, the Company sold its British Columbia
Southern Interior wood products assets for proceeds of $66 million. The sale
included the Elko and Canal Flats sawmills and approximately 1.1 million cubic
meters of combined Crown tenures, private land and contract annual allowable
cut. As a result of the sale, the Company recorded a gain of $24 million in the
fiscal 2012 financial results.

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

The Companys strategy is to maintain the net debt to total
capitalization ratio at 40% or less. The objective is to keep a relatively
strong balance sheet and maintain the ability of the Company to access capital
markets at favourable rates. The net debt to total capitalization ratio of the
Company was 45% as at September 29, 2012, as compared to 27% at the end of the
prior fiscal year. The increase was due to fiscal 2012 losses, which reduced
shareholders equity, combined with higher net debt due primarily to finance the
previously noted Temiscaming specialty cellulose project. The Company
anticipates that the net debt to total capitalization ratio will remain in
excess of its target until the Temiscaming project is completed and begins to
generate the projected incremental adjusted EBITDA.

| | - 29 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

|LONG-TERM DEBT                                                                                                   |  |      |  |  |      | 
|---------------------------------------------------------------------------------------------------------------- |  | ---- |  |  | ---- | 
|(in millions of dollars)                                                                                         |  | 2011 |  |  | 2012 | 
|Tembec Industries - US $305 million (2011 -
      US $255 million) 11.25% senior secured notes due December 2018 |  | 262  |  |  | 300  | 
|Tembec Inc. - 6% unsecured notes due
      September 2012                                                        |  | 5    |  |  | -    | 
|Tembec Energy LP - 6.35% secured term loan                                                                       |  | -    |  |  | 20   | 
|Tembec French operations                                                                                         |  | 25   |  |  | 22   | 
|Kirkland Lake Engineered Wood Products Inc.                                                                      |  | 8    |  |  | 8    | 
|Other debt                                                                                                       |  | 2    |  |  | 2    | 
|Total long-term debt                                                                                             |  | 302  |  |  | 352  | 
|Less
      net unamortized financing costs                                                                       |  | 13   |  |  | 13   | 
|                                                                                                                 |  | 289  |  |  | 339  | 
|Current portion included in above                                                                                |  | 18   |  |  | 16   | 

In August 2010, the Company completed a private offering of US
$255 million of 11.25% senior secured notes maturing in December 2018. In
February 2012, the Company issued a further US $50 million of senior secured
notes with the same terms and conditions as the original US $255 million notes.
The notes are senior secured obligations of the Company, secured by a first
priority lien on the majority of the property and assets of the Company. They
are secured by a second priority lien on accounts receivable, inventories and
certain intangibles.

During the March 2012 quarter, the Company entered into a $75
million term loan facility to assist with the financing of the previously
mentioned Temiscaming, Quebec, specialty cellulose project. The interest rate on
the facility is 5.5% . The loan has a 15-year term consisting of a three-year
construction or drawdown period followed by a 12-year amortization period. The
term of the loan will be shortened by three years if the Company does not
complete certain future capital expenditures at the Temiscaming specialty
cellulose mill. The loan is secured by a second ranking charge on the project
assets. The Company has also granted the lender a five-year option starting on
the first loan disbursement date to acquire 3 million common shares of Tembec at
a price of $7 per share. As at the end of September 2012, the Company had not
drawn on the facility. On October 19, 2012 and on November 14, 2012, the Company
received $9 million and $6 million respectively on the term loan.

On June 29, 2012, the Company entered into a $30 million term
loan facility to assist with the financing of the previously noted specialty
cellulose project in Temiscaming, Quebec. The interest rate on this loan will be
the greater of 6.35% and the yield on equivalent terms Government of Canada
bonds plus 4.25% at the date the funds are advanced. The loan will be reimbursed
in blended monthly instalments over a period of eight years beginning
approximately 24 months after the initial advance, with a balloon payment of
$18 million to be repaid at the end of the ten-year term period. The loan is
secured by a first ranking charge on the project assets. On July 12, 2012, the
Company received $20 million representing the first tranche advanced under the
facility. The interest rate on this tranche was set at 6.35% . The final $10
million tranche will be advanced by June 2013 at the latest.

The two previously noted facilities will fund $105 million of
the $190 million required to complete the Temiscaming, Quebec, specialty
cellulose project. The Company intends to fund the remaining amount from
available cash resources and cash flows from operations.

As part of a financial recapitalization that occurred in 2008,
the Company issued $18 million of 6% unsecured notes having a maturity of
September 30, 2012. These notes were subject to an amortization schedule and an
amount of $5 million was repaid in fiscal 2012, compared to $4 million in the
prior year. The notes were fully repaid in fiscal 2012.

The debt of the French operations relates to the Companys
specialty cellulose pulp mill. The decrease in debt relates to scheduled
amortization payments.

| | - 30 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

The current portion of long-term debt includes $8 million
related to the Kirkland Lake Engineered Wood Products facility. This operation
has been idle for several years and the loan has been subject to a standstill
agreement between the Company and the lender. This is a non-recourse facility
and while it is classified as a current item, the Company considers it highly
unlikely that it will repay this facility in the next 12 months.

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. Moodys has a stable outlook
with respect to its ratings. S&P has a negative outlook with respect to
its rating.

At the end of September 2012, the Company had total cash of $92
million (including cash held in trust) plus unused operating lines of $48
million. At the end of September 2011, the Company had total cash of $105
million and unused operating lines of $124 million. The Company has set an
objective of maintaining a minimum liquidity of $135 million to $150 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 several entities and
jurisdictions to ensure they meet the needs of the various operating units.

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

|OPERATING LINES               |  |      |   |  |      |  
|----------------------------- |  | ---- | - |  | ---- | -
|(in millions of dollars)      |  | 2011 |   |  | 2012 |  
|Borrowing base                |  | 186  |   |  | 187  |  
|Less: availability reserve    |  | (22  | ) |  | (23  | )
|Net availability              |  | 164  |   |  | 164  |  
|                              |  |      |   |  |      |  
|Outstanding letters of credit |  | (34  | ) |  | (48  | )
|Amount drawn                  |  | (6   | ) |  | (68  | )
|Unused amount                 |  | 124  |   |  | 48   |  

In March 2011, the Company entered into a five-year $200
million ABL (asset-based loan) facility expiring in February 2016. The 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 adjusted EBITDA falls below $60 million. There is also a
variable reserve, which totalled $8 million at the end of fiscal 2012 as
compared to $7 million at the end of the prior year.

In April 2011, the Ontario Court of Appeal rendered a decision
in the restructuring proceedings involving Indalex Limited under the Companies
Creditors Arrangement Act (CCAA). The Court of Appeal held that defined benefit
pension plan deficiency claims had priority over security held by
debtor-in-possession (DIP) lenders in the context of a sale made under a CCAA
proceeding. This decision is currently being appealed to the Supreme Court of
Canada. The agent for the ABL lenders syndicate recently expressed concern
regarding the solvency deficits of the Companys Ontario defined benefit pension
plans. In light of the uncertainty surrounding the Ontario Court of Appeal
decision, the ABL agent requested that the Company refrain from making any
further draws or utilization of the ABL facility until such priority issue is
dealt with by the Supreme Court of Canada.

| | - 31 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

The Company is currently under discussions with the ABL agent
regarding this request as it considers the risk to be minimal and the position
of the ABL agent to be unwarranted. The ruling of the Supreme Court of Canada is
expected in the near term and the Company anticipates it will resolve the
situation. However, there can be no assurance at this time that the decision of
the Ontario Court of Appeal will not be maintained by the Supreme Court of
Canada, nor that a decision will be rendered in a timely manner. The Companys
liquidity position at September 29, 2012, was $140 million, including $31
million related to the unutilized portion of the ABL. If the unutilized ABL
portion was to remain unavailable for an extended period of time, the Companys
liquidity would fall below its stated objective of $135 million to $150 million.
In order to address this risk, the Company is assessing other liquidity
enhancing alternatives such as limiting capital expenditures and seeking other
sources of financing or funding.

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)                |  | 2011 |  |  | 2012 | 
|Shares outstanding - opening |  | 100  |  |  | 100  | 
|Shares outstanding - ending  |  | 100  |  |  | 100  | 

There were no shares issued in fiscal 2011 and fiscal 2012.

Prior to February 29, 2012, there were 11,093,943 outstanding
warrants (unchanged from the prior year). The warrants were convertible into an
equal amount of common shares. They would have been deemed to be exercised and
automatically converted into common shares of the Company if the 20-day
volume-weighted average trading price of a single common share reached or
exceeded $12.00 or immediately prior to any transaction that would have
constituted a change of control at a purchase price per common share equal to at
least $12.00. The warrants expired unexercised on February 29, 2012.

Pursuant to options granted under the prior Long-Term Incentive
Plan (LTIP), an additional 104,987 shares may be issued. The weighted average
exercise price of the options was $66.13 per share with expiry dates up to 2016.
As at September 29, 2012, all of the options were exercisable.

| | - 32 - | TEMBEC 2012 MD&A
| | ------ | ----------------

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FINANCIAL INSTRUMENTS AND CONTRACTUAL
OBLIGATIONS

|FINANCIAL ASSETS AND LIABILITIES           |  | September 29, 2012 | 
|------------------------------------------ |  | ------------------ | 
|(in millions of dollars)                   |  | Carrying value     | 
|Financial assets                           |  |                    | 
|Cash and cash equivalents                  |  | 87                 | 
|Cash held in trust                         |  | 5                  | 
|Accounts receivable                        |  | 200                | 
|Loans receivable                           |  | 12                 | 
|                                           |  |                    | 
|Financial liabilities                      |  |                    | 
|Operating bank loans                       |  | 68                 | 
|Accounts payable and accrued charges       |  | 230                | 
|Interest payable                           |  | 10                 | 
|Long-term debt (including current portion) |  | 339                | 

The carrying values for cash and 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 $30 million higher than
its carrying value. Unamortized financing costs increased the fair value by $13
million. The fair value was increased by a further $17 million as the Companys
US $305 million senior secured notes were trading above par at year-end.

|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 2012 was nil, unchanged from the prior year. The Company
may require payment guarantees, such as letters of credit, or obtain credit
insurance coverage.

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 $135 million to $150
million of liquidity. As noted previously, the Company had total cash of $92
million plus unused operating lines of $48 million as at September 29, 2012.

| | - 33 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

The Company currently has sufficient available cash resources
and access to additional funding to meet its commitments for at least the next
12-month period. This is based on certain assumptions regarding general economic
conditions, the availability of borrowings on existing credit facilities to fund
operating and capital requirements and the projected operating results of the
various business segments. Access to future borrowings is dependent on meeting
the terms and conditions contained in the Companys various credit facilities.
As well, an adverse perception in the capital markets of the Companys financial
condition or prospects could limit future access to debt and equity markets.

The Company is currently proceeding with an ambitious capital
expenditure program, including a $190 million project at the Temiscaming
specialty cellulose mill, which is increasing liquidity risk. The Company has
recently negotiated two credit agreements that will provide up to $105 million
of project financing for the Temiscaming specialty cellulose project. These
project credit facilities contain terms and conditions specific to the project,
including project completion commitments. If general economic conditions were to
deteriorate significantly, or if the Company was unable to meet the terms of the
new project credit facilities, or if future operating performance is
significantly below expectations, the Company may have to reduce or defer its
capital expenditure plans.

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    |  | Total |  |  | Within 1 |  |  | 2 - 3 |  |  | 4 - 5 |  |  | After 5 | 
|-------------------------- |  | ----- |  |  | -------- |  |  | ----- |  |  | ----- |  |  | ------- | 
|(in millions of dollars)   |  |       |  |  | year     |  |  | years |  |  | years |  |  | years   | 
|Long-term debt             |  | 352   |  |  | 7        |  |  | 13    |  |  | 11    |  |  | 321     | 
|Interest on long-term debt |  | 227   |  |  | 36       |  |  | 73    |  |  | 71    |  |  | 47      | 
|Operating leases           |  | 12    |  |  | 4        |  |  | 5     |  |  | 3     |  |  | -       | 
|Purchase obligations       |  | 657   |  |  | 178      |  |  | 155   |  |  | 108   |  |  | 216     | 
|Pension obligations:       |  |       |  |  |          |  |  |       |  |  |       |  |  |         | 
|Current service costs      |  | 120   |  |  | 8        |  |  | 15    |  |  | 15    |  |  | 82      | 
|Past service costs         |  | 167   |  |  | 35       |  |  | 56    |  |  | 30    |  |  | 46      | 
|                           |  | 1,535 |  |  | 268      |  |  | 317   |  |  | 238   |  |  | 712     | 

The table above shows the Companys contractual obligations as
at September 29, 2012. 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 current service costs are limited
to a 15-year period and are based on estimated future employee service for
existing registered defined benefit plans. Past service costs include estimated
solvency and going concern amortization payments.

| | - 34 - | TEMBEC 2012 MD&A
| | ------ | ----------------

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2011 vs. 2010

|FINANCIAL SUMMARY                                          |  |       |  |  |       |  
|---------------------------------------------------------- |  | ----- |  |  | ----- | -
|(in
      millions of dollars, unless otherwise noted)     |  | 2010  |  |  | 2011  |  
|Sales                                                      |  | 1,877 |  |  | 1,743 |  
|Adjusted EBITDA                                            |  | 132   |  |  | 95    |  
|Depreciation and amortization                              |  | 56    |  |  | 45    |  
|Other items                                                |  | 13    |  |  | 1     |  
|Operating earnings                                         |  | 63    |  |  | 49    |  
|Net
      earnings (loss)                                  |  | 52    |  |  | (3    | )
|Basic and diluted net 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   |  
|(1)includes current portion                                |  |       |  |  |       |  

The following variance
analysis relates to the Companys reported results under previous Canadian
Generally Accepted Accounting Principles (GAAP). The financial results for
fiscal 2011 have not been restated for IFRS so that they may be compared to
fiscal 2010 GAAP financial results.

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 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.

Adjusted EBITDA declined by $37 million over the prior year.
Forest Products segment adjusted EBITDA declined by $36 million due to higher
costs and lower pricing. Dissolving and Chemical Pulp segment adjusted EBITDA
increased by $18 million due to higher prices, partially offset by higher costs.
High-Yield Pulp segment adjusted EBITDA decreased by $51 million due to lower
prices. Paper segment adjusted EBITDA increased by $30 million on a combination
of higher prices and lower costs. Corporate expenses for fiscal 2011 included a
charge of $2 million relating to share-based compensation, unchanged from the
prior year.

|OPERATING EARNINGS (LOSS)    | 
|---------------------------- | 
|                             | 
|                             | 
|(in millions of dollars)     | 
|Forest Products              | 
|Dissolving and Chemical Pulp | 
|High-Yield Pulp              | 
|Paper                        | 
|Corporate                    | 
|                             | 

| | - 35 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

The Company generated operating earnings of $49 million in
fiscal 2011 compared to operating earnings of $63 million in the prior year. The
previously noted decline in adjusted EBITDA was partially offset by an $11
million decline in depreciation expense and a favourable $12 million variance in
other items.

The Forest Products segment fiscal 2011 results included a
charge of $3 million relating to the permanent closure of the Taschereau,
Quebec, SPF sawmill. It also included a charge of $1 million related to
severance payments at the idled planer facility in Cranbrook, BC. The prior year
included a $2 million gain related to land sales. The Dissolving and Chemical
Pulp segment fiscal 2011 operating earnings increased due to lower depreciation
expense resulting from the sale of two pulp mills in the prior year. In fiscal
2010, the Company had recorded a gain of $12 million related to the sale of the
aforementioned pulp mills. The Paper segment fiscal 2010 results had absorbed a
charge of $7 million related to the permanent closure of a newsprint mill.

The fiscal 2010 Corporate segment results absorbed a charge of
$12 million relating to the write-down of notes receivable. In fiscal 2011, the
Corporate segment results were enhanced by 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 recorded a $3 million gain related to the sale of its hydroelectric
generating facilities located in Smooth Rock Falls, Ontario.

|INTEREST, FOREIGN EXCHANGE AND OTHER |  |      |  |  |      |  
|------------------------------------ |  | ---- |  |  | ---- | -
|(in millions of dollars)             |  | 2010 |  |  | 2011 |  
|Interest on debt                     |  | 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 fiscal 2010 interest on long-term debt related to a US $300 million 11.25%
term loan. This credit facility was repaid in August 2010. The Company issued US
$255 million 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, gains are generated.

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.

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% . Fiscal 2011 absorbed an $11 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.

| | - 36 - | TEMBEC 2012 MD&A
| | ------ | ----------------

---

During fiscal 2010, the Company recorded an income tax recovery
of $15 million on earnings before income taxes and non-controlling interests 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 gain on consolidation of foreign integrated
subsidiaries increased the income tax recovery by $10 million.

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.

| | - 37 - | TEMBEC 2012 MD&A
| | ------ | ----------------

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CRITICAL ACCOUNTING
ESTIMATES

Property, plant and equipment depreciation

The Company records its property, plant and equipment,
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. Property, plant and equipment acquired as a result
of a business acquisition are recorded at their estimated fair value.
Depreciation of property, plant and equipment is provided over their estimated
useful lives, generally on a straight-line basis. The estimated useful lives of
property, plant and equipment 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
property, plant and equipment 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 property,
plant and equipment in fiscal 2012 and fiscal 2011.

Impairment of non-financial assets

The Company must review the carrying value of non-financial
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.
If any such indication exists, then the assets recoverable amount is estimated.
The recoverable amount of a non-financial asset is the greater of its value in
use and its fair value less costs to sell. In assessing value in use, the
estimated future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments of the time value
of money and the risks specific to the asset. For the purpose of impairment
testing, assets that cannot be tested individually are grouped together into the
smallest group of assets that generates cash inflows from continuing use that
are largely independent of the cash inflows of other assets or groups of assets.
An impairment loss is recognized if the carrying amount of an asset exceeds its
estimated recoverable amount. Impairment losses are recognized in profit or
loss. An impairment loss recognized in prior periods is assessed at each
reporting date for any indications that the loss has decreased or no longer
exists. An impairment loss is reversed only to the extent that the assets
carrying amount does not exceed the carrying amount that would have been
determined, net of depreciation or amortization, if no impairment loss had been
recognized. To estimate future cash flows, the Company uses operating and
financial assumptions, primarily those contained in its most recent multi-year
operating plan. There were no impairment charges in fiscal 2011. In fiscal 2012,
the Company recorded $50 million related to the impairment of the Chetwynd, BC,
high-yield pulp mill.

| | - 38 - | TEMBEC 2012 MD&A
| | ------ | ----------------

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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 September 29, 2012, (the measurement date), the fair
value of defined benefit pension plan assets was $667 million, an amount equal
to 73% of the estimated accrued benefit pension obligations of $910 million,
generating a deficit of $243 million. The plan deficit was $239 million at the
end of the prior year. The deficit increase of $4 million that occurred over the
12-month period was due to several offsetting items. The deficit was decreased
by $31 million as the return on plan assets exceeded the assumed rate of return.
The deficit was further reduced by $33 million as employer contributions of $42
million exceeded the current service cost of $9 million. These favourable items
were offset by an actuarial loss of $73 million that increased the obligations
at the measurement date. This item was caused by a decrease in the applicable
discount rate from 4.42% to 3.69% . 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 2012 was $14 million, as compared to
$19 million in the prior year. Based on current assumptions under IFRS, employer
contributions and pension expense in fiscal 2013 are expected to be
approximately $44 million and $2 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 $41 million, a decrease from $44
million in the prior year. Employer contributions were $1 million, compared to
$2 million in the prior year. In fiscal 2012, the Company recognized an expense
of $3 million, compared to a credit of $1 million in the prior year. Based on
current assumptions under IFRS, the amount of employer contributions and the
amount of expense to be recognized in fiscal 2013 are expected to be
approximately $2 million and $3 million respectively.

Deferred income taxes

Deferred 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 deferred income tax
asset to the extent that, in its opinion, the future realization of the tax
asset is probable. 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. At September 29, 2012, the Company had unrecognized
deferred tax assets of $563 million, an increase from $520 million at the end of
the prior year.

| | - 39 - | TEMBEC 2012 MD&A
| | ------ | ----------------

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USE OF NON-IFRS FINANCIAL MEASURES

The following summarizes non-IFRS 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.

Adjusted EBITDA refers to earnings before
interest, income taxes, depreciation, amortization and other items. Since the
Company excludes other items such as gains and losses on significant asset
disposals, restructuring charges and custodial costs for permanently idled
facilities, it differs from EBITDA. Adjusted EBITDA does not have any
standardized meaning according to IFRS. The Company defines adjusted EBITDA as
sales less cost of sales and selling, general and administrative expenses,
meaning it represents operating earnings before depreciation, amortization and
other items. The Company considers adjusted EBITDA to be a useful indicator of
the financial performance of the Company, the business segments and the
individual business units. The most comparable financial measure is operating
earnings or loss. The following table is a reconciliation of operating earnings
to the Companys definition of adjusted EBITDA:

|(in millions of dollars)      |  | 2011 |  |  | 2012 |  
|----------------------------- |  | ---- |  |  | ---- | -
|Operating earnings (loss)     |  | 47   |  |  | (32  | )
|Depreciation and amortization |  | 48   |  |  | 46   |  
|Other items                   |  | 3    |  |  | 50   |  
|Adjusted EBITDA               |  | 98   |  |  | 64   |  

Free cash flowrefers to cash provided by
operating activities before changes in non-cash working capital balances less
interest expense and capital expenditures. 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 debtrefers to debt less cash, cash
equivalents and cash held in trust.

Total capitalizationrefers to net debt plus
deferred income taxes, other long-term liabilities and credits, and
shareholders equity.

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

|(in millions of dollars)                 |  | 2011 |   |  | 2012 |  
|---------------------------------------- |  | ---- | - |  | ---- | -
|Long-term debt                           |  | 271  |   |  | 323  |  
|Net unamortized financing costs          |  | 13   |   |  | 13   |  
|Current portion of long-term debt        |  | 18   |   |  | 16   |  
|Operating bank loans / Bank indebtedness |  | 6    |   |  | 68   |  
|Less: total cash                         |  | (105 | ) |  | (92  | )
|Net debt                                 |  | 203  |   |  | 328  |  
|Other long-term liabilities and credits  |  | 303  |   |  | 304  |  
|Shareholders' equity                     |  | 233  |   |  | 102  |  
|Total capitalization                     |  | 739  |   |  | 734  |  
|                                         |  |      |   |  |      |  
|Net debt to total capitalization ratio   |  | 27%  |   |  | 45%  |  

| | - 40 - | TEMBEC 2012 MD&A
| | ------ | ----------------

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CHANGES IN ACCOUNTING POLICIES AND ESTIMATES

During the years ended September 24, 2011 and September 29,
2012, there were no new standards that impacted the Companys consolidated
financial statements.

IMPACT OF ACCOUNTING PRONOUNCEMENTS ON FUTURE
REPORTING PERIODS

|IFRS 7
      FINANCIAL INSTRUMENTS  DISCLOSURES
|------------------------------------------------

In December 2011, the IASB amended the standard IFRS 7,
Financial Instruments  Disclosures, to provide additional information
about offsetting of financial assets and financial liabilities. IFRS 7 has been
amended to require disclosures that will enable users of financial statements to
evaluate the effect or potential effect of netting arrangements, including
rights of set-off associated with an entitys recognized financial assets and
recognized financial liabilities, on the entitys balance sheet. An entity
provides information including the gross amounts subject to rights of set-off,
amounts set off in accordance with the offsetting criteria, amounts of financial
instruments subject to master netting arrangements or similar agreements, and
the related net amounts to meet the disclosure objective.

These amendments are effective for annual periods beginning on
or after January 1, 2013. The Company has not yet begun the process of assessing
the impact that the new standard will have on its financial statements and does
not plan to early adopt the new requirement.

|IFRS 9
      FINANCIAL INSTRUMENTS
|----------------------------------

In November 2009, the IASB issued IFRS 9, Financial
Instruments(IFRS 9), and in October 2010, the IASB published amendments to
IFRS 9 (IFRS 9 R).

IFRS 9 R supersedes IFRS 9 and is effective for annual periods
beginning on or after January 1, 2015, with early adoption permitted. For annual
periods beginning before January 1, 2015, either IFRS 9 or IFRS 9 R may be
applied. This standard provides guidance on the classification and measurement
of financial liabilities and the presentation of gains and losses on financial
liabilities designated at fair value through profit and loss. When an entity
elects to measure a financial liability at fair value, gains or losses due to
changes in the credit risk of the instrument must be recognized in other
comprehensive income. The Company has not yet begun the process of assessing the
impact that the new standard will have on its financial statements and does not
plan to early adopt the new requirement.

|IFRS 13 FAIR
      VALUE MEASUREMENT
|------------------------------------

In May 2011, the IASB issued the standard, IFRS 13, Fair
Value Measurement. The new standard is effective for annual periods
beginning on or after January 1, 2013, with early adoption permitted. IFRS 13 is
a comprehensive standard for fair value measurement and disclosure requirements
for use across all IFRS standards. The new standard clarifies that fair value is
the price that would be received to sell an asset, or paid to transfer a
liability in an orderly transaction between market participants, at the
measurement date. It also establishes disclosures about fair value measurement.
Under existing IFRS, guidance on measuring and disclosing fair value is
dispersed among the specific standards requiring fair value measurements and in
many cases does not reflect a clear measurement basis or consistent disclosures.
This new standard is not expected to have an impact on the amounts recorded in
the financial statements. The Company does not plan to early adopt the standard.

| | - 41 - | TEMBEC 2012 MD&A
| | ------ | ----------------

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|IAS 1
      PRESENTATION OF FINANCIAL STATEMENTS
|------------------------------------------------

IAS 1 has been amended to require entities to separate items
presented in other comprehensive income into two groups, based on whether or not
items may be recycled to net income in the future. Entities that choose to
present other comprehensive income items before tax will be required to show the
amount of tax related to the two groups separately. The amendment is effective
for annual periods beginning on or after July 1, 2012, with earlier application
permitted. IAS 1 is not expected to have an impact on amounts recorded in the
financial statements of the Company. The Company does not plan to early adopt
the standard.

|AMENDMENTS TO
      IAS 19 EMPLOYEE BENEFITS
|--------------------------------------------

In June 2011, the IASB published an amended version of IAS 19,
Employee Benefits. Adoption of the amendment is required for annual
periods beginning on or after January 1, 2013, with early adoption permitted.
This standard was amended to:

|a) | eliminate the option to defer the recognition of gains
      and losses arising in defined benefit plans;                                      
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------
|b) | require gains and losses relating to those plans to be
      presented in other comprehensive income; and                                      
|c) | improve the disclosure requirements concerning the
      characteristics of defined benefit plans and the risks arising from those
      plans.

The amended standard also incorporates changes to the
accounting for termination benefits. The amendment is generally applied
retrospectively with certain exceptions. The Company is still in the process of
assessing the full impact that the new standard will have on its financial
statements and does not plan to early adopt the new requirement.

|IAS 32
      FINANCIAL INSTRUMENTS  PRESENTATION
|-------------------------------------------------

In December 2011, the IASB amended the standard IAS 32,
Financial Instruments  Presentation, to address inconsistencies
identified in applying some of the offsetting criteria. IAS 32 clarifies the
meaning of the offsetting criterion currently has a legally enforceable right
to set off and the principle behind net settlement, including identifying when
some gross settlement systems may be considered equivalent to net settlement.

These amendments are effective for annual periods beginning on
or after January 1, 2014. This new standard is not expected to have an impact on
the amounts recorded in the financial statements. The Company does not plan to
early adopt the standard.

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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 2013 planned sales volumes, the following table
illustrates the approximate annual impact of changes to average Canadian dollar
selling prices on adjusted EBITDA:

|Selling price sensitivity                             |  | Impact on       |  |  | Average                 | 
|----------------------------------------------------- |  | --------------- |  |  | ----------------------- | 
|                                                      |  | adjusted EBITDA |  |  | selling prices ($/unit) | 
|                                                      |  | ($ millions)    |  |  | Sept. 2012 quarter      | 
|Pulp - $25/tonne                                      |  | 26              |  |  | 802                     | 
|Coated bleached board and newsprint -
      $25/tonne |  | 10              |  |  | 861                     | 
|SPF
      lumber - $10/mbf                            |  | 8               |  |  | 376                     | 

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 29, 2012, 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 Company generates approximately $1.1 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.

| | - 43 - | TEMBEC 2012 MD&A
| | ------ | ----------------

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Based on 2013 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                                     |  | 11 | 
|Cost
      of sales increase                       |  | 3  | 
|Adjusted EBITDA increase                           |  | 8  | 
|Interest expense increase                          |  | -  | 
|Cash flow increase                                 |  | 8  | 
|Loss
      on translation of US $ denominated debt |  | 3  | 
|Pre-tax earnings increase                          |  | 5  | 

Direct US $ purchases of raw materials, supplies and services
provide a partial offset to the impact on sales. The above does not include the
potential indirect impact of currency on the cost of items purchased in Canadian
dollars.

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 36 months in duration. At September
29, 2012 and September 24, 2011, 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.

| | - 44 - | TEMBEC 2012 MD&A
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Energy is an important component of mill costs, especially for
high-yield pulp mills and newsprint mills. In 2012, purchased energy costs
totalled approximately $125 million, 63% 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 2012 and September 2011, 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 29, 2012 and September 24, 2011, 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 2012, the Company had approximately 2,500 employees
covered by collective bargaining agreements. At September 29, 2012, there were
seven agreements covering 431 employees that had expired. During fiscal 2013, no
collective agreements will expire. The remaining contracts expire at various
dates up to January 2019. The Company anticipates it will reach satisfactory
agreements on contracts currently under active negotiations and those expiring
in the future.

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

The production of lumber, pulp and paper is capital intensive.
The Company estimates that it must invest approximately $35 million 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 is currently proceeding with a $190
million modernization project at the Temiscaming specialty cellulose mill. This
is the first of two phases that will total in excess of $300 million to be spent
over the next four to five years. As a significant portion of the funding for
the modernization project is to be provided by operating cash flows, there is a
risk that the Company may experience delays or cost overruns in executing this
project or other required capital expenditures.

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.

| | - 45 - | TEMBEC 2012 MD&A
| | ------ | ----------------

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|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 2012. 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 $352 million, 85% relates to the
US $305 million senior secured notes maturing December 2018. 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.

In addition to the above significant risks, the Companys
Annual Information Form (AIF) provides a comprehensive list of risk factors
related to the Companys operations. The AIF can be found on SEDAR.

| | - 46 - | TEMBEC 2012 MD&A
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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 have 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 IFRS. 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 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 sedar.com and on the Companys
website at tembec.com.

| | - 47 - | TEMBEC 2012 MD&A
| | ------ | ----------------

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MANAGEMENT RESPONSIBILITY

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 International Financial Reporting Standards (IFRS) as issued by the
International Accounting Standards Board (IASB) 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 auditors also report any significant internal control deficiencies
identified during the course of the annual audit. In addition, the Company
employs internal auditors to evaluate the effectiveness of its systems, policies
and procedures.

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

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

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

November 30, 2012

| | - 48 - | TEMBEC 2012 MD&A
| | ------ | ----------------

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